Online Auctions

March 31, 2011

The deregulated energy market is causing a big buzz in this area. In the spring of 2010, NJ opened up deregulated opportunities to the residential market.

In January 2011, PA opened up the Peco territory to deregulation after a 5 year moratorium.

As the result, the market has been flooded with companies and individuals trying to capitalize on these opportunities.

Online Auction opportunities are now available. All you have to do is type buying deregulated energy online into your Google page and you will have multiple selections.

Also many companies have been promoting a Multi-level marketing approach to set up a grass roots effort in hopes of gaining penetration in the market.

.

As more consumers have grown more comfortable with on line purchasing, it seemed natural that this avenue would be an effective marketing option.

The only problem we see is that when buying energy in the deregulated market, you are dealing with a commodity. This puts a whole new spin on the opportunity.

This week, we would like to take a look at on line auctions.

Below is a plus-minus list we have developed to help you make an objective decision about purchasing energy on line versus using an independent broker.

On Line Auctions:

Plus

  • Feel like you are getting a good deal by participating in an ecommerce transaction
  • Potentially lower price by doing the ecommerce transaction 
  • Potentially easier transaction since there is limited contact with 3rd party energy suppliers
  • Electricity is a commodity and customer’s management feels this is best process for doing transaction

 

Minus

  • Can be more challenging to negotiate terms & conditions  
  • Potentially less leverage with suppliers since there is no personal interaction
  • Difficult determining what factors are included in the price.
    •  Is it fully loaded? (contains 7% loss transmission and sales tax)
    •  Is it a fixed rate or variable rate?
  • How do you know when is the best time to buy
  • Online auctioneers are brokers approaching the same providers we would be using.
  • Many on line auction companies do not have any information on their website regarding the management of the company

 

Dealing with an Independent Broker (Hutchinson Business Solutions)

 

Plus   

  • We represent all the major 3rd party providers selling energy in deregulated sates
  • We offer personal service, individually marketing your account to these providers
  • We monitor market fluctuations and discuss timing with our clients
  • We offer fixed price solutions (Other options available for large volume users)
  • We make sure all prices received are fully loaded and are an apples to apples comparison to your local utility’s price to compare
  • Due to our business relationships, we bring leverage to the deal
  • We assist with customer’s legal team in negotiating the business terms of the contract as they may apply
  • We provide options, defining the best terms and conditions and service the account throughout the term of the contract, addressing issues as they arise
  • We have been advising customer risk management strategies in the deregulated markets for over 10 years.
  • Opportunity to outsource many of the tasks involved with the energy procurement process while retaining the control and final decisions on any potential transaction

 

Minus

  • The energy market is in a growth mode, many new faces and the information is sketchy.
  • You must be sure to deal with a reputable company who will represent your best interest
  • Many of the new companies are offering variable rates

 

At first glance you may think this overview is biased.

Yes, we are an independent broker. We take pride in the value we have brought to our clients in the deregulated market.

We have just seen too much abuse. The deregulated energy market is an unknown.

We take time to explain how the market works with each client. We want you to understand this concept and feel comfortable with your purchase.

Each account is unique. There is no one size fits all solution.

There are great opportunities for savings in the business market.

Know the facts!!!!

Look to ask the right questions.

Let HBS be your eyes and ears….

While you continue to do what you do best….

Run your day to day business.

To learn more about deregulated energy opportunitiews for your business email george@hbsadvantage.com

Visit us on the web www.hutchinsonbusinesssolutions.com

Advertisements

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?

  1. 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. 
  2. 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.
  3. 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? 
  4. 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?

As reported by Bipartisan Policy Center

March 22, 2011

Media Contact:

Paul Bledsoe
Bipartisan Policy Center
(202) 637‐0400
pbledsoe@bipartisanpolicy.org

Washington, DC – A national producer—consumer Task Force convened by the Bipartisan Policy Center (BPC) and the American Clean Skies Foundation (ACSF) issued a report today finding that the growth of shale gas production “reduce[s] the susceptibility of [natural] gas markets to price instability and provide[s] an opportunity to expand the efficient use of natural gas in the United States.”

The Task Force’s 70-page report, the result of a yearlong review, calls on governments to “encourage the development of domestic natural gas resources, subject to appropriate environmental safeguards” given that the efficient use of gas has the potential to reduce harmful air emissions, enhance energy security and improve the prospects of U.S.-based energy-intensive manufacturers.

