‘We’ll Fight This To The Death’: The Vicious Capitol Hill Battle Between Banks and Credit Unions
March 22, 2012
As reported by Zach Carter and Ryan Grimm of the HuffingtonPost
WASHINGTON — In early February, Alabama Republican Spencer Bachus called for a meeting between two of the most quietly influential interest groups in the nation’s capital: credit unions and community banks.
Bachus, chairman of the powerful House Financial Services Committee, was looking to ensure the passage of a slew of federal favors benefiting both sides. All the lobbyists had to do was show up at a meeting and figure out how to work together.
It was too much to ask.
The Credit Union National Association and the Independent Community Bankers Association immediately agreed to the sit-down, but as the meeting approached the community bankers abruptly cancelled the event, according to lobbyists and congressional staffers familiar with the plans.
“There was supposed to be a couple of joint meetings with different congressional offices and with the leadership of Financial Services. And the banks decided that we had too many bills in play and they didn’t want to meet with us,” says Linda Armyn, a senior vice president for Bethpage Federal Credit Union.
It’s no small matter to cancel on a committee chairman. ICBA had performed the Capitol Hill equivalent of cussing out the boss at an office Christmas party. Still, the group has no regrets.
“There won’t be any meetings. There won’t be any compromise. There won’t be any deals. There won’t be any discussions,” says ICBA chief economist Paul Merski.
To most folks, community banks and credit unions are indistinguishable. Both are often viewed as good-guy alternatives to Wall Street banks, eschewing the too-big-to-fail crowd’s phantom, subprime profits in favor of safe, consumer-friendly products. After the 2008 financial crash, that strategy allowed them to reap financial rewards and reputational halos. The “Move Your Money” movement and Bank Transfer Day shifted billions of dollars worth of business from Wall Street to these small lenders.
But community banks and credit unions each operate under different government charters and regulatory regimes. They compete for the same good-guy customer base, and are openly hostile with each other on Capitol Hill. Their mutual animosity is frequently unmoored from profit margins and bottom lines, a passionate conflict that at times seems like a Washington version of the Hatfields and McCoys.
“The credit unions have become the skunk at the garden party,” Merski says.
“The hypocrisy of the bank lobby appears to have no end,” Credit Union National Association (CUNA) CEO O. William Cheney said during a November hearing.
But while the dispute between the two groups goes back decades, their most recent clash serves as a window into the way American government works — or doesn’t work — in the 21st century. Legislative scuffles between entrenched interest groups occasionally gather enough momentum to attract public attention. Last year’s blowout over debit card swipe fees hijacked the Senate schedule for nearly six months, and the Stop Online Piracy Act sparked furious online protests.
Most of the time, the special interest stranglehold over Congress is exercised relatively quietly, in small-bore negotiations that never really get off the ground. Even if the bills go nowhere, they present lucrative fundraising opportunities for lawmakers, while devouring the time and attention that elected officials could be using to attend to the public good — say, solving the jobs crisis, ending homelessness or improving the standard of living for the one in four American children who currently live in poverty.
Instead, lawmakers expend tremendous amounts of energy trying to bridge emotional divides between favored interest groups that are accustomed to getting their way and have little interest in compromise — like, for example, credit unions and community banks.
Few fight harder in Washington than your cuddly local lenders.
“People always say it’s Wall Street, but the big banks aren’t the most potent lobbyists, because everybody hates them,” says Rep. Barney Frank (D-Mass.). “It’s the credit unions and the community banks because of their grassroots networks.”
A big bank like Citigroup appears to have oceans of lobbying clout that a small community bank lacks. But every congressional district has a community bank and a local credit union. As united forces, the ICBA and CUNA can (sometimes) defeat even their Wall Street competitors on the Hill.
This week, they will flex that muscle. CUNA expects 4,000 members of the credit union community to fly in to Washington for the group’s annual lobbying convention — including at least one from every congressional district.
Like the credit unions, community banks will be making their annual descent on Capitol Hill later this year. Both groups have profitable requests pending in Congress.
The Communities First Act, introduced in April 2011, reads like ICBA’s wish-list for the entire year. During a November hearing on the bill, Georgetown University Law School professor Adam Levitin criticized the bill as a set of unearned giveaways for small financial firms — tax cuts, accounting gimmicks to hide losses, weaker capital requirements and even immunity from some forms of scrutiny by the Securities and Exchange Commission. But whatever its impact on communities, the bill would undoubtedly help banks pad their profits.
“It does nothing for communities,” Levitin said, calling the bill “narrow, special-interest pleading.”
Credit unions, meanwhile, are seeking legislation that would allow them to expand their business lending operations. Credit unions are currently barred from issuing business loans in excess of 12.25 percent of their total assets, an arbitrary rule that banks were able to slip into a 1998 law over the objections of both credit unions and President Bill Clinton’s administration.
Over the past year, credit union lobbyists have amassed 121 co-sponsors — 46 Republicans and 75 Democrats — for the Small Business Lending Enhancement Act, a bill that would raise that business lending cap to 27 percent. Credit unions argue that allowing them to make more business loans will help small firms hire, claiming the bill will create 140,000 jobs.
Community banks and credit unions need each other. Neither the Communities First Act nor the Small Business Lending Enhancement Act is likely to pass on its own, prompting Rep. Bachus’ attempt to combine them. (Bachus’ office did not return requests for comment). The only trouble? The credit unions and community banks have been at each other’s throat for decades.
“It’s a very visceral reaction they have,” says Ryan Donovan, a top CUNA lobbyist, referring to community bankers. “The ICBA would rather have their entire legislative agenda burned than let our small bill pass.”
On the bill that would lift the lending cap on credit unions, ICBA’s Merski says,”We’ll fight this to the death because of the fundamental philosophical unfairness. It’s almost un-American, really.”
Banks have little to lose from the credit union bill, and large potential profits to gain from their own legislation. Credit unions do very little business lending. For the most part, they stick to simple, standardized consumer products like checking accounts, mortgages and credit cards. Credit unions are generally small, even compared to community banks, and account for just 1 percent of the commercial lending market nationwide, according to CUNA, with an average loan amount of only $220,000.
