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Political Corruption and Asymmetric Information: Opinion

Bill Britt

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By Bill Britt
Alabama Political Reporter

According to the Federal Bureau of Investigation:

“Public corruption poses a fundamental threat to our national security and way of life. It impacts everything from how well our borders are secured and our neighborhoods protected…to verdicts handed down in courts…to the quality of our roads, schools, and other government services. And it takes a significant toll on our pocketbooks, wasting billions in tax dollars every year.”

Because public corruption is so detrimental to our Nation and State, socially as well as morally, it is important to understand how legal and illegal corruption in government is rooted in Asymmetric Information.

Asymmetric Information generally related to economics can be defined as “a situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well,” according to Investopedia.

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Politicians, bureaucrats, lobbyists, special interests, and businesses use Asymmetric Information to their advantage in the political arena. Not unlike the car salesman, real estate agent, or doctor, privileged information creates an advantage for one player over another. While the internet has leveled the playing field in many areas, politics still remains a maze of complicated rules, laws, agencies, and hierarchy, that can leave even an astute observer at a decidedly stunning disadvantage.

Hidden information and actions can, and quite often do, actually cause harm to the very citizens the government is sworn to protect. This abuse is seldom discovered without vigilant watchdogs.

The citizens do feel the effects. 

In State’s where Asymmetric Information is used to advance private interest over public good, there are tell-tale signs. They generally manifest themselves in quality of life issues. Poor education, limited health services, crumpling infrastructure, and slow economic grow are all signs of government corruption. 

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In a representative government, citizens elect others to act on their behalf, and then rarely question how that elected official carries out their duty, until something goes terribly wrong.

Meanwhile, hidden information and hidden action used by these representatives often leads to corruption, both legal and illegal.

In the Harvard University study, “Corruption in America Survey,” authors Oguzhan Dincer and Michael Johnston define legal corruption as, “political gains in the form of campaign contributions or endorsements by a government official, in exchange for providing specific benefits to private individuals or groups, be it by explicit or implicit understanding.”

Illegal corruption is stated as, “private gains in the form of cash or gifts by a government official, in exchange for providing specific benefits to private individuals or groups.”

However, under Alabama law, a quid pro quo arrangement doesn’t have to be proven for a politico to run afoul of the law. 

There are many examples of how Asymmetric Information is used in politics to benefit a certain group or individual. Here, we will look at two legislative acts that were influenced by hidden information and hidden acts.

Such a case involves the State Insurance Premium tax. An insurance premium tax is the amount of tax paid on a given insurance policy. According to Lexis Nexis, “An insurance premium tax is a form of gross receipts or excise tax; it is not based on profits or earnings, and is not affected by the cost of ceded reinsurance or other expenditures, of an insurer.”

In 1985, the US Supreme Court held that Alabama insurance premium tax system was unconstitutional in Metropolitan Life v. Ward.

Prior to the 1985 ruling, domestic carriers paid a rate of 3.0 percent while out-of-state carriers paid 4.0 percent.

The Court held the State law violated the equal protection clause, and that a State could not charge out-of-state insurance (foreign) companies a higher premium tax than domestic insurance carriers. To address the US Supreme Court ruling, the State passed the Insurance Premium Tax Reform Act of 1993, which set the Premium tax rate at 3.6 on both foreign and domestic carriers.

From 1993 until 1995, the State’s largest insurance business (ALFA) would spend $2.3 million on political campaigns through its two political action committees, according to a 1997 report in the Wall Street Journal.

In 1995, the State legislature passed a new insurance premium tax system that, through a complicated scheme of incentives, would give ALFA a huge advantage over its competition. 

According to former Revenue Commissioner under Gov. Bob Riley, and past president of Baldwin Mutual Insurance, Judge Tim Russell, this type of advantage hurt the citizens of the State, as well as companies that would do business here. 

“Anytime you have a Premium tax that’s not fair to all concerned, you’re gonna hurt the citizens of the State, and the companies who can’t get that Premium tax,” Russell said. 

Data provided from the Department of Insurance reveals that from 2008 to 2013, ALFA  would receive over $70.6 million in Premium tax credits from the State.

Other carriers have since learned to take advantage as well, but ALFA’s benefits from the 1995 law are clearly demonstrated by the data. 

However, it is important to note that tax credits vary from ALFA’s property and casualty tax of 1.6 percent, to Allstate’s at 3.45 percent, whereas companies like GEICO do not take a tax credit; therefore they pay the maximum of 3.6 percent.

Here is a case, in my opinion, where political contributions led to passage of a set of laws that benefited one particular company over others, while giving one set of customers a benefit at the detriment of others. 

