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    Highlights—October 23, 2004
  • Wall Street Journal: SEC Investigates Six Companies On Pension, Benefit Accounting, by Ellen Schultz. Excerpts: The Securities and Exchange Commission is investigating whether six large companies could have manipulated earnings by using certain assumptions to calculate liabilities and costs for pensions and retiree health benefits. ... The SEC also says it is examining how changes in benefits plans can create "cookie jar" reserves to boost earnings. There has been growing concern that large U.S. companies have been using their benefits plans for many years to enhance income and mislead shareholders in various ways. Benefits plans are among the areas the SEC's enforcement division is scrutinizing under its new "risk based" initiative to identify emerging areas of possible accounting fraud. ... One concern is that companies may be tempted to use unrealistically high discount rates to lower their liabilities, to make their balance sheet look better and to generate accounting gains that boost income, and thus, executives' pay. Alternatively, companies can jack up liabilities prior to union negotiations or bankruptcy filings. ... The kind of accounting gimmickry that the SEC is looking for doesn't have anything to do with a company's decision to fund its pension plan. Companies use different calculations under pension laws to determine whether they need to contribute to their pension plans.

  • Wall Street Journal: Boeing Receives SEC Inquiry On Pension, Benefit Accounting, by Ellen Schultz. Excerpts: Boeing Co. disclosed that it has received a request from the Securities and Exchange Commission for information about how it accounts for its pension and other retiree benefits. The airplane maker joined Ford Motor Co., General Motors Corp., Delphi Corp. and Northwest Airlines, all of which disclosed this week that they had received requests from the SEC for information on their accounting practices. None have been accused of wrongdoing and all say their calculations are appropriate. ... As news of the SEC's inquiry filtered out, retiree groups and unions asked the regulator to investigate other practices involving the way companies report pension information in their government filings. ... Earlier this week, the Lucent Retirees Organization asked the SEC to examine Lucent Technologies Inc.'s pension accounting practices. The group noted that the pension plan had contributed $1.1 billion to income in 2004, which accounted for a significant portion of the company's $1.2 billion in operating profit for the year.

  • BusinessWeek: Pumped-Up Pension Plays? Regulators are investigating how some companies tinker with retiree accounting. Excerpts: Small shifts in projected returns can make a big difference. A study published by the National Bureau of Economic Research in May by accounting professors Daniel B. Bergstresser and Mihir A. Desai of Harvard Business School and Joshua D. Rauh of the University of Chicago Graduate School of Business found that nearly 5% of IBM's (IBM ) pretax income in 2000 and 2001 resulted from an increase in the assumed rate of return from 9.5% to 10% in 2000. IBM adjusted the rate, which is meant to be a long-term projection, four times between 1991-2002. IBM says the company's decision to raise the assumed rate of return in 2000 was consistent with actual returns ranging from 14% to 21% over five previous years. The study also offers support for speculation that some executives may deliberately monkey with pension assumptions for corporate and even personal gain. The trio analyzed accounting for 3,247 pension plans from 1991-2002 and found that companies tended to hike pension return estimates the year before making an acquisition or before a CEO exercises stock options. "If you want an easy way to manufacture earnings, this is as good as it gets," says Desai.

  • Computerworld: Two IBM services units acquired by GXS owners. Excerpt: IBM Global Services is selling its Electronic Data Interchange (EDI) and Business Exchange Services businesses to technology investment company Francisco Partners, the majority owner of electronic data transmission vendor Global Exchange Services Inc. GXS provides business-to-business e-commerce services that enhance business process integration and collaboration. In an announcement today, Menlo Park, Calif.-based Francisco Partners said it will merge the two IBM units into Gaithersburg, Md.-based GSX within six months.

