Tax Law

State Net Capitol Journal – April 2, 2012

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Budget & Taxes

PENSION SANCTITY MAY BE TESTED IN CA BANKRUPTCY: Financially troubled Stockton, California is currently in mediation with its creditors to determine whether it will file for Chapter 9 bankruptcy. The bankruptcy process is typically a collective one in which the creditors of the distressed entity negotiate a plan under court supervision to share the losses equitably, more or less; some creditors may stand more toward the front of the line than others.

But the California Public Employee Retirement System, the nation's largest public pension system, doesn't appear willing to stand in that line at all. It claims the state Constitution bars any reduction in pension obligations even in cases of severe fiscal distress.

"They will probably say it's a statutory right and it can't be changed by a bankruptcy court," said James E. Spiotto, a Chapter 9 specialist at the legal firm of Chapman & Cutler. "I think it's still subject to some question."

Under Chapter 11 bankruptcy, private companies can completely divest themselves of their pension obligations if they're able to convince a bankruptcy court it's the only way they can restructure. In such cases, the federal government, which insures most company pensions, assumes obligation of the debt. But there is no such federal backstop for municipal pensions. And since cities have managed to avoid bankruptcy until recently, there is no real precedent for how those pensions will fare under Chapter 9.

CalPERS doesn't seem inclined to allow a Chapter 11-like precedent to be established in California, however. When the city of Vallejo, declared bankruptcy in 2008, it fully expected to renegotiate its retirement plans along with everything else that was on the table.

But CalPERS warned the city's finance director at the time, Robert V. Stout, that under state law public pensions could never be decreased.

"They made it quite clear that they take that law very seriously," Stout said.

CalPERS also told the city that if the bankruptcy court ruled that federal bankruptcy law superceded the state's pension laws, it would appeal.

"We interpreted that as, 'If we try, they'll fight us through the courts forever,'" Stout said.

He and the city's lawyers opted to cut city services, gut the public retiree health plan, add a 1 percent sales tax and cut bond payments. But the city made all of its pension contributions throughout its three-year bankruptcy.

"We never shortchanged CalPERS," Stout said.

Even if the same thing happens in Stockton, however, bankruptcy lawyers say the legal issues are going to be addressed somewhere soon.

"There are a bunch of cities in bad shape, and pensions are part of the problem," said David A. Skeel Jr., a law professor at the University of Pennsylvania. "If you have a string of Chapter 9's, I don't think every one of them is going to say, 'This enormous obligation can't be touched.' I think one of them is going to take the plunge." (NEW YORK TIMES)

STUDY CASTS DOUBT ON COST SAVINGS OF 'MEDICAL HOMES': Advocates of "medical home" programs - which aim to reduce costly hospital visits by improving primary care - insist they can potentially save states and the federal government billions of dollars in Medicaid costs.

"The more we invest in the program, the more it saves," said Dr. Allen Dobson, who has led North Carolina's medical home program for over a decade. "It's like compound interest."

A study last year by the actuarial firm Milliman found that North Carolina's medical home program reduced Medicaid spending by nearly $1 billion between fiscal years 2007 and 2010. Much of that money was re-invested in the program.

Federal health officials are so sold on the medical homes concept that they've offered to cover 90 percent of the bill for states that test a variant of it called "health homes" for patients with multiple chronic conditions, including mental illness, starting in 2013. At least 41 states are already testing medical home programs, which originated in the 1960s as a means of improving care for children with asthma. The programs generally rely on patient education, electronic record-keeping and more personalized care to improve the quality of life for the chronically ill and help the healthy prevent illness. The assumption has been that they might also cut health care costs by reducing the number of emergency room visits, hospital readmissions, and expensive tests and procedures.

But a study published this year in The Journal of Managed Care, which reviewed 14 evaluations of 12 medical home programs, including North Carolina's, found that that only one provided statistically significant evidence of cost savings. And that 23 percent savings on a high-risk group of Medicare patients was offset by cost increases for patients who were healthier.

Deborah Peikes, the lead author of the Journal of Managed Care study, said that doesn't mean there's no value to medical homes.

"My sense is that the medical home model is really promising," she said. "Some interventions have been able to reduce the number of hospitalizations and improved some health outcomes. But whether the program saves money is another question."

She said medical homes that focus on patients with complex health conditions, like the federally subsidized health home program, are likely to realize the greatest cost savings. (STATELINE.ORG, AMERICAN JOURNAL OF MANAGED CARE, COMMUNITY CARE OF NORTH CAROLINA)

PROPERTY TAX SETTLEMENTS COSTING NJ BILLIONS: More than 87,000 New Jersey homeowners and businesses filed property tax appeals in 2011, nearly four times as many as in 2007. With most properties in the state not having been assessed since the collapse of the housing market, municipalities have been dealing with the onslaught largely by settling. And they've been paying a hefty price for it: The settlements cost them $3.8 billion in tax revenues last year.