“We’re not talking shopping malls,” explains CUNA senior vice president for communications Mark Wolff. “We’re talking landscaping and bakeries.”
Even community banks that compete head-to-head with specific credit unions simply will not lose very much if the credit union bill passes. The credit union group only pegs the gains from their legislation at 140,000 jobs — a drop in the bucket relative to the jobs crisis. Yet the legislative arm-wrestling continues.
“If you look at the marketplace, the banks have 95 percent of the market share. There isn’t a whole lot of data that supports we’re taking their business,” says Armyn of the Bethpage Federal Credit Union. “I mean, we’re taking a piece of their business, but if you look at it on the grand scale, they still have 95 percent of the market share.”
But the battle isn’t really over balance sheets. It’s over those “philosophical” differences Merski cites. Talking to members of both groups, bankers essentially think credit unions are tax cheats, while credit unionists see bankers as greed-mongers.
Credit unions are nonprofits owned by their customers, a unique status among financial institutions which allows them to be exempt from income taxes. But a credit union charter comes with major drawbacks — they can’t pay dividends to shareholders, since they don’t have any shareholders, nor can their executives enjoy wild paydays in the form of stock options. They also only have one option for growth: profit. Banks can take on debt or issue stock to capitalize on profit opportunities, but credit unions have nothing but year-end earnings to draw on.
Bank executives do enjoy higher paydays. Among credit unions with at least $100 million in assets, the median CEO pay comes out to $211,558, according to CUNA. According to data compiled by SNL Financial, publicly traded banks with less than $10 billion in assets (a common threshold in regulation and legislation to define a “community bank”) pay out median CEO compensation of $385,577.
As with most CEO pay in the financial industry, the bigger the bank, the better the potential payday, but community banks with less than $500 million in assets still paid a median of $248,437 — about 15 percent better than the median for all credit unions over $100 million in assets, according to the SNL Financial data. The largest credit union is Navy Federal, with $46 billion in assets.
But both sides use such relative metrics to criticize the other.
“They don’t pay taxes!” says ICBA’s Merski.
“They don’t get that we really are a different model,” counters CUNA’s Wolff.
Both sectors, of course, have always been free to change their charters whenever they wish. Credit unions file to become banks all the time, and there is no law barring banks from adopting a credit union model.
This year’s skirmish between community banks and credit unions will almost certainly dwindle into obscurity, a common fate for special interest legislation. Next year the two groups will undoubtedly concoct new slates of legislative demands, as is the nature of lobbying. But the public has still paid the opportunity cost for the lobbying push.
The dispute between credit unions and community banks is one of an endless array of Washington feuds that tend to not connect with the broader public interest. Even if the two groups had been able to put aside their differences and move their legislation forward, the tangible benefits for everyday Americans would have likely been minor. It doesn’t make much difference for most businesses whether they get their loan from a small bank or a credit union, so long as they get their loan. And the benefits that ICBA was seeking amount to a set of unhelpful deregulation.
Even if the uncounted hours of attention that were devoted to introducing the bills, garnering co-sponsors, holding hearings and briefing lawmakers had borne fruit, the public would still have been left out of the equation. Similar disputes take place every year between dozens of special interests, on every committee in Congress. And, in this case, the special interests groups themselves say the fuss has largely proved to be just that.
“We all just want to move forward and grow,” says Armyn, the Bethpage Federal Credit Union executive, frustrated with the political gridlock. “To me, it’s just silly.”
Debt Ceiling Talks Make Way For Tough Trade-Offs
June 17, 2011
As reported in Huffington Post
By Andy Sullivan
WASHINGTON — Negotiators trying to tame the United States’ spiraling debt said on Thursday that they had tentatively agreed on a number of cuts and are now gearing up for tough trade-offs that could lead to trillions of dollars in savings.
“We’ve gone through a first, serious scrub of each of the categories that make up the total federal budget,” Vice President Joe Biden told reporters. “Now we’re getting down to the real hard stuff: I’ll trade you my bicycle for your golf clubs.”
Biden and top Democratic and Republican lawmakers aim to reduce the country’s stubborn budget deficits by $4 trillion over the next 10 years in order to give lawmakers the political cover to raise the $14.3 trillion U.S. debt ceiling to prevent a default.
The agreed-upon cuts will serve as bargaining chips in the coming weeks as the two sides tackle a stark divide over taxes and health benefits, participants said.
“Even stuff we agreed to that we may have refined today is all subject to be reopened if we don’t get agreement on some of the big issues. We’ve got a long way to go here,” said Democratic Representative Chris Van Hollen.
But Republicans have refused to consider increased taxes, while Democrats have resisted wholesale changes to health benefits for the poor and the elderly.
COMPROMISE ON TAXES, HEALTHCARE?
Compromise is not impossible in these areas. Democrats hope to boost tax revenues primarily by ending breaks and closing loopholes, rather than raising rates. Two recent Senate votes have given them heart as Republicans backed closing tax breaks for ethanol providers.
On healthcare, Democrats have blasted a Republican plan that would scale back the Medicare health program for future retirees. But they have proposed less dramatic changes that could still save hundreds of billions of dollars.
Both President Barack Obama and Republicans have proposed significant changes to the Medicaid health program for the poor. Obama has also said he would support limiting medical malpractice lawsuits — a longtime Republican priority.
“I think we really are covering every type of spending program there is,” Representative Eric Cantor, the No. 2 House Republican, told reporters. “We are doing all that we have set out to do.”
The group is stepping up negotiations as it faces a self-imposed deadline of July 1, with longer and more frequent talks set for next week.
The Obama administration has warned that it will run out of money to pay the nation’s bills if Congress does not raise the debt ceiling by August 2 — a prospect that could push the country back into recession and upend financial markets across the globe.
Washington needs to show investors that it can rise above its dysfunctional reputation, Biden said.
“The single most important thing to do for the markets is convince them no, that’s not true, we can handle difficult decisions,” he said.
Republicans want at least $2 trillion in cuts, measured over 10 years, to go along with a similar increase in the debt ceiling to ensure Congress doesn’t have to revisit the politically toxic issue before the November 2012 elections.
