Posts tagged ‘accounting’

Newsflash: Apparently, Obamacare will Reduce Full-Time Employment. Who Would Have Guessed?

The Washington Post reports on an updated CBO report:

The Affordable Care Act will reduce the number of full-time workers by more than two million in coming years, congressional budget analysts said Tuesday in the most detailed analysis of the law’s impact on jobs.

After obtaining coverage through the health law, some workers may forgo employment, while others may reduce hours, according to a report by the Congressional Budget Office. Low-wage workers are the most likely to drop out of the workforce as a result of the law, it said. The CBO said the law’s impact on jobs mostly would be felt after 2016.

This almost certainly underestimates the impact.   Why?  Well, one reason is that a lot of full-time jobs were switched to part-time jobs way back in late 2012.  That is what our company did.  Why so early?  Because according to rules in place at the time (rules that have since been delayed at least a year) the accounting period for who would be considered full-time for the purpose of ACA penalties would be determined by an accounting period that started January 1, 2013.  So, if a business wanted an employee to be considered part-time on January 1, 2014 (the original date employer sanctions were to begin), the changes to that employees hours had to be put in place in late 2012.  More on this here in Forbes.

In addition, this CBO report is  a static analysis of existing business.  It does not seem to include any provisions for businesses that have dialed back on investment and expansion in response to the ACA (we have certainly cut back our planned investments, and we can't be the only ones.)  This effect is suggested (but certainly not proven) by this chart.

click to enlarge

The sequester and government shutdown were cited by the Left as reasons for a sluggish economy.  Which government action seems most correlated with a flattening in job growth?

 

EPA Enhancing Its Power with Sue and Settle

Congress has ceded far, far too much legislative power to Administration agencies like the EPA.  The only check that exists for that power is process -- regulators have to go through fairly elaborate and lengthy steps, including several full stops to publish draft rules and collect public comment.  A lot of garbage gets through this process, but at least the worst can be halted by a public or Congressional outcry to draft rules.

But like most government officials, regulators resent having any kind of check on their power.  Just like police look for ways to conduct searches without warrants, and even the President looks for ways to rule without Congress, the EPA wants to regulate unfettered by public comment process.

The EPA has found a clever and totally scary way around this.  In short, they collude with a friendly environmental group which sues the EPA seeking certain rules that the EPA believes to be too controversial to survive the regulatory process.  The EPA settles with the friendly group, and a consent decree is issued imposing the new rules, entirely bypassing any rules-making or public comment process.  The EPA then pretends that they were "forced" into these new rules, and as a kicker, the taxpayer funds the whole thing by making large payoffs to the environmental group who initiated the suit part of the settlement.  Larry Bell describes the process:

“Sue and settle “ practices, sometimes referred to as “friendly lawsuits”, are cozy deals through which far-left radical environmental groups file lawsuits against federal agencies wherein  court-ordered “consent decrees” are issued based upon a prearranged settlement agreement they collaboratively craft together in advance behind closed doors. Then, rather than allowing the entire process to play out, the agency being sued settles the lawsuit by agreeing to move forward with the requested action both they and the litigants want.

And who pays for this litigation? All-too-often we taxpayers are put on the hook for legal fees of both colluding parties. According to a 2011 GAO report, this amounted to millions of dollars awarded to environmental organizations for EPA litigations between 1995 and 2010. Three “Big Green” groups received 41% of this payback, with Earthjustice accounting for 30 percent ($4,655,425).  Two other organizations with histories of lobbying for regulations EPA wants while also receiving agency funding are the American Lung Association (ALA) and the Sierra Club.

In addition, the Department of Justice forked over at least $43 million of our money defending EPA in court between 1998 and 2010. This didn’t include money spent by EPA for their legal costs in connection with those rip-offs because EPA doesn’t keep track of their attorney’s time on a case-by-case basis.

The U.S. Chamber of Commerce has concluded that Sue and Settle rulemaking is responsible for many of EPA’s “most controversial, economically significant regulations that have plagued the business community for the past few years”. Included are regulations on power plants, refineries, mining operations, cement plants, chemical manufacturers, and a host of other industries. Such consent decree-based rulemaking enables EPA to argue to Congress: “The court made us do it.”

Wherein I Tell The Census Bureau to Take a Leap

Every year I am required by law to fill out what is called the "Accommodation Report" by the Census Bureau.  As a lodging company (we run campgrounds) I must reveal my revenues and some of my expenses.  They ask for numbers aggregated differently from how we collect them for GAAP, so it is not a simple exercise.  But I do it under protest, even though several of my competitors do not seem to be similarly punished with this requirement.

Well, I don't actually fully comply.  We run over 150 small locations, and technically I am supposed to fill out an 8-page accommodation survey for every one of them.  This would take a week of my time.  So I pretend I have only one campground and report my summary revenue numbers for all our campgrounds as if they were for one location.   Also, a year ago the Census folks began demanding the data quarterly, and I told them to pound sand, that I was on the verge of not doing the annual report and so I definitely was not going to do all that work quarterly.

Well, this year it got worse.  For some reason, the survey this year had 3 extra pages asking me to break down my expenses in detail, in many categories that do not match those that I use in my bookkeeping.  Here is an example page:

 

First, not only do I not have time to figure this out (who tracks software purchases as its own item in the accounting system?), but it is not the government's business, particularly given that I am a private company.  Even the IRS is not this intrusive.

Further, at best the data I report will be used for nothing.  More likely, it will be used to justify new taxes on me, new regulations on me, or new subsidies for my competitors.  I have no desire to aid any of these activities.

Postscript:  And you know what I have zero patience with? -- otherwise free market academic economists who support this kind of data gathering because it is critical.  Yes, I am sure they much prefer to get free statistics for their work gathered via government coercion  rather than have to pay for it, as one would have to do if we relied on private companies to gather this data rather than the government.  There is absolutely no difference between an economist supporting government statistics gathering and any other company or individual asking that the government subsidize their inputs.  But, but, we are critical to the country!  Yeah, the sugar industry says the same thing.

