Tag Archives: James A. Bacon

Community College Students Taking Loads of Unneeded Courses

The Woodbridge campus of Northern Virginia Community College, the state’s largest community college.

A cornerstone of the Commonwealth of Virginia’s strategy for making higher education more affordable involves the state’s 23 community colleges. First and foremost, community colleges charge lower tuition than four-year colleges. Second, college-transfer programs enable students to combine two years of relatively inexpensive community college with two years of more costly four-year college to earn a four-year degree. And third, the dual-enrollment program allows students to earn community college credits in high school.

None of these is working as well as it should, concludes the Joint Legislative Audit and Review Commission (JLARC) in a comprehensive study released today: “Operations and Performance of the Virginia Community College System.”

In the 2015-16 academic year, Virginia’s community colleges enrolled about 111,000 full-time-equivalent students. But only 39% earned a degree or credential that would further their education or improve their prospects in the job market, the study revealed.

There is a cost — to both the student and the state — when a student enrolls in community college but does not attain a credential. The median number of credits earned by non degree-completing students was 42 — the equivalent of nearly a year and a half of full-time attendance at a community college. States the study:

In FY16, a single community college credit cost a student $142.50 in tuition and fees, and cost the state $106.85 in general fund appropriations. At these rates, those 42 credits would cost a student approximately $5,985, either out-of-pocket, or through state, federal, or institutional financial aid. The cost in state general fund appropriations would be about $4,490, bringing the total investment to approximately $10,470 for an individual student.

The problem is most acute among certain groups: older, part-time students, lower-income students, students who are the first in their family to attend college, and students who require remedial course work in English and math.

The community college system permits open enrollment to anyone with a high school diploma. But a majority of students in JLARC’s cohort analysis needed at least one remedial course at some point in their community college studies. Only one-third of students who enrolled in remedial courses ended up earning a credential within seven years, compared to almost half who did not require remedial courses.

JLARC suggested that many community-college students could benefit from academic advising. Ideally, with better guidance, they would pay for fewer courses and be more likely to successfully complete their degree or certification in a more timely manner.

The study team also found that the dual enrollment program is not clearly reducing the time or resources that students invest in earning higher education credentials. Dual enrollment students typically accumulate more credits than their non-enrollment peers.

Finally, the study called into question the utility of the college-transfer program:

Transfer students who earned a bachelor’s degree took longer and earned more credits than their counterparts who started college in a four-year institution. Transfer agreements between the state’s community colleges and four-year institution have proliferated, are not kept up to date, and are not sufficiently accessible to students, making them difficult for students to understand and leverage.

JLARC suggested that streamlining the transfer agreements and making them more accessible would save time and money.

Corporations Tapping Virginia’s Under-Employed Labor Market

Hunter Willis, left, doubled his income by switching jobs from a call center to AvePoint in Richmond. Photo credit: Wall Street Journal.

A fascinating trend in the national job markets appears to be benefiting Virginia. A front-page Wall Street Journal article today is date-lined Richmond, Va.:

Pressed for workers, a New Jersey-based software company went hunting for a U.S. city with a surplus of talented employees stuck in dead-end jobs.

Brian Brown, chief operating officer at AvePoint, Inc., struck gold in Richmond. Despite the city’s low unemployment rate, the company had no trouble filling 70 jobs there, some at 20% below what it paid in New Jersey. New hires, meanwhile, got more interesting work and healthy raises.

As the unemployment rate approaches full employment, around 4%, companies are tapping the reservoir of under-employed — people working part-time, stringing together gig-economy work, or simply not fully utilizing the skills and capabilities they were trained for. It turns out there are a lot of those people in Virginia.

Here’s another example, which didn’t make it into the WSJ article: The Roanoke office of California-based PowerSchool will add 96 jobs and relocate to the former Norfolk Southern office building downtown.

PowerSchool’s expansion, announced Friday, will help offset the loss of more than 400 office jobs the railroad had eliminated in 2015, reports the Roanoke Times. The company expects the new jobs to pay an average annual salary of $68,116, 50% higher than today’s prevailing average wage in the city. The positions will include software development, customer service and administration and will filled during the next three years. 

