Category Archives: Budget

Disgraceful

Richmond City Hall

Richmond City Hall

by James A. Bacon

Fiscal Year 2015 in Virginia came to a close yesterday but the City of Richmond still had not filed its Comprehensive Annual Financial Report (CAFR) for FY 2014, reports the Richmond Times-Dispatch. The report provides an audited overview of revenues, spending, assets and debts critical to appraising a locality’s financial condition.

The City of Richmond is one of only three localities still to have failed to issue the report, the filing deadline for which was seven months ago. With a population of 218,000, Richmond is by far the most populous of the three, which includes poverty-stricken Wise County (pop. 40,000) and the town of Dumfries (pop. 5,100).

“A ten-month delay for something that should be a basic function of government is unconscionable,” said City Councilman Jonathan T. Baliles. “This is what happens when you ignore the fundamentals of government.”

City officials, reports the TD, have cited employee turnover, a lack of training and challenges in implementing a new financial system as reasons for this year’s delay. In other words, city officials blame dysfunctional management.

The problems did not materialize overnight, however. The city issued emergency procurement documents for outside help from an independent consultant to ensure timely completion of the 2013 CAFR. Payments to that consultant have risen from an anticipated $95,000 to $295,000 under  March contract extension.

Shortly thereafter, the city’s auditing firm, Cherry Bekaert, fired the city as a client. According to the TD, partner Eddie Burke cited “a high-risk, dysfunctional working environment that ‘has continually gotten worse every year.'” Ask yourself: How bad did the situation have to be for a midsize CPA firm to turn down a $320,000 annual contract?

Bacon’s bottom line: As Baliles says, balancing the books is fundamental. Add this failure to a string of other spending and administrative scandals over the past few years, and it seems pretty clear that government in Virginia’s capital city is a mess. It wasn’t always this way. Long-time residents remember when Robert C. Bobb ran the city in the 1980s as one of the most effective city managers in the country.

Ultimately, it is the responsibility of one person — the mayor — to ensure that the city functions properly. While Mayor Dwight C. Jones is good at striking the right rhetorical chords on a variety of issues, he has proven ineffectual as an executive.

I admire Jones’ response to the controversy over the Confederate flag and other symbols of the Confederacy, including the statues along Monument Avenue. “Rather than tearing down,” he said recently, “we should be building up in ways that establish a proper sense of balance and fairness by recognizing heroes from all eras to tell a richer and more accurate story of Virginia’s history.” Those are the words of a uniter and a healer, not a divider.

But I’m concerned that Jones doesn’t have much interest in the nuts and bolts of government. Perhaps that is understandable considering that he has divided his time between his responsibilities as mayor, Senior Pastor of First Baptist Church and for a year, chairman of the Democratic Party of Virginia. But when he does focus on his mayoral duties, instead of making sure the trains run on time, Jones has promoted high-profile projects like the Shockoe Bottom baseball stadium, the Washington Redskins training park and the World Road Cycling Championship.

Private investors are pouring money into the city. What most of them want to see, however, isn’t wheeling and dealing that rewards a privileged few. They want to see a city that does the things that cities are supposed to do. Like close out the books on time.

Richmond’s Pathetic Leadership

At the Diamond

At the Diamond

By Peter Galuszka

Richmond is going through an existential crisis. Its “leadership” can’t get anything done after wasting the public’s time and attention on the supposed possibilities of this so-called “Capital of Creativity.”

Two examples come to mind. One is the city’s and region’s utter failure to do anything about its crumbling ballpark. The other is wasting everyone’s time on pushing an independent children’s hospital and then having VCU Health and Bon Secours pull the rug out from everyone.

Mind you, you hear ramblings out the wazoo about how Richmond is all about “regionalism” and how the “River City” is just a dandy place to live. One of the worst offenders is Bacon’s Rebellion, which shamelessly crams Richmond boosterism down readers’ throats.

