How to Cripple Small Business With One Easy Law

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Anti-discrimination legislation under consideration by the Virginia state Senate would shrink the value of the state’s economy and fundamentally alter its business climate.
Senate Bill 868, introduced by Sen. Adam Ebbin, D-Alexandria, would subject even small businesses to unlimited compensatory and punitive damages in discrimination lawsuits and order businesses to pay the lawyers’ bills of the workers, tenants, or customers who sue them. The bill also would let Virginia’s Attorney General sue businesses for a $50,000 fine. But if a business proves itself innocent, it would receive nothing under this bill — no reimbursement of its attorney fees.
The legislation is very one-sided. If it become law, many businesses will have a powerful incentive to pay off people who make even dubious accusations of discrimination. Having to put up with that injustice will discourage people from starting a business in the first place. It will also discourage large companies for expanding into or relocating to Virginia, since plenty of other states don’t impose such onerous damages and fines on companies in discrimination cases.
The Ebbin bill, co-patroned by Senator Jennifer Boysko is more extreme than, but in some ways similar to, California’s Fair Employment and Housing Act (FEHA). That law also provides for unlimited compensatory and punitive damages in discrimination cases, and also forces the business to pay the attorney fees of a person who successfully sues it.
But it is more radical and anti-business. It also imposes civil fines, unlike California employment law. And unlike California’s law, it applies not just to employment and housing, but also public accommodations like restaurants and hotels. (California has a separate, less anti-business law banning discrimination in public accommodations. For example, that law, the Unruh Act, routinely lets an innocent business collect its attorneys fees when it wins).
Comparisons to California are instructive, because the Golden State does not have a very good business climate compared to most states. In its annual ratings, the American Tort Reform Association typically rates California as having the worst or second worst legal climate in America. CNBC ranks it #50 — dead last — in “cost of doing business,” and #32 in overall business climate out of the 50 states. Businesses are more likely to leave California than to move into it, like Northrop Grumman and Nestlé, which moved to Virginia from California a few years ago. Up to 10,000 businesses have left California in recent years.
Legislation like FEHA is a key reason why California has a bad business climate. It creates a constant need for businesses to pay nuisance settlements. I saw this first-hand as a young lawyer in Los Angeles. The law firm I worked at ended up repeatedly paying people discrimination settlements after it terminated them for totally non-discriminatory reasons — such as when their job became obsolete and was eliminated. (For example, computers with word processors made many legal secretaries unnecessary.)
Fighting these lawsuits would have cost the law firm more than it was worth. Years ago, it cost an estimated $25,000 on average for an employer to get a very weak discrimination lawsuit it dismissed at the earliest phase of litigation (“motion to dismiss”), $75,000 to get a fairly weak lawsuit dismissed at a later phrase (“summary judgment”) and $250,000 to defeat a lawsuit that goes all the way to trial.
When a business or institution loses a discrimination lawsuit, it can be ordered to pay huge sums money in attorneys fees to the plaintiff. That’s true even when the jury didn’t award the plaintiff much money because the plaintiff wasn’t really harmed. For example, a court awarded a worker over $40,000 in attorney fees even though the jury awarded her only $1 in damages, in Brandau v. State of Kansas (1999).
So, fighting a discrimination lawsuit can easily cost a business hundreds of thousands of dollars. That expense could bankrupt many small businesses. It reaches any employer with more than 5 workers. When such a small business is threatened with a discrimination lawsuit, it may have little alternative but to pay off the lawyer making the threat. (Most federal discrimination laws, by contrast, cover only employers with 15 or more workers, and limit the amount of damages that can be imposed on covered businesses).
Even worse is the way it awards attorney fees. Under it’s provisions, the court can only “award a prevailing plaintiff reasonable attorney fees and costs.” Not a prevailing defendant — like a business that was found not guilty by a jury. So, if the plaintiff brings a totally groundless lawsuit, and forces an innocent business to spend $250,000 defending itself, the business is not reimbursed a penny for its legal expenses..
By contrast, in California, the defendant business can be awarded its legal expenses if it shows the lawsuit was groundless. That’s because California’s Fair Employment and Housing Act provides that a business is entitled to be compensated for its lawyer bills if “the court finds the action was frivolous, unreasonable, or groundless when brought, or the plaintiff continued to litigate after it clearly became so.” (This is the same standard used by the U.S. Supreme Court in federal civil-rights cases).
That standard isn’t very pro-business, because it only penalizes clearly unreasonable lawsuits. Only a tiny percentage of workers who lose lawsuits are ever ordered to pay their employers’ legal bills under it. But it does discourage at least some unreasonable lawsuits from being filed, and thus makes it harder to extort settlements from innocent businesses.
SB 868 lacks even that minimal safeguard against groundless lawsuits and extortion.
And it is even more extreme compared to the Unruh Act, California’s law against discrimination in public accommodations. Under the Unruh Act, businesses that win a lawsuit are entitled to recover attorneys fees in many cases, even when a lawsuit against them was not frivolous or groundless. That is a more pro-business standard than exists in California employment and housing law, and far more pro-business than what Senators Ebbin and Boysko propose.
In short, SB 868 will make Virginia more anti-business in some ways than California. That is disturbing, because California’s employment laws are anti-business enough to be a drag on its economy. Researchers at the RAND Institute found that employer fears of lawsuits due to California’s anti-employer laws shrank employment in the state by 2-3%. This bill will similarly shrink the size of Virginia’s economy if it becomes law.
It will also cause businesses to leave Virginia. California has a wonderful meteorological climate that limits the number of people who flee the state due to its bad business climate. Virginia doesn’t. It has hot humid summers and cold winters that make it less appealing. And it is much easier to escape. Nothing stops a business from relocating to nearby North Carolina and Tennessee. Virginia is smaller and surrounded by more states than California, making it easier to lose businesses if it adopts a hostile attitude toward businesses. Bristol, Tennessee, already attracts businesses from neighboring Bristol, Virginia, right across the border — due partly to Tennessee having no income tax.
In the last election, many warned that the outcome could “turn Virginia into another California.” SB 868 is proof that the outcome might be even worse.
Hans Bader is an attorney living in Northern Virginia. A version of this post first appeared in Liberty Unyielding.
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Runaway Health Costs and Hospital Monopolies