Roanoke is shifting from being a “train city to a brain city,” said Roanoke Mayor Sherman Lea.

After years of sub-par economic growth since the 2008 recession, prosperity is finally trickling down from the millionaires and billionaires who benefited from booming stock and bond markets to everyday Americans. As the labor market tightens, corporations are still slow to raise general wages, but by tapping hidden corners of the economy they are creating better job opportunities for thousands.

The WSJ estimates the number of part-time workers who would prefer to work full time is about 5.3 million, or about 3.2% of the civilian workforce. That’s down from 6% at the depth of the recession but still high by historical standards.

AvePoint faced stiff competition for qualified workers in Jersey City, across the Hudson River from New York City, recounts the WSJ. Rather than increase worker pay in New Jersey, the company hired a site-selection consultant to review some 20 other locales. Richmond fit the bill. Although unemployment was only 4%, under-employment was pegged at 12%.

AvePoint pays its Richmond workers about 20% less than its New Jersey employees, but CEO Brian Brown says its Richmond workers enjoy more buying power. Median housing prices in the city are 40% cheaper. Indeed, AvePoint’s experience in Richmond has been so positive that Brown is making the city his operational headquarters. The company plans to have 200 employees there by the end of 2018.

I’ll take steady, incremental growth generated by a lot of midsize employers like Avepoint over a transformational investment by Amazon any day.

Dreaming the Impossible Dream

Amazon headquarters in Seattle. Really, would you pay hundreds of millions in subsidies for architecture like this?

Amazon’s announcement of its intention to build a second headquarters complex somewhere in the United States, generating $5 billion in investment and up to 50,000 jobs, sparked some lively punditry around Virginia. Reactions varied widely.

Central Virginia would be an ideal location, opined the Richmond Times-Dispatch. The region meets the threshold population of one million, it has a stable, business-friendly environment, it has a strong university system and access to a major airport and mass transit, and it offers a strong logistical system.

The big drawback, suggested the editorial, is Virginia’s aversion to subsidies and tax breaks. Amazon has made clear its interest in incentives. “Fabulously rich companies shouldn’t get handouts from the taxpayers,” says the libertarian-leaning editorial page. But with a prize as big as Amazon, it conceded, “It’s highly unlikely that the state’s political leaders will let any laissez-faire principles stand in the way of a project that could transform an entire region.”

The Virginian-Pilot editorial writer didn’t have much use for Amazon. Noting that Virginia Beach Mayor Will Sessoms hopes to pitch the technology-intensive retailing giant, the Pilot figured that Hampton Roads faces an uphill climb. Sure, the region does have the requisite one million population, and it soon will have access to huge trans-Atlantic broadband links, but the Amazon announcement may be no more than a marketing ploy — “a plan to wring tax breaks out of cities and states stepping on each other for the chance to capture some of that Amazon magic.”

“While communities in Virginia — including Virginia Beach — should certainly try to lure the retail giant here, officials should be wary as well,” the Pilot concluded. “Bending over backward for this or any company carries risk that needs to be worth the reward.”

Then there is the starry-eyed Roanoke Times which, despite a regional population less than a third of the one-million minimum, proceeded to make the case that Amazon should think transformationally: “If you go to some conventional big city, that’s simply a case of the rich getting richer. There’s no glory in that. If you come to Roanoke, a promising city that sits on the edge of Appalachia, you are single-handedly changing the rules of the game.”

The editorial writer touted the region’s high quality of life, its creativity in making deals work, and its proximity to Virginia Tech and Liberty University. “Our region has more undergraduates per capita than Boston, San Francisco-Oakland, Raleigh-Durham, or Austin, Texas. ”

Sad to say, I don’t think Amazon is looking for glory in its new headquarters complex. It’s not looking to transform the world with its corporate real estate strategy. I have to agree with the Pilot on this: Amazon is looking to convert its name into hundreds of millions of dollars in subsidies and tax breaks. And who can blame the company, as long as there are local governments around the country willing to sell their souls?

