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Tax Law

State Net Capitol Journal – July 23, 2012

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Budget & Taxes

CA'S 'CHARTER CITIES' BANKRUPTCY PRONE? The last three major California cities to file for bankruptcy or announce plans to do so - including Stockton last month and San Bernardino two weeks ago - have something in common: They are all "charter cities." They have their own constitutions, or charters, granting them more freedom than non-charter cities to govern their affairs.

A hundred and twenty one of California's 482 cities are charters. The first were established in the 1870s when tough economic times and criticism that the state was meddling in city affairs spurred a constitutional revision granting municipalities the charter option. Other states, including Colorado, New Jersey, Ohio and Texas, also offer their cities greater autonomy under what is generally known as "home rule," but while the courts in those states have sometimes limited the power of home-rule cities, California's Supreme Court has tended to side with the cities when power disputes with the state have arisen.

Some say the resulting level of independence may be the very cause of charter cities' fiscal problems. They say charter cities, for instance, aren't subject to state laws mandating salary limits for elected officials, a fact that was revealed - infamously - two years ago, when news broke that the tiny, working-class city of Bell outside Los Angeles paid its city manager $800,000 a year.

California Bear


But not all of California's charter cities are in financial trouble. Two of the largest, Los Angeles and San Francisco, are relatively stable, owing to their large populations, diverse economies and high property-tax rates. And it isn't just California's charter cities that are struggling; plenty of non-charter cities are also facing financial difficulties.

Charters can actually give cities more flexibility to cut costs. For example, California's Supreme Court recently ruled that charter cities don't have to pay prevailing union rates to contractors on municipal projects funded with local tax dollars.

"When you give a city more control, it can go one of two ways," said Jessica Levinson, a professor at Loyola Law School Los Angeles and local-government expert. "One way is the leaders are very successful in running that city; the other way is, you get Bell, you get San Bernardino, you get Stockton."

Lately, however, it seems more charter cities are headed the way of the latter group. Another, Compton, just announced it may have to file for bankruptcy by September (WALL STREET JOURNAL, STATE NET)

STATES TO RECEIVE MILLIONS IN DRUG SETTLEMENT: Pharmaceutical manufacturer GlaxoSmithKline agreed this month to pay $3 billion to settle government charges it illegally marketed several popular prescription drugs and overcharged government programs for them, the U.S. Justice Department said last week.

"GlaxoSmithKline illegally marketed several prescription drugs for ailments the medications were not intended to treat," Mike DeWine, attorney general of Ohio - one of 43 states that will collectively receive an estimated $500 million from the settlement - said in a statement. "The medicines were then overprescribed and paid for with Ohio taxpayer dollars."

The government alleged the drug company, among other things, marketed the antidepressant Paxil for use by children and the drug Wellbutrin for weight loss, neither of which are approved uses. The government also alleged the company's inappropriate marketing practices included providing doctors expensive resort vacations, high-paid speaking engagements and tickets to a Madonna concert.

"There are no excuses for deceptively marketing unapproved drugs to children, offering kickbacks to health care professionals and ripping off the taxpayers by defrauding Medicaid and other programs," said New York Attorney General Eric Schneiderman, whose state's Medicaid program is expected to receive $146 million as part of the settlement. A portion of that money will go to the federal government, since it jointly pays for Medicaid.

The $956 million criminal fine, $43 million in forfeiture and $2 billion in civil penalties GlaxoSmithKline agreed to constitute the largest healthcare fraud settlement in U.S. history. (STATELINE.ORG, LAMAR LEDGER)

BIG NAMES IN FINANCIAL WORLD ISSUE UNSURPRISING WARNING TO STATES: A state budget task force released a report last week identifying six major threats to states' fiscal health, including Medicaid spending, underfunded public pensions and increasingly volatile tax revenues, and urging state officials to regularly replenish their rainy-day funds and stop using one-time revenue sources to balance their budgets. They weren't exactly earth-shattering findings, but the star power behind them could give them more resonance in state capitals than similar pronouncements in the past few years.

The State Budget Crisis Task Force is co-chaired by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch, who is credited with helping rescue New York City from financial collapse in the mid-1970s. Former officials who served in both Democratic and Republican presidential administrations also contributed to the report. And the task force received funding from the foundations of both Blackstone Group co-founder Peter G. Peterson and supporter-of-progressive-causes George Soros.

The task force doesn't advocate for raising taxes or cutting spending, leaving that decision to policymakers.

"They weren't clear on whether they think simply fixing taxes to raise more revenue can fix the problem, or whether we also need deep cuts to public and social benefits as well," said Nicole Gelinas, a senior fellow at the Manhattan Institute.

The report also doesn't say the states' fiscal collapse is imminent, only that they shouldn't delay taking action.

"Our goal was not to say that the apocalypse is around the corner," said Ravitch. "But it will be a hell of a lot more expensive to deal with these problems in five or ten years than to deal with them now." (WALL STREET JOURNAL)

BUDGETS IN BRIEF: A report released last week by the U.S. Conference of Mayors (USCM) forecasts that 300 of the nation's 363 metro areas will experience real economic growth by the end of the year. But the report, prepared by IHS Global Insight, also warns that unless investment in transportation infrastructure is dramatically increased, families, commuters and businesses could see costs associated with traffic congestion double over the next decade (UNITED STATES CONFERENCE OF MAYORS). • FLORIDA's Department of Corrections said last week it will move ahead with plans to privatize inmate health care, despite a recent court stalemate on the issue and the expiration of a provision in the state budget authorizing the sweeping change (TAMPA BAY TIMES). • The CALIFORNIA Public Employees' Retirement System (CalPERS), the nation's largest public pension fund, posted a 1 percent return for the fiscal year that ended June 30. That performance is well below CalPERS' target for the year of 1.7 percent and nowhere near its long-term average annual growth target of 7.5 percent (LOS ANGELES TIMES). • The U.S. Department of Health and Human Services informed states this month that they can obtain a waiver from the 1996 welfare reform law's requirement that they document the number of hours welfare recipients spend in paid jobs or activities directly related to finding employment if they can come up with better ways to help recipients find permanent, well-paid jobs. NEVADA and UTAH had both asked for waivers from that requirement (WALL STREET JOURNAL).

- Compiled by KOREY CLARK

The above article is provided by the State Net Capitol Journal. State Net is the nation's leading source of state legislative and regulatory content for all states within the United States. State Net daily monitors every bill in all 50 states, the District of Columbia and the United States Congress - as well as every state agency regulation. Virtually all of the information about individual bills and their progress through legislatures is online within 24 hours of public availability.

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