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Healthcare costs are crowding out other spending by citizens and governments. All Virginians know this. Few understand, though, that their elected leaders in Richmond, who are recipients of huge campaign contributions from hospital interests, bear a significant share of the blame and some are actively working to increase costs further.

Virginia had the highest priced commercial health insurance in the country in 2018. (See chart above.) At $6,597, the 2018 average annual employee premium contribution for family health insurance coverage was the highest in the nation. The premium for single coverage in Virginia was the third highest.

The Affordable Care Act exchange is no better. The Centers of Medicare/ Medicaid database lists 16,900 lines of Silver plans and locations nationally in 2018. Virginia had 22 of the 55 highest priced, including 14 of the top 16. In the worst case in the nation, a 40-year-old couple with two children in the Charlottesville area paid almost $39,000 in premiums in 2018 for the less expensive of the only two family Silver policies available on the ACA exchange. Both were offered by Sentara’s Optima Health. With that policy, their out-of-pocket costs were capped at $14,700. Both policies were HMOs with no non-emergency coverage for out-of-network providers. It was a Sentara network. 

Hospital systems in Virginia’s five largest metro areas, either own their own health plans and insurers or have joined exclusive partnerships with one. Sentara, the largest, controls 63 corporations, 43 of which are for profit.  Its non-profit subordinates include Optima Health and Sentara providers except its ambulatory surgery centers, which are for-profit partnerships. 

Insurers are required to represent only their clients’ interests and their own when negotiating prices with providers and when negotiating network access by competing providers. Yet the Charlottesville example and similar situations in Hampton Roads and Harrisonburg are cast doubt on insurer motivation in vertically integrated provider/insurer situations. 

Nationally, health insurance premiums increased between 2013 and 2017 from $633 billion to $855 billion, or 35%. Incurred claims increased by exactly the same percentage. Over the same period, healthcare utilization increased less than 1%. Higher prices paid to healthcare providers and pharmaceutical makers are likely responsible. 