  • National Bureau of Economic Research (NBER) Working Paper No. W10543, Earnings Manipulation and Managerial Investment Decisions: Evidence from Sponsored Pension Plans. (Editor's note: The full paper may be downloaded for $5.00). Abstract: Managers appear to manipulate firm earnings when they characterize pension assets to capital markets and alter investment decisions to justify, and capitalize on, these manipulations. We construct a measure of the sensitivity of reported earnings to the assumed long-term rate of return on pension assets. Managers are more aggressive with assumed long-term rates of return when their assumptions have a greater impact on reported earnings. Managers also increase assumed rates of return as they prepare to acquire other firms and as they exercise stock options, further confirming the opportunistic nature of these increases. Decisions about assumed rates of return, in turn, influence asset allocation within pension plans. Instrumental variables results suggest that a 25 basis point increase in the assumed rate of return is associated with a 5% increase in equity allocation. Taken together, these results suggest that earnings manipulation arising from managerial motivations influences significant managerial investment decisions. Excerpts:
    • Some capital market observers have viewed the actions of IBM, under CEO Louis Gerstner, Jr., as an example of how firms can use pension accounting to manipulate earnings. IBM sponsors a large defined benefit pension plan, with over $57 billion in assets at the end of 2002. Table 1 outlines the operating performance of IBM, the performance of its DB pension plan, and the CEO’s option grants and exercises. Changes in the long-term rate of return (LTROR) that IBM assumes on its DB pension plan assets are of particular interest. IBM changed its assumed long-term rate of return four times during this period: a twenty-five basis point reduction in 1995, a twenty-five basis point increase in 1997, a fifty basis point increase in 2000, and a fifty basis point reduction in 2002. As we describe more fully in the sections that follow, IBM’s assumed rates of return throughout this period exceeded those used by most firms. The frequent changes are also notable given the long run nature of these assets and assumptions. While IBM reacted to poor actual performance in its pension plan in the mid-1990s by reducing the assumed long-term rate of return, the opposite occurred in 2000. Despite poor equity market returns and declining bond yields during that year, IBM raised its long-term rate of return assumption by fifty basis points. Nearly five percent of IBM’s income before tax in 2000 and 2001 resulted from the increase in the assumed long-term rate of return from 9.25% to 10.00%. More generally, IBM’s reported pretax income grew at a compound annual growth rate of 6.7% from 1995 to 2001; without these changes, income would have grown at only a 5.6% rate. As Table 1 shows, these changes in pension assumptions coincided with deteriorating operating performance. This example illustrates how senior managers can use pension accounting to boost their firms’ reported profits.

    • Specifically, we find that 25 basis point increases in assumed rates are associated with 5% increases in equity allocation....We go on to speculate on the magnitude of these effects by returning to the case of IBM. We estimate that between $12 and $76 million of compensation accrued to Gerstner from these changed assumptions alone."

    • "Finally, it is useful to consider the potential magnitude of these redistributive effects for a specific example. We return to IBM to consider the effects of the inflated stock prices arising from inflated pension earnings. Specifically, we attempt to outline the scale of managerial enrichment during that period due to pension decision-making. While this exercise is necessarily speculative, it is useful for scaling the potential redistribution in this instance. The first panel of Table 12 provides information on IBM market values and acquisition activity from 1997 to 2001, the period emphasized in Table 1. This period saw an increase in market value of almost $100 billion as well as robust acquisition activity. IBM made 41 acquisitions during this period valued at over $4 billion. The second panel combines the estimates from Table 1 regarding the effect of the deviations from an assumed rate of return of 9.25% on income with the Coronado and Sharpe (2003) estimates suggesting that pension earnings are capitalized in the same manner as operating earnings. This assumption gives an estimated stock price in the absence of those deviations from the 9.25% long-term rate of return assumption. Finally, Gerstner's option exercise activity is employed to arrive at an estimate of the dollar value garnered by Gerstner that arose from the deviations from the 9.25% rate. This estimate totals more than $12 million for the period...the final column considers an alternative scenario where the capitalization rate of all earnings is altered by the changed growth rates noted in introduction. Under these assumptions, this estimate rises to nearly $76 million."

    • "Finally, it is possible that these rate of return changes and resulting incremental compensation was facilitated to enable exercises of options and transfers of value away from current shareholders and toward management." (Emphasis added by editor of this newsletter).

    • "Some capital market observers have viewed the actions of IBM, under CEO Louis Gerstner, Jr., as an example of how firms can use pension accounting to manipulate earnings. IBM sponsors a large defined benefit pension plan, with over $57 billion in assets at the end of 2002. Table 1 outlines the operating performance of IBM, the performance of its DB pension plan, and the CEO's option grants and exercises. Changes in the long-term rate of return (LTROR) that IBM assumes on its DB pension plan assets are of particular interest. IBM changed its assumed long-term rate of return four times during this period: a twenty-five basis point reduction in 1995, a twenty-five basis point increase in 1997, a fifty basis point increase in 2000, and a fifty basis point reduction in 2002. As we describe more fully in the sections that follow, IBM's assumed rates of return throughout this period exceeded those used by most firms. The frequent changes are also notable given the long run nature of these assets and assumptions.

