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Tax Law

State Net Capitol Journal – June 11, 2012

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Budget & Taxes

NC AGENCY LIFELINE FOR LOCAL GOVERNMENTS: North Carolina has the fourth highest state unemployment rate in the nation, according to the Bureau of Labor Statistics' April rankings. But unlike other states with job markets that are in particularly bad shape - especially, Nevada, Rhode Island and California, the three states with higher jobless rates - North Carolina is not strewn with local governments on the edge of insolvency. That's apparently due in large part to a state agency known as the Local Government Commission (LGC).

"I've got to believe we'd have more local governments in distress, perhaps even in default, if we didn't have an authority like this," said Rob Shepherd of the North Carolina League of Municipalities (NCLM).

The LGC was created by the North Carolina Legislature during the Great Depression, following a string of municipal bond defaults. The state's plan was to impose a little of its own fiscal discipline on local governments, an approach that seems to have worked. Since 1942 no city, county or special district in the state has failed to meet a bond obligation, despite frequent hurricanes and the upheaval of the Great Recession.

"A lot of the credit [for avoiding financial troubles] goes to the presence of the commission," said state Treasurer Janet Cowell.

Other states have programs to assist troubled local governments, but they tend to be reactive. Pennsylvania's Early Intervention Program, for instance, is only triggered after a local government requests grant assistance and an independent financial consultant quantifies the situation and suggests corrective action.

North Carolina's commission, on the other hand, examines local governments' financial reports to spot problems before they become severe. It also reviews, approves and sells all general obligation bonds that are issued by cities, counties and special districts. This year it denied a loan request from the town of Navassa to finish a sewer project because the town had a budget deficit.

The national bond rating agencies seem to like North Carolina's system; it is one of only eight states in the nation with a top bond grade from all three.

"The influence and oversight of the Local Government Commission is a major reason why North Carolina local government issuers have been able to weather this recession to this point," said Andrew Teras, an associate director for Standard & Poor's rating agency. "North Carolina's oversight model is one of the strongest of any state."

Local governments found by the commission to be in poor fiscal shape - a key indicator of which is a general fund balance of less than 8 percent of operating expenses - are placed on a watch list and notified accordingly.

"It's typically a telltale sign if the local government keeps dipping into their fund balance," said NCLM's Shepherd. "Once below that 8 percent, the warning letters start to come. If they don't right the ship the commission will sound the warning horn a little louder."

The governing commission of Scotland County received such a warning this year.

"The county has serious financial problems which the county's governing board must address immediately," the Local Government Commission stated in a letter, noting that the county's fund balance had dropped from 9 percent to 6 percent in a single year.

By raising taxes, cutting jobs, ordering furloughs and reducing 401(k) contributions to public employees, the county managed to get back into the commission's good graces.

Governments that fail to heed the agency's warnings, however, risk having their fiscal management taken over by the commission. That is exactly what happened to the town of East Spencer in 2001, when local officials there refused to comply with the agency's directives to erase a budget deficit. The town eventually regained control over its finances but only after a 23 percent increase in water and sewer rates had been imposed on its residents.

The commission has only taken that action four times in the last 70 years, however. And T. Vance Holloman, the deputy state treasurer who supervises the Local Government Commission, maintains that the agency's approach is generally very measured.

"We've always tried to serve an advisory rather than regulatory role even though we have that authority," he said.

State Treasurer Cowell added that the commission's nine-member board includes former elected officials who are sensitive to the political difficulties of raising taxes and cutting services to balance a budget.

"We don't ask them to do anything that we aren't doing ourselves at the state level," she said. (STATELINE.ORG, BUREAU OF LABOR STATISTICS, PUBLIC FINANCIAL MANAGEMENT)

NC FRONT LINE IN BATTLE OVER DENTAL MANAGEMENT COMPANIES: North Carolina House Speaker Thom Tillis (R) has heard from a number of high-profile, conservative nonresidents, including former Florida Gov. Jeb Bush, former Mississippi Gov. Haley Barbour and anti-tax crusader Grover Norquist, about a bill that has passed the state's Republican-controlled Senate but is stalled in the GOP-led House.