Landing a mega Amazon corporate center would be an economic game changer, it is true. The Times-Dispatch is right to relax its libertarian scruples enough to at least contemplate the idea of incentives.

But I have yet to see anyone conduct a rigorous cost-benefit analysis of a major economic development project. Studies invariably are framed in such a way as to bias the outcome in favor of the desired outcome. Thus, a study on the “economic impact” of an Amazon headquarters undoubtedly would show billions of dollars of positive impact — but would exclude the liabilities associated with providing government services not only to the Amazon corporate campus but to fund the growth in infrastructure and government services associated with 50,000 direct jobs and perhaps another 100,000 or more in “multiplier” jobs. Rarely will any consultant’s study reveal the net benefit — the benefit after costs have been deducted.

A region like Roanoke would be totally overwhelmed by the impact. Even Roanoke or Hampton Roads would be hard-pressed to accommodate such a surge in investment and jobs. Frankly, only Northern Virginia has the size, assets and wherewithal to play Amazon’s game. The rest of us need to dream more modest dreams and husband our resources for projects that (a) we realistically might win, and (b) we won’t regret it if we do.

Update: The New York Times crunches the numbers for Amazon, and narrows down the final four list to Portland, Denver, Washington and Boston. The optimum pick: Denver.

Americans Increasingly Skeptical of Value of Four-Year Degrees

Graphic credit: Wall Street Journal

Americans are finally getting wise to the value of a four-year college degree. A Wall Street Journal/NBC News poll finds a significant growth in skepticism over the past four years, especially among Americans who haven’t graduated from a four-year college.

Overall, 49% of Americans believe that earning a four-year degree will lead to a good job and higher lifetime earnings, compared to 47% who don’t — a two-percentage point gap. Four years ago, that gap was 13 points.

Skeptics number in the majority — 57% to 37% — among Americans 18 to 34 years old. That should come as no surprise, as that age group has taken on a disproportionate share of the $1.3 trillion in outstanding student debt and is having the greatest trouble repaying it.

A majority of women still have faith in the four-year degree, reports the Wall Street Journal, but men’s attitude has undergone a dramatic reversal. Four years ago, men saw college as worth the cost by a 12-point margin; today they say its not, by a 10-point margin.

Many observers pushed college attendance on the astonishing superficial grounds that college graduates on average earn higher salaries and experience a lower unemployment rate than those who never went to college. What such analysis ignores is that the average earnings and unemployment for all college grads is not necessarily typical of earnings and unemployment of college grads on the margins, who were less academically prepared, received lower grades, attended less prestigious institutions. It also ignores the ugly reality of millions of Americans who racked up large debts attending college but failed to graduate.

Awareness is spreading that people can earn solid middle-class wages with a couple of years of technical training, without losing two years of earnings attending a four-year college or spending tens of thousands of tuition, fees, room, and board. The WSJ gave a great example:

Jeff McKenna, a 32-year-old from Loveland, Colo. said he doesn’t believe college is worth the cost. Mr. McKenna went to a trade school, earning a certificate as a mechanic and how earns a base salary of $50,000 a year. He said he has never gone three weeks without a job, including during the recession.

“I have friends from high school that are making half what I’m making, and they went and got a four-year degree or better, and they’re still $50, $60, $70,000 dollars in debt,” Mr. McKenna said. “There’s a huge need for skilled labor in this country.”

Indeed there is. As more people — young men, mostly — think like Jeff McKenna, there will be a growing demand for community colleges and trade schools that teach marketable blue-collar skills. Skepticism runs greatest in the college-age population, making it likely that four-year colleges will find it increasingly difficult to maintain their enrollments. Those at greatest risk are institutions that appeal to precisely those demographics — rural, lower-income, male — where skepticism runs the deepest.