With a more stable price horizon for natural gas, the report also urges state public utility regulators and industry to consider making greater use of longer term supply contracts. “Rules that unnecessarily restrict the use of or raise the cost of long-term contract and hedging tools for managing supply risk should be avoided,” the Task Force said.

“We have a good problem,” said Task Force co-Chair, Norm Szydlowski, Bipartisan Policy Center and President and CEO of SemGroup Corporation. “Finding more natural gas provides an opportunity that is as much unparalleled as it was unexpected. Fundamental changes that have taken shape in the domestic supply and demand balance for natural gas, including an unprecedented level of available storage and import capacity, should allow markets to function more efficiently and fluidly in the future,” said Szydlowski.

“The extensive work of this diverse, expert panel identifies a small number of practical regulatory and policy measures that can provide the necessary confidence to support new investment in efficient applications of natural gas,” said Ralph Cavanagh, Senior Attorney and Co-Director of the Energy Program at Natural Resources Defense Council. “If the industry can meet high standards of environmental performance for extracting and delivering the fuel, we are looking here at very good news for America’s economy and industrial competitiveness, the environment, and our nation’s energy security.”

“The Task Force findings and recommendations reflect optimism that the robust supply horizon for natural gas presents fresh opportunities—not only to move beyond prior price volatility concerns shared by both consumers and producers, but to develop new tools for managing price uncertainty,” said Marianne Kah, Chief Economist, Planning and Strategy of ConocoPhillips. “With sound policies, the nation can capitalize on this abundant natural gas supply and convert it into intelligent energy progress.”

“With U.S. natural gas now one-fourth the price of oil on an energy equivalent basis, it is further welcome news to consumers that, with the right policies, U.S. natural gas appears poised to enter into an era of greater price stability,” said Paula Gant, Senior Vice President for Policy and Planning of the American Gas Association.

“The fact that a diverse Task Force like this could reach a consensus on these particular findings and recommendations was unexpected,” said Task Force co-Chair Gregory C. Staple, CEO of ACSF. “This consensus suggests that, although we may have a stalemate on many other energy issues, there is at least one important area – natural gas – where progress is within reach,” Staple added.

Background

Interest has grown recently in natural gas as a cleaner, low-carbon, low-cost alternative to other fossil fuels in the electric power and industrial sectors. For example, in his State of the Union address, President Obama called for a federal clean energy standard for generating electricity that could be partly satisfied by using more domestic natural gas.

The Task Force was jointly convened by the BPC and ACSF in March 2010 to examine historic causes of instability in natural gas markets and to explore potential remedies. Task Force members, listed below, represent natural gas producers and distributors, consumer groups and large industrial users, as well as independent experts, state regulatory commissions and environmental groups.

Key Task Force Findings and Recommendations:

1. Recent developments allowing for the economic extraction of natural gas from shale formations reduce the susceptibility of gas markets to price instability and provide an opportunity to expand the efficient use of natural gas in the United States.

2. Government policy at the federal, state and municipal level should encourage and facilitate the development of domestic natural gas resources, subject to appropriate environmental safeguards. Balanced fiscal and regulatory policies will enable an increased supply of natural gas to be brought to market at more stable prices. Conversely, policies that discourage the development of domestic natural gas resources, that discourage demand, or that drive or mandate inelastic demand will disrupt the supply-demand balance, with adverse effects on the stability of natural gas prices and investment decisions by energy-intensive manufacturers.

3. The efficient use of natural gas has the potential to reduce harmful air emissions, improve energy security, and increase operating rates and levels of capital investment in energy intensive industries.

4. Public and private policy makers should remove barriers to using a diverse portfolio of natural gas contracting structures and hedging options. Long-term contracts and hedging programs are valuable tools to manage natural gas price risk. Policies, including tax measures and accounting rules, that unnecessarily restrict the use or raise the costs of these risk management tools should be avoided.

5. The National Association of Regulatory Utility Commissioners (NARUC) should consider the merits of diversified natural gas portfolios, including hedging and longer-term natural gas contracts, building on its 2005 resolution. Specifically, NARUC should examine:

  • Whether the current focus on shorter-term contracts, first-of-the-month pricing provisions and spot market prices supports the goal of enhancing price stability for end users,
  • The pros and cons of long-term contracts for regulators, regulated utilities and their customers,
  • The regulatory risk issues associated with long-term contracts and the issues of utility commission pre-approval of long-term contracts and the look-back risk for regulated entities, and
  • State practices that limit or encourage long-term contracting.