Incredible Level of Cronyism

I am simply amazed at this level of cronyism enjoyed by the sugar industry -- import restrictions on cheaper world sugar, price supports, and government loans that can be paid back with excess product rather than cash.

The U.S. Department of Agriculture is likely to buy sugar in the domestic market this year in order to drive prices up and prevent defaults on loans made to sugar processors, according to a USDA economist.

The USDA estimates it would need to buy 400,000 tons of sugar to boost prices to an “acceptable level,” said Barbara Fecso, an economist at the department. A purchase of 400,000 tons would amount to about 4.4% of projected U.S. sugar production in the marketing year that ends Sept. 30.

Domestic sugar prices have been trading at about 20 cents a pound, their lowest level in nearly four years, putting companies that make sugar from cane or beets at risk of defaulting on loans they received from the USDA when prices were higher.

People talk about these supposed government subsidies for oil companies, but every time I see a list of them they are dominated by things like depletion allowances, FIFO accounting, and investment tax credits, which are either standard accounting rules that apply to all industries or tax credits that apply to all manufacturers.  But Big Sugar gets real heavy-duty subsidies no one, except maybe ethanol companies and other farmers, get.

When Low Interest Rates are Anti-Stimulus

We have heard about the difficulty folks who are retired are having with low interest rates.  But low interest rates are having a huge impact on corporations that still have defined-benefit pensions.

Across America's business landscape, the gap between the amount that companies expect to owe retirees and what they have on hand to pay them was an estimated $347 billion at the end of 2012. That is better than the $386 billion gap recorded at the end of 2011, but the two years represent the worst deficits ever, according to J.P. Morgan Asset Management.

The firm estimates that companies now hold only $81 of every $100 promised to pensioners.

In general, everything happening on the liability side of the pension equation is working against companies. A big source of the problem: persistently low interest rates, set largely by the Federal Reserve....

Pension liabilities change over time as employees enter and leave a pension plan. For financial-reporting purposes, companies use a so-called discount rate to calculate the present value of payments they expect to make over the life of their plan.

The discount rate serves as a proxy for the hypothetical interest rate that an insurance company would expect on a bond today to fund a company's future pension payments. The lower the discount rate, the greater the company's pension liabilities.

Boeing's discount rate, for example, fell to 3.8% last year from 6.2% in 2007. The aircraft manufacturer said in a securities filing that a 0.25-percentage-point decrease in its discount rate would add $3.1 billion to its projected pension obligations.

Boeing reported a net pension deficit of $19.7 billion at the end of 2012.

The discount rate is based on the yields of highly rated corporate bonds—double-A or higher—with maturities equal to the expected schedule of pension-benefit payouts.

Moody's decision last summer to lower the credit rating of big banks hurt UPS and other companies by booting those banks out of the calculation. And because bonds issued by some of those banks carried higher yields than other bonds used in the calculation, UPS's discount rate fell 1.20 percentage points.

This is obviously not a wildly productive use of corporate funds, to divert ever-increasing amounts of money to pay people who are no longer producing.  But at least corporations are acknowledged the problem (I will give credit where it is due -- thanks to accounting rules and government regulations that force a fair amount of transparency here).

It is interesting to note the Boeing example, where their expected rate of return on pension funds fell from 6.2% to 3.8%.  Compare that to corrupt government entities like Calpers, which bravely faced this new reality by cutting its discount rate from an absurd 7.75% to a still absurd 7.5%.  This despite returns last year around 1%.  By keeping the number artificially high, Calpers is hiding its underfunding problem.  An interesting reform would be to force Calpers to use a discount rate equal to the average of that used by the 10 largest private pension funds.

Counting Coup

The fiscal settlement passed last night did absolutely nothing to improve the deficit or the financial sanity of government.  Its only purpose, as far as I can tell, was to let Democrats count coup on rich people as a reward for winning the last election.  It's like telling your kids that on their birthday, you will take them to do absolutely anything they like, and Democrats chose to display their disdain for rich people as their one act of celebration.    A few other observations:

  • I had expected that they would gen up a bunch of fake savings and accounting tricks to pretend there were spending cuts in proportion to tax increases, but apparently they did not feel the need to bother.  Essentially only trivial spending cuts were included.
  • At what point can we officially declare that the reduction in doctor reimbursement rates that supposedly paid for much of Obamacare is a great lie and will never happen?  Congress once again extended the "doc fix" another year, eliminating the single largest source of savings that was to fund Obamacare.  Congress has been playing this same game  -- using elimination of the doc fix to supposedly fund programs and then quietly renewing the doc fix later -- for over a decade
  • The restoration of the FICA tax is probably a good thing.  Though I think the reality is something else, people still think of these as premiums that pay for future benefits, so in the spirit of good pricing, the premiums should reflect the true costs.  And FICA premiums have always been set about at the right level (it is only the fact that past Congresses spent all the money supposedly banked for future generations that Social Security has a financial problem).  In fact, we should raise Medicare premiums as well.
  • Apparently, though I have not seen the list, this last minute deal was chock full of corporate cronyism, with a raft of special interst tax preferences thrown into the mix.

And so ends, I suppose, the 12-year saga of the Bush tax cuts, with tax cuts for the rich revoked and the rest made permanent.   The establishment media decided early on that it was going to run with the story line that these cuts were "for the rich."  The irony, that will never get any play, is that now, at the end, it is all too clear that this was far from the case.  Reversing the tax cuts to the rich only reversed a small percentage of the original tax cuts.  In fact, if the Bush tax cuts had been mainly for the rich, then the Democrats would not have even bothered addressing the fiscal cliff.