But what really sets me off is a full page and unabashedly revisionist editorial in this morning’s Richmond Times-Dispatch titled “Ballpark in the Bottom? Definitely not.” The writers claim they “having listened carefully, and at great length, to all sides, we have become convinced a proposal that seemed promising at first is fatally flawed.”

Yipes! This comes after a couple years of the newspaper’s flacking Mayor Dwight C. Jones’ dubious plan to put a new $67 million stadium in historic Shockoe Bottom for the city’s Minor League AA team, the Flying Squirrels, rather than refurbishing or replacing the crumbling Diamond on the Boulevard near the strategic intersections of Interstates 64 and 95.

TD Publisher Thomas A. (TAS) Silvestri, the one-time and obviously conflicted chair of the local chamber of commerce, pushed the Shockoe idea because that was the flavor of the month with parts of the Richmond elite, including some developers, the Timmons engineering group, the Jones regime and others.

It was a bad idea from the start and had been shot down before. The Bottom has no parking and is too cramped. Even worse, it would disturb graves of slaves and other reminders of the city’s darker past such as being the nation’s No. 2 slave trading capital (this is before the “creativity” part).

The AAA Richmond Braves hated the Diamond so much that they bolted to a new stadium in Gwinnett County outside of Atlanta in 2009. A new team associated with the San Francisco Giants decided to move in. The Flying Squirrels have been an outstanding success and in the five years they have been here, their team has drawn more fans than any other in the Eastern League. In fact, their stats place them among the best draws in all of minor league baseball.

But the Squirrels had been led to believe they would get new or greatly improved digs. Instead of focusing on the Diamond (which has ONE elevator for the sick and elderly and it often doesn’t work). A couple of weeks ago, Lou DiBella wrote an open letter to the community noting that nothing has happened. Their deal with the city end next year, raising the issue of whether they will bolt as the Braves did.

Squirrels owner DiBella

Squirrels owner DiBella

I did a Q&A with DiBella for Style. Here’s how he put it:

“We have been a great asset for the whole Richmond region. Where am I looking? I’m not trying to look. You want me to look, tell me. I want to create a dialogue. I want people to be honest and open and candid right now. If you’re going to screw around with us the same way you did with the Braves, the way Richmond did under false pretenses, and there’s no chance of any regional participation or the city being creative in building a stadium — let me know now because I do have to start thinking about the future.”

He has a point. Richmond did screw around with him. Chesterfield and Henrico Counties did, too. The Squirrels get most of their spectators from the suburbs but their political leaders don’t want to spend anything to help. They neatly got off the hook when they conveyed the Diamond from the Richmond Metropolitan Authority, of which they are members, to the city exclusively.

The Jones administration, meanwhile, wasted everyone’s time (except that of the Richmond Times-Dispatch) by pushing the Bottom idea. The business elite sponsored trips for so-called local leaders to fly around the country and look at other stadiums.

Then, nothing. A development firm called the Rebkee Co. came up with a plan to build a new stadium near the Diamond with private funds. But the city refused to even review the plan. They did not accept formal written copies of the idea.

The Jones team did manage to come up with a summer practice area for the Washington Redskins that is used about two or three weeks a year. It hardly draws anything close to what the Squirrels do, but they had little problem pushing with their idea.

Bill Goodwin

Bill Goodwin

Next up is a stand-alone children’s hospital, an idea backed by a group of pediatricians and Bill Goodwin, a wealthy philanthropist and one of the most powerful men in Richmond. He and his wife pledged $150 million for the project and many, including the RTD, talked about it to death. Goodwin’s idea would be to create a world class hospital on the level of the famous Childrens Hospital of Philadelphia.

Then, without warning, non-profits VCU and Bon Secours health system pulled the rug out from under Goodwin and everyone else. They said an independent children’s hospital wasn’t needed, there was no market for it and pediatric care is moving more towards out-patient service, anyway.

The real reason, says Goodwin, is that a stand-alone children’s hospital would mean that other local hospitals would have to scale back their money-making pediatric units.