    Thanks to Skip Bogart for unearthing this report on a Yahoo! message board. The report is well worth the cost of the $5.00 download.

  • CBS MarketWatch: $320m pensions settlement hits IBM. Excerpt: A $320m charge to cover the settlement of pensions litigation dragged down third quarter net income at International Business Machines. But the largest technology company still managed to increase earnings per share by 4 per cent to $1.02, or 15 per cent to $1.07 excluding the charge.

  • IBM has made still another reduction in its retiree medical plan, as outlined in this Yahoo! message board posting by "shuffnew". Included in the posting are excerpts from an IBM letter to retirees including this: "Effective January 1, 2005, IBM is changing the requirements for retirees who enroll dependents in IBM medical, dental and vision coverage. If you are currently retired from IBM, or if you retire on or before December 31, 2004, new dependents (such as a new spouse or new dependent children acquired by birth, adoption or marriage) must meet dependent eligibility guidelines as of December 31, 2004 to enroll in IBM retiree medical, dental and/or vision coverage in 2005. Dependents acquired after December 31, 2004 will not be eligible to enroll in IBM retiree medical, dental and/or vision coverage in 2005 or in subsequent years. If you retire from IBM on or after January 1, 2005, only those dependents who meet dependent eligibility guidelines as of your retirement date will be eligible to enroll in IBM retiree medical, dental and/or vision coverage. You will not be able to enroll those who become dependents after your retirement date (for example, a new spouse, or a dependent child acquired by birth, adoption or marriage)."

  • Janet Krueger comments on the differences in how the Clinton and Bush administrations have treated cash balance pension conversions. Full excerpt: Seems like there is a lot of rewriting of history going on here. The Clinton administration DID do some things -- there was a complete moratorium imposed on IRS approvals of cash balance conversions after the 1999 fiasco, and a task force was put in place with members from the Treasury, the DOL, and the EEOC to study the issue. In case anyone needs any reminders, they were only in power for 6 months after the conversion. Once the Bush administration took over, the task force was disbanded and the IRS went back to rubber-stamping conversions.

    There were also a number of bills and amendments introduced in both the Senate and the House, with far more advocates than just Sanders and Wellstone. Notable supporters have been Rep. Gutknecht from the 1st district of Rochester (the only Republican actively supporting our fight!), Rep. George Miller from California, and Senator Tom Harkin from Iowa. A majority of both the House and the Senate have repeatedly ensured that treasury appropriations can not be used for any further attempts to legalize cash balance conversions without new congressional legislation.

    In short, we have had good and vocal support from a number of folks on Capitol Hill, but not from the current White House or their appointees. Our support in the EEOC, the Treasury, AND the DOL was removed within weeks of the Bush administration, which is why I continue to strongly believe we need a regime change in DC -- the Bush administration has done everything in their power to make Cooper v IBM go away.

  • Editor's note: Previous coverage in these highlights backing Ms. Krueger's claims include:
    • From the January 11, 2003 highlights: Orlando Sentinel: Changes may shrink nest eggs. Excerpt: IBM Corp. was the poster child for criticism of such plans. It announced its intention to convert its existing pension to a cash-balance plan in 1999. Workers rallied to oppose the effort. Some sued the company. The computer maker relented and allowed older employees to remain in the conventional pension. Concerns about age discrimination sparked the Clinton administration to impose a moratorium on cash-balance plans three years ago. Companies can still adopt the plans, but they do not receive the approval of the Internal Revenue Service -- meaning they could be subject to back taxes or penalties. The Bush administration's new proposal, which could take effect by mid-year, would lift the IRS moratorium and make it legal for companies to offer cash-balance plans even if older workers' benefits are reduced. The proposal also gives companies the right to temporarily stop contributing to the pensions of older workers so younger workers in cash-balance plans can 'catch up.' 'I think this will be a huge raid on the pensions of millions of workers, who will end up receiving 30 percent to 50 percent less than what they anticipated,' said U.S. Rep. Bernie Sanders, I-Vt., who has been a leader in Congress criticizing the plans. 'Unless we stop this, a whole lot of middle-class families are going to be hurting big time.'"