Geometrically Proliferating License Requirements Are Driving Me Nuts

I frequently write here that almost never does a month go by, even in a state where I have operated for over 10 years, that I don't discover yet another tax I owe or license I must obtain.

Today, I got a note from the state of Arizona that we must license our two septic pumping trucks with the state.  Already, these are licensed each year with the County in which they operate, a process that includes a fee (of course) and an inspection by the County.  Now I have to fill out a bunch of forms to send the exact same information to the state, with yet another fee (of course) and the need for another inspection each year by the County.  I asked if my current County license would suffice to cover the inspection, and I was told no.  So, to operate this truck in Arizona I must

  • Fill out forms and send fee to County
  • Get inspected by County
  • Fill out forms with the same information as already sent to County and send fee to State
  • Get inspected yet again by County, but this time on the state form
  • Repeat every year

It is interesting to note that the state does nothing except file my form and bank the fee.  This is just another money and power grab -- more cash for the bureaucracy and yet another useless task (filing these forms and sending out compliance letters, etc) to justify their headcount.  Then the next time someone suggests "brutal cuts" to state budgets, everyone can scream that the rivers will run brown with sewage because the state won't have the people to collect all the paperwork that duplicates what the County already collects.

Just after wasting an hour or two of my time with this (and sending it to my managers to waste days of their time), I got a happy note from the US Census Bureau that I had been selected to file quarterly reports about my business (they have a special survey of the lodging business -- I presume they do this for other industries as well).  I wrote back:

To Whom It May Concern:

I am not sure what we have done wrong to be punished with this extra workload, but unless I hear back from you that this report is required of us by law under threat of some sort of dire consequence, we will not be filling it out.

We are a small company and only I, the President, am equipped to fill out this form.  We already fill out your annual survey and it is incredibly time-consuming for us, for it asks for data in ways we do not normally track it.  Further, it asks for our P&L in a form that does not match GAAP accounting, which causes all sorts of difficulties in completing it.  And we don’t normally compile results on a quarterly basis, only annual, so this report would be particularly onerous.  We actually have to run a business here.

Finally, I might add, I am loathe to send the government yet more data since this data will likely just be used as a justification to raise my taxes or increase our regulatory burden.

So no thanks.

PS- let's just assume the "you have a crappy job" jokes have already been made and move forward from there in the comments.

Privatization Updates

While this may be familiar territory for readers of this blog, I have a post up at the Privatization blog on the history of private operation of public parks.  In this article I quoted one of my favorite over-wrought criticisms of private operation of parks, this time from the San Francisco Chronicle:

The question is, how will these agreements work over time? If parks remain open using donations, what is the incentive for legislators to put money for parks in the general fund budget? And who is going to stop a rich crook or pot dealer from taking a park off the closure list and using it for fiendish pursuits?

LOL.  "Fiendish pursuits?"

I also had an article there a while back about government accounting systems and how they make such privatization efforts difficult:

Back when I was in the corporate world, "Make-Buy" decisions -- decisions as to whether the company should do some task itself or outsource it to companies with particular expertise or low costs in that area -- were quite routine.  Even in the corporate world, though, where accounting systems are built to produce product line profitability statements and to do activity-based costing, this kind of analysis is easy to get wrong (in particular, practitioners frequently confuse average versus marginal costs).

But if these analyses are tricky in the private world, they are almost impossible to do well in the public sphere.  Grady Gammage, a senior and highly respected research fellow at Arizona State University's Morrison Institute, has as much experience with public policy analysis as anyone in the state.  Several years ago, he spent months digging into the financial numbers of Arizona State Parks, with the full cooperation of that agency.  A critical question of the study was how much it actually cost to operate a park, vs. do all the other resource and grant management tasks the agency is asked to perform.  Despite a lot of effort by Gammage and his staff, he told me once that the best he could do was make an educated guess --plus or minus several million dollars -- as to how much of the Agency's budget is spent actually operating parks vs. performing other tasks.

The reasons that this is so hard is that the parks agency's budgeting process was not set up to determine true net operating gains and losses at parks.  It was set up, like most public accounting systems, to enforce accountability to different pools of money that have been allocated by the legislature for certain tasks.  This tends to lead to three classes of problems that cause public make-buy decisions, as well as ex post facto third-party analyses, so difficult.  Since I am most familiar with the parks world, I will discuss these three issues in the context of parks:

Current Oil Boom Only A Surprise to Those Who Don't Understand Markets

There is nothing surprising or unpredictable about the current oil boom, except perhaps how far it has gotten in the face of an Administration that has done virtually everything it can to stop it  (thank god there is oil and gas under private land).  Your humble scribe, neither an economist nor an expert in oil markets, wrote way back in 2005:

Everything old is new again.  Back in the late 70′s, all the talk was about the world running out of oil.  Everywhere you looked, "experts" were predicting that we would run out of oil.  Many had us running out of oil in 1985, while the most optimistic didn’t have us running out of oil until the turn of the century.  Prices at the time had spiked to about $65 a barrel (in 2004 dollars), about where they are today.  Of course, it turned out that the laws of supply and demand had not been repealed, and after Reagan removed oil price controls and goofy laws like the windfall profits tax, demand and supply came back in balance, and prices actually returned to their historical norms....

 Supply and demand work to close resource gaps.  In fact, it has never not worked.  The Cassandras of the world have predicted over the centuries that we would run out of thousands of different things.  Everything from farmland to wood to tungsten have at one time or another been close to exhaustion.  And you know what, these soothsayers of doom are 0-for-4153 in their predictions. ...

The vagaries of reserve accounting are very difficult for outsiders to understand.  I am not an expert, but one thing I have come to understand is that reserve numbers are not like measuring the water level in a tank.  There is a lot more oil in the ground than can ever be recovered, and just what percentage can be recovered depends on how much you are willing to do (and spend) to get it out.  Some oil will come out under its own pressure.  The next bit has to be pumped out.  The next bit has to be forced out with water injection.  The next bit may come out with steam or CO2 flooding.  In other words, how much oil you think will be recoverable from a field, ie the reserves, depends on how much you are willing to invest, which in turn depends on prices.  Over time, you will find that certain fields will have very different reserves numbers at $70 barrel oil than at $25....