Also for Style, I asked Goodwin for his thoughts. He was flabbergasted at shutting down the idea without warning. He said:

“We were planning for an independent children’s hospital that was regional and would provide more comprehensive coverage than what VCU and Bon Secours are currently providing. This effort would have been a heck of an economic driver for our community and would provide significantly better medical care for children. Better medical education and research were also planned. We would be creating something that was creating good jobs, and it would be something that the community would be proud of, which we haven’t had recently.”

So there you have it, sports fans – a moment of truth. With its current leadership, Richmond couldn’t strike water if it fell out of a boat. You know it when the editorial writers on Franklin Street start revising history.

The Volcker Alliance Appraises Virginia’s Budget

virginia_finances

Source: “Truth and Integrity in State Government”

by James A. Bacon

Critics of Virginia’s state constitution often point to the one-term limit for governors as a source of dysfunctional governance. The state’s chief executives have little time to put their imprint on policy and the budget before they’re gone. But it is precisely that term limit — and the resulting shifting of budgeting power to professional budget and finance officials — that the Volcker Alliance points to as a strength of Virginia’s budgeting process.

“Professional budget and finance officials in Virginia tend to last through multiple administrations, while governors are barred by the state constitution from serving a second consecutive four-year term and thus have relatively limited influence over the biennial budget cycle,” states the Volcker Alliance report, “Truth and Integrity in State Budgeting.” As a consequence, the report summarizes, Virginia has a budgetary policy “that is more administrative than political.”

The Volcker Alliance, launched in 2013 by former Federal Reserve Board Chairman Paul Volcker, praises Virginia’s budget process overall, although it does note some areas where it could stand improvement. The study provides an in-depth look at the budgets of California, New Jersey and Virginia as part of an ongoing effort to shine a light on opaque and confusing budget practices and encourage best budgeting practices. Among the study’s main observations of the Virginia budget:

Revenue forecasting. Revenue forecasting is a strength of the Virginia budget. Forecasts are based upon input from the Joint Advisory Board of Economists and from the Governor’s Advisory Council on Revenue Estimates, two statutorily established panels. “While the practice does not guarantee more-accurate forecasts,” the study states, “its wide range of inputs allows political leaders to focus more on the debate about expenditures than on a debate about the level of revenue.”

In actual practice, the  forecasts missed the downturn in state income tax revenues stemming from a downturn in capital gains income when president George W. Bush’s tax cuts expired in 2012. But the system recovered fairly quickly.

Either because it was late in the budget process or because the governor was unwilling to re-estimate revenue by year-end, the fiscal 2015-2016 biennial budget was not adjusted downward for $1.55 billion in diminished revenue expectations ($950 million in 2015 and $600 million in 2016). Still, the so-called money committees — House Appropriations and Senate Finance — subsequently adjusted appropriations to address the expected shortfall. Their actions included zeroing out most discretionary spending increases and preparing to tap the Revenue Stabilization Fund, the state’s rainy day fund, if needed.

Borrowing. Maintaining Virginia’s AAA credit rating imposes a “powerful discipline” on policy makers. “Total borrowing is limited by how much the state has received in the last three years from income and sales taxes. Virginia avoids using bond premiums for its general fund; leaders instead use the proceeds to reduce borrowing.”

Transferring revenues and costs. Not so admirable was Virginia’s use of an accelerated sales tax program in 2009 that obligated many businesses to prepay a year of expected levies — an initiative the state has yet to fully reverse. The state also allows for transferring costs from one fiscal year to the next within the biennium.

Pension funding. While Virginia fell way behind it its pension funding, it has been aggressive in recent years to restore the Virginia Retirement System to fiscal health.

The pension is underfunded compared with other states, with actuarial assets only 65% of liabilities in fiscal 2013 — the legacy of years of underfunding. Wilshire Consulting estimates that the funding ratio for state funding plans nationwide was 75 percent in 2013, up from 72% in 2012. (By 2014, the estimate of the funding ratio had risen to 80 percent.)

While Virginia has historically not paid the full amount that actuaries recommend for the annual contribution, it is moving toward full annual funding. The General Assembly has put itself on a schedule to increase funding each year until it hits 100 percent of the recommended contribution in fiscal 2019.

