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20 Hartford Business Journal • January 12, 2015 www.HartfordBusiness.com OpiniOn & Commentary editorial Lock-box approach could create fiscal accountability T he new buzzword around the State Capitol is "lock box," and it may be music to the ears of Connecticut business executives who have lost faith in state govern- ment's ability to be fiscally responsible. Gov. Dannel P. Malloy during his State of the State speech last week proposed the creation of a secure transportation lock box that would ensure every single dollar raised for transportation is spent on transportation, now and into the future. That idea was pitched in response to lawmakers' penchant over the years to raid the state's special transportation fund to help fill deficits in other parts of the budget. That practice has caused the state to significantly underfund its transportation infrastructure, saddling Connecticut with billions of dollars in unfunded highway, road, and bridge projects, which the business community has identified as a key threat to future economic development. Meanwhile, Comptroller Kevin Lembo wants to create a new reserve system that would require automatic deposits into the state's rainy day fund whenever the most volatile tax revenue streams produce one-time excess revenues. While Lembo didn't use the term lock box, his plan would essentially have the same effect, requiring lawmakers to set aside a portion of future budget surpluses for economic downturns, rather than spend that money on new programs. Both Malloy and Lembo are proposing smart concepts, however, the specific details of the proposals will have to be weighed carefully before the business community can offer up its full support. We've backed the adoption of a constitutional amendment that would forbid lawmak- ers from raiding the special transportation fund. That practice is one of the key reasons Connecticut is now thinking about bringing back tolls to raise money for a chronically underfunded transportation budget. Any lock box, however, must have real teeth. The CT Mirror reported last week that states that have tried the lock-box approach have still seen some of their transportation funds diverted for other means. We also need Malloy and legislative leaders to outline where this transportation money will be invested. There are numerous projects, several with $1 billion or more pricetags, waiting in the pipeline, including reconstruction of the I-84 viaduct in Hartford. Taxpayers need to know which projects are at the top of the priority list and why. Money should be invested in initiatives that will have the greatest impact in promoting safety and economic development. Lembo's reserve system proposal offers a partial solution to the state budget's sus- ceptibility to economic downturns. The income, corporation business, and inheritance and estate taxes, which collec- tively makeup a substantial part of state revenues, mirror the cyclical ebbs and flows of the stock market and overall economy. In good times — when unemployment is low, workers are receiving wage increases and bonuses, and investors are earning dividends and capital gains — Connecticut's coffers swell with an oversupply of money. But too often lawmakers have decided to squander those funds rather than save for recession- ary periods, causing the state to experience budget shortfalls in bad economic times. The state, for example, is facing a $1.3 billion deficit for the next two fiscal years, but only has about has about $500 million in its reserves, which equals just under 3 percent of the general fund. The state can build its reserve by up to 10 percent of the general fund, but has never reached that level of savings. By requiring lawmakers to set aside a certain percentage of budget surpluses for the rainy day fund, the state can safeguard against future deficits. However, lawmak- ers must also determine if the current levels of state spending are appropriate. Many in the business community would argue the state is spending too much money, and that building up sizable reserves during good times only protects the state's huge money dispensing apparatus. What everyone can agree on, however, is that the continued threat of budget deficits must end. It's a drag on the state's economy. n HartfordBusiness.Com Poll Should CT reinstate tolls to pay for transportation projects? ● Yes ● No To vote, go online to HartfordBusiness.com. Last week's poll results: Do you use a financial/investment advisor to manage your wealth? 