A comparison of insurance carriers paints a vivid picture of how Premium tax credits vary between companies. Data provided from the Department of Insurance reveals that from 2008 to 2013, ALFA, and State Farm combined received a total of around $140 million compared to Nationwide, who earned approximately $10 million in premium tax credits or less than 10 percent of the bigger players. From 2008 to 2013, the total for all insurance carriers receiving premium tax credits was $160.2 million.

If one family has ALFA coverage and the other has Nationwide, the one with ALFA will pay less on their premium tax. 

Governor Bentley has called this an unfair tax, and had hoped to address this during the 2015 Legislative Session. Bentley’s plan estimated this would increase State revenue by $25 million per year. Most of the insurance premium tax goes to the General Fund Budget, and is, in fact, the single, largest contributor to the Fund.

According to Alabama Department of Insurance (ALDOI), over the last four years, the State’s General Fund has received $1,001,414,336 in revenue from the Premium tax paid in. In the same period, ALFA and State Farm have taken a combined total of $96,230,401 in tax credits, (estimated for 2014). The total for all companies taking advantage of the Premium tax credits was $110,443,705 (estimated for 2014). 

Here, I believe Asymmetric Information held by certain business interests, lobbyists, and lawmakers led to passage of incentives that would benefit one company over another, dissuade growth in an industry, all the while creating a disparity in payments by consumers. 

Why, after 20 years, should the State continue to incentivize ALFA?

Because, its PACs remain highly active in financing candidates to public office.

In my judgement, this is the type of legal corruption that the Harvard study defines as, “political gains in the form of campaign contributions or endorsements…in exchange for providing specific benefits to private individuals or groups, be it by explicit or implicit understanding.”

The study found that legal corruption in Alabama’s legislative branch is extremely common. 

Twenty years after its passage, few remained who voted to give ALFA its tax advantage. Most legislators were not even aware of the incentive, or its negative impact on the General Fund Budget. Outside of the insurance community, even fewer average citizen has any knowledge of the disparity that cost many of them money, in the form of higher insurance rates. 

After breaking the story on ALFA’s tax advantage in March 2015, two State Representatives claimed they were threatened by ALFA lobbyists. The Governor couldn’t find a single Republican House Member to carry his legislation to reform the insurance premium tax system. 

In politics, Asymmetric Information used to pass legislation can lead to various forms of graft, coercion, and fraud. 

In October 2014, Republican Speaker of the House Mike Hubbard was arrested on 23 felony counts of public corruption. Hubbard was charged with using his office for personal gain, receiving cash and contracts from lobbyists, and business associates, and receiving assistance with his business interests from high-profile individuals and companies, including former Gov. Bob Riley.

After hearing from over 150 witnesses and reviewing thousands of documents, a Grand Jury of 18 citizens from Lee County found probable cause that Hubbard should be tried for these crimes.

The State alleges that Hubbard has committed acts of illegal corruption. In June 2013, this publication was the first to report that Hubbard had not only voted to passage legislation to benefit a business client, but that he had also arranged for 23 words to be inserted into the State’s Medicaid budget to benefit that client.

During the 2013 Legislative Session Hubbard worked to pass law that would have made his client American Pharmacy Cooperative Inc. (APCI) the sole company to provide Pharmacy Benefits Manager services to Alabama’s Medicaid agency.  The resulting contract would have been worth an estimated $12 to $20 million annually. 

According to the State, Hubbard, while Speaker of the House, was paid over $700,000 for illegal actions on behalf of various business clients, APCI being one. 

At a time when the State was looking to better administer drug benefits to Medicaid recipients, Hubbard was looking out for his client, who was paying him around $7500. a month and himself. Here, Hubbard used the power of his office while hiding Asymmetric Information, which, if known, would have forced him to recuse himself from a vote. But, not only did Hubbard have language placed into the budget, he voted for its passage 12 times.

Once rumors started to surface around the State House that Hubbard had a client who would benefit from the passage of legislation, he arranged a meeting with the State Ethics Director to seek approval for the contract. Again, this was kept secret from other members of the House.

According to then Alabama Ethics Commission Director James L. Sumner, Hubbard informed him after-the-fact of a business agreement between Hubbard’s media company, Auburn Network Inc., and the Bessemer-based APCI. “He said it [the contract] was to provide several services is what I understood. I don’t recall that he went into detail.”

During the meeting, Sumner gave a verbal nod to the contract even through he admitted, “I never saw a contract and didn’t ask to see a contract.” 