The Biden group could claim another $2 billion in savings by mandating automatic cuts or tax increases if Congress doesn’t meet specified deficit targets in coming years.
Budget deficits in recent years have hovered at their highest level relative to the economy since World War Two. The deficit is projected to hit $1.4 trillion in the fiscal year that ends September 30.
(Additional reporting by Richard Cowan; Editing by Eric Walsh)
The Mistake of 2010
June 3, 2011
By PAUL KRUGMAN
Published: June 2, 2011
Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that aborted an ongoing economic recovery and prolonged the Great Depression. As Gauti Eggertsson, the post’s author (with whom I have done research) points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?
Fred R. Conrad/The New York Times
Paul Krugman
Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data.
To be sure, things could be worse — and there’s a strong chance that they will, indeed, get worse.
Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. In particular, the effects of the stimulus would start fading out in 2010 — and given the fact that financial crises are usually followed by prolonged slumps, it was unlikely that the economy would have a vigorous self-sustaining recovery under way by then.
By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow an overwhelming consensus emerged among policy makers and pundits that nothing more should be done to create jobs, that, on the contrary, there should be a turn toward fiscal austerity.
This consensus was fed by scare stories about an imminent loss of market confidence in U.S. debt. Every uptick in interest rates was interpreted as a sign that the “bond vigilantes” were on the attack, and this interpretation was often reported as a fact, not as a dubious hypothesis.
For example, in March 2010, The Wall Street Journal published an article titled “Debt Fears Send Rates Up,” reporting that long-term U.S. interest rates had risen and asserting — without offering any evidence — that this rise, to about 3.9 percent, reflected concerns about the budget deficit. In reality, it probably reflected several months of decent jobs numbers, which temporarily raised optimism about recovery.
But never mind. Somehow it became conventional wisdom that the deficit, not unemployment, was Public Enemy No. 1 — a conventional wisdom both reflected in and reinforced by a dramatic shift in news coverage away from unemployment and toward deficit concerns. Job creation effectively dropped off the agenda.
So, here we are, in the middle of 2011. How are things going?
Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. Long-term interest rates have fluctuated with optimism or pessimism about the economy; a recent spate of bad news has sent them down to about 3 percent, not far from historic lows.
And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. Yes, there has been some job creation — but at a pace barely keeping up with population growth. The percentage of American adults with jobs, which plunged between 2007 and 2009, has barely budged since then. And the latest numbers suggest that even this modest, inadequate job growth is sputtering out.
So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.
Yet worse things may soon happen.
On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.
Meanwhile, a loud chorus is demanding that the Fed and its counterparts abroad raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out, the rise in consumer price inflation over the past few months — which is already showing signs of tailing off — reflected temporary factors, and underlying inflation remains low. And smart economists like Mr. Eggerstsson understand this. But the European Central Bank is already raising rates, and the Fed is under pressure to do the same. Further attempts to help the economy expand seem out of the question.
So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.
Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.
WASHINGTON (Kevin Drawbaugh) – Twelve big U.S. companies paid far less than the statutory corporate tax rate from 2008 to 2010, despite making substantial profits in that period, said a report released on Wednesday.
With the Obama administration drafting a corporate tax reform plan, the report found General Electric Co, American Electric Power Co Inc, DuPont Co and nine other companies had a negative 1.5 percent tax rate on $171 billion in profits over the three years studied.
“Not a single one of these companies paid anything close to the 35 percent statutory tax rate,” said the report from Citizens for Tax Justice, a left-leaning group based in Washington that promised more details later this year.
The White House and Congress are considering an overhaul of the corporate tax system as a partial solution to the federal deficit, projected to hit $1.4 trillion this year.
Critics say tax loopholes promoted by corporate lobbyists and enacted by Congress are to blame for a system that lets companies avoid taxes, usually in perfectly legal ways.
Some business leaders have said they could live with closing some of these loopholes, but in return, they have said they want the statutory tax rate lowered. It is among the highest rates in the industrialized world.
The Business Roundtable, a lobbying group for corporate CEOs, issued a report in April that said U.S.-based companies faced an average effective tax rate of 27.7 percent in the 2006-2009 period, more than their non-U.S. competitors.
The debate promises to go on for months and possibly years. U.S. Treasury Secretary Timothy Geithner last week predicted movement on tax reform later in 2011.
Citizens for Tax Justice produced a report in the 1980s that helped lead to President Ronald Reagan’s landmark 1986 tax reforms. Since then, the tax code has become riddled with exemptions, deferrals and other special breaks.
Companies singled out in Citizens for Tax Justice’s newest report also included Verizon Communications, Boeing Co, Wells Fargo & Co, FedEx Corp and Exxon Mobil Corp.
‘TIP OF ICEBERG’
“These 12 companies are just the tip of the iceberg of widespread corporate tax avoidance,” said Bob McIntyre, director of Citizens for Tax Justice, which is working on a broader report covering the Fortune 500 companies.
Elected officials should make “reducing or eliminating the vast array of corporate tax subsidies the centerpiece of any deficit-reduction strategy,” he said.
GE spokesman Andrew Williams said the company is “fully compliant with all tax laws. There are no exceptions.”
He said GE’s 2010 tax rate was low because the company lost billions of dollars in GE Capital, its financial arm, as a result of the global financial crisis. “GE’s tax rate will be much higher in 2011 as GE Capital recovers,” he said.
Citizens for Tax Justice said that in the 2008-2010 period, 10 of the dozen companies studied enjoyed at least one year in which they were profitable, but paid no taxes.
Exxon Mobil had a 14.2 percent effective tax rate over the 3-year period, the highest of the 12 companies cited in the report, according to the group.
Exxon Mobil spokesman Alan Jeffers said, “Our effective tax rate in this country over the past six years has averaged about 32 percent. Last year our total taxes and duties to the U.S. government were $9.8 billion, which includes an income tax expense of $1.8 billion.”
American Electric Power and DuPont did not respond to requests for comment. DuPont effectively paid $258 million in taxes in the first quarter of 2011, a 15.2 percent tax rate.