51.7% Yes 48.3% No rule of law The Tenet tipping point By John M. Horak T he biggest Connecticut business news of 2014 was the decision of for-profit Tenet Healthcare Corp. to withdraw from its planned acquisition of five financially challenged nonprofit Connecticut hospitals (Waterbury, St. Mary's, Bristol, Manchester and Rockville). My first thought upon hearing the news was that Connecticut had "grabbed defeat from the jaws of victory." Upon reflection, I found some solace in the old saw about "finding a silver lin- ing in every dark cloud," hoping that the lining within this thunderhead is a wake-up call that nudges our regula- tory apparatus back into equilibrium. For readers not familiar with the matter, Tenet is the publicly traded owner and operator of 80 hospitals in 14 states, and it would have brought to Con- necticut a massive injection of capital and operating efficiencies derived from service consolidation and its national buying power. Waterbury Hospital was the first hospital in the acquisition queue, but on Dec. 11, Tenet walked from that deal (and the others) because of onerous regulatory condi- tions imposed by the state. The conditions would give even first year MBA students heartburn. Here are just a few examples: no reduc- tion or relocation of inpatient or outpa- tient services for five years; no termination of certain identified service lines for seven years; no clinical work- force reductions for five years; and no increase in pricing levels for services, pharmaceuticals, or supplies for five years. The decision to withdraw was no small potatoes as Tenet and these hospitals had both invested over two costly years of effort in nego- tiations and discussions. While for-profit hospitals are increasingly common, the only for-profit in Connecticut is Sharon Hospital, which was sold to a for-profit operator in 2002. I represented Sharon Hospi- tal in that transaction so the three comments that follow are derived from having been through the legal and regulatory thicket. First, something is backwards. The imposed conditions are really operating covenants (though not this severe) that a person bringing money to the closing table (a lender or an equity investor) might attach to a loan or investment in a company. But here we have the reverse — the party bringing the money to the table (Tenet) is being told how it must use its own money to operate in Connecticut. The word chutzpa comes to mind — though regulatory dyslexia may be a more accurate description if we contrast driving away a com- pany bringing its own money to the state to preserve five vital institutions with the multiple millions the state has doled out to other for-profit businesses such as Cigna ($71 million), ESPN ($25 million), NBC Sports ($20 million) and Pratt & Whitney ($400 million in tax credits) to keep or attract them here. Second, when it comes to the issues of the uninsured, charity care, community ben- efit, an open emergency room and the like, the operations of for-profit and nonprofit hospitals have become so indistinguishable that members of Congress have actually questioned why nonprofits still deserve tax- exempt status. Moreover, the term nonprofit is a misno- mer because even nonprofit hospitals must operate with a financial profit or they will fail (the five nonprofits could never abide by the conditions imposed on Tenet). Both types of hospitals are paid by a combination of private insurance, Medicare and Medicaid (hospitals must treat Medicare and Medicaid patients even though both programs reimburse at rates below cost). For-profit hospitals and their sharehold- ers pay tax on profit earned and distributed as dividends at an average state and federal integrated rate of 56.5 percent. For-profit hos- pitals pay local property taxes and nonprofit hospitals do not. Finally, the money for-profits pay to buy the assets of nonprofit hospitals (Tenet would pay market value for the assets in addition to its future capital commitments) stays in the community in a charitable foundation to support area health needs. The commu- nity retains an asset of equal value to the hospital (the founda- tion) and still has a hospital. Third, let's con- trast the NAACP's input into the Water- bury Hospital regula- tory proceedings (it was a formal inter- vener), to the remarks Tom Swan, the execu- tive director of Con- necticut Citizens' Action Group (CCAG), deliv- ered after Tenet announced its withdrawal. The NAACP rightfully pointed out the criti- cal challenges facing the Waterbury commu- nity — high rates of child poverty, low weight babies, unemployment, and teen pregnancy. Mr. Swan was quoted as follows in the CT Mirror: "Tenet has confirmed our worst fears about their intentions to plunder Connecticut's hospitals and that they were not serious about addressing the health needs of our families." Let me see if I have this right. The com- munity of needy Waterbury families is cur- rently being serviced by two financially chal- lenged hospitals. The state's finding of fact noted that Waterbury Hospital had five con- secutive years of losses from 2006 to 2012, ranging from $2.5 million to $17.8 million, had defaulted on bond covenants, and had been impeded by limited access to capital, inade- quate reimbursement, aging facilities and an accrued pension liability. Plunder what Mr. Swan? The socially afflicted families are the folks most damaged by what happened here. Only time will tell if this massive defeat wakes us up in time to deal with the even darker clouds gathering on the health care horizon. n John M. Horak has practiced law at Reid and Riege P.C. in Hartford since 1980. The views expressed are his own. John M. Horak ▶ ▶ Only time will tell if this massive defeat wakes us up in time to deal with the even darker clouds gathering on the health care horizon.