6. As the Commodity Futures Trading Commission (CFTC) implements financial reform legislation, including specifically Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203), the CFTC should preserve the ability of natural gas end users to cost effectively utilize the derivatives markets to manage their commercial risk exposure. In addition, the CFTC should consider the potential impact of any new rulemaking on liquidity in the natural gas derivatives market, as reduced liquidity could have an adverse affect on natural gas price stability.

7. Policy makers should recognize the important role of natural gas pipeline and storage infrastructure and existing import infrastructure in promoting stable gas prices. Policies to support the development of a fully functional and safe gas transmission and storage infrastructure both now and in the future, including streamlined regulatory approval and options for market-based rates for new storage in the United States, should be continued.

Complete copies of the Task Force report along with a library of original commissioned research can be found here and here.

Sponsoring Task Force Members:

Gregory C. Staple
Task Force Co-Chair
Chief Executive Officer
American Clean Skies Foundation

Norm Szydlowski
Task Force Co-Chair
Bipartisan Policy Center;
President & CEO
SemGroup Corporation

Ken Bromfield
U.S. Commercial Director, Energy Business
The Dow Chemical Company

Carlton Buford
Lead Economist
The Williams Companies

Peter Sheffield
Vice President, Energy Policy and Government Affairs
Spectra Energy Corporation

Ralph Cavanagh
Senior Attorney and Co-Director, Energy Program
Natural Resources Defense Council

Paula Gant
Senior Vice President for Policy and Planning
American Gas Association and on behalf of the American Gas Foundation

Carl Haga
Director, Gas Services
Southern Company

Byron Harris
Director
West Virginia Consumer Advocate Division

Marianne Kah
Chief Economist, Planning and Strategy
ConocoPhillips

Todd Strauss
Senior Director, Energy Policy, Planning and Analysis
Pacific Gas & Electric Company

Additional Task Force Members:

Colette Honorable
Chairman
Arkansas Public Service Commission

Sharon Nelson
Former Chair, Board of Directors
Consumers Union

Sue Tierney
Managing Principal
Analysis Group, Inc.;
Former Assistant Secretary of Energy

Bill Wince
Vice President, Transportation and Business Development
Chesapeake Energy Marketing

Marty Zimmerman
Professor
Ross School of Business, University of Michigan;
Former Group Vice President, Corporate Affairs,
Ford Motor Company

About the American Clean Skies Foundation

The American Clean Skies Foundation, a Washington-based nonprofit, supports energy independence and a clean, low-carbon environment through expanded use of natural gas, renewables and efficiency. For more information, visit www.cleanskies.org.

About the Bipartisan Policy Center

The Bipartisan Policy Center (BPC) is a non-profit organization that was established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell to develop and promote solutions that can attract public support and political momentum in order to achieve real progress. The BPC acts as an incubator for policy efforts that engage top political figures, advocates, academics and business leaders in the art of principled compromise. For more information, please visit our website.

What’s Up?

March 24, 2011

I say potato.

You say patato.

The difference may be just an inflection

Or the pronunciation of the word

(in this case it was my spelling, so you get the gist)

However, we all know what we are discussing.

Shame that the same thing cannot be said

About the word…….

Deregulation……

We should all know what we are discussing

We should all be on the same page…..

But there are so many stories……

Each one providing the best deal……..

A once in a lifetime offer……

Get in on the ground floor…….

What is going on????

With electric prices being at a 7 year low

We are finding, that everyone and their brothers,

Are now selling energy………

I get calls at my office almost….. everyday

Would like to switch electric providers?

How would you like to earn some extra cash?

The market is being inundated.

I am surprised Comcast and Verizon are not selling energy?

HBS has been selling energy to commercial clients for over 10 years

I would like to take a few moments to add our perspective.

Define what we see as the opportunity.

Educate our clients and friends.

Business

 

 

  • The deregulated electric market price is closely tied to natural gas pricing.

 

  •  
    • Thirty ( 30%) of the electric generated in the US is made with natural gas. Therefore, natural gas is a good indicator of the market prices.

 

  • Natural gas market prices are the lowest they have been in the last 4 years.