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Who Are the Real Fiscal Conservatives?

Source: "Truth and Integrity  in State Budgeting"

Source: “Truth and Integrity in State Budgeting”

Paul Volcker is one of the real heroes of the modern economic profession. During the late 1970’s and early 1980’s he conquered the “Great Inflation” by taming the growth of the money supply. Interest rates rose to levels unprecedented in modern American history. During my time in charge of cash management at AIG, I bought and sold money market securities yielding 20%; today similar instruments yield less than 1%. His efforts led to President Ronald Reagan’s “Morning in America” and a renewed attention to monetary policy. His success, as painful as it was,  gives him lots of “street cred.”

The Volcker Alliance recently published an analysis of the budgets in three states:  California, Virginia, and New Jersey.  The results will be surprising to many.  He gives kudos to California and Virginia, and holds a dim view of New Jersey, home of Republican presidential wanne-be, Chris Christie.

Standing alone, California would be the world’s eighth biggest economy with domestic output equaling US$2.1 trillion. Under Democratic Governor Jerry Brown, the Golden State’s credit ratings have been raised multiple times by the rating agencies.  Under his leadership,  voters have approved some temporary tax hikes, increasing budget reserves and improved funding for pension liabilities of teachers and other government employees.  According to Volcker, California’s outstanding debt has been reduced by approximately US$10 billion in three years.

The Old Dominion comes in for praise by the former Fed Chairman.  In an interesting comment he states that the budget professionals in Richmond serve for many years while the Governor is restricted to one 4-year term.  Budget cycle planning, which takes as long as 6 years, removes some of the politics out of Virginia’s budget process.  Virginia’s unfunded pension liability of US$ 3,436 per employee is only a few dollars more than that of the Golden State.

New Jersey, home of Gov Christie, leaves much to be desired according to the former Fed Chairman.  Volcker’s analysis paints a messy picture of the Garden State’s fiscal condition.  Volcker lists myriad accounting and financial tricks that have been employed to balance the home of the Jersey Boys: these do include not using the proceeds of bond sales for their stated purposes.  Frequent use of non-recurring revenues for operating purposes.  And diverting tolls from the turnpike from their stated use to maintain that highway.

It is a shame that Volcker did not include Kansas in his analysis.  Governor Sam Brownback, a Tea Party favorite, has enacted a budget cutting, tax reducing program that only a “fauxconomist” like David Bratt would endorse.  The budget deficit has ballooned, school systems in some detracts have closed early due to lack of funding, and a liberal website reports today that the Kansas Gov has threatened to cut off funding for the judicial system if it does not rule in his favor should a court challenge arise to his policies.

— D. Leslie Schreiber

Is SEAL Team 6 Out of Control?

Seal_Team_Six_old_insigniaBy Peter Galuszka

Dam Neck Annex is a forgettable piece of beachfront landscape amidst the strip malls of Virginia Beach. F-18s Hornet jets roar past from nearby Oceana Naval Air Station and the traffic is typical for the area: vans with soccer moms, bikers’ choppers and sedans with families headed for the sand.

Surrounded by thousands of yards of barbed wire and other protections, the annex which consists of shooting ranges and blocky buildings is home to SEAL Team 6, one of the most celebrated covert warrior groups in the world. Despite their fame and penchant for grabbing publicity, there’s evidence that SEAL Team 6 is out of control – in more ways than one.

On Sunday, The New York Times printed an extensive investigation showing that TEAM 6 has been serving as a covert hit-job unit in Afghanistan and other parts of South Asia and the Middle East. The highly-trained unit has been involved with many high risk missions but one stands out, according to the Times. It is “Operation Omega,” started by former Army commander Lt. Gen. Stanley McChrystal who was concerned in 2006 that the U.S. did not have sufficient troops in Afghanistan to beat back an increasingly aggressive insurgency by the Taliban.