Virginia health system profits

A Navigant study of the nation’s largest health systems showed that operating margins in 2018 averaged 2.92%. Health system reports to the Commonwealth showed the combined operating margin of acute care hospitals here was 8.2%. The difference between 3% and 8% with 2018 operating revenue of about $22 billion is over a billion dollars in one year. Those extraordinary Virginia margins were in years before Medicaid expansion and the accompanying reimbursement increases that could add another billion dollars in profits.

Regional monopolies are in control when pricing inpatient procedures to commercial insurers. All insurers including Medicare and Medicaid pay between 1.5 times and three times more for procedures performed in hospitals than by the same physicians in independent ambulatory care centers.

The Virginia Department of Health (VDH) has severely restricted ambulatory care access by awarding only 71 certificates for ambulatory surgical centers (ASCs), about half of them to hospitals. The hospitals’ only competition in ambulatory care comes from fewer than 40 certificate-holding ambulatory surgical centers and the few diagnostic imaging centers. Maryland has 20% fewer people than Virginia but more than seven times as many ASCs, the vast majority physician-owned.

Ambulatory care including surgery and imagery for the vast majority of patients can be accomplished either in hospital outpatient departments or in detached ambulatory surgical centers. The same surgery by the same surgeon is far less expensive in the — unless a hospital owns that ASC and bills the procedures at hospital rates. 

So, how did this happen?

The answer is found in bad public policy badly executed. We can directly thank Virginia’s Certificate of Public Need (COPN) and its irresponsible administration by VDH since 1973.

The COPN law enacted in 1973 gave VDH control over the construction and expansion of new hospitals, ambulatory care and diagnostic imagery centers and over the equipment necessary to operate them. Virginia has thus limited supply in the face of growing demand and some are apparently surprised that prices have risen.

Without legislative direction for 47 years, VDH years has used the COPN process both to create hospital monopolies in nearly every region of Virginia but Richmond and to severely restrict the creation of outpatient facilities as competitors to those hospitals. Monopolies have consequences, including control of prices and suppression of competitors.

Lawmakers have made no serious attempt either to limit rates of growth of the prices charged by those monopolies or to oversee their business practices. Both COPN and the permissive provider regulatory regime remain in place because, in creating regional monopolies, VDH simultaneously created a powerful political interest in most General Assembly districts.

Some hospital systems are both monopolies and self-declared non-profit charities. No state agency oversees the business activities of healthcare providers, monopolies or not. The Virginia Department of Taxation apparently counts on the Internal Revenue Service to oversee tax exempt entities, which avoid hundreds of millions in state and local taxes every year. Nationally, there are 250,000 self-identified entities large enough to warrant review of such things as executive salaries and charitable mission compliance. The IRS simply doesn’t do it.

The Justice Department is blocked from enforcing federal antitrust laws because the monopolies have been granted by the state. The Virginia Antitrust Act has never been enforced. Virginians would have been in a far better place if the Commonwealth had never passed COPN. But here we are and the General Assembly is poised to make it worse — lower access, less competition and higher cost. More on that soon. 

A version of this commentary originally appeared in the January 20 edition of the online Bacon’s Rebellion.

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Will California Run Your Livestock Production?