 

  •  
    • As a result, the deregulated market price of electric has also dropped.

 

  • Many experts think that we may have hit the floor on natural gas prices back at the end of October 2010.

 

  •  
    • The market has gone up and down several times since then, but it has never gone back to the low point recorded on October 25th, 2010.

 

This information indicates that clients should be looking to lock in or fix the price of electric with a 3rd party deregulated provider for a minimum of 1 year…… possibly 2 years.

We have actually seen instances where the 2 year fixed price is more competitive and offers more savings.

Each account is unique. Prices are all based on demand factors.

Are you a seasonal account?

(Highest usages during summer months)

Do you use most of your energy during the day?

(On Peak….when prices are higher)

Or do you have mixed usage?

(On Peak and Off Peak)

All these factors play into defining the deregulated market rate for your account.

Do you have annual usage demands

vs seasonal usage demands……

Your fixed rate will be lower.

(your demand usage is being spread out over the entire year)

Is your usage a mixed between on peak usages and off peak usages

vs only using power during the day,

when rates are the highest

Then your rates will be lower.

Each provider has their sweet spot. A client profile, they are most competitive with in that market.

HBS is an independent energy management consultant. Thru our strategic partnerships, we represent all the major deregulated gas and electric providers selling energy in deregulated states.

Our expertise is the ability to properly define the market and select the provider(s) who will bring the most competitive fixed rate, offering the best opportunity for savings to our clients.

What about Variable rates?

There are many companies now offering variable rates for electric.

Month to month contracts….offering savings of around 10%.

If the market prices are near the bottom,

Why would it not be in the clients’ best interest to lock in a fixed rate instead of floating with a variable rate?

As the summer season starts,

Market rates will also go up,

Due to summer demand.

So will those variable rates!!!!

It only makes sense to lock in on a fixed price,

if the market presents the opportunity.

In the deregulated energy market,

You are dealing with a commodity.

Timing is everything.

Let HBS be your eyes and ears.

Next week, we will outline using an independent broker vs buying online. Also, what does it mean when you say the price is fully loaded

To learn more about deregulated opportunities for your company email george@hbsadvanatge.com  

Visit us on the web www.hutchinsonbusinesssolutions.com

Note: With the current deregulated market opportunities now being presented to many business that qualify, the market has been inundated with new sales personnel. I found this article provides on objective overview of questions you should ask and details you should know before making a decision.

There are many companies offering variable electric rates. I would not recommend this solution at this time.

With natural gas prices being the lowest they have been in the last 3 or 4 years, there are great opportunities to lock into a fixed price electric contract for a 1 or 2 year period.

By Carl Shaw

With the deregulation of energy in many parts of the US, competition is now allowed between energy companies to provide electricity at discounted rates directly to their customers. These Energy Service Provider Companies (ESCOs) are licensed by individual states and are required to adhere to the applicable regulatory guidelines set by the Public Service Commissions (PSC) or Public Utility Commission (PUC).  Customers (end-users) also have the opportunity to work with electricity brokers or consultants who can compare different offers and provide additional services to help manage your monthly energy spending and costs.

If you are a business spending a minimum of $3000 a month  on your electric or natural gas bill, you may qualify to choose your electric or natural gas supplier in deregulated markets, which could create savings opportunities. Companies that can control or manage their electric consumption to use more electricity in the off-peak hours will find the greatest opportunity for savings. In deregulated markets, you now have a choice and can choose lower energy rates without any risk or local service change.

Your local energy service providers buy natural gas and electricity on the open market at wholesale prices based on the current market conditions and then bill their customers at increased rates to include margins and/or service fees.

Independent Deregulated brokers can put your company in a competitive position by leveraging extensive buying power to help you develop energy supply procurement programs. They can conduct an unbiased rate and tariff analyses that may result in substantial savings to you. 

Due to the current economic conditions and the complications deregulation has caused there are many new energy advisory companies popping up, so be sure to know all the facts before making any decision.

When choosing a qualified utility tariff analysis & rate optimization firm to represent you, you should be aware of a few things:

First, be sure that the price you are quoted from your local provider includes all charges. Should you be talking to a consultant or broker, make sure the price is “fully loaded” meaning, does it include the 7% loss allowance (to deliver 100,000 kWh of electric, the providers must actually send 107,000 kWh, for there is a 7% loss in transmission)? Also does it include the local sales tax?

