Archive for March, 2009

Dangerous Trends Require Action
By David Coates, KPMG Managing Partner (retired) and
Member, Vermont Business Roundtable

Rising mandatory expenditures in the state of Vermont translates into less discretionary dollars to support important programs for needy Vermonters. Two such expenditures are retirement plans and other post-retirement benefits for state workers and teachers, whose costs are rising at unsustainable levels. It is time to begin talking about changing from the path we’re on.

There are essentially two types of pension plans….a defined contribution, similar to a 401 (K) plan, and a defined benefit plan which guarantees a certain lifetime benefit upon retirement. As of June 30th the state employees defined pension plan covered most of the state’s 8442 workers. Effective July 1st, workers contribute 5.1% of their pay, and the state is responsible for funding the balance of lifetime benefits paid to retirees. In 2008 the state paid approximately $23 million (projected at $40 million in 2015) from the general fund into the retirement fund. The state workers can retire after 30 years of service or age 62, and receive a lifetime benefit of 50%. For workers employed after June 30, 2008 the retirement age is 65 and they receive a lifetime benefit of 60%.

Although the wages for the teachers are determined locally, the state is required to pay their pension costs. As of June 30th there were 10,685 teachers in the plan. Teachers contribute 3.5% of their pay annually and the state is responsible for funding the balance of lifetime benefits. In 2008 the state paid approximately $40 million (projected at $52 million in 2015). Teachers can retire after 30 years of service or age 62 and receive a lifetime benefit of 50%.

As a result of the recent decline in the investment markets and the significant under-funding of the teachers plan, the state has unfunded pension liabilities of over $466 million as of June 30. This is roughly a three-fold increase in just five years. With obvious market declines since June, these liabilities are certain to be much higher; requiring the state to pay even more to assure the financial integrity of the plans.

The situation with other post-retirement benefits (i.e. medical insurance) is more alarming. Retired state workers pay 20% of the cost of the premiums, which covers the retiree and all dependents. Teachers pay 20% as well, but this covers only the retiree.

In 2008 Vermont paid in about $17 million for state workers, but nothing for the teachers. This left a liability, for 2008, of $29 million for state workers and $60 million for teachers. The state actuary has calculated the unfunded liability for both plans at June 30 to be $1.6 billion. This is projected to increase to over $4 billion in thirty years, if we continue to fund these plans as we have in the past.

Clearly, Vermont is currently on a path that is not financially sustainable. The private sector and most not-for-profit institutions have done away with those benefit plans because they are expensive to maintain and the liability will forever remain with the employer, in this case, the state.

So, what are the alternatives to avoid state bankruptcy? There are several: Fully fund the pension and benefits; reduce the work force; cut the benefits to more closely align with the private and not-for-profit sectors; freeze or eliminate some or all of the plans; or, require the local governments to fund the costs for teachers.

Not addressing the issues now will only require future generations of Vermonters (our children) to pay for the promises we have made but failed to fund. We need the leadership of the legislature, the administration and the unions to come together and identify a common solution to these vexing issues now. The current economic climate is precisely the motivation for changing current practice toward a more sustainable system.

On April 7th, GBIC is hosting a workshop on IP Strategy and how it can help your business today.  The event is free, but be sure to register as space is limited!

Good Ideas, Great Ideas, Valuable Information and Technology:
Have you identified and protected them?
Know how to maximize their value?

“IP Strategy and Building Company Value”
A workshop for area businesses on the subject of intellectual property and strategy.
Hosted by Greater Burlington Industrial Corporation (GBIC) for area businesses.

Many companies have a business strategy, fewer companies have an IP strategy, and even fewer companies integrate their IP strategy with their business strategy in a way that builds significant company value.

Agenda:
• The basics of an IP strategy, including consideration of how to develop and protect IP in a cost-effective manner;
• How an IP strategy can be integrated with a business strategy;
• How to make money or create value in your company using an IP strategy;
• Interesting case studies and approaches to implementing an IP strategy to enhance company value.

Presenters:
Larry Meier, Director and Chair of the Intellectual Property Practice at Downs, Rachlin and Martin PLLC;
Nancy Edwards Cronin, Principal Partner, ipCapital Group, Inc.; and
Mark Blanchard, Technology Development & Commercialization Advisor, Vermont Small Business Development Center.