"It's not terribly common to have these types of names" taking an active interest in a state bill, said Jordan Shaw, a spokesman for Tillis.

The bill at issue would impose new restrictions on dental management companies, which dentists contract with for marketing, scheduling, staffing and other services, but which the North Carolina Dental Society claims "have crossed the line from providing business support services to exerting control over the dental practice," according to its website.

Dentist and Dental Patient

The measure has drawn national interest in part because dental management companies have become a favored investment choice of private equity firms, which have put money into at least 25 such companies over the last decade. Half of the companies that have raised over $1.1 million to defeat North Carolina's legislation (HB 698 and SB 655) are backed by private equity groups, including Leonard Green & Partners of Los Angeles, Court Square Capital Partners of New York and Levine Leichtman Capital Partners of Beverly Hills.

"They're looking at North Carolina as their test case," said Lisa Ward, director of government affairs for the North Carolina Dental Society. "They'll do anything they can to win here."

At least five states are taking a close look at the business practices of dental management companies, also called dental service organizations, or DSOs. Texas officials have already cut off Medicaid payments to one firm, All Smiles Dental Center Inc., owned by Chicago-based Valor Equity Partners, over allegedly "excessive" and "inappropriate" orthodontic care, according to a bankruptcy filing by the company last month.

"We're going to defend ourselves and contest against these claims," said Michael Lozich, All Smiles' chief compliance officer.

A couple of U.S. senators, Charles Grassley (R-Iowa) and Max Baucus (D-Montana) are also taking a hard look at DSOs. The senators accused one company, Nashville-based Church Street Health Management LLC, of "grossly overcharging the United States government in Medicaid reimbursement claims" and focusing "more on achieving self-imposed quotas via assembly line service than proper patient care."

Like All Smiles, Church Street denies those charges, stating it "respects the Senate's important oversight role," but it doesn't make care decisions or own dental practices.

The Federal Trade Commission, meanwhile, has sided with the DSOs, contending North Carolina's bill might not be beneficial for consumers. In a May 25 letter it said "given that DSOs focus solely on non-clinical aspects of dental practice, it does not appear that the Bill would enhance the Board's ability to ensure patient safety" and that lawmakers should consider whether it risks "merely protecting those dentists who do not choose to use DSOs against competition from those who do."

Grover Norquist made much the same argument in a May 21 letter to North Carolina lawmakers, in which he called the bill an "attempt to use the power of government to eliminate competition."

Representatives from the dental society and DSOs have been meeting with lawmakers to try to work out a compromise.

"We're trying to see if we can peacefully co-exist," said the dental society's executive director, M. Alec Parker. (BLOOMBERG, STATE NET)

BUDGETS IN BRIEF: Stockton, CALIFORNIA's City Council passed a resolution last week authorizing its city manager, Bob Deis, to declare bankruptcy if an agreement isn't reached with creditors by the time a state mediation process expires on June 25. Deis said he is still "hopeful" the city can avoid bankruptcy but he intends to be ready to go to bankruptcy court immediately if the negotiations fail (WALL STREET JOURNAL). • Public higher education officials in CALIFORNIA say if the tax increase proposed by Gov. Jerry Brown (D) is not approved this year and further cuts are mandated they will have to consider eliminating entire programs or schools (NEW YORK TIMES). • Federal Medicaid officials are threatening to take action against NEW HAMPSHIRE if it fails to show within 30 days that Medicaid patients still have adequate access to health care in the state after lawmakers slashed Medicaid payments to the state's hospitals by $230 million last year. The federal officials did not specify what action they were considering, and a center spokesman declined to say whether it included withholding the $600 million in federal Medicaid money the state receives each year (CONCORD MONITOR). • MICHIGAN's Republican-led House easily approved a modest income tax relief plan (HB 5700) that could provide as little as $20 to $30 in short-term benefit to many households. Democrats panned the legislation as election year pandering even as most of them voted for it, with all 110 seats in the chamber up for grabs in November. The plan now heads to the Senate (MLIVE.COM, STATE NET).

- Compiled by KOREY CLARK

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