(Additional reporting by Matthew Daily and Ernest Scheyder in New York, Anna Driver in Houston, Scott Malone in Boston; Editing by Richard Chang)
Copyright 2011 Thomson Reuters
Deficitly
May 25, 2011
With all the commotion going on around us
Osama…..tornadoes….floods
The public has been spared the talk on the debt ceiling
Did you hear the gang of six talks fell apart?
They were seen as representing the best hope
For a bipartisan deal to reduce the deficit
Senator Tom Coburn dropped out
Citing differences over entitlement spending,
Saying the 3 Republicans and 3 Democrats were
Unable to bridge differences over Medicare and Social Security
The clock is ticking,
We already exceeded the debt limit.
Now we are just shuffling payments
While waiting for a resolve.
How did we get to
this point?
There is some great information on the internet about this
subject.
Stephen Bloch did some extensive research on the deficit
And how it relates to each President
His report is titled:
US Federal Deficits, Presidents and Congress
Below are some of the facts I found interesting
- First data he found showing
a deficit was traced back to 1910
- The single best predictors
of deficits for most of the century have been war.
- Starting in the 1970’s, it
became harder to see a connection between war and deficits:
- Permanent deficits became
a way of life, regardless of whether there was a war going on.
- The Deficit did not break
the $1 trillion mark until 1981
- The Deficit did not break
the $5 trillion mark until 1995
- During the first seven
years of G W Bush presidency, the deficit was increased by almost twice
the dollar amount as it had been for 32 years. (Running from JFK through
GHW Bush).
- When GW Bush entered
office the deficit was $5.807 trillion
- When GW Bush left office
the deficit ballooned to $11,909 trillion. - The deficit increased
$6,102 trillion
- Since Obama entered office
the deficit has grown to $14,268 trillion - That an additional $2,359
trillion
Some other interesting facts:
- Military spending has
increased 81% since the year 2000
- Fraud constitutes at least
ten percent ($100 billion) of the nearly one trillion in taxpayer dollars
that Medicare and Medicaid will spend this year.
- The current tax system of
the United States will collect about 18% of the GDP(Gross Domestic
Product)
- Spending needs are much
higher, currently around 24% of GDP.
What makes up the 24%?
I referred to an article by Jeffrey Sachs (Economist and
Director of Earth Institute, Columbia University)
Focusing on best estimates for 2021, a decade from now
- Social Security outlays
will total around 5.2% of GDP - As Americans age and as
health care cost have multiplied, The cost of Social Security and
Medicare have risen from 1.7% of GDP in 1980 to 5.1% of GDP in 2011 - Medicare will total around
3.6% of GDP - Medicaid, assuming no
drastic cuts, will total around 2.9% of GDP - Other mandatory programs
for the poor, such as food stamps, will total 2.1% of GDP - Total defense spending is
around 5% of GDP, most agree that defense should be cut and be around 3% of
GDP - Most projections put
interest cost on debt around 2.7% of GDP - Discretionary spending
(cost used on public goods and services that cannot be provided
efficiently by the private economy alone) will be around 4.5% of GDP
Now if you go and add up all these categories,
You will see that cost will total around 24% of GDP
In Paul Ryan’s plan, taxes would be kept at 18% of GDP and
spending would be cut to 19% of GDP.
However the deficit is still expected to grow to $16 trillion by 2021.
The Obama plan would have a slightly higher tax collection,
around 19% of GDP (by allowing Bush tax cuts expire for those making over
$250,000), while allowing the deficit to grow to $19 trillion by 2021.
Guess what!!!!!
They are still going
the wrong way!!!!!
Many experts feel that both of these current plans, as
presented seem practically impossible.
In several opinion surveys,
The public has spoken clearly about what to do:
- Do not balance the budget
by slashing Medicare, Social Security, or programs for the poor; - Increase spending on
education and infrastructure; - Tax the rich and giant
corporations.
This is not a practical solution either…….
It is our responsibility to stop the bleeding
Everyone will have to proportionally share in the sacrifice
Will someone step forward and have the vision and leadership,
To usher in this era……….
Will the public be accepting to the reality of their
resolution….
Or will we continue to allow our excesses to undermine us.
Let us know your thoughts…… email george@hbsadvantage.com
States ignored warnings on unemployment insurance
April 28, 2011
As reported by Ebru News Feb 19,2011
WASHINGTON (AP) – State officials had plenty of warning. Over the past three decades, two national commissions and a series of government audits sounded alarms about the dwindling amount of money states were setting aside to pay unemployment insurance to laid-off workers.
“Trust Fund Reserves Inadequate,” federal auditors said in a 1988 report.
It’s clear now the warnings were pretty much ignored. Instead, states kept whittling away at the trust funds, mostly by cutting unemployment insurance taxes at the behest of the business community. The low balances hastened insolvency when the recession hit, leading about 30 states to borrow $41.5 billion from the federal government to pay unemployment benefits to their growing population of jobless.
The ramifications will be felt for years.
In the short term, states must find the money to pay interest on the loans. Generally, that involves a special tax on businesses until the loan is repaid. Some states could tap general revenues, making it harder to pay for schools, roads and other state services.
In the long term, state will have to replenish their unemployment insurance programs. That typically leads to higher payroll taxes, leaving companies with less money to invest.
Past recessions have resulted in insolvencies. Seven states borrowed money in the early 1990s; eight did so as a result of the 2001 recession.
But the numbers are much worse this time because of the recession was more severe and the funds already were low when it hit, said Wayne Vroman, an analyst at the Urban Institute, a liberal-leaning think tank based in Washington.
The Obama administration this month proposed giving states a waiver on the interest payments due this fall. Down the road, the administration would raise the amount of wages on which companies pay federal unemployment taxes. Many states probably would follow suit as a way of boosting depleted trust funds.
Businesses pay a federal and state payroll tax. The federal tax primarily covers administrative costs; the state tax pays for the regular benefits a worker gets when laid off. The Treasury Department manages the trust funds that hold each state’s taxes.