Amazon Sparks Competition for World’s Top Economic Development Trophy

Amazon has left an indelible mark upon rainy Seattle, where 24,000 of its employees work. These spheres, according to USA Today, provide “a warm, dry, plant-filled space for meetings, meals and mingling for up to 800 Amazon employees at a time.”

Amazon has announced its intention to build a second headquarters complex, the equal in size to its Seattle headquarters. And localities across North America — including some in the Washington region — are salivating over the prospect of winning what could be the biggest economic development trophy of all time.

The potential reward is stupendous. According to the Washington Business Journal, Amazon’s second corporate headquarters would bring 50,000 new full-time jobs with an average compensation of more than $100,000 over the next ten to 15 years. The company expects to invest $5 billion over the first 15 to 17 years of the project, which could require up to eight million square feet of commercial space.

Only handful of major metropolitan areas in North America have a prayer of competing for such a huge project because only a handful have a labor market big enough to accommodate such a massive demand for IT-savvy workers. Amazon has said it is focusing on metro areas with a population of more than one million.

With its highly educated, technically proficient workforce, the Washington region fits the bill in many ways. Perhaps giving Washington another edge is Amazon CEO Jeff Bezos’ familiarity with the region. He owns the Washington Post, he recently purchased the former Textile Museum property in the chi-chi Kalorama neighborhood for $23 million, and Amazon gave a D.C. nonprofit a $1 million match grant — its first outside of Seattle, notes the WBJ.

Moreover, Amazon Web Services (AWS) has a track record of doing business in Northern Virginia, which it has helped build into a world-class data-center hub. The cloud services subsidiary has developed strong relations with local governments, Loudoun County and Prince William County in particular, as well as local electric utilities, and the state of Virginia. AWS has worked out deals to supply its data centers with Virginia-located solar power.

Insofar as a company values the ability to get things done — and building a massive corporate center bigger than the Pentagon will require extensive zoning and regulatory permissions — and insofar as Amazon has had a positive experience in Virginia, I would expect the company to give the Old Dominion serious consideration.

You know that Governor Terry McAuliffe would give his right arm to close a deal of this magnitude — it would arguably be the greatest economic development coup in Virginia’s history. Amazon’s search and decision-making process undoubtedly will extend beyond McAuliffe’s term of office, but I cannot imagine the governor not making it his number one priority. He will have behind him much of the Virginia business establishment, desperate as it is to diversify the Northern Virginia economy from its perilous dependence upon the federal government.

Northern Virginia likely will be a strong contender for the investment, but it will face stiff competition from other major metros. Other bidders for the big prize undoubtedly will roll out billions of dollars in subsidies and tax breaks, which Virginia might be hard-pressed to compete against. Playing in this league will dwarf the resources currently available through the Commonwealth Opportunity Fund and other tools at the governor’s disposal.

We will know that Virginia is serious about competing for the Amazon headquarters if McAuliffe asks for special legislation from the General Assembly in January. Doling out billions in subsidies and tax breaks to benefit Bezos, one of the world’s richest men, should make for a rollicking good debate.

Virginia Online Network Targets Adult Learners

Online learning at Old Dominion University, a key participant in the Virginia Online Network.

Several years ago when Del. Kirk Cox, R-Colonial Heights, was still teaching high school government classes in Chesterfield County and serving as majority leader in the House of Delegates, he had to take a continuing-education course to get his teaching re-certification.

“I went, wow, my schedule was crazy. There was no way I could get to a class,” he recalls. “I was swamped teaching and doing the majority leader thing.”

Cox’s salvation was online learning. Finding time to study at night, he managed to complete his re-certification requirements. Likewise, his wife Julie earned a Master’s degree in crisis counseling through an online course delivered by Liberty University. Having seen the advantages of online learning close-up, he has become a big believer. He sees the online learning as a big part of the higher-ed future, and he wants Virginia’s public institutions to get more involved.

Kirk Cox. (Photo credit: Roanoke Times.)