Tuesday, April 7 2:00 to 5:00 PM at the Windjammer Conference Center, South Burlington.

Admission is free but attendance is limited and registration is required.
To register contact Curt Carter at curt@vermont.org or call GBIC at 862-5726.

Tom Friedman has long been a proponent of nascent business and in a recent NY Times article he challenged convention in how we should revitalize the economy.  Whether or not he has the answer, the importance that start-ups play in driving our economy shouldn’t be overlooked.

Start Up the Risk-Takers

Reading the news that General Motors and Chrysler are now lining up for another $20 billion or so in government aid — on top of the billions they’ve already received or requested — leaves me with the sick feeling that we are subsidizing the losers and for only one reason: because they claim that their funerals would cost more than keeping them on life support. Sorry, friends, but this is not the American way. Bailing out the losers is not how we got rich as a country, and it is not how we’ll get out of this crisis.

G.M. has become a giant wealth- destruction machine — possibly the biggest in history — and it is time that it and Chrysler were put into bankruptcy so they can truly start over under new management with new labor agreements and new visions. When it comes to helping companies, precious public money should focus on start-ups, not bailouts.

You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way. If they go bust, we all lose. If any of them turns out to be the next Microsoft or Intel, taxpayers will give you 20 percent of the investors’ upside and keep 80 percent for themselves.

If we are going to be spending billions of taxpayer dollars, it can’t only be on office-decorating bankers, over-leveraged home speculators and auto executives who year after year spent more energy resisting changes and lobbying Washington than leading change and beating Toyota.

I’ve been traveling all across the country on a book tour, and every evening I return to my hotel with my pockets full of business cards from inventors in clean energy. Our country is still bursting with innovators looking for capital. So, let’s make sure all the losers clamoring for help don’t drown out the potential winners who could lift us out of this. Some of our best companies, such as Intel, were started in recessions, when necessity makes innovators even more inventive and risk-takers even more daring.

Yes, we have to shore up the banking system, which underpins everything; and finding a fair way to prevent hardworking people, who played by the rules, from losing their homes to foreclosure is both right and essential for stability.

But beyond that, let’s think, talk and plan in more aspirational ways. We’re down, but we’re not out. As we invest taxpayer money, let’s do it with an eye to starting a new generation of biotech, info-tech, nanotech and clean-tech companies, with real innovators, real 21st-century jobs and potentially real profits for taxpayers. Our motto should be, “Start-ups, not bailouts: nurture the next Google, don’t nurse the old G.M.’s.”

To be fair, the stimulus package that the Obama team and the Democrats in Congress recently passed — with virtually no Republican help — goes some way toward doing just that. Hat’s off for that. Now let’s do more.

The renewable-energy business — wind, solar and solar thermal — was almost dead in this country. Most new projects stopped last fall because they depended for their financing on selling their renewable energy tax credits to Wall Street firms. As those Wall Street firms went bust or suffered steep losses, they had no need for tax credits because they had no profits to offset. The stimulus package created a mechanism for renewable energy innovators to bypass Wall Street and monetize their tax credits directly through the U.S. Treasury, for any project that starts between now and the end of 2010.

The wind and solar industries in America “were dead in the fourth quarter,” said John Woolard, chief executive of BrightSource Energy, which builds and operates cutting-edge solar-thermal plants in the Mojave Desert. Almost five gigawatts of new solar-thermal projects — the equivalent of five big nuclear plants — at various stages of permitting were being held up because of a lack of financing.

“All of these projects will now go ahead,” said Woolard. “You are talking about thousands of jobs … We really got something right in this legislation.”

These jobs will be in engineering, constructing and operating huge solar systems and wind farms and manufacturing new photovoltaics. Together they will drive innovation in all these areas — and move wind and solar technology down the cost-volume learning curve so they can compete against fossil fuels and become export industries at the “ChinIndia price,” that is the price at which they can scale in China and India.

That is how taxpayer money should be used to stimulate: limited financing, for a limited time, targeted on an industry bristling with new technology start-ups that, with a little push from Uncle Sam, won’t just survive this crisis but help us thrive when it is over. We need, and the world needs, an America that is thriving not just surviving.