Each state decides whether its unemployment fund has enough money. In 2000, total reserves for states and territories came to about $54 billion. That dropped to $38 billion by the end of 2007, just as the recession began.
Over the next two years, reserves plummeted to $11.1 billion, lower than at any time in the program’s history when adjusted for inflation, the Government Accountability Office said in its most recent report on the issue. Yet benefits have stayed relatively flat, or declined when compared with average weekly wages.
“If you look at it from the employers’ standpoint, they’re not going to want reserves to build up excessively high because then there’s an increasing risk that advocates for benefit expansion would point to the high reserves and say, ‘We can afford to increase benefits,”‘ said Rich Hobbie, executive director of the National Association of State Workforce Agencies.
A review of state unemployment insurance programs shows how states weakened their trust funds over the past two decades.
In Georgia, lawmakers gave employers a four-year tax holiday from 1999-2003. Employers saved more than $1 billion, but trust fund reserves fell about 40 percent, to $700 million. The state gradually has raised its unemployment insurance taxes since then, but not nearly enough to restore the trust fund to previous levels. The state began borrowing in December 2009. Now it owes Washington about $588 million.
Republican Mark Butler, Georgia’s labor commissioner, said his state had one of the lowest unemployment insurance tax rates in the nation when the tax holiday was enacted.
“The decision to do this was not really based upon any practical reasoIt was based on a political decision, which I think, by all accounts now, we can look back on and say it was the wrong decision,” Butler said. “Now we find ourselves in a situation where we’ve had to borrow money and that puts everyone in a tight situation.”
In New Jersey, lawmakers used a combination approach to deplete the trust fund. The Legislature expanded benefits and cut taxes, as well as spending $4.7 billion of trust fund revenue to reimburse hospitals for indigent health care. The money was diverted over a period of about 15 years and helps explain why the state’s trust fund dropped from $3.1 billion in 2000 to $35 million by the end of 2010. The state has had to borrow $1.75 billion from the federal government to keep the program afloat.
“It was a real abdication of responsibility and a complete misunderstanding of how you finance an unemployment insurance fund to make sure you have sufficient money in bad economic times,” said Phillip Kirschner, president of the New Jersey Business and Industry Association. “In good economic times you build up your bank account, but in New Jersey, they said, ‘Well, we have all this money, let’s spend it.”‘
California took its own road to trust fund insolvency. Lawmakers kept payroll tax rates the same, but gradually doubled the maximum weekly benefit paid to laid-off workers to $450. The average benefit now is about $300 and is paid for about 20 weeks.
Loree Levy, spokeswoman for the California Employment Development Department, said lawmakers were warned of the consequences.
“We testified at legislative hearings that the fund would eventually go broke and would become permanently insolvent if legislation wasn’t passed to increase revenue,” Levy said.
California has borrowed $9.8 billion to keep unemployment insurance payments flowing. It owes the federal government an interest payment of $362 million by the end of September.
In Michigan, unemployment insurance tax rates declined from 1994 through 2001. The trust fund prospered during those years because of the healthy economy and low unemployment rate. Then the recession arrived and reserves plunged. In response, Michigan lawmakers passed legislation that lowered the amount of wages subject to unemployment taxes from $9,500 to $9,000. They increased the maximum weekly benefit from $300 to $362. The trust fund dropped from $1.2 billion to $112 million over the next four years. In September 2006, Michigan was the first state to begin borrowing from the federal government.
Other states held their trust funds purposely low as part of an approach called “pay-as-you-go.” Texas is a nationally recognized leader of this effort. Its philosophy is that, in the long run, it’s better for the economy to keep the maximum level of dollars in the hands of businesses rather than government. Texas had to borrow $1.3 billion in 2009. State officials have no regrets about their policy.
“By keeping the minimum in the (trust fund), Texas is able to maximize funds circulating in the Texas economy, allowing for the creation of jobs and stimulation of economic growth,” said Lisa Givens, spokeswoman for the Texas Workforce Commission.
The pay-as-you-go approach goes against the findings of a presidential commission that looked into the issue of dwindling trust funds in the mid-1990s.
“It would be in the interest of the nation to begin to restore the forward-funding nature of the unemployment insurance system, resulting in a building up of reserves during good economic times and a drawing down of reserves during recessions,” said the Advisory Council on Unemployment Compensation, which President Bill Clinton appointed.
Hobbie, from the association representing state labor agencies, said there’s no way to tell which approach is better over the long haul. He acknowledged that keeping reserves at the minimum in good times goes against one of the original aims of the program – to act as an economic stabilizer in bad times. That’s because businesses are asked to pay more in taxes, which leaves them less money to invest in their company.
A survey from Hobbies’ organization found that 35 states raised their state unemployment taxes last year.
Hobbie said he suspects that some states allowed reserves to dwindle out of complacency.
“I think we just got overconfident and thought we wouldn’t experience the bad recessions we had in, say the mid ’70s, and then this big surprise hit,” he said.
By
Why aren’t Americans being told the truth about the economy? We’re heading in the direction of a double dip — but you’d never know it if you listened to the upbeat messages coming out of Wall Street and Washington.
Consumers are 70 percent of the American economy, and consumer confidence is plummeting. It’s weaker today on average than at the lowest point of the Great Recession.
The Reuters/University of Michigan survey shows a 10 point decline in March — the tenth largest drop on record. Part of that drop is attributable to rising fuel and food prices. A separate Conference Board’s index of consumer confidence, just released, shows consumer confidence at a five-month low — and a large part is due to expectations of fewer jobs and lower wages in the months ahead.
Pessimistic consumers buy less. And fewer sales spells economic trouble ahead.
What about the 192,000 jobs added in February? (We’ll know more Friday about how many jobs were added in March.) It’s peanuts compared to what’s needed. Remember, 125,000 new jobs are necessary just to keep up with a growing number of Americans eligible for employment. And the nation has lost so many jobs over the last three years that even at a rate of 200,000 a month we wouldn’t get back to 6 percent unemployment until 2016.