The Times says that Operation Omega was modeled after the infamous Phoenix Program in South Vietnam that was designed to identify and eliminate, often by assassination, members and supporters of the Viet Cong. From 1965 until 1972, up to 41,000 people were killed in the process.

It isn’t know what Seal Team 6’s death count was, but the Times reports that from 2006 to 2008, there were weeks at a time “when their unit logged 10 to 15 kills on many nights, and sometimes up to 25.”

These, apparently, are not traditional night raids or return-fire situations when an American patrol is ambushed. These were surgical, precision strikes including kidnappings and at times, apparently, assassinations.

One issue is that because of their intense secrecy and worries about security there is not much oversight into the Team’s activities. The Times says that Team 6 by passes usual military judicial processes and is overseen by the secretive Joint Special Operations Command (JSOC).

The Virginia-based SEAL time had been tasked with special, high-risk missions such as the highly-acclaimed rescue of Capt. Richard Phillips, a commercial sea captain, who had been kidnapped by pirates off of East Africa when his ship had been taken by pirates in 2009. One concern in the Times is that such special missions were subverted as TEAM 6 was pushed into using its special snatch and grab or kill expertise in a more routine basis in Afghanistan and other countries.

Another strange issue is that for what is purported to be a highly covert unit, Team 6 gets a ton of publicity, some of it sleazy, and some of its members tend to get into trouble when they get back home.

For example, when Tom Hanks made a movie in which he portray the rescued cargo ship captain, the Navy willingly laid on a small fleet of ships and helicopters to help.

Book publishers have been inundated by supposedly non-fiction tomes about Team 6’s heroics. A couple involved who actually nailed Osama bin Laden. Robert O’Neill penned one claiming it fired the last fatal shot. Matt Bissonette, writing ‘No Easy Day,” under the nom de ’guerre Mark Own, said he did. Both SEALS drew criticism for violating security and going after big bucks.

The hands-down worst case involves “American Sniper” about the famed shooter Chris Kyle who was the subject a best-selling (two million copes) book and a box-office smash movie directed by Clint Eastwood. The book made $6 million and the movie hit the $400 million mark. But strangely, Kyle’s family didn’t see much of it after Kyle was murdered at a Texas shooting range two years ago.

The Virginian-Pilot reported recently that the family has seen none of the funds raised to help Kyle’s family by some so-called military help funds.

So, it seems you have two serious questions. Has Seal Team 6– and other SEAL units –morphed into an assassination team that has little accountability. If this is so, why are so many trying to cash in on it, especially, it seems, the United States Navy.

I’ve not been in the military service but I have known a few people who have been, including covert operators. Many tend to operate within strict rules and they don’t say anything about what happened.

Finally, Tobacco Commission Gets Reforms

Feinman

Feinman

By Peter Galuszka

Virginia’s infamous tobacco commission appears to be finally getting needed reforms 15 years after it went into existence.

Gov. Terry McAuliffe announced today that he was appointing a new executive director, Lynchburg native Evan Feinman, ordering a slimmed down board of directors and requiring a dollar-for-dollar match on grants the commission doles out to support community development in Virginia’s old tobacco belt.

In another break with the past, McAuliffe is renaming the old Virginia Tobacco Indemnification and Community Revitalization Commission as the Virginia Tobacco Region Revitalization Commission.

That might sound cosmetic, but any change is welcome given the commission’s history.

Since its formation after the 1998 Master Settlement Agreement between 46 states and four large cigarette makers, the commission has been spending millions of dollars won from the tobacco firms supposedly to help tobacco growers in a region roughly following the North Carolina border wean themselves off of the golden leaf toward economic projects that are far healthier.

Instead, the commission has been racked by scandal after scandal, including the conviction of a former director, John W. Forbes II, for embezzling $4 million in public money. He is now serving a 10-year jail sentence.

The commission also figured in the corruption trial of former Gov. Robert F. McDonnell since it was suggested my McDonnell as a possible source of funding for businessman Jonnie R. Williams Sr. during McDonnell’s trial for corruption. Williams, who was the star prosecution witness against McDonnell, got help from McDonnell in promoting one of his vitamin supplement products. McDonnell was convicted of 11 felonies and is now appealing.