Hubbard had asked the Commission’s opinion on another contract with the Southeast Alabama Gas District (SEAGD). In writing, legal council for the commission Hugh Evans, III, warned Hubbard, “The only potential issue that we saw [with the SEAGD contract] would be if something came before the legislature that uniquely affected the Southeast Alabama Gas District differently than it affected all other utilities around the State of Alabama.”

Evans said, that should an issue that directly effected SEAGD come before the legislature, Hubbard  “would expect … to remove himself from discussions, votes, etc.” Evan’s also stated in his opinion that, “the Speaker may not use his position or mantle of his office to assist him in …providing benefits to his … clients.” 

In the indictments against Hubbard, the State says he ignored the warnings. He is also charged with committing crimes in relation to his work for SEAGD.

On several occasions, Hubbard met with Gov. Bentley, and other public officials were unaware of Hubbard’s financial arrangements which were contrary to the law according to the indictments.

In the case of APCI, or his other clients: Did Hubbard have the State’s best interests in mind or his own? In meetings with high ranking government and business leaders, Hubbard withheld pertinent information. He strategically used the power of Asymmetric Information for his personal gain. Hubbard could dupe fellow legislators, the Governor, and others, because he had hidden information. The real motivation behind his actions was hidden, giving him further advantage because his real agenda was unknown.

Secret contracts, private approvals and hidden payments, led to what the State calls a crime.

Hubbard is the self-proclaimed architect of the Republican take-over of State government in Alabama. He and his fellow Republicans offered transparency as a cornerstone of governing policies.

Rather than real reform, the same use of Asymmetric Information to gain advantage over legislation and the voters is still practiced.

This continues to foster a climate of legal and illegal corruption, which keeps our State at the bottom in almost every metric of progress. Just like the used car salesman, our politicians, bureaucrats, lobbyists, special interests, and businesses will continue to use Asymmetric Information to their advantage. The public, and especially the press, must demand more tools to end the politicos advantage, which almost always leads to public corruption.

 

Bill Britt is editor-in-chief at the Alabama Political Reporter and host of The Voice of Alabama Politics. You can email him at [email protected] or follow him on Twitter.

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Tuberville calls for term limits, balanced budget and lobbying reform

Tuberville has also made a major media buy across the state to trumpet this message.

Brandon Moseley

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Republican Senate candidate Tommy Tuberville (TUBERVILLE CAMPAIGN)

Senate candidate Tommy Tuberville’s campaign began emphasizing key structural reforms that the Republican nominee hopes to advance if elected to the U.S. Senate including congressional term limits, withholding lawmakers’ paychecks unless a balanced budget is passed and a ban on former officials becoming lobbyists.

“Only an outsider like me can help President Trump drain the Swamp, and any of the proposals outlined in this ad will begin the process of pulling the plug,” Tuberville said in a statement. “Doug Jones has had his chance, and he failed our state, so now it’s time to elect a senator who will work to fundamentally change the way that Washington operates.”

Tuberville has also made a major media buy across the state to trumpet this message.

“You know Washington politicians could learn a lot from the folks in small town Alabama, but Doug Jones … he’s too liberal to teach them,” Tuberville added.

Polls consistently show that term limits are popular with people across both political parties, but the U.S. Supreme Court has ruled that imposing term limits would be adding a qualification to be a member of Congress and that can only be done by constitutional amendment.

It is an unspoken truth that when Americans send someone to Congress they never come back. They either keep getting re-elected like Alabama’s own Sen. Richard Shelby, who is in his sixth term in the Senate after four terms in the U.S. House of Representatives. On the other hand, they may become lobbyists getting paid to influence their colleagues on behalf of corporations, foreign governments or some well funded non-government organization.

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Tuberville said he would ban that practice.

A balanced budget amendment almost passed in the 1980s and again in the 1990s.

Since that failure, Congress has increasingly passed bigger and bigger budget deficits. The U.S. government borrowed more money during the eight years of President George W. Bush’s presidency than the government had borrowed in the first 224 years of the country combined.

President Barack Obama followed and the TARP program propped up the post-Great Recession economy. Rather than cutting the deficit, President Donald Trump invested billions in the military and a tax cut without cutting domestic spending. The 2020 coronavirus crisis has further grown the budget.

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The government has borrowed trillions to prop up the economy and provide stimulus while investing billions into medical research and treating the virus victims. Congress is currently debating a fifth stimulus package that would add more to the deficit.

Both a balanced budget amendment and a term limits amendment would have to be ratified by the states if passed by Congress. Tuberville is challenging incumbent Sen. Doug Jones, D-Alabama.

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House passes General Fund Budget

Brandon Moseley

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By Brandon Moseley
Alabama Political Reporter

The Alabama House of Representatives passed the state General Fund Budget on Tuesday.