But isn’t the economy growing again — by an estimated 2.5 to 2.9 percent this year? Yes, but that’s even less than peanuts. The deeper the economic hole, the faster the growth needed to get back on track. By this point in the so-called recovery we’d expect growth of 4 to 6 percent.
Consider that back in 1934, when it was emerging from the deepest hole of the Great Depression, the economy grew 7.7 percent. The next year it grew over 8 percent. In 1936 it grew a whopping 14.1 percent.
Add two other ominous signs: Real hourly wages continue to fall, and housing prices continue to drop. Hourly wages are falling because with unemployment so high, most people have no bargaining power and will take whatever they can get. Housing is dropping because of the ever-larger number of homes people have walked away from because they can’t pay their mortgages. But because homes the biggest asset most Americans own, as home prices drop most Americans feel even poorer.
There’s no possibility government will make up for the coming shortfall in consumer spending. To the contrary, government is worsening the situation. State and local governments are slashing their budgets by roughly $110 billion this year. The federal stimulus is ending, and the federal government will end up cutting some $30 billion from this year’s budget.
In other words: Watch out. We may avoid a double dip but the economy is slowing ominously, and the booster rockets are disappearing.
So why aren’t we getting the truth about the economy? For one thing, Wall Street is buoyant — and most financial news you hear comes from the Street. Wall Street profits soared to $426.5 billion last quarter, according to the Commerce Department. (That gain more than offset a drop in the profits of non-financial domestic companies.) Anyone who believes the Dodd-Frank financial reform bill put a stop to the Street’s creativity hasn’t been watching.
To the extent non-financial companies are doing well, they’re making most of their money abroad. Since 1992, for example, G.E.’s offshore profits have risen $92 billion, from $15 billion (which is one reason it pays no U.S. taxes). In fact, the only group that’s optimistic about the future are CEOs of big American companies. The Business Roundtable’s economic outlook index, which surveys 142 CEOs, is now at its highest point since it began in 2002.
Washington, meanwhile, doesn’t want to sound the economic alarm. The White House and most Democrats want Americans to believe the economy is on an upswing.
Republicans, for their part, worry that if they tell it like it is Americans will want government to do more rather than less. They’d rather not talk about jobs and wages, and put the focus instead on deficit reduction (or spread the lie that by reducing the deficit we’ll get more jobs and higher wages).
I’m sorry to have to deliver the bad news, but it’s better you know.
Medicare Fraud – $900B Crime that Technology Can Solve
March 28, 2011
As reported by ReimagineAmerica
Congratulations to the FBI for their “take-down” of a $100M Medicare fraud ring on October 13,2010. According to the NY Times October 14 morning addition, the “band of Armenian-American gangsters” billed Medicare for more than “$100M by inventing 118 bogus health clinics in 25 states”. According to the paper, the gangsters made off with $35M in cash that cannot be recovered. You will find a link to the NY Times news story at the end of this blog.
How did this happen? It happened because Medicare is a wholly automated payment system that is notoriously porous. If the SSN number of both patient and doctor are validated electronically, and the treatment code is separately validated electronically, an electronic payment is generated. Only after the payment is any audit performed. Often, but not always, the audit happens only when a recipient reviewing their own Medicare statement reports activity they know to be fraudulent, according to the CBS 60 Minutes exposé filmed in Florida, earlier this year, I suppose that Medicare subscriber doctors, also, report fraud when the IRS accuses them of under reporting their income?
The 2010 Health Care Reform legislation did include funding for Medicare fraud detection. But focusing on investigation after the fraud occurs and on TV warnings to Medicare recipients urging them to “guard the card” will not solve a problem estimated to be at least $50B – billion with a B – dollars a year! In fact, the legislation expects these efforts to save only $2B a year – 4% of the estimated reduction in benefit payments mandated by the Act. Wow we need to do 96% better or cut seniors’ benefits, according to Congressional Budget Office estimates!
Last week Fox Business News reported, and an IBM spokesman confirmed, that Sam Palmisano, CEO of IBM, told Barack Obama that IBM had carefully studied the Medicare fraud issue and estimated the actual 10 year problem to be closer to $900B – that’s billion with a B — over ten years. Mr. Palmisano believes so strongly in both IBM’s numbers and IBM’s potential solution that he offered to “build” the solution for “free”. Fox reported that Barack Obama turned down this offer. Can you imagine, an American CEO of an American corporation offers a solution that could, potentially, save 90% of the projected health care reform deficit and the President of the United States turned down the offer?
I was astounded – so astounded that I knew I needed to verify the story before I gave full vent to my frustration. So I Googled “IBM Medicare fraud”. Turns out that it’s true! IBM confirmed it.
There is no mystery here. Health care is a great business opportunity for IBM. IBM Health Care Practice works with partners every day in both the United States and Europe to improve the use of technology to simultaneously reduce the cost of delivering health care and improve health care outcomes.
It is important to examine my Palmisano’s language carefully. He offered to “build” the solution for free to “prove” it worked. He never said, IBM didn’t want to be paid if it worked. He was willing to “share the risk”. That has been a standard practice in business for years! Time that we adopted these money saving practices in the government as well.
Why would the President turned down such an offer? Certainly he knows that all major technology initiatives in federal government are done by private contract vendors? So what’s up?
- Most benignly, he does not want to appear to promote one federal vendor over others? That can easily be dealt with in the contracting process – requiring IBM to partner with other major software and hardware vendors to develop an “open source” solution.
- Can it be the President, who has no business experience, does not understand the concept “investing in a new business opportunity”? Mr. Palmisano is not an altruist. Successfully ending Medicare fraud would further strengthen IBM’s “qualifications” as a global health care solutions provider. This would be worth billions in new profits to IBM and its partners.
- Can it be possible that the President really has such a deep-seated distrust of business and business executives that he cannot imagine a CEO can be a patriot at the same time that he is responsible for producing share holder value?
- Could the President fear that accepting this offer might be seen as a public rebuke of the team at Medicare, who are all SEIU or AFGE members? Could he be concerned that such a perception would have political ramifications as he looks to government union support in his 2012 Presidential election?