Cox took the legislative lead in 2015 to create the Online Virginia Network (OVN), a portal delivering online courses from Old Dominion University, George Mason University, and other public Virginia institutions that develop online capabilities. The portal, which targets 1.1 million Virginians who have taken some college courses but not completed their degree, has its debut this fall semester. Last time he checked, says Cox, OVN was on track to meet its target enrollment of 225 students.

“My immediate target with the OVN is adult learners with some college credit,” says Cox. “Military guys. Working moms. A four-year degree would be extremely beneficial for them.”

As he knows from personal experience, it’s not easy for working people to return to school. The dominant educational model offers classes at set times during the day, typically on a Tuesday-Thursday or a Monday-Wednesday-Friday schedule. “If you’re working, that’s tough,” says Cox. “We want to make it easier for these folks to come back and help them get a higher-paying job.”

Private schools — including Liberty University, which Cox says, has “eaten our lunch in the online space” — offer online courses as well. But tuition at Virginia institutions, subsidized by the state, is more affordable. Previously, students could enroll in either ODU or GMU’s online programs, but they were restricted to the course offerings of each individual institution. With OVN, they will be able to mix and match courses from both institutions, as well as from colleges and community colleges that join the consortium in the future.

“The portal brings all the online programs together in one place,” says Tony Maggio, a fiscal analyst for the House Appropriations Committee. “The programs themselves will reside in the host institutions. A degree program could come from multiple providers. The experience will be seamless from the student’s perspective.”

OVN funding will provide counselors to help students navigate the system as well as a net cost calculator to help evaluate the most efficient path forward.

The program works nicely for ODU and GMU as well.

“It’s a natural connection,” says Dr. Ellen J. Neufeldt, vice president of student engagement and enrollment services at ODU, which operates the largest online program of any public university in Virginia. About 20% of ODU’s students, many of them in the military, are already online.

“The Online Virginia Network initiative aligns with our mission of affordability and access and has influenced the way Mason serves undergraduate students online,” says Robin Rose Parker, a director for strategic engagement & communications AT GMU. “This complements our online efforts at the graduate level and helps us leverage the online model to reach many more potential students. In fact, OVN has provided Mason with the opportunity to further target a key segment in Virginia — the adult learner — an increasingly significant part of the community we serve.”

The present incarnation of OVN is just the beginning. Building the network is Cox’s number one higher-ed priority in the 2018 session, which, given the fact that he is the newly elected Speaker of the House, means it will be a top priority of the House of Delegates.

Cox says he hopes to find ways to wring out costs of online attendance. Why, he asks, should online students be charged student activity and athletic fees? Is there a way for online students to share instructional materials rather than pay thousands of dollars for textbooks? Can classes be structured so that super-popular instructors can reach more students?

He also will work to coax other Virginia higher-ed institutions into participating in the network. In his view, there’s more at stake than helping students earn college degrees, as important as that is. The educational industry is changing, and Virginia’s public universities need to get a foothold online to adapt.

With their big endowments and deep alumni bases, the University of Virginia and Virginia Tech may not have to change their residential-college model, Cox says. But he’s convinced that the high-cost, high-tuition model at most institutions is unsustainable.

“If you’re not innovative — if you’re not holding costs down — you’re going to be in trouble,” Cox says. “For the viability of our public institutions, they’ve got to be in that space.”

Uh, Oh, Optima Retracting Its Obamacare Coverage

First Aetna pulled out of Virginia’s Affordable Care Act insurance exchange. Then United Health did. Then Anthem cut back. Now Optima, a division of the Sentara Health Care system, is retracting to core markets in Hampton Roads plus the Harrisonburg, Charlottesville and Halifax-Mecklenburg areas. Oh, and it’s increasing rates on average by 81.8%.

“For now,” sums up the Daily Press, “it appears as if 48 Virginia counties and 15 cities have no insurer offering Obamacare coverage through the federal health care exchange. … The three insurers’ cuts leave 350,000 Virginians needing to find new coverage.”

While the health exchanges implode, a dysfunctional government in Washington, D.C., appears unable to devise either a patch to Obamacare or an alternative to it. Republicans are saying, in effect, “See, we told you that Obamacare was melting down.” Democrats are responding, “It’s melting down because you sabotaged it.”