All the oil doomsayers tend to define the problem as follows:  Oil production from current fields using current methods and technologies will peak soon.  Well, OK, but that sure defines the problem kind of narrowly.  The last time oil prices were at this level ($65 in 2004 dollars), most of the oil companies and any number of startups were gearing up to start production in a variety of new technologies.  I know that when I was working for Exxon in the early 80′s, they had a huge project in the works for recovering oil from oil shales and sands.  Once prices when back in the tank, these projects were mothballed, but there is no reason why they won’t get restarted if oil prices stay high.

Postscript:  I really need to find new topics to blog about.  The adjacent article in 2005 included this, a frequent topic on this site.  I had not idea I was writing about this so long ago:

When health care is paid for by public funds, politicians only need to argue that some behavior affects health, and therefore increases the state’s health care costs, to justify regulating the crap out of that behavior.  Already, states have essentially nationalized the cigarette industry based on this argument.

Engineering Intuition and The Media

I don't really want to ridicule Kevin Drum here for thinking out loud.  I really hate partisan Conservative and Liberal team-politics blogs, but I read a few to stay out of the echo chamber, and Drum is smarter and incrementally more objective (a relative thing) than most.

But this is really terrible, awful engineering intuition:

These two things together reminded me about an energy factoid that's always struck me as slightly odd: virtually every form of energy seems to be almost as efficient as burning oil, but not quite.

For example, on either a power/weight basis or a cost basis, batteries are maybe 2x or 3x bigger and less efficient than an internal combustion engine. Not 50x or 100x. Just barely less efficient. And you see the same thing in electricity generation. Depending on how you do the accounting, nuclear power is maybe about as efficient as an oil-fired plant, or maybe 2x or 3x less efficient. Ditto for solar. And for wind. And geothermal. And tidal power.

I'm just noodling vaguely here. Maybe there's an obvious thermodynamic explanation that I'm missing. It's just that I wouldn't be surprised if there were lots of ways of generating energy that were all over the map efficiency-wise. But why are there lots of ways of generating energy that are all surprisingly similar efficiency-wise? In the great scheme of things, a difference of 2x or 3x is practically invisible.

First, we have to translate a bit.  He mentions power to weight ratios for batteries in the second paragraph.  In fact, batteries have terrible power (actually energy storage) to weight ratios vs. fossil fuels, much worse than 2-3x for energy storage per unit of weight or volume.  That is why gasoline is still the transportation energy source of choice, because very few things short of plutonium have so much potential energy locked up in so little volume.  But I will assume he is comparing an entire electric drive system compared to a gasoline drive system (including not just energy storage but the drive itself) and in this case the power to weight ratios are indeed closer.

But here is the problem:  in engineering, a 2-3x difference in most anything -- strength, energy efficiency, whatever -- is a really big deal.  It's the difference between 15 and 45 MPG.   Perhaps this is Moore's Law corrupting our intuition.  We see electronic equipment becoming twice as powerful every 18 months, and we start to assume that 2x is not that much of a difference.

But this is why Moore's Law is so much discussed, because of its very uniqueness.  In most fields, engineers tinker for decades for incremental improvements, sometimes in the single digit percentages.

The fact that alternative energy supporters feel like their preferred technologies are just so close, meaning they are only 2x-3x less efficient than current technologies, explains a lot about why we skeptics of these technologies have a hard time getting through to them.

Wal-Mart's Bribery Problems

Walter Olson has been writing a lot about Wal-Mart and FCPA.  I don't have a lot to add except my own experience working for a large corporation in third world countries.

I worked for a manufacturer of industrial equipment for years.  In most countries in Europe and North America, part of our strategy was a dedicated in-house sales force that could provide a high level of technical support.  But we went away from that strategy when we went into third world countries, just the place where we needed more rather than less technical support for our customers.

Why?  A big reason was the FCPA.  There are many countries where it is simply impossible to do business without paying bribes.  Bribes are absolutely wired into the regulatory process.  In Nigeria, public officials are paid less with the expectation they will make it up on bribes, similar to the way we pay waiters who get tips.  The only way to legally work in these countries is to work through third party resellers and distributors and other such partners, and then tightly close your eyes to how they get things done.

What always ticks me off about these cases is the fake attitude of naivite in the press that seems to be constantly amazed that corporations might have to pay bribes to do basic things we take for granted here, like get the water turned on or have your goods put on a ship.  But in fact reporters can't be this naive, as they almost certainly have to deal with many of the same things in their business.  I would love to see an accounting of the grease payments the NY Times pays in a year in foreign countries.

I think most people when they hear these foreign bribery cases assume corporations were paying to get a special advantage or to escape some sort of fundamental regulation.  And this is possibly the case with Wal-Mart, but more likely they were simply paying because that is what you have to do just to function at all.

Everything I Need To Know About The Effect of Metrics on Police Behavior I Learned from The Wire

Scathing report on how NY police gamed the process to improve their reported crime numbers.  Nothing in this should be the least surprising to anyone who watched a few seasons of The Wire.

These are not just accounting shenanigans.  There were actions the directly affected the public and individual liberty.  People were rounded up on the street on BS charges to pad arrest stats while real, substantial crimes went ignored in a bid to keep them out of the reported stats.

There is one part in here that is a good illustration of public vs. private power.  People who fear corporations seem to have infinite trust for state institutions.  But the worst a corporation was ever able to do to a whistle blower was fire him.  This is what the state does:

For more than two years, Adrian Schoolcraftsecretly recorded every roll call at the 81st Precinct in Brooklyn and captured his superiors urging police officers to do two things in order to manipulate the "stats" that the department is under pressure to produce: Officers were told to arrest people who were doing little more than standing on the street, but they were also encouraged to disregard actual victims of serious crimes who wanted to file reports.