Based on CBS and the New York Times reporting, I can think of a half dozen “quick hit” changes to the existing Medicare payment process that would produce billions in potential Medicare fraud savings. So, its easy for me to believe that the full force of IBM, IBM partners, the Medicare staff, and the FBI could eliminate $900B in Medicare fraud over the next decade.
Personally, I believe that Mr. Palmisano is acting both as a patriot and a good CEO. Mr. Obama, what do you have to lose?
Posted by: Mitchell Hirsch on Feb 17, 2011
As reported by Unemployedworkers.org
UPDATE: FEB. 17 – UNEMPLOYMENT INSURANCE SOLVENCY BILL INTRODUCED IN SENATE
Senator Richard Durbin (IL), with Senators Jack Reed (RI) and Sherrod Brown (OH), today introduced the Unemployment Insurance Solvency Act of 2011, which offers immediate tax relief to cash-strapped states and employers, preserves UI benefit levels, and creates strong incentives for states to restore their UI programs to solvency while also rewarding states that have managed their UI trust funds effectively.
In a statement, NELP Executive Director Christine Owens said, “Jobless workers, and we hope employers too, should be grateful for the leadership of Senator Richard Durbin and his colleagues Sherrod Brown and Jack Reed on the issue of unemployment insurance solvency. Following the President’s FY 2012 budget, the introduction of the Unemployment Insurance Solvency Act sets the stage for a serious conversation on how to make sure that the safety net tens of millions of Americans have counted on during the tough times of the last few years will be financially secure into the future.”
The new bill is similar to the plan outlined by President Obama in his remarks last week, but adds further protections for benefits and additional opportunities and incentives for states to return to solvency in the long run.
Original Post: Feb. 11
Unemployment insurance is just that — insurance — and it’s financed by premiums paid on workers’ paychecks and deposited into a trust fund. However, the unemployment insurance (UI) trust funds in many states are not only insolvent, but now face heavy debt burdens due to their increased need for federal borrowing during this prolonged period of high unemployment. Restoring them to financial health is essential to ensure that unemployment insurance benefits are there for workers when they’re needed, both today and in the future. The Administration has outlined a significant framework to address the problem, which would provide needed debt and tax relief to states and businesses.
A new plan from the National Employment Law Project (NELP) and the Center on Budget and Policy Priorities (CBPP) would build on that framework, further strengthening the long-term solvency of state UI systems while avoiding benefit cuts and employer tax increases. Workers need to pay attention to this issue. The last time UI trust funds got hit this hard, in the 1980s, 44 states cut back benefits for workers.
Many states UI trust funds have been hit in recent years by a double-engine freight train. First, for years many states have inadequately financed their UI funds, both by keeping their taxable wage base for UI too low relative to inflation-adjusted dollar values, and by taking a dangerous “pay-as-you-go” approach, which failed to build adequate reserves during periods of economic growth. The graph below shows the substantial erosion in the inflation-adjusted value of the wage base that is subject to the UI taxes that fund state systems. What does this mean? It means that the employer of a dishwasher pays the same unemployment premium as the employer of a banker. It does not take a degree in actuarial science to know that this is not going to work.
And oh yeah, second — well, then came the Great Recession with millions of workers’ jobs being lost and the vastly increased need for unemployment benefits to help sustain unemployed job-seekers and their families.
Now, 30 states have exhausted their UI trust funds and are borrowing from the federal government.
The lead editorial in The New York Times yesterday, titled ‘Relief for States and Businesses’, explained the need for the Obama administration’s approach. Here are some excerpts:
So many people now receive jobless benefits that 30 states have run out of their unemployment trust funds and are borrowing $42 billion from the federal government. Three of the hardest-hit states — Michigan, Indiana and South Carolina — have borrowed so much that they triggered automatic unemployment tax increases on employers, and the same thing is likely to happen to 20 more states this year.
….
On Tuesday, the Obama administration unveiled a smart proposal to delay those tax increases and provide some relief to both employers and state governments. Congressional Republicans reflexively objected to the idea, which could produce higher taxes in three years, but this plan provides relief that might stimulate hiring now when it is most needed.
….
Under the plan, which is subject to Congressional approval, there would be a two-year moratorium on the increased taxes that employers would otherwise have to pay to support the unemployment insurance system, which could save businesses as much as $7 billion. During those same two years, states would be forgiven from paying the $1.3 billion in interest they owe Washington on the money they have borrowed.
….
In 2014, when the economy will presumably have recovered somewhat, employers will have to make up for the moratorium by paying higher unemployment taxes to the states. Specifically, they will have to pay taxes on the first $15,000 of an employee’s income, instead of the current $7,000. But, even then, unemployment taxes will be at the same level, adjusted for inflation, as they were in 1983, when President Ronald Reagan raised them.
The administration is proposing to cut the federal unemployment tax rate in 2014 so that employers would pay the same amount to Washington as they do now. States, if they choose to do so, could collect more from each employer to repay the federal government and restock their own unemployment trust funds.
….
The full details of the plan’s costs and benefits will be available when President Obama submits his 2012 budget to Congress next week. When he does, both parties should take a close look at the numbers and seize the opportunity to keep this fundamental safety net solvent.
“It is a major step forward for the President’s FY 2012 budget to address the UI trust fund crisis,” said Andrew Stettner, deputy director of the National Employment Law Project and a co-author of the new joint NELP-CBPP policy proposal. “Our proposal rests on the same core principles — giving employers and states relief now while taking concrete steps to restore the long term solvency of the UI trust fund as the economy recovers. The plan endorses two key aspects of what the Administration’s proposal reportedly includes — raising the taxable wage base up from the inadequate, outdated level of $7,000 and endorsing a two-year moratorium on federal UI tax increases.”
The NELP-CBPP plan, detailed in a new report, would enable states to restore the solvency of their UI trust funds, avoid significant tax increases on employers during a weak economy, and prevent damaging cuts in UI eligibility and benefits for jobless workers, without increasing the deficit. The plan also suggests additional debt relief for states and positive incentives for employers, rewards states that have maintained sound financing packages, and builds on existing federal protections of state benefit levels.