The old commission also has been criticized by a major state audit for funding dubious projects and not keeping track of whether the money it has doled out has done much good. It had been criticized for acting as a slush fund for projects favored by Southside and southwestern Virginia politicians.

McAuliffe’s reforms include reducing the commission’s board from 31 to 28 members and requiring that 13 of them have experience in business, finance or education.

Feinman has been deputy secretary of natural resources and worked with McAuliffe’s post-election team.

It’s too soon, of course, to know if these changes will bring results, but anything that moves the commission away from its past and the grasp of mossback Tobacco Road politicians is welcome.

The General Assembly STILL Doesn’t Get It

By Peter Galuszka

Gov. Terry McAuliffe is right to amend the latest ethics bill to close a loophole that would have allowed legislators to collect $99.99 worth of gifts every day of the year.

After all the uproar over the Bob McDonnell scandal, one would think that the General Assembly would have the sense and maturity to take responsible corrective efforts.

Well, no. First they went to little scenes that would ban gifts over $250, but “intangibles” which often are the real goodies such as trips to the Master’s golf tournament in Augusta, Redskins Games, and so on, are not included.

Then, they had to be browbeaten to lower the gift limit to $100. And no intangibles.

But, “nooo,” as the Blues Brothers used to say. They made it no more than $100 in gifts per day. That means they could take something like $36,496.35 a year, not $99.99. Multiply that by the number of senators and delegates and it adds up.

Never mind that the General Assembly wouldn’t consider real ethics reform, such as setting up a true ethics commission with subpoena power.

McAuliffe should ratchet this down as much as possible. After the worst public ethics scandal in the state’s history – one that drew international attention, they still don’t get it.

Propping Up Coal at the Taxpayers’ Expense

W._Va._coal_mine_1908By Peter Galuszka

It’s always curious when big business and their bankrolled politicians complain about how the government and its regulations stymie the “magic of the free market.”

Then they turn around and keep protectionist policies that give certain industries big favors such as tax credits.

That’s what the General Assembly has done with a bill that would have reduced tax credits doled out to utilities that burn coal mined in Virginia. The original proposal backed by Gov. Terry McAuliffe was intended to help fill a $2.4 billion gap in the state’s biennial budget.

The idea quickly ran afoul of Dominion Virginia Power and the Virginia Coal & Energy Alliance. The original idea was to scale back tax credits but cap coal tax deductions at $500,000 in any given year. But after the utility and the coal industry lobbyists got involved, a bill to retain the tax credits was quickly approved setting caps at a more generous $7.5 million in a given year.

The credits stem from a law passed in 1999. Its purpose is to make it easier for big utilities like Dominion to choose thermal coal mined in Virginia over product mined elsewhere.

Coal production peaked in the state at 46 million tons. It’s now about 22 million tons or less. Coal employment has likewise dropped sharply over the years.

Much of the coal mined in Southwest Virginia is of high quality and some can be used either to generate electricity or make steel. The problem is its cost. Many of the seams in the state have played out and coal is increasingly thinner and is in  harder to reach areas. The cost of mining it has gone up.

For years coal maintained a price advantage over alternatives such as natural gas but thanks to hydraulic fracturing, that is no longer the case. Utilities like Dominion have been converted facilities to gas or are building new plants that use gas. Its last coal-related plant is a hybrid near St. Paul.

What’s causing this shift away from coal? High production costs and cheaper alternatives. Out West, in the Powder River Basin of Wyoming and Montana, coal is cheap and easy to mine. It does well. In other words, the free market is affecting  the declining Virginia coal industry  yet the General Assembly wants to prop it up at the expense of taxpayers and the budget.

By the way, Dominion and coal giant Alpha Natural Resources in Bristol are among the biggest political donors in the state.

Dominion Resources Is on a Tear

acl pipeline map By Peter Galuszka

Dominion Resources has been on a tear recently.

