Milwaukee Biz Blog

One of the benefits of being affiliated with TEC (The Executive Committee) is being able to participate in presentations by world class experts on the business issues of the day.

Currently, our most popular resource specialist is Brian Beaulieu, an internationally recognized economist who has been forecasting a worldwide, consumer led recession beginning is 2009, running through 2010, for the past several years. If Beaulieu is correct, from a macro-economic view point, the worst is yet to come.

As an economist, Beaulieu is somewhat unique in his profession. Not only does he forecast the ups and downs of the business cycle with a certain degree of accuracy, he also suggests actions that CEOs can initiate in advance of turn in the business cycle that will mitigate the negative effects of the downturns and take advantage of unique opportunities on the upside.

I have "adapted" some of Brian Beaulieu's prescriptions as they might apply to the public, rather than private sector. As you can see, on several fronts, our local political leaders are clearly ahead of the curve relative to a recession in 2009.
 
Ignore the balance sheet. With inflation adjusted interest rates at historic lows, this is a terrific time to add significant debt to the balance sheet. Heading into a downturn a nice big fat Cap Ex project like commuter rail would be the coup de grace. It appears governments, not bound by GAAP accounting, aren't required to book long term obligations anyway. Take on more debt now, while the almost free money is readily available.

Raise prices. Beaulieu is insistent here. For the past year and half, he has been advising TEC members to raise prices early and often. Again, local governments are on top of this one with the recent plethora of tax and user fee increases. The plan to add 0.5 percent to the county sales tax for parks and 0.5 percent to the county sales tax for public transit would be uniquely timed price increases heading into recession. Recently, the Milwaukee Pubic Schools board took a real leadership position here when they made the case for a 14.9% tax increase on top of the 9% increase last year. As one board member pointed out, "We just don't know what else we can do."

Forecast never ending top line revenue increases. Again, our elected officials appear to be economic gurus here. Gov. Jim Doyle was the first to yelp earlier this year when the state's tax collections failed to meet forecast. They came back with some budget gimmicks and more taxes, and even some increased spending ideas, like commuter rail.  Now, when the economy tanks in 2009 and, according to Beaulieu, potentially worsens in 2010, our local politicians can simply "blame the economy" for any shortfall. After blaming the economy, our elected leaders will be free to raise all manor of taxes to cover the inevitable accumulated deficits.

Insource. As with many of Beaulieu's prescriptions for thriving in a downturn, bringing work in-house may seem counter intuitive. But for a politician heading into a economic downturn, adding headcount rather the subcontracting to better, cheaper, faster outsourced alternatives means more voters dependent on government for a job. There is simply no excuse not to be re-elected in a downturn. Similarly, retaining marginal employees in a downturn becomes even more important. The evidence would suggest Milwaukee's leaders are doing a fine job here as well. For us, it is not getting the right people on the bus, the wrong people off the bus and the right people in the right seats. It is more like, borrow money and buy a bunch of buses and jam as many people on them as possible. They can stand. Every vote counts. 

So, if we do experience at least two back-to-back quarters of negative growth in 2009, it appears our governments are uniquely positioned to offer up their contributions. If Brian Beaulieu is correct and the worst is yet to come, our current crop of elected leaders are working hard to insure that the worst is yet to come.
 

Dennis Ellmaurer is a principal of Globe National Corp., a Milwaukee firm working exclusively with sellers of small businesses in southeastern Wisconsin. Ellmaurer also is a chairman of The Executive Committee (TEC), facilitating three CEO groups in southeastern Wisconsin.

When I recently wrote a Milwaukee Biz Blog to suggest the Darwin E. Smith Awards for people, organizations and government entities who made it difficult for companies to business Wisconsin, I had no idea Steve Roell, chairman and chief executive officer of Johnson Controls Inc., would step forward as a nominee.

Johnson Controls reports annual revenues of $35 million this year with a pre-tax profit of $2.6 billion.  It is the largest corporation in the state of Wisconsin. The company employs 140,000 people. A model corporate citizen.
It is a company of which Darwin Smith, the CEO of Kimberly-Clark who moved his company's corporate headquarters out of Wisconsin because of high taxes and excessive regulation, might have suggested considering removing itself from the Wisconsin corporate gene pool - by relocating to another state or perhaps, another country. 

So why is Steve Roell supporting the state hospital tax?

Let's connect the dots.

Wisconsin Gov. Jim Doyle and the Senate Democrats included the $400 million hospital tax in their budget repair bill. The idea was to add an "assessment" to all hospital bills. This assessment would be a tax - a 0.7-percent sales tax - on every patient who paid his or her hospital bill, either through private insurance or out of his or her own pocket. Hospitals throughout the state would collect the tax from their paying patients and send it to the governor.

The governor agreed to pay an extra $275 million to the state Medicaid health program to repay hospitals a portion of the bill for people who are unable to pay their medical bills.  The federal government matches the state's additional contribution. Under this socialized reimbursement plan, hospitals with the highest percentage of Medicaid patients would see their reimbursement rates increase the most. 

Doing the math, the governor gets to keep $125 million, under a provision in the bill called "the skim." The skim is analogous to the "grease" a bettor pays a bookmaker for placing and winning a bet. The bookie earns the grease for facilitating the transaction. In this case, because the grease goes to the general fund, Doyle gets to spend the skimmed tax money any way that pleases him and his constituents.