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On January 10, 2020, California’s Attorney General and several animal rights groups filed to dismiss with prejudice a case brought by National Pork Producers Council and the American Farm Bureau Federation.
In 2018, California voters approved Proposition 12. California seeks ”…to prevent animal cruelty by phasing out extreme methods of farm animal confinement.” The purpose of California’s proposition is to require “…California farmers to house veal calves, breeding pigs, and egg-laying hens in confinement systems that comply with specific standards for freedom of movement, minimum floor space, and cage-free design.” Proposition 12 also prohibits the sale in California of meat that comes from an animal from any other state not ”housed” according to California standards.
Much of California’s brief deals with arcane issues related to the U.S. Constitution and what is called the “dormant Commerce Clause.” California’s Attorney General argues that Proposition 12 is a fair proposition because it only applies to sales within California. His slick brief does admit if other states wish to sell their products into California their farmers must comply with California’s standard. He relies on a 9th Circuit “nutty” opinion involving foie gras. He notes the 9th Circuit has always held that California can regulate sales “…even if such regulation has upstream effects.”
He is correct in arguing Proposition 12 only applies to sales in California. However, the Attorney General does not seem to understand the Constitution has the Commerce Clause to prevent the exact argument made by California’s Attorney General. The penalties for not complying with California’s Proposition 12 are a fine of $1,000 or imprisonment in the county jail for 180 days or less, or both.
Supporters of agriculture, such as the Humane Society of the United States, the Animal Legal Defense Fund, Animal Equality, the Humane League, Farm Sanctuary, World Farming USA, and Compassion Over Killing have also filed motions to dismiss NPPC’s and AFBF’s complaint.
Much is made over the fact that a number- of- lawsuits have been filed and dismissed over technical reasons. California dismisses that it might be engaged in economic protectionism. It is argued there is no discrimination against out of state producers. (Only lawyers in California could make this argument.) California argues …a nondiscriminatory law that does not regulate extraterritorially will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.”
Because California’s lawyers have no agricultural experience and frankly know nothing about farming, they believe imposing their standards on the rest of the farmers around the country is clearly not excessive. California’s Attorney General claims Proposition 12 does not regulate the conduct of pork producers extraterritorially!!!!
California believes it is perfectly acceptable to send its inspectors to other states in-an attempt to assure its animal housing codes are adhered to. The Attorney General claims California is not violating the Commerce Clause or burdening interstate commerce. The Attorney General’s brief clearly indicates he is concerned about controlling pork production outside of California. He claims without any support that Proposition 12 “…is not an extraterritorial regulation.” When you see a statement such as this, you fully understand how stupid well -educated people are about agriculture production.
As noted, “The Ninth Circuit has consistently rejected claims that statutes regulating in-state sales impermissibly extend beyond the state’s borders.” We all know how well versed in the law the 9th Circuit Court judges have been in the past. The present administration in Washington has appointed a number of judges to the 9th Circuit in an attempt to be fair. Let’s hope some of those judges will hear NPPC’s and AFBF’s case in the near future and rule in their favor with common sense.
A version of this commentary was originally published in the January 14 online Farm Futures.
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Virginia Budget Explodes

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The new spending over the next two years by major category. This is for the smaller $48 billion general fund. No such pie chart was published by the Department of Planning and Budget for the combined $139 billion full budget.


The interesting thing is not how Virginia’s overall budget has grown 20% in just two years (seen that number reported anywhere else?) What’s interesting is how many interest groups are openly pushing to make it even larger. The $23 billion increase is not enough!
Just two years ago, in December 2017, Governor Terry McAuliffe dropped in his proposed budget for the budget cycle we are still in, Fiscal Years 2019 and 2020.  Before the 2019 General Assembly worked its magic, the baseline two-year total for spending he proposed was $116 billion.
Comparing an apple to an apple (which the political class discourages) the equivalent figure for the budget Governor Ralph Northam published last month is $139 billion, growth of $23 billion or 20%. That is the general fund and the non-general fund combined. It becomes more and more obvious that the non-general fund is the cart pulling this horse. At $90 billion over the next two years, it is almost double the proposed $48 billion general fund. Soon it will be more than double.
The proposed gasoline tax increase of four cents per year for three consecutive years is included in non-general funds. The continued explosion of university tuition charges is in the non-general fund. The undefined, “sum sufficient” hospital assessments behind the massive increase in Medicaid costs are non-general funds, as are the matching federal dollars they leverage. The days of putting the main focus on the smaller general fund with its direct taxes are over.
As noted, advocates for public education (call it K minus two to 12, since pre-K is expanding) want far more money from the state. The $1.2 billion spending increase the Governor has proposed is mainly focused on adjusting the base cost of existing programs for enrollment and inflation, plus a modest teacher raise. They want more for teacher salaries and other programs, the Full Monty from the Board of Education.  Expect additional spending amendments from human service advocates, including a coalition that now wants to expand dental benefits for Medicaid recipients.
The wish will become flesh with many of these later this week, when proposed amendments to the budget must be filed with the money committees. State employee groups, noting that neither year in the proposed budget includes raises for them, will be among the hardest to deny.  The $200 million slush fund the Governor left unspent for the Assembly to play with will not be sufficient.
Some key talking points: 
To start with something positive, the Governor held discipline and is significantly increasing the state’s reserves to almost $2 billion. Thank goodness Virginia has that beloved AAA credit rating and no governor or finance secretary wants to be remembered for losing it. We go to AA+ and nothing will hold them back.
By the second year of the budget Virginia achieves so-called “structural balance,” when revenues and expenditures match without relying on reserves or by moving money between years. That will hold until the next economic hiccough or full recession, unless the General Assembly now blows it.
Tax increases have funded this explosive growth, some open and some hidden. The hidden tax increase is the added state revenue created by conforming to all the tight new restrictions on deductions created by the federal Tax Cuts and Jobs Act, while keeping Virginia’s tax rates the same. This budget abandons the legislative requirement to track and hold that extra money aside for future tax relief, something discussed here just a few weeks ago.
The taxpayer relief fund was enshrined in law as well as in the budget, but a budget bill language provision directly repeals the law, too. “17. That the fifth enactment of Chapter 17 of the Acts of Assembly of 2019 and the fifth enactment of Chapter 18 of the Acts of Assembly of 2019 are repealed.”  That’s clear, right?