Arresting bystanders made it look like the department was efficient, while artificially reducing the amount of serious crime made the commander look good.

In October 2009, Schoolcraft met with NYPD investigators for three hours and detailed more than a dozen cases of crime reports being manipulated in the district. Three weeks after that meeting—which was supposed to have been kept secret from Schoolcraft's superiors—his precinct commander and a deputy chief ordered Schoolcraft to be dragged from his apartment and forced into the Jamaica Hospital psychiatric ward for six days.

Public vs. Private

Folks on the Left prefer public institutions over private ones because they percieve them as more "fair."  But the power of lawmaking and police and prisons allows public institutions to be far more abusive than private entities could ever be.  We spent months and years torturing ourselves about accounting abuses at Enron, but these are trivial compared the accounting shenanigans state institutions engage in every day.

Or consider this, from Europe, particularly the first bit

“In the event of default (i) any non-official bond holder is junior to all official creditors and (ii) the issuer reserves the right to change law as needed to negate any rights of the nonofficial bond holder.

.

“We should not underestimate the damage these steps have inflicted on Europe’s €8.4 trillion sovereign bond markets. For example, the Italian government has issued bonds with a face value of over €1.6 trillion. The groups holding these bonds are banks, pension funds, insurance companies, and Italian households. These investors bought them as safe, low-return instruments that could be used to hedge liabilities and provide for future income needs. It was once hard to imagine these could ever be restructured or default.

.

“Now, however, it is clear they are not safe. They have default risk, and their ultimate value is subject to the political constraint and subjective decisions by a collective of individuals in the Italian government and society, the ECB, the European Union, and the International Monetary Fund (IMF). An investor buying an Italian bond today needs to forecast an immediate, complex process that has been evolving in unpredictable ways. Investors naturally want a high return in order to bear these risks.

.

“Investors must also weigh carefully the costs and benefits to them of official intervention. Each time official creditors provide loans or buy bonds, the nonofficial holders become more subordinated, because official creditors including the IMF, ECB, and now the European Union continue to claim preferential status.”

This is not to say that bondholders in private entities don't get crammed down in a refinancing or bankruptcy.  But here we are talking about differential treatment of holders of the exact same class, even issue, of securities.

These Are The Folks Who Are Wrapping Themselves in the Mantle of "Science"

Oops.  Accounting error seriously overestimates benefits of biofuels.  

The European Union is overestimating the reductions in greenhouse gas emissions achieved through reliance on biofuels as a result of a “serious accounting error,” according to a draft opinion by an influential committee of 19 scientists and academics.

The European Environment Agency Scientific Committee writes that the role of energy from crops like biofuels in curbing warming gases should be measured by how much additional carbon dioxide such crops absorb beyond what would have been absorbed anyway by existing fields, forests and grasslands.

Instead, the European Union has been “double counting” some of the savings, according to the draft opinion, which was prepared by the committee in May and viewed this week by The International Herald Tribune and The New York Times.

The committee said that the error had crept into European Union regulations because of a “misapplication of the original guidance” under the United Nations Framework Convention on Climate Change.

“The potential consequences of this bioenergy accounting error are immense since it assumes that all burning of biomass does not add carbon to the air,” the committee wrote.

Duh.  This has been a known fact to about everyone else, as most independent studies not done by a corn-state university have found ethanol to have, at best, zero utility in reducing atmospheric CO2.

It is worth noting that the EU would likely have never made this admission had it solely been under the pressure of skeptics, for whom this is just one of a long list of fairly obvious errors in climate-related science.  But several years ago, environmental groups jumped on the skeptic bandwagon opposing ethanol, both for its lack of efficacy in reducing emissions as well as the impact of increasing ethanol product on land use and food prices.

Weird Coincidences

I spent four days last week trying to get my online backup file restored for Quickbooks, our accounting software.

One morning, we woke up and found our entire QB file corrupted.  I would insert cautions to QB users about such occurrences, but I think everyone already knows the problem.  Such a warning would be like reminding a New York resident about street crime.  We QB users always feel like we are walking on eggshells with QB, ready at any moment for everything to go haywire.  We live with it, because the program is useful and ubiquitous.

So I perform a backup every day, but recently started using the QB online backup facility.  This automatically backs up the file every day.  I still make a local backup from time to time, but I have gotten lazy.  When things went south the other day, my online backup was 10 days old, an eternity in our business.  I sent QB our file to try to execute a repair, but in the mean time I went to the restore command to restore the most recent online backup before the corruption.

Fail.  Fail.  Fail.  Fail.  After four tries, each 3 hours each, I got the idea maybe it was not going to work.  So I called QB and got their Phillipines tech support desk.  They walked me through some steps.  Fail. Fail. Fail.

Through all this time, we were entirely shut down accounting-wise.  Finally, in exasperation, I asked them to just post my backup file on an FTP server somewhere.  After all, we could both see the file exists, and it was just the QB proprietary file transfer protocol that was failing to restore it.  Well, three countries and four departments later, no one could post the file on an FTP server.  Or to my Amazon S3 account.  Or to a password-protected web page.

For God sakes, this is a software company?  Finally, they agreed to have someone at the third party contractor who runs the servers try to put the file on a DVD and mail it to me, LOL.

It was almost exactly at this point that I opened this XKCD comic:

I tell you, sometimes that site is totally dialed into my brain.  (by the way, as I blog, a signed version of this comic on the wall behind my monitor).

PS- eventually the Quickbooks people rebuilt my corrupted file before I could ever get the backup in my hands.  Object lesson here - don't ever give up on the original file, the Intuit guys have twice in my life fixed a file that seemed corrupted beyond all hope of recovery.