The flood of appeals is showing no signs of abating this year or in the foreseeable future.

"We've seen people at the counter continuously," said East Brunswick Finance Director L. Mason Neely. "Have you seen any major change in the housing market? Until we do, this is something we're going to have to deal with." (STAR-LEDGER [NEWARK])

PROGRESS ON VA BUDGET: There was movement on - but still not complete resolution of - Virginia's budget standoff last week. The deadlock was broken after Senate Democrats agreed to divorce their effort to obtain more power in the chamber - which is split 20-20 between Democrats and Republicans but effectively controlled by the GOP because of Lt. Gov. Bill Bolling's (R) tie-breaking vote - from the budget process.

"It's not out the window, but it's not part of this," Minority Leader Richard L. Saslaw (D) said of the Senate control issue. "This strictly has to do with financing state government and where the priorities ought to be."

The Senate then proceeded to pass an $85 billion spending plan that provides hundreds of millions of dollars in additional funding for schools, health care and transportation, including $300 million for a Metrorail extension to Dulles Airport, on a 35-4 vote.

"After a long, arduous partisan process, I'm relieved we passed a budget with a bipartisan vote," said Senate Majority Leader Thomas K. Norment (R).

Now, negotiators will have to hammer out a compromise between the Senate budget and the version approved by the House in February. (WASHINGTON POST)

BUDGETS IN BRIEF: Last week, ILLINOIS became the first state to offer online lottery ticket sales, which netted $15,000 on the first day. At least 20 other states are considering online lottery sales or other Internet wagering, in the wake of the Justice Department ruling clearing the way for it last year (USA TODAY, NBC CHICAGO). • The MARYLAND Senate voted last month to raise income taxes on residents who earn $500,000 or more per year. The measure headed to the House, which has indicated receptiveness to the idea (BALTIMORE SUN). The Census Bureau reported last month that state and local government tax revenues rose for the ninth straight quarter. But the 2.1 percent increase in the fourth quarter was the smallest since the end of 2010 (BLOOMBERG). • WASHINGTON Gov. Christine Gregoire (D) signed a transportation budget last month. But the $800 million in new spending is a far cry from the $3.6 billion over 10 years she called for in January (OLYMPIAN). • ALABAMA Treasurer Young Boozer warned last week that the state's prepaid college tuition program will go broke in about three years without a major influx of additional funding. The Prepaid Affordable College Tuition plan currently holds about $347 million in investments, but it is paying out about $100 million in tuition per year (BIRMINGHAM NEWS). • More than 20,000 CALIFORNIA public school teachers have received pink slips informing them they may not have a job in the fall. The layoff notices are only preliminary, however, based on districts' estimates of how much money they'll have next year, which is largely contingent on the outcome of a tax proposal scheduled for the November ballot (SAN FRANCISCO CHRONICLE). • A proposed constitutional amendment in IDAHO to require a two-thirds vote of the Legislature for any tax increase, fee hike or reduction of a tax break, died in the House last month. The measure - HJR 1 - actually garnered a 37-33 majority in the chamber but not the required two-thirds vote needed to pass (SPOKESMAN-REVIEW [SPOKANE]). • The U.S. Supreme Court has ruled 5-4 that states cannot be sued for monetary damages for failing to give an employee time off for an illness under the Family and Medical Leave Act. The plurality opinion of the court was that the self-care provision of the FMLA is different from the family-care provisions of the law upheld by the court in 2003 in that there is no "widespread evidence of sex discrimination or sex stereotyping in the administration of sick leave" (NATIONAL PUBLIC RADIO). • Job growth is picking up in the four states hit hardest by the housing bust: ARIZONA, CALIFORNIA, FLORIDA and NEVADA. The states, which are all tourist and retirement meccas, are benefiting from an uptick in travel as a result of the improving economy and an increase in the flow of retirees to Sunbelt states after a slowdown in that trend during the downturn, according to Mark Zandi, chief economist of Moody's Analytics (USA TODAY). • NEW YORK Gov. Andrew Cuomo (D) and legislative leaders reached a tentative agreement on a $132.6 billion state budget last week, setting the stage for the state to meet its perennially missed March 31 budget deadline for the second year in a row (DEMOCRAT AND CHRONICLE [ROCHESTER]).

- Compiled by KOREY CLARK

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