At this point, the proponents of the "sales tax on people who pay their own hospital bills either through private insurance or out their own pockets" claim that the matching funds coming back from Washington, D.C., is free money. Wisconsin does not receive its fair share of the federal largess, they say. Twenty other states have cooked up similar schemes.

The free money from Washington isn't free. It is, more appropriately, money that has been extracted from ordinary, everyday people. Not corporations. Not hospitals. Real people, like the folks who send some of their earned income withheld from every paycheck to Washington every week.   

So why would really smart guys like Steve Roell, Jim Haney (president of Wisconsin Manufacturers & Commerce) and Tim Sheehy (president of Metropolitan Milwaukee Association of Commerce) support such a scam?

The deception is even more interesting considering the primary beneficiaries of the arrangement. Besides Doyle, the hospital systems that stand to gain the most under the proposed socialized hospital tax solution appear to be Children's Hospital of Wisconsin and Aurora Health Care - two of, arguably, the most profitable, "nonprofit" hospital systems of the planet. San Aurora serves poor patients in Milwaukee, while Children's substantial niche in health care for kids, attracts everyone, rich and poor.

We all love and admire Children's Hospital for the incredible work they do. But Aurora? Why are the big businesses and outstanding companies like Johnson Controls, with the support of WMC and MMAC, supporting, the 800-pound gorilla?

Connect the dots.

Doyle is creating on a $1 billion project on the campus of the University of Wisconsin-Madison, called the Wisconsin Research Institute. Stem cell research. Cancer research. Cures for all manor of diseases. A worthy cause, no doubt.

Consider the Wisconsin corporations that would benefit from the construction and operation of the Wisconsin Research Institute? On a billion dollar laboratory project, how much would Johnson Controls "climate control group" and "facilities management divisions" stand to gain? $50 million?  $100 million? Run the numbers over the lifetime of the facility, if you like. I trust Johnson Controls has a pretty good idea. 

Next, consider how many companies represented on the WMC and MMAC boards of directors stand to benefit directly and indirectly from the construction and management of this $1 billion expenditure? Google the lists of their directors. Make your own evaluation.

For me, it took a fair amount of time and research to connect the dots. Assembly Speaker Mike Huebsch (R-Onalaska) has his heels so dug in on this one that the sales tax on people who pay their hospital bills is unlikely to pass the Assembly.

The question is why would smart, big business leaders go along with something that they know is wrong?
One of the reasons local business leaders join business associations, such as MMAC and WMC, to help sort through the almost incomprehensible machinations of government, particularly at the state and local government levels. They let us down on this one. They ought to know better. They thought we would not connect the dots.
 
Dennis Ellmaurer is a principal of Globe National Corp., a Milwaukee firm working exclusively with sellers of small businesses in southeastern Wisconsin. Ellmaurer also is a chairman of The Executive Committee, facilitating three CEO groups in southeastern Wisconsin.

I was reading the latest edition of The Darwin Awards recently.  As we know, The Darwin Award honors those who improved the species … by accidentally removing themselves from it.

The stories recount some truly remarkably stupid stunts performed by apparently remarkably stupid people. With the governor and Senate Democrats passing a budget "fix" with more taxes on businesses and hospitals, I would suggest we create our own version of the award - The Darwin Smith Awards.

Darwin Smith was the CEO of Kimberly-Clark in the 70's and 80's. K-C became the world's No. 1 paper-based consumer products company under his watch. The corporate headquarters was located in Neenah. The State of Wisconsin was spending more than they collected at the time.

Smith warned then-Gov. Tony Earl that his plan to increase taxes on business was putting the state at a competitive disadvantage with other, more tax and business friendly, states.  In 1985, Smith moved the K-C corporate headquarters to Dallas. There is no corporate or personal income tax in Texas. It's unconstitutional there.

Milton Friedman was fond of pointing out that corporations don't pay taxes; only people pay taxes. Corporations are, however, extremely effective tax-collecting machines for governments.  Sales taxes, income taxes, property taxes, etc. are all simply pass-through collections from end users, i.e. people. 

As Friedman also noted, if raising taxes was the cure for budget deficits, there wouldn't be any $600 million shortfall - because we have been raising all sorts of taxes for about 100 years. The State of Wisconsin currently takes approximately $25 billion annually. Wouldn't that seem to be enough?

To show just how disingenuous these folks are, they added $200 million in new spending for the commuter rail in the so-called $600 million "budget fix." They plan to pay for it with another tax on business. This time it is the rental car companies that are expected to be the tax collectors with a 750-percent sales tax increase on rent-a-car customers.

The Metropolitan Milwaukee Association of Commerce and Wisconsin Manufacturers & Commerce deserve special Darwin Smith Award mention for their support of the $400 million hospital tax increase. Actually, the MMAC could be nominated in two categories, considering their unwavering support of commuter rail and the taxes necessary to fund these excesses.

My guess is Darwin Smith would have favored a constitutional amendment such as the Taxpayer Bill of Rights to simply limit tax increases of all levels of government to the increases in growth and inflation. With a potential downturn in the economy on the horizon, we are sure to hear more wailing from governor and Senate Democrats about not having enough money to spend due to decreases in tax collections.

Get more Darwin Smith Awards ready. More taxes can't be far behind. How many more businesses need to be culled from the Wisconsin gene pool before we learn?

Dennis Ellmaurer is a principal of Globe National Corp., a Milwaukee firm working exclusively with sellers of small businesses in southeastern Wisconsin. Ellmaurer also is a chairman of The Executive Committee, facilitating three CEO groups in southeastern Wisconsin.