Over two years the state will reap hundreds of millions from individual and business taxpayers paying more than they would have on the same income two years ago. But President Trump’s tax cuts also stimulated the economy, so incomes are up as well – a double windfall for the state from him, and one impossible to track and calculate. Politicians love tax hikes you cannot see. 

The tax hikes you can see are not that clear, either. The two hospital taxes created to fund the Medicaid expansion and the hike in Medicaid provider payments are intentionally hard to track. Nowhere in any of the presentations made December 17, from the Governor, the Secretary of Finance, or the Director of Planning and Budget, will you find the dollar value of those hospital taxes mentioned.

In prior years there has been a table spelling out the specifics on all tax rule changes, positive and negative. That is lacking this year, a disappointing retreat from openness. But there is a $250 million over two years estimate in one of the slide sets on the proposed tobacco and vaping taxes, with another reference to $61 million from the first stage of the gas tax increase. New taxes on certain gambling machines (“games of skill”) may produce another $125 million over two years.
The non-general fund tax hikes are really fueling higher general fund spending. For example, the new tax on those now-unlicensed games in bars will transfer to school spending. The gas tax revenue will displace general funds that were being used for transportation. This is more reason to focus on the full budget and end the distinction between general and non-general funds.
>Stand by for updates. There is plenty in this budget yet to be explored in detail, and if the pattern holds both the House and Senate money committees will publish detailed analyses soon. Maybe one of them will put all the tax changes on one table or chart and save me an exercise in Excel.
This commentary originally appeared in the January 7 edition of the online Bacon’s Rebellion.

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Virginia’s Cost-Benefit System Provides More Efficient Transportation System

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Each year when we release the Annual Highway Report, I receive a flurry of calls asking how states can improve their highways. Maintaining a quality state highway system is obviously difficult and complicated. While many factors play a role, the adoption of an accurate quantitative process based on cost-benefit analysis is one of the most important steps to improving the overall highway network.
Unfortunately, a recent Federal Highway Administration (FHWA) survey of state departments of transportation (DOTs) officials found that only five or six states systematically use cost-benefit analysis to evaluate transportation projects. FHWA’s survey found that state DOTs also use life-cycle cost analysis and multifactorial scoring systems to make decisions on whether to fund a project. Most state DOTs do not include measurements of transportation projects’ effects on emissions or freight. There are also problems with the accuracy of state estimates of traffic demand.
Two states, North Carolina and Virginia, have the most objective selection processes. Prior to 2013, the North Carolina Department of Transportation (NCDOT) used a transportation project funding assessment model that failed to measure costs of design, construction, regulatory compliance, and operations and maintenance. In 2013, the North Carolina Legislature adopted the Strategic Transportation Investments Act, which established a Strategic Mobility Formula that allocates transportation project funding on the basis of how the projects perform on different criteria.
The Strategic Mobility Formula gives the following weights to these evaluative categories:

  1. The needs of the state’s 14 transportation divisions (30 percent);
  2. regional impact (30 percent); and
  3. statewide impact (40 percent).