WTF? This is What They Mean by Oil and Gas Subsidies?

When the Left has talked about oil and gas subsidies, I have generally nodded my head and agreed that any such things should be eliminated, just as they should be eliminated for all industries.   They have in the past thrown out huge numbers for such subsidies that seemed high, but I have not really questioned them.  But then I see this chart at Kevin Drum's site

Seriously, nearly half the "subsidy" number is the ability of a company to use LIFO accounting on inventory for their taxes?  Since the proposition is to eliminate these only for oil and gas, what is the logic that somehow LIFO accounting is wrong in Oil and Gas but OK in every other industry?   In fact, at least the first two largest items are both accounting rules that apply to all manufacturing industry.  So, rather than advocating for the elimination of special status for oil and gas, as I thought the argument was, they are in fact arguing that oil and gas going forward be treated in a unique and special way by the tax code, separate from every other manufacturing industry.

In fact, many of these are merely changes to the amortization and depreciation rate for up-front investments.  Typically, politicians of both parties have advocated for the current rules to encourage investment.  Now I suppose we are fine-tuning the rules, so that we encourage investment in the tax code in everything but oil and gas.  I will say this does seem to be consistent with Obama Administration jobs policy, which has been to try to stimulate businesses that are going nowhere and hold back the one business (oil and gas drilling) that is actually trying to grow.  I am fine with stopping the use of the tax code to try to channel private investment in politician-preferred directions.  But changing the decision rule from "using the tax code to encourage all manufacturing investment" to "using the tax code to encourage investment only in the industries we are personally sympathetic to" is just making the interventionism worse.

This is really weak.  Not to mention flawed.  Unless I am missing something, a change from LIFO to FIFO or some other inventory valuation rules will create a one-time change in income (and thus taxes) when the change is made.  LIFO only creates sustained reductions in taxable income, and thus taxes, if your raw materials prices are consistently rising (it actually increases taxes vs. FIFO if input prices are falling).  Given that oil and gas prices are volatile, its hard to see how this does much except extract a one-time tax payment from oil companies at the changeover.

By the way, I am pretty sure I would be all for ending government spending on "ultra-deepwater and unconventional natural gas and other petroleum research," though ironically this is exactly the kind of basic research the Left loves the government to perform.

Mandating Faulty Accounting to Reach Absurd MPG Standards

President Obama wants a 56.2 mile per gallon standard for cars by 2025.  Both advocates and opponents of this say the only way to make this is if everyone drives an electric car or plug in hybrid.  But the fact of the matter is, even those don't get 56.2 mpg, except through an accounting fiction.

A while back I ran the numbers on the Nissan Leaf. According to the EPA, this car gets an equivalent of 99 MPG.  But that is only by adopting the fiction of looking only at the efficiency in converting electricity to power in the wheels.  But the electricity comes from somewhere (the marginal kilowatt almost certainly comes from a fossil fuel) and the new EPA methodology completely ignores conversion efficiency of fuel to electricity.  Here is how I explained it at Forbes:

The problem is that, using this methodology, the EPA is comparing apples to oranges.   The single biggest energy loss in fossil fuel combustion is the step when we try to capture useful mechanical work (ie spinning a driveshaft in a car or a generator in a power plant) from the heat of the fuel’s combustion.  Even the most efficient processes tend to capture only half of the potential energy of the fuel.   There can be other losses in the conversion and distribution chain, but this is by far the largest.

The EPA is therefore giving the electric vehicle a huge break.  When we measure mpg on a traditional car, the efficiency takes a big hit due to the conversion efficiencies and heat losses in combustion.  The same thing happens when we generate electricity, but the electric car in this measurement is not being saddled with these losses, even though we know they still occur in the system.

Lets consider an analogy.  We want to measure how efficiently two different workers can install a refrigerator in a customer’s apartment.  In both cases the customer lives in a fourth floor walkup.  The first installer finds the refrigerator has been left on the street.  He has to spend much of his time struggling to haul the appliance up four flights of stairs.  After that, relatively speaking, the installation is a breeze.  The second installer finds his refrigerator has thoughtfully been delivered right to the customer’s door on the fourth floor.  He quickly brings the unit inside and completes the installation.

So who is a better installer?  If one only looks at the installer’s time, the second person looks orders of magnitude better.  But we know that he is only faster because he offloaded much of the work on the delivery guys.  If we were to look at the total time of the delivery person plus the installer, we’d probably find they were much closer in their productivity.  The same is true of the mileage standards — by the EPA’s metric, the electric vehicle looks much better than the traditional vehicle, but that is only because someone else at the power plant had to do the really hard bit of work that the traditional auto must do itself.  Having electricity rather than gasoline in the tank is the equivalent of starting with the refrigerator at the top rather than the bottom of the stairs.

The DOE has actually published a better methodology, going from "well to wheels," creating a true comparable efficiency for electric cars to gasoline engine cars.  By this methodology, the Nissan Leaf all electric car only gets 36 MPG!  In fact, no current electric car would meet the 56.2 MPG standard if the accounting were done correctly.  Which is why the EPA had to create a biased, inaccurate MPG equivalent measure for electric vehicles to artificially support this Presidential initiative.

Medicare and Social Security Trustee Reports

Here is some analysis of these reports. A few things I found interesting

  • I have always understood the "trust funds" for these programs were a crock, that we had spent the money in these funds years ago.  But the accounting fiction is important for a reason I did not know - when the trust fund is used up from an accounting standpoint  (vs. a cash standpoint, where it is not only already used up but never existed) in 2036 or whenever, statutory authority for spending is capped at annual tax collections, which at that point will be way, way below programmed spending levels.
  • Medicare alone is projected to grow to 6% of GDP.  wow.
  • The reality of Obamacare's promises of cost reductions is starting to appear, as already these supposed cost reductions are being discounted by folks who have accountability for getting the numbers right.