The General Fund Budget for the 2019 fiscal year is Senate Bill 178. It is sponsored by Sen. Trip Pittman, R-Montrose. State Rep. Steve Clouse, R-Ozark, carried the budget on the House floor. Clouse chairs the House Ways and Means General Fund Committee.

Clouse said, “Last year we monetized the BP settlement money and held over $97 million to this year.”

Clouse said that the state is still trying to come up with a solution to the federal lawsuit over the state prisons. The Governor’s Office has made some progress after she took over from Gov. Robert Bentley. The supplemental we just passed added $30 million to prisons.

The budget adds $50 million to the Department of Corrections.

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Clouse said that the budget increased the money for prisons by $55,680,000 and includes $4.8 million to buy the privately-owned prison facility in Perry County.

Clouse said that the budget raises funding for the judicial system and raises the appropriation for the Forensic Sciences to $11.7 million.

The House passed a committee substitute so the Senate is either going to have to concur with the changes made by the House or a conference committee will have to be appointed. Clouse told reporters that he hoped that it did not have to go to conference.

Clouse said that the budget had added $860,000 to hire more Juvenile Probation Officers. After talking to officials with the court system that was cut in half in the amendment. The amendment also includes some wording the arbiters in the court lawsuit think we need.

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The state General Fund Budget, SB178, passed 98-1.

Both budgets have now passed the Alabama House of Representatives.

The 2019 fiscal year begins on Oct. 1, 2018.

In addition to the SGF, the House also passed a supplemental appropriation for the current 2018 budget year. SB175 is also sponsored by Pittman and was carried by Clouse on the floor of the House.

SB175 includes $30 million in additional 2018 money for the Department of Corrections. The Departmental Emergency Fund, the Examiners of Public Accounts, the Insurance Department and Forensic Sciences received additional money.

Clouse said, “We knew dealing with the federal lawsuit was going to be expensive. We are adding $80 million to the Department of Corrections.”

State Representative Johnny Mack Morrow, R-Red Bay, said that state Department of Forensics was cut from $14 million to $9 million. “Why are we adding money for DA and courts if we don’t have money for forensics to provide evidence? if there is any agency in law enforcement or the court system that should be funded it is Forensics.”

The supplemental 2018 appropriation passed 80 to 1.

The House also passed SB203. It was sponsored by Pittman and was carried in the House by State Rep. Ken Johnson, R-Moulton. It raises securities and registration fees for agents and investment advisors. It increases the filing fees for certain management investment companies. Johnson said that those fees had not been adjusted since 2009.

The House also passed SB176, which is an annual appropriation for the Coalition Against Domestic Violence. The bill requires that the agency have an operations plan, audited financial statement, and quarterly and end of year reports. SB176 is sponsored by Pittman and was carried on the House floor by State Rep. Elaine Beech, D-Chatham.

The House passed Senate Bill 185 which gives state employees a cost of living increase in the 2019 budget beginning on October 1. It was sponsored by Sen. Clyde Chambliss, R-Prattville and was being carried on the House floor by state Rep. Dimitri Polizos, R-Montgomery.

Polizos said that this was the first raise for non-education state employees in nine years. It is a 3 percent raise.

SB185 passed 101-0.

Senate Bill 215 gives retired state employees a one time bonus check. SB215 is sponsored by Senator Gerald Dial, R-Lineville, and was carried on the House floor by state Rep. Kerry Rich, R-Guntersville.

Rich said that retired employees will get a bonus $1  for every month that they worked for the state. For employees who retired with 25 years of service that will be a $300 one time bonus. A 20-year retiree would get $240 and a 35-year employee would get $420.

SB215 passed the House 87-0.

The House passed Senate Bill 231, which is the appropriation bill increase amount to the Emergency Forest Fire and Insect and Disease Fund. SB231 is sponsored by Sen. Steve Livingston, R-Scottsboro, and was carried on the House floor by state Rep. Kyle South, R-Fayette.

State Rep. Elaine Beech, D-Chathom, said, “Thank you for bringing this bill my district is full of trees and you never know when a forest fire will hit.

SB231 passed 87-2.

The state of Alabama is unique among the states in that most of the money is earmarked for specific purposes allowing the Legislature little year-to-year flexibility in moving funds around.

The SGF includes appropriations for the Alabama Medicaid Agency, the courts, the Alabama Law Enforcement Agency, the Alabama Department of Corrections, mental health, and most state agencies that are no education related. The Alabama Department of Transportation gets their funding mostly from state fuel taxes.