It’s been muscling through a dubious law in the General Assembly that would allow it to avoid State Corporation Commission rate audits for six years.

And, it has been throwing its weight around in less populated sections of the state. It is suing to force its way on the land of private property owners to survey its $5 billion Atlantic Coast Pipeline project that would take fracked natural gas from the Marcellus Shale formation in West Virginia and Pennsylvania on new routes to the southeast.

Property owners, particularly those in Nelson and Augusta Counties, are fighting in federal court in Harrisonburg.

What’s most interesting about this case is how the Commonwealth of Virginia, which swaddles itself in the ideals of the American Revolution of individual rights , somehow ignores the rights of small property owners when a big utility with deep pockets for political donations is involved. One wonders where all the conservatives are who were huffing and puffing over the Kelo case a few years back

And (bonus question) what do the two situations have in common? Republican State Sen. Frank Wagner of Virginia Beach, that’s who. He introduced the bill for Dominion to sidestep SCC oversight with the excuse that Dominion has deal with the impacts of a yet-to-be-finalized set of new federal carbon emission rules.

In 2004, Wagner also carried water for Dominion and other power companies by getting a law passed that would allow a “public service company” to survey private property without getting permission.

This is the basis of several hundred lawsuits Dominion has filed against small landowners. In the pipeline case, it will be interesting to see whether the natural gas is used for the common good of American customers or will end up being exported to foreign countries. Dominion insists it won’t,  but time will tell.

Another oddity is that Dominion is demanding access to survey a pipeline route when it hasn’t formally applied for  the project with the Federal Energy Energy Commission. Imagine if some private landowners showed up at the front door of Dominion’s downtown Richmond headquarters and demanded access to the building because they were thinking about building a natural gas pipeline? (Somebody call security!)

Here’s an opinion piece I wrote for this morning’s Washington Post.

The Strange Story of Health Diagnostic Laboratory

HDL's Mallory before her fall.

HDL’s Mallory before her fall.

By Peter Galuszka

The biggest problem facing the health care industry in Virginia and the rest of the country isn’t Obamacare or the lack of new medical discoveries. It the lack of transparency that hides what is really going on with pricing tests, drugs and hospital and doctors’ fees. Big Insurance and Big and Small Pharma cut secret deals. We are all affected.

I’ve been wanting to blog about this – especially after Jim Bacon’s recent post on the supposed tech trend in health care – but I wanted to wait until a story I’ve been working on for a few weeks was posted at Style Weekly, where I am a contributing editor.

In it, I explore the strange story of Health Diagnostic Laboratory, a famed Richmond start-up that went from zero to $383 million in revenues and 800 employees in a few short years. The firm said it was developing advanced bio-marker tests that could predict heart disease and diabetes long before they took root. HDL’s officials thought it would transform the $1.6 trillion health care industry.

Richmond’s business elite applauded HDL founder Tonya Mallory, a woman who grew up just north of the city and had the strong personality and drive to create the HDL behemoth. Badly wanting a high tech champion in a not-so high tech town, the city’s boosters did much to publicize HDL and Mallory, believing they could draw in more startups.

The story was too good to be true. It start to deflate last summer when the federal government noted that HDL was one of several testing labs being probed for paying doctors $17 for using HDL tests for Medicare patients when Medicare authorized $3 per test. Mallory resigned Dept. 23. Several lawsuits by Mallory’s former employer, Cigna health insurance and another have accused HDL of fraud. HDL has responded in court.

One legal picture suggests that HDL wasn’t a true tech startup but a new firm that stole intellectual property and sales staff. HDL says no, but its new leader Joe McConnell has taken steps to reform sales and marketing and is said to be working with the U.S. Department of Justice to settle a federal investigation.

The HDL affair raises issues about the inside marketing and apparent payoffs that are the biggest problem the health care industry faces. It doesn’t matter what kind of “market magic” combined with new technology comes up if something like this keeps happening.

This is all the more reason for a universal payer system. That may be “socialized” medicine but in my opinion it is the only logical way to go.