As the system collapses, the issue of whom to blame will dominate the public discourse. It seems clear to me that Obamacare was melting down on its own, but the political uncertainty created by Washington dysfunction has accelerated the downward spiral. There’s so much flak and so much smoke, however, that Americans have no idea what to believe. In the meantime, Virginians will suffer.

Virginia Students Out-Perform on ACT College-Readiness Test

Virginia students traditionally have out-performed their peers nationally in  ACT college-readiness tests, but the margin widened for 2107 graduates, according to data released this morning by the Virginia Department of Education.

The gains applied to public schools, private schools, and home schooled students across the board. Virginia public school students achieved an average composite score of 23.7 on the ACT, compared with 21.0 for graduates nationwide. The composite score for all Virginia students, including home schoolers and private school grads, was 23.8. The highest possible score is 36.

“Nearly twice as many Virginia students take the ACT today than ten years ago, making it an increasingly important indicator of how well the commonwealth’s public schools are preparing young people for the future,” Superintendent of Public Instruction Steven R. Staples said in a press release. “The latest results continue a long-term trend of higher achievement and increasingly well-prepared graduates.”

Bacon’s bottom line: The improved scores of Virginia students is impressive, especially against the backdrop of flat scores nationally. Somewhere, somehow, Virginia is doing something right for its college-aspiring students. Given the fact that the gains applied to public schools, private schools, and home-school students alike, it’s not clear who or what deserves the credit. In any case, the ACT scores apply only to the 29% of the Virginia student population that takes the tests, not to the other 71%.

The VDOE press release did not break down scores by racial/ethnic category. However, a Wall Street Journal article today notes that so-called “underserved” student populations — low-income, racial minority, or first-generation college student — continued to perform poorly nationally.

More than four of five test takers who had all three of those “underserved” characteristics, as ACT calls them, showed college readiness on one or none of the exam benchmarks in English, reading, math and science. Only 9% met the benchmark in at least three of the four areas. That compares with 54% for test takers who didn’t mark that they had these characteristics.

Given the fact that a similar gap persists as measured by other indicators, it is likely that similar racial/ethnic gaps would show up in Virginia ACT scores. Perhaps VDOE didn’t have access to that data on a statewide level. Or perhaps the department chose not to report the data because it didn’t look good. The public needs to know if the problem is getting better (which would suggest that what we’re doing to address disparities is working), or is getting worse (which would suggest that what we’re doing is not working).

Is Dominion Generating Millions in Excess Profits? It Depends on Who’s Doing the Accounting.

The SCC says Dominion generated up to $395 million in excess revenue in 2016 under the electric rate freeze. Dominion says the SCC is inflating the numbers.

Depending on how you crunch the numbers, Dominion Energy Virginia (DEV) is earning between $221 million and $252 million in excess profits. Had the company not expensed nearly $174 million in coal ash clean-up costs, excess earnings would have amounted to $395 million. That’s the analysis of the State Corporation Commission in a report released last week.

The report supports the narrative that Dominion and its counterpart in western Virginia, Appalachian Power Co., negotiated a lopsided deal for themselves when they pushed for a base-rate freeze in 2015. Invoking the uncertainty created by the Obama administration’s Clean Power Plan, which would have compelled a major re-engineering of the electric power industry, power companies persuaded the General Assembly that a rate freeze would provide stability for the companies and their customers.

Now that the Clean Power Plan appears to be a dead letter under the Trump administration, critics argue, it’s time to roll back the freeze. Sen. J. Chapman Petersen, D-Fairfax, who had sought in the 2017 General Assembly session to overturn the freeze, said the SCC report confirms his claims. “It simply proves what we suspected all along,” he told the Richmond Times-Dispatch. “Everything I filed last year that was even mildly controversial will be coming back.”

I wanted perspective on the SCC numbers, so I reached out to Dominion as well as Edward L. Petrini at Christian Barton LLP, who represents large industrial and commercial electricity customers in Virginia, and to Michael Kelly, director of communications for the Virginia Attorney General’s Office. Only Dominion responded to my interview request.