Since implementing this, North Carolina has been able to dedicate more resources to capital and bridge spending while maintaining top-25 rankings in all four of the Annual Highway Report’s pavement condition categories without increasing taxes.
Similarly, prior to 2014, Virginia used a multi-criteria evaluation system that used qualitative factors (such as, local and regional support) to determine whether to fund a project. This system failed to include quantitative metrics such as cost-benefit analysis. In 2014, to address this problem, the Virginia Legislature adopted the HB 2 Prioritization Process for Project Selection, which instituted a method for quantitatively scoring prospective transportation projects before they were reviewed by the Commonwealth Transportation Board (CTB). (In Virginia, the CTB allocates funds for transportation projects).
HB 2 created Smart Scale, which uses 10 criteria to measure project effectiveness. The criteria are weighted as follows:

  1. The reduction of congestion (35 percent);
  2. project readiness (25 percent);
  3. service deficiencies (5 percent);
  4. reduction in vehicle-miles traveled (5 percent);
  5. improvements in transportation safety (5 percent);
  6. increased connections between activity centers (5 percent);
  7. increased regional and modal integration (5 percent);
  8. improved bicycle and pedestrian travel options (5 percent);
  9. improved management of existing operations (5 percent); and
  10. cost-sharing with other entities (5 percent).

I have some minor concerns with the Virginia model. By examining benefits on a regional or local level as opposed to a statewide level, the system risks prioritizing small projects over large projects. For example, a bicycle project could score better than highway capacity or expansion of the Blue Line/Orange Line/Silver Line Metrorail tunnel under the Potomac.
I also don’t think the current system weighs safety highly enough. Regardless, it is a major improvement over the previous process, which dispersed funding over so many projects that there was seldom enough money to build any major projects. And, similar to North Carolina, Virginia maintains top 25 rankings in all four pavement categories, although urban traffic congestion is a major problem in several areas of the state.
Not all quantitative scoring processes work well. FHWA cited the cost-benefit methodology of the California Department of Transportation (Caltrans) and the cost-efficiency methodology of the Washington State Department of Transportation (WSDOT) as examples of methodological shortcomings of state DOT evaluation processes.
Caltrans formulated the Cal-B/C methodology to evaluate the costs and benefits of transportation projects on the basis of:

  1. Time savings for travelers;
  2. vehicle operating cost savings;
  3. safety cost savings;
  4. lowered air pollution emissions;
  5. construction costs; and
  6. operations and maintenance costs.

However, CalTrans’ methodology has a major problem — In calculating travel time savings, it does not include travel demand network data. As a result, this skews the analysis inputs, making the conclusion of the cost-benefit analysis inaccurate.
Similarly problematic, the WSDOT’s cost-efficiency evaluation only uses travel time savings to estimate users’ benefits, which potentially ignores other benefits including safety and redundancy.
Almost every state could benefit from a quantitative review process, including states viewed as effective and innovative. Recently, an audit of the Georgia Department of Transportation (GDOT) found that the agency does not have a formal cost-benefit analysis process. Auditors found that GDOT’s initial project selection process is not transparent and includes very few objective criteria. Further, the $2 billion project to build truck lanes on I-75 between I-475, north of Macon, and Henry County in the southeast Atlanta suburbs, was approved without any cost-benefit analysis. To its credit, GDOT has refined its scoring method and revised scoring criteria to meet objective goals.
GDOT ranks first or second in delivering projects on-time and under-budget. The state’s pavement condition ranks relatively high. And much of the criticism of the agency has come from the Southern Environmental Law Center, a group that opposes nearly every type of roadway project.
Further, developing an accurate scoring system for state transportation projects is daunting and challenging. Implementing a system with major flaws, as has happened in California and Washington, would be a step backward for many states. Yet, as North Carolina and Virginia have shown, it is possible to adopt an effective, accurate system that improves a state’s process and infrastructure. In addition to improving project selection, developing an effective cost-benefit analysis system can make it easier for transportation departments to generate support from both elected officials and taxpayers, which is critical to building and maintaining an effective transportation system.
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