The Legislature also gives ALEA a portion of the gas taxes. K-12 education, the two year college system, and all the universities get their state support from the education trust fund (ETF) budget. There are also billions of dollars in revenue that are earmarked for a variety of purposes that does not show up in the SGF or ETF budgets.

Examples of that include the Public Service Commission, which collects utility taxes from the industries that it regulates. The PSC is supported entirely by its own revenue streams and contributes $13 million to the SGF. The Secretary of State’s Office is entirely funded by its corporate filing and other fees and gets no SGF appropriation.

Clouse warned reporters that part of the reason this budget had so much money was due to the BP oil spill settlement that provided money for the 2018 budget and $97 million for the 2019 budget. Clouse said they elected to make a $13 million repayment to the Alabama Trust fund that was not due until 2020 but that is all that was held over for 2020.

Clouse predicted that the Legislature will have to make some hard decisions about revenue in next year’s session.

 

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Day Care bill delayed for second time on Senate floor, may be back Thursday

Sam Mattison

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By Samuel Mattison
Alabama Political Reporter

The day care bill, which would license certain day care centers in Alabama, was once again delayed on the state Senate floor after one lawmaker requested more information.

Its brief appearance Tuesday ended with state Sen. Gerald Dial, R-Lineville, saying a compromise had not yet been worked out with the bill’s detractors.

Alabama’s Senate has been hesitant to act on the legislation because of complaints of state Sen. Shay Shelnutt, R-Trussville, who has been an opponent of the bill since its introduction last year. The bill’s delay on Tuesday marks the second time its been taken off the Senate’s agenda.

The bill has had a rocky time in this year’s session, but the bill’s sponsor state Rep. Pebblin Warren, D-Tuskegee, said she is still confident about its passage out of the Legislature.

Warren, D-Tuskegee, filed the bill this session with the support of influential lawmakers including Gov. Kay Ivey, who told reporters last year that she though all day cares should be licensed.

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Mainly sparked by the death of 5-year-old boy in the care of a unlicensed day care worker, the bill had great momentum coming into this year’ session.

Despite the growing support from lawmakers, Religious groups had concerns that the bill would increase state-sponsored reach into religious day cares in churches and non-profit groups.

Spearheading the dissenters was Alabama Citizens Action Program, a conservative religious-based PAC.

Warren, proponents, and ALCAP announced a compromise to the bill while it was still in the Alabama House.

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Announced by ALCAP originally, the new bill was a weaker version in that it did not require that all day cares in the state be regulated. Instead, religious-based day cares would only need to be registered if they received federal funds. At a Senate committee meeting in February, Warren said a similar requirement was about to come from federal law in Congress.

The bill moved through the House in a overwhelming vote in favor of the proposal and passed unanimously out of a Senate committee a few weeks ago.

Warren, speaking to reporters after its passage from the House, said she was unsure if the bill would encounter resistance in the upper chamber.

It was the Senate that killed the daycare bill last year amid a cramped last day where senators took the bill off the floor. The bill may face similar complications this year, as lawmakers seem to be preparing to adjourn within a few weeks.

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Fantasy sports bill fails on Senate floor

Sam Mattison

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By Samuel Mattison
Alabama Political Reporter

Would-be Fantasy Sports players in Alabama will have to wait to legally play in the state following a Senate vote on Tuesday.

The Alabama Senate decisively killed a bill to exempt fantasy sports from the state’s prohibition on gambling.

Not even entertaining a debate on the Senate floor, the proposal was killed during a vote for the Budget Isolation Resolution, which is usually a formality vote preluding a debate.

Fantasy sports are contests where participants select players from real teams to compete on fantasy teams using the real-world players’ stats.

Since 2016, the practice has been illegal in Alabama following a legal decision by the Attorney General’s Office that categorized it as gambling.

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The bill’s sponsor, state Sen. Paul Sanford, R-Huntsville, predicted the bill’s failure during a committee meeting two weeks ago, where the bill passed unanimously.

Sen. Paul Sanford speaks to reporters after a Senate Committee meeting on Feb. 28, 2018. (Samuel Mattison/APR)

Speaking to reporter’s after the committee meeting, Sanford said the decision to file the bill was mainly a philosophical belief that the practice shouldn’t be illegal.

Sanford, a fantasy sports player before its ban, said that fantasy sports are a way to bring people closer together and not a means to win money. The Huntsville senator is not seeking re-election.

The bill’s failure in the Senate follows its trajectory last year too. A similar version of the bill, also sponsored by Sanford, failed in the Senate during the final days of the 2017 Legislative Session.

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Since Sanford is retiring, it is unclear if the bill will even come back next session, or if it will even have a Senate sponsor.

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