I spoke with Thomas P. Wohlfarth, senior vice president of regulatory affairs. Not surprisingly, he says there is a lot less to the SCC excess-earnings numbers than meets the eye.

Accounting for coal ash expenditures. It is “ridiculous,” Wohlfarth says, to remove expenses tied to coal ash removal from the excess-earnings estimates. Dominion incurred a large liability when the Environmental Protection Agency ordered it to develop a permanent storage solution for millions of tons of coal combustion revenue accumulated over the decades. While about half the coal ash expenses qualify for recovery under a “rider” request not included in the base rate, about half of it does, he says.

“There are no circumstances under which it would be appropriate other than to record those expenses when the liability occurred,” Wohlfarth says. Referring to the SCC presentation of the excess-earnings data, he adds, “That’s the game they kind of play, trying to inflate the numbers worse than they are.”

Accounting for Return on Equity. Other accounting issues are more complicated to explain. First some background…. The key determinant in how much money electric utilities are allowed to earn before returning the surplus to ratepayers is Return on Equity (ROE), a ratio expressing earnings as a percentage of shareholder equity. The goal is to set the ROE at a level high enough to encourage power companies to invest in their utility operations — but no higher. Dominion Energy, DEV’s parent company, typically earns a corporation-wide ROE of about 14% to 15%. That includes the return on non-regulated business operations. Because regulated utilities are perceived as less risky, the SCC sets DEV’s ROE significantly lower.

The SCC calculates separate ROEs for Dominion’s generation business and its distribution business, which have different risk profiles. Here are the results based on SCC accounting:

“The combined generation and distribution earned ROE of 11.94% is above the 9.60% ROE approved by the Commission for DEV’s RACs (Rate Adjustment Clauses) during 2016 by 2.34 percentage points, or $358.2 million in revenues,” states the SCC report, “and is above the 10.0% ROE approved by the Commission in DEV’s last biennial review by 1.94 percentage points, or $297 million in revenues.”

Wohlfarth says that the SCC inflated the appearance of excess earnings by using the 9.6% ROE as the basis for its calculations. The SCC allows the company to earn a 10.7% ROE for the base rate, which applies to ongoing operations and are subject to the freeze. Why would the SCC pick the high ROE used for rate adjustment clauses rather than the low ROE used for the base rate when the freeze applies to the base rate?

An exceptional year. Another thing to consider, says Wohlfarth, is that “2016 was an anomalously good year for us.” Dominion benefited from a spike in revenue relating to the way PJM Interconnection, the regional transmission organization of which Virginia is a part, calculated its “capacity” payments. (PJM pays power companies separately for making generating capacity available, whether it is used or not, and for the electricity they actually generated.) That non-recurring revenue added $150 million in revenue.

“If you normalize for capacity revenue, we were down around 11% ROE, which doesn’t give us much of a buffer at all,” says Wohlfarth.

That leaves Dominion somewhat ahead of the game in 2016, concedes Wohlfarth, but that’s only one year. The company is still exposed to considerable downside risk in future years.

Future risks. Coal ash remains a potential liability. While Dominion has endeavored to pursue a “cap in place” strategy, environmental groups have pushed hard for Dominion to remove the coal ash and place it in synthetically lined landfills, which could be significantly more expensive. Dominion is expected to issue a report on the economics of coal ash disposal to the General Assembly later this fall.

Also, Dominion remains at risk for major weather events. In 2016, the company experienced only one hurricane remnant, but it was not an expensive one. A superstorm like Hurricane Harvey or Hurricane Irma could incur hundreds of millions of dollars in repair costs.

Yet another risk Dominion faces is plant “impairment.” The company still operates a handful of coal-burning power plants, but in an era of increased electric generation by wind, solar and gas, they are increasingly relegated to the sidelines. When natural gas is cheap and gas plants are more economical to run, coal plants are dispatched less frequently, which means they produce less revenue.