In PA, you must also ask if the price includes GRT (gross receipt tax) and RMR (reliabilty must run). RMR is a pass thru charge from the provider that allows them to meet peak demand periods when they must use additional resources to meet this demand. This is normally found during the summer months.

All these important components should be included in the quote from your deregulated provider to make an accurate comparison. These components are included in your price to compare from your local provider.  Often, companies will provide a low end quote without including sales tax and a load allowance. Be sure you are comparing apples to apples. Often when these figures are included, their real quote is much higher.

Does the company providing your quote have an Energy Information Management System in place, to make sure that you are getting the best available rate?

Are they shopping your account to more than 1 provider. Each provider has a sweet spot (a market they are most competitive in). An independent broker who knows the market will be able to identify these providers and work to get the best price.

Information is power. Knowing what questions to ask will save you time and money.

There are opportunities to save from 10% to 25% in the deregulated electric market depending on your usage patterns.

When making a final decision, know that you are dealing with a commodity and timing is everything. Market fluctuations may happen on a daily basis.

By Lisa Fleisher/Statehouse Bureau

As reported on NJ.com

TRENTON — Gov. Chris Christie Thursday will propose major changes to the state’s broken unemployment system, reducing benefits for workers and limiting tax increases on employers, legislative and administration officials said tonight.

Christie’s proposal, which will need to be passed by the Democrat-controlled Legislature, is aimed at softening a tax hike business groups said was their top concern for the year, while also targeting benefits given to future unemployed workers.

Democratic lawmakers have said they would fight to protect benefits for workers, but they also said increasing taxes employers pay for workers could stunt job growth.

“I am going to have to support some element of what is being put on the table,” said Assembly Speaker Sheila Y. Oliver (D-Essex), who was briefed on the proposal Thursday. But “to have unemployed people, quote, ‘share the burden’ of dealing with our fiscal (problem), it’s like adding insult to injury to devastated New Jerseyans.”

The proposal, which would take effect in July, would reduce tax increases on businesses, institute a one-week waiting period for people receiving benefits, reduce the maximum weekly benefits check by $50 and increase benefit restrictions on people fired for “misconduct,” said Oliver and two senior Christie administration officials, who requested anonymity because they were not authorized to speak before the announcement.

With the state’s jobless rate hovering around 10 percent, the proposal would not affect employees already on unemployment.


Full Star-Ledger coverage of the N.J. budget


Christie’s proposal is a shift from a statement he made just before taking office in January. He had said he wanted to find a way to help employers, but the state would have to “pay the piper on this” and he would not ask for legislation to put off the tax increase.

Those taxes on employers pay most of the cost of providing state benefits to laid-off workers. But politicians in both parties for years used unemployment taxes for other purposes, such as paying for health care for the poor.

A constitutional amendment, which Christie supports, will go on the ballot in November asking voters to force the Legislature to stop raiding accounts such as the New Jersey Unemployment Insurance Trust Fund.

When New Jersey and the country plunged into the deepest recession since the Great Depression, the state quickly ran out of money to pay benefits. That triggered a tax increase lawmakers have tried to soften.

“There’s no bigger issue for the economy, for future economic growth, for this state,” said Arthur Maurice, a vice president with the New Jersey Business and Industry Association. “Unless it’s resolved, there will be greater unemployment and no hope of any jobs recovery in the state.”

Without the proposed changes, the average employer in July would see taxes go up 58 percent — or $390 a year — per employee, according to the administration. The changes would hold that increase, on average, to 17 percent this year, or $130 per employee and further limit the potential for increases through 2013.

New Jersey has borrowed $1.2 billion from the federal government in the past year, and Christie and lawmakers have asked congressional representatives to work to get the loan forgiven.

Under Christie’s changes, future laid-off workers would have to bear some of the pain. The maximum weekly state benefit would be scaled back from $600 to $550, and people would have to wait a week to get a check. That means people who take weeklong furloughs — or temporary, unpaid time off — would not be eligible for benefits for that first week.

Those provisions will likely face the biggest fight.

“It’s something that I would have a very hard time supporting,” said Senate Majority Leader Barbara Buono (D-Middlesex). “I think it’s Draconian.”


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.

Value of UI Taxable Wage Base, Adjusted

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.”

KEVIN FREKING   02/19/11 08:42 PM   AP

As reported in Huffington Post

WASHINGTON — 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.