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cross-posted on the Progressive Blog

Below is a memo I sent to the Joint Fiscal Committee. It deals with the VEPC / VEGI background growth rate issue I blogged about on Aug. 13 (VEPC and the Money-Go-Round).  

The issue is on the JFC’s agenda for tomorrow’s meeting.  This is an opportunity for the committee (including two gubernatorial candidates) to finally stand up to VEPC and stop wasting the taxpayers’ money.  At a time when the administration (often with the approval of the Leg.) is cutting programs and jobs, it is outrageous that this charade continues.  Short of killing the program (only the full Leg. can do that), this is a way to make VEPC more accountable and efficient.  I hope readers will communicate with the members and ask them to do the right thing.

more below

To: Representative Michael Obuchowski, Chairman Joint Fiscal Committee

Date: 9 November 2009

Re: Comments on VEPC’s pre-filed testimony re. the VEGI background growth rate methodology

Cc: Joint Fiscal Committee

The Auditor’s findings highlight a serious flaw in the program that needs to be remedied.  As the principal author of the first review of VEPC, I first noted this problem nine years ago.  I am grateful that the committee is taking the time to reconsider the issue.

VEPC claims that changing the methodology will introduce a “bias” into the cost-benefit analysis.  Interesting choice of words.  The bias would be toward reducing waste in the program because the current method subsidizes job creation that would have occurred without the incentives.  

VEPC stated, “Such biases would ultimately and unintentionally discourage job creation from small and recently embarked business endeavors”.  There is absolutely no evidence to support this claim.  Presumably, the remedy would not affect applicants with little or no history in Vermont.  In such cases, VEPC could use the industry growth rate just as it does now.  

VEPC argued that “The current practice of sector-based, long-term…hurdle rates for background growth is an economically sound process that has worked well”.  It may have worked well for companies that received unwarranted subsidies, but not for taxpayers.  Applying a 2% industry-wide background growth rate to a firm that has grown at a rate of 6% makes no sense whatsoever.  

VEPC praised the so-called “standardized approach” that creates a “level playing field”.  But why should the “playing field” be level if it results in waste?  Many applicants come to VEPC with a history.  To ignore that in the name of uniformity is to ignore the intent of the program — pay only for incremental new jobs.  VEPC’s reliance on the “uniformity” card is nothing more than misdirection.

VEPC noted that changing the methodology would require increased due diligence.  At what point can we say there is enough waste in the program to justify more due diligence?  Over time, the cost to the treasury may have been millions of dollars.  To me, that seems like sufficient justification.

As the legislature looks for efficiencies in state government, no program should be off limits.  I am aware that crafting a solution will not be easy; it’s complicated.  At the very least, I hope the JFC will convene the technical advisory group to dig in and come back with recommendations.  

Members of the Joint Fiscal Committee

Representative Michael Obuchowski, Chair

Senator Ann Cummings, Vice Chair

Senator Diane Snelling, Clerk

Representative Janet Ancel

Senator Susan Bartlett

Representative Martha Heath

Representative Richard W. Hube

Representative Mark Larson

Senator Peter Shumlin

Senator Richard Sears