“We’ve got units that are not being dispatched very much at all,” says Wohlfarth. “It becomes difficult to keep them on the books at value. We’re not at that point right now. But it’s something we’re always reviewing.”

Impairment resulting from changing economic or regulatory conditions could result in write-downs of hundreds of millions of dollars, he says. That was one of the concerns about the Clean Power Plan, which, if implemented would have put some of Dominion’s remaining coal-generating assets in jeopardy. While the Clean Power Plan is on the back burner under the Trump administration, it is not dead. The initiative is tied up in the courts. Meanwhile, the McAuliffe administration is pursuing its own restrictions on carbon-dioxide emissions.

All things considered, says Wohlfarth, and Dominion’s ROE is about where it ought to be. Revenues might be a little high in 2016, but they could well be lower in the years ahead. “It’s part of the balanced equation. … Look under the hood, and you’ll see that our rates are adequate to deal with the risks we take.”

Thank You, GASB, for Bringing Tax-Break Transparency to Local Government

How to blow a hole in your tax base without really trying.

Every year, local governments across Virginia publish a voluminous document called a Comprehensive Annual Financial Report (CAFR) that describes their fiscal condition, detailing revenues, expenditures, debt, and growth in the tax base. This year, CAFRs should include a new data point: revenue foregone due to business tax incentives.

Few localities have bothered to compile and report this information before. But the Government Accounting Standards Board (GASB) issued a directive that requires state and local governments to disclose any taxes being abated, the dollar amount of the tax breaks, and any other commitments made by the government as part of a tax-abatement agreement. This “statement 77” goes into effect for financial statements beginning after Dec. 15, 2015. The data should begin surfacing in 2016 annual reports being submitted this year.

The accounting issue has become an issue because tax giveaways have become so ubiquitous. By one estimate, reports a Land Lines magazine article on GASB 77, state and local governments spent $45 billion in tax incentives in 2015, including $12 billion in property tax abatements. According to another estimate, total business incentives have tripled since 1990.

Many state and local governments have been addicted to tax incentives as a tool for recruiting businesses and capturing the tax revenue they generate. Here in Virginia, local governments reap real estate property taxes, machine & tool taxes, BPOL (business professional and occupational license) taxes, and a share of sales taxes paid by businesses in their borders. Many are willing to forego some of those tax revenues in order to capture a business and the balance of the revenue it will pay.  While Virginia localities haven’t gone to the extremes of some regions — the Land Lines article highlights the Kansas City metropolitan area and Franklin County, Ohio — tax exemptions are widespread.

For purposes of calculating a jurisdiction’s fiscal health, it is critical to get a handle on its real estate property tax base, which accounts for about 30% of all local revenue nationally. Local governments typically track the impact of non-profit and tax-exempt hospitals, universities and state facilities within their borders. Excessive reliance upon exemptions for corporate citizens also can hollow out a locality’s tax base, but that information is not readily available to citizens.

Few observers would advocate abolishing all tax incentives. Attracting a cornerstone facility such as an automobile assembly plant can generate tax revenues even after abatements, draw suppliers to an area, boost worker productivity, spark the creation of new training programs at local colleges and universities, and recruit top technical and managerial talent in a positive feedback loop. But all too often, incentives are handed out to everyone as businesses learn to play the game. A huge challenge for economic developers is gauging whether a business prospect is seriously considering relocating to other localities and needs the incentive as a tie-breaker or if it is just seeking to extract a subsidy for a decision it has already made.

Tax exemptions also raise equity issues. Why should newcomer companies get better tax treatment than businesses that have demonstrated a commitment to a community and paid taxes all along? From a social justice perspective, how much money is being diverted from priorities such as schools and infrastructure for all? From a free market perspective, could localities use the money to reduce tax rates for everyone?

People are less likely to ask those questions if they have no idea how much money local governments are leaving on the table. Transparency is good. GASB’s reporting requirement will make the information available in localities’ annual reports. Now it’s up to citizens to ferret out that information and make something of it.