In a statement, the groups provide a summary of the plan:
• The federal government would gradually raise the amount of a worker’s wages subject to the federal UI tax (i.e., the FUTA taxable wage base). This would automatically raise the floor for the taxable wage bases in the states which by law cannot be lower than the federal wage base, helping those states rebuild their trust funds. (The federal UI tax rate would fall, however, so that overall federal UI taxes did not go up.)
• The federal government would provide a moratorium, until 2013, on state interest payments on their UI loans.
• The federal government would also postpone, for two years, the FUTA tax increases required to recoup the loan principal in borrowing states.
• The federal government would offer immediate rewards and future incentives for states that currently have and continue to maintain adequate trust fund levels.
• The federal government would excuse a state from repaying part of its loan if the state (a) enters a flexible contractual agreement with the U.S. Labor Department to rebuild its trust fund to an appropriate level over a reasonable number of years, and (b) agrees to maintain UI eligibility, benefit levels, and an appropriate tax rate over the loan-reduction period.
This plan would produce the following benefits:
• Employers would not pay higher federal UI taxes until the beginning of 2014, saving them $5 billion to $7 billion while the economy remains weak and $10 billion to $18 billion over the next five years. Also, employers would pay no additional assessments to cover interest payments in 2011 or 2012, saving them $3.6 billion.
• In addition, partial loan forgiveness that comes from a state’s commitment to build adequate trust funds would save employers about $37 billion by the end of the decade. Counting the interest payments on this principal as well, employers could save as much as $50 billion.
• All or nearly all states would assume a path to permanent solvency.
• Employers in responsible states would receive concrete rewards and a more level playing field between the states.
• Adequate trust funds would stabilize UI tax rates over time, avoiding the roller-coaster tax rates common in many states — very low during healthy economic times, rising rapidly during recessions — that harm businesses and the economy.
• States would maintain current UI benefit and eligibility levels.
• The federal deficit would not rise as a result of these policies.
“States face a tremendously urgent crisis when it comes to their unemployment insurance trust funds,” said Michael Leachman, assistant director of the Center’s State Fiscal Project and co-author of the report. “If federal policymakers address this crisis using our plan, employers could save as much as $50 billion in taxes and states would maintain the critical benefits they provide to people who lose their jobs.”
The Republican Bogus Budget Plan
January 26, 2011
The GOP’s budget proposal is a preposterous, dangerous fantasy.
By Eliot SpitzerPosted Tuesday, Jan. 25, 2011, at 11:34 AM ET
Paul RyanThe time has finally come for both parties to create a federal budget that simultaneously addresses the economy’s structural deficits—tackles the immediate, recession-driven shortfall and still allows us to invest long-term in education, infrastructure, energy, and research and development.
There are basic budget and revenue facts that are not in dispute.
These should factor into every discussion about the budget:
1. Top marginal rates have been generally descending for the past 70 years, from 81 percent in 1940 to 35 percent today.
2. Over the past 30 years, income has grown nearly 300 percent for the top 1 percent, but only 25 percent for middle-income Americans.
3. The percentage of all taxes paid by each income group—including income, payroll, sales, etc.—roughly reflects its total income. In other words, our tax system is barely progressive. Despite the cries of the wealthy for tax relief, they pay only a slightly greater share of taxes than the significantly less wealthy, as a percentage of total income earned.
4. Our annual budget is significantly out of balance:
a. Spending is about $3.8 trillion.
b. Revenue is about $2.5 trillion.
c. This leaves a deficit of about $1.3 trillion.
5. The big buckets of spending are pretty clearly separable:
a. Defense—about $900 billion.
b. Social Security—$730 billion.
c. Medicare—$490 billion.
d. Medicaid—$300 billion.
e. Interest—$250 billion.
f. Nondefense discretionary—$610 billion.
Where do you begin to scale back spending or raise revenue to bring us into long-term balance, while laying a foundation for a competitive economy?
Keep in mind, there are only three things that can be done to close the gap—borrow more, tax more, or spend less. There is a clear consensus that dramatic borrowing will not be acceptable to the markets once we are beyond the immediate recession. The political will to raise taxes, unfortunately, is not there—witness the unfortunate extension of the Bush tax cuts last December. This means that the only real issue becomes which spending will be cut—and by how much?
The Republican answer is simple, and wrong. We got a glimpse of the Republican answer last week, in the Spending Reduction Act issued by the Republican Study Committee—the policy voice of the Republican Party. (Presumably, the response to the president’s State of the Union, to be delivered by Rep. Paul Ryan, the Republican anointed budget whiz and incoming chairman of the House budget committee, will echo this document.)
First off, the RSC proposes to cut only $2.5 trillion over 10 years—not even enough to make up for the additional deficit created by extending the Bush tax cuts.
And where exactly do the Republicans want to cut? Not at all in defense, Social Security, Medicare, or Medicaid, the biggest drivers of current spending. Moreover, these are the buckets of spending that if not altered will generate larger deficits every year and contribute almost nothing to our future competitiveness.
Instead, they propose that virtually the entirety of the cuts—$2.3 trillion of $2.5 trillion—come from nondefense discretionary spending. That means slashing spending in everything from education to scientific research funding by a whopping 20 percent to 30 percent over the next decade.
This approach is a political punt of the worst form. The Republicans appear to be afraid to make a single tough decision on entitlement spending, defense, or equity issues. They are simply caught in a dogma of “cut where the political cost will be least” and ignore what the impact on the future will be.
Nowhere in the Republican document is there mention of even sensible defense cuts—such as the trillion dollars over a decade suggested by Lawrence Korb, a senior Reagan Defense department official, or any discussion of raising the retirement age for Social Security, or any consideration of raising payroll taxes on the wealthy to keep Social Security solvent into the future.
Nope. The Republican approach to the federal budget continues to be vapid and dangerous for our future.
The moment for President Obama to draw a line in the sand approaches. Whatever disappointment there may have been over the decisions that got us here—the lame-duck tax agreement in particular—this is the moment when budget decisions will set the trajectory for the next decade. He must insist that the obligation to bring greater balance to the federal budget not forsake the education, R&D, and infrastructure investments critical to the future.