One thing to note -- Social Security actually has some shot at being repaired, because benefits are a fixed, predictable amount (as long as your actuarial tables are right).  Medicare and Medicaid are far harder, because the benefits are open ended, and every recent "fix" has tended to shift incentives to encourage rather than discourage more spending.  Note, for an example, the political pressure to eliminate the part D donut hole that actually is there to provide incentives to camp drug spending and prices.

Shareholder Suits

From Overlawyered today:

"A new study in the Financial Analysts Journal casts serious doubt on the premise [of litigation social efficiency], at least when it comes to shareholder class actions. In most cases, the authors found, the litigation mainly serves to punish shareholders who have already suffered from a downturn in their stock. Only suits targeting illegal insider trading, and to a lesser extent, accounting fraud were associated with subsequent higher long-term returns."

Way back in early 2006 (have I been blogging so long?) I was guest blogging at Overlawyered and I wrote this:

But from a philosophical standpoint, shareholder suits have never made much sense to me. While I can understand the shareholders of the company suing a minority shareholder who might be enriching themselves disproportionately (e.g. Rigas family at Adelphia), suits by shareholders against the company they own seem"¦ crazy.

Any successful verdict for shareholders against the company would effectively come out of the pockets of the company's owners who are.. the shareholders. So in effect, shareholders are suing themselves, and, win or lose, they as a group end up with less than if the suit had never been started, since a good chunk of the payout goes to the lawyers. The only way these suits make financial sense (except to the lawyers, like Bill Lerach) is if only a small subset of the shareholders participate, and then these are just vehicles for transferring money from half the shareholders to the other half, or in other words from one wronged party that does not engage in litigation to another wronged party who is aggressively litigious. Is there really justice here?

OK, you could argue that many of these shareholders are not suing themselves, because they are past shareholders that dumped their stock at a loss. But given these facts, these suits are even less fair. If these suits are made by past shareholders who held stock (ie, were the owners) at the time certain wrongs were committed, they are in fact paid by current and future shareholders who may well have not even owned the company at the time of the abuses, and who may in fact be participating in cleaning the company up. So these litigants are in effect making the argument that because the company was run unethically when they owned it, they are going to sue the people who bought it from them and cleaned it up? Shouldn't the payment be the other way around, with past owners paying current owners for the mess they left?

I understand that theoretically they might have an incentive improvement from the threat of these suits that improves corporate governance.  But this is mitigated by the fact that most corporations consider these suits to be random landmines without merit, to be avoided if possible, to be settled if necessary, but that have little bearing on the underlying governance of the company.

Is GM's Equity Real?

There was a fair amount of blog reporting on GM's IPO papers, focusing on various outsized risks reported in those documents.   But for someone who has read a fair number of red herrings in the past, I can tell you these over-the-top risk statements are virtually pro forma.  The lawyers don't want any suits down the road about failure to disclose, so every risk up to and including getting kidnapped by evil trolls if you buy the offering are listed.

Via the Accounting Onion, I found an issues I have not seen well-reported.  Tom Selling argues that without some accounting shennanigans at its reorganization, GM's equity should be negative.   Reading between the lines, it does not appear that he is very confident that the SEC, which is a branch of GM's ownership group, will do much about it.

The 1099 Landmine

The Senate will take a vote today to repeal the hugely onerous 1099 provision from the Obamacare legislation.   Good news, though Obama is opposed to the repeal as he feels (probably correctly) that it will open the floodgates to further repeals and amendments.  Which is pretty disingenuous, as one of the soothing memes he handed out when the legislation was being rushed through Congress was that there was plenty of time to amend and fix its rough edges.  How he needs to decide if he was lying about that, as Congress addresses a rough edge that had nothing to do with health care but created a huge and largely useless burden on businesses.  I know that this provision would really kneecap my business.

Meanwhile, small businesses are staring in horror toward 2013, when the 1099 mandate will hit more than 30 million of them. Currently businesses only have to tell the IRS the value of services they purchase from vendors and the like. Under the new rules, they'll have to report the value of goods and merchandise they purchase as well, adding vast accounting and paperwork costs.

Think about a midsized trucking company. The back office would have to collect hundreds of thousands of receipts from every gas station where its drivers filled up and figure out where it spent more than $600 that year. Then it would also need to match those payments to the stations' corporate parents.

Most Democrats now claim they were blindsided and didn't understand the implications of the 1099 provision"”which is typical of the slapdash, destructive way the bill was written and passed. As the critics claimed, most Members had no idea what they were voting on.

Democrats are trying to water down this repeal:

Yesterday the White House endorsed a competing proposal from Florida Democrat Bill Nelson that would increase the 1099 threshold to $5,000 and exempt businesses with fewer than 25 workers. Yet this is little more than a rearguard action in favor of the status quo; the Nelson amendment leaves the basic architecture unchanged while making the problem more complex.

Businesses would still have to track all purchases, not knowing in advance which contractors will exceed $5,000 at the end of the year. It also creates a marginal barrier to job creation"”for a smaller firm, hiring a 26th employee would be extremely costly. The Nelson amendment also includes new taxes on domestic oil production, as every Democratic bill now seems to do.

This analysis is dead on -- our company generally cannot predict exactly how much we will purchase from a specific vendor in a year, so we would still have to collect tax ID's from every single vendor, not knowing which would cross the hurdle.

Kevin Drum Is Still Repeating This Absurd Claim About Social Security

From Kevin Drum

Bob Somerby is following the latest Social Security chatter and hopes that Paul Krugman can explain how the trust fund works in an understandable way:

The trust fund is just an accounting fiction "” a pile of worthless IOUs! Generations of voters have been misled by such skillfully-wrought presentations.

....Krugman is our most valuable player by far "” our only player at the top of the press corps. Can he disentangle the trust fund scam in a way average people will understand? We don't know, and it isn't his job; no player should be expected to carry the ball on every play from scrimmage. Tomorrow, we'll offer our own ideas at how the "there-is-no-trust-fund nonsense" might best be approached, in a way average people can follow.

Well, hell, I'll take a crack at it. Here's the simple version.

In 1983, when we last reformed Social Security, we made an implicit deal between two groups of American taxpayers. Call them Groups A and B. For about 30 years, Group A would pay higher taxes than necessary, thus allowing Group B to reduce their tax rates. Then, for about 30 years after that, Group A would pay lower taxes than necessary and Group B would make up for this with higher tax rates.

This might have been a squirrelly deal to make. But it doesn't matter. It's the deal we made. And it's obviously unfair to change it halfway through.

This is an incredible fantasy.  Absolutely no one thirty years ago (Drum dates the "deal" to 1983) explicitly or even secretly crafted any such deal.  Seriously, is Drum really positing that a Democrat-dominated Congress led by for-god-sakes Tip O'Neil really said "lets have poor people pay some of rich people's taxes for thirty years?"  Just last night I was reading a quote from Hitler late in WWII that asserted he actually let the British escape from Dunkirk on purpose because he wanted the British to know he had no real quarrel with them.  While it certainly is true Hitler never really wanted a war with Britain, this is just a self-serving rewrite of history.  Drum is doing the same thing.  Its amazing to me that an obviously intelligent person can convince himself of this.

Here is the real, simple explanation of the Social Security trust fund:  Social Security was spinning off huge piles of money and no Congress person of either the Coke or the Pepsi party could resist grabbing it and spending it in a way that would support their reelection.  They ended up spending it all.  Every bit of it, all gone.  The Social Security trust fund is the Enron 401K plan stuffed with Enron stock.

Drum gets to his bizarre theory because he believes the fiscal discipline problem over the last 30 years was all due to tax cuts rather than spending, and that all these tax cuts were for rich people.   Of course, throughout the last 30 years, the share of taxes paid for by the rich have steadily risen, so the claim is absurd on its face, but the false assumptions it is built on are ones that every progressive accept as holy writ.

This paragraph is particularly a howler:

The physical embodiment of this deal is the Social Security trust fund. Group A overpaid and built up a pile of bonds in the trust fund. Those bonds are a promise by Group B to repay the money. That promise is going to start coming due in a few years, and it's hardly surprising that Group B isn't as excited about the deal now as it was in 1983. It's never as much fun paying off a loan as it is to spend the money in the first place.

It would be some exercise to try to define groups A and B in a non-overlapping manner.  The fact is everyone is in group A, as almost everyone overpays into Social Security on a return on capital basis -- the retirement income most people get represents generally a negative net ROI on the "premiums" paid.  And it is amazing to me that I have never heard that we now have government bonds that must be paid back only by a specific sub-section of the population.  It may very well have been a progressive assumption that only rich people would be on the hook for every dollar of government debt run up over the last 30 years, but that fact will likely be a surprise to just about everyone else in the country.  Here is his conclusion:

But pay it off they must. The rich have been getting a loan from the middle class for decades...

Delusional.

Insurance Expense Ratios

One of the arguments Democrats have made for nationalized health care is that government expenses will be much lower than private companies.  This is on its face absurd, given most people's experience with government agencies, but is nominally supported by low expense ratios in Medicare.  I won't go into this today, but this is more an artifact of the way government does accounting as well as operations decisions at Medicare which may be non-optimal (e.g. Medicare does much less claims verification and investigation than private companies, which is why we see huge fraud cases from time to time).

Anyway, we get a fresh example of private vs. public expenses on a very comparable basis in California workers comp.  The public State Fund acts as an insurer of last resort as well as a competitor to many private providers.  The fact that it is an insurer of last resort will increase its loss ratios, but its expense ratios of management or "claims adjustment" expenses should be similar.  But of course they are not.

State Fund's unallocated loss adjustment expense ratio was a whopping 51.4% last year compared to 8.9% for private carriers, while State Funds allocated loss adjustment expenses were 9.8% compared to the industry's 13.8% respectively.

This means the management expense ration of the state agency is 61.2% of premiums vs. 18.7% for private companies.  This just makes laughable the pious requirement in Obamacare that insurance companies keep their expense ratios under 20% -- or else the more efficient government agency will take over.

We are facing a huge 29.6% increase in workers comp rates in California, in part because the very high State Fund expense ratios are averaged into the calculation.

Hair of the Dog?

WTF is this designed to accomplish, except to give Obama something to crow about in one or two news cycles while doubling down on the same kind of practices that got the housing market and banks into the current mess?  This reminds me so much of the final days of the government in Atlas Shrugged.  Fannie and Freddie are bankrupt?  Well, lets do the same thing to the FHA, just to save our sorry government jobs for a few weeks longer.

The Federal Housing Administration is heading toward a taxpayer bailout, yet the president's latest mortgage modification plan would further increase the agency's exposure to risky mortgages. Mark Calabria calls it a "Backdoor Bank Bailout."The administration's plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.

A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn't properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it's hard to see how the president's plan to refinance private underwater mortgages into FHA mortgages won't further exacerbate the situation.

Stock Up on Meeses and Gippers

The CBO, which Democrats frequently tell us to pay close attention to only when it is giving them the answers they want, is not particularly sanguine about the US budget deficit:

President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.

Bruce McQuain, as always, has some good analysis.

States, apparently, are not in much better shape:

Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity....

In a recent AEI working paper I've shown that the typical state employee public pension plan has only a 16% chance of solvency. More public pensions have a zero probability of solvency than have a probability in excess of 50%. When public pension assets fall short, taxpayers are legally obligated to make up the difference. The market value of this contingent liability exceeds $3 trillion.

Productive people in this country are about to get plastered with huge new taxes.  Hang on.