    • From the December 21, 2002 highlights: Washington Post: What a Pension Shift Would Mean to You. Excerpts: "The Treasury Department's view, announced last week, that 'cash balance' pensions do not violate federal age discrimination laws may open the floodgates to these hybrid plans. Employer groups applauded cautiously, noting that other uncertainties remain for companies seeking to convert their traditional pensions. But it seems likely that conversions, which were on the rise until a Clinton administration moratorium in 1999, will resume when the Treasury's new regulations become final. That is expected next year. This is a controversy that every worker should pay attention to. Pension benefits almost always depend heavily on the passage of time, and decisions that workers make in their youth -- or that employers make for them when they're in mid-career -- can have an enormous impact on retirement income." ... "The result has been an explosion of litigation, much of it charging age discrimination. While a court could still decide that the Treasury is wrong, the agency's position in the new regulations will make those cases much harder to win. 'What the Treasury did was, they took us off at the knees,' said Kathi Cooper, the lead plaintiff in a class-action suit against IBM that accuses the computer giant of age discrimination in shifting to a cash-balance pension plan." If link is broken, view Adobe Acrobat version [PDF--27 KB].

    • Also from the December 21, 2002 highlights: Statement by the Honorable George Miller (D-CA), December 10, 2002, Regarding New Bush Pension Plan [PDF--38.4 KB]. Full excerpt: "This is the latest example of the tin ear President Bush and his Administration have for average employees. Workers who are playing by the rules and raising families and looking forward to a secure retirement are now having the rug pulled out from under them. This is a devastating blow for employees who are in secure pension plans today at good companies and who still have another 5 or ten years left before retirement. The Bush Administration is implementing the wish list of big business with a total disregard for the financial losses average employees are going to suffer from it. Older workers, many with families, many with dreams of a secure retirement, should be very concerned about this change, because they are going to suffer big financial losses from it – thanks to the Bush Administration. Employees have already seen huge losses in their 401k plans. Now they are going to see losses to their traditional pension benefit plans at top companies across the country. The defined benefit plan is the last pillar of private pension security and it has just taken a severe blow under this proposal. The only way to stop this now is for employees to make their concerns know – to their employers, to the elected representatives and to the President. Congress could stop it, if it were not under the control of the Republicans who are unlikely to come to the rescue of average employees against the President’s wishes."

  • The Association of Members of IBM UK Pension Plans (AMIPP): The Ombudsman's Determination. Full excerpt: The Ombudsman has issued his determination on the known complaints against IBM and the IBM Pensions Trust. None of the complaints have been upheld. In case this news fills you with such a surge of feelings of injustice that you want to do something immediately, we remind you of the "Eacott Initiative" which will put you in touch with like-minded people. (You can reach AMIPP officials by email through our contacts page.) If you are willing to wait for wheels to grind, you can expect AMIPP to produce an analysis of the determination and of the options ahead. (The determination has 67 pages. We have 27 days in which to appeal). The text below is for the benefit of anyone looking for an instant AMIPP response to the determination. It should be read in the context of the website as a whole since a short text necessarily over-simplifies.
    At the turn of the century, some members of the IBM UK occupational pensions scheme were asking the question "can a company do and say whatever it likes when it wants to recruit, retain or retire employees and then do something different subsequently?" Recently they had an answer from the Pensions Ombudsman, and the answer for them is "Yes". Dozens had complained to the Occupational Pensions Advisory Service, and the complaints were condensed into those of four representative scheme members. After four years of investigations the Ombudsman has decided not to uphold any of the complaints.

    The Association of Members of IBM UK Pensions Plans (AMIPP - www.amipp.org.uk) takes the view that "In a minor echo of the Hutton and Butler reports, this report describes behaviour that a typical person would find reprehensible, yet the investigator finds nobody to blame. IBM UK promised that for its pensions in payment policy, as with other benefits, it would aim to be competitive with leading companies. In practice, they have chosen to make the erosion of pension value with inflation the worst of all comparable companies.

    The IBM UK Pensions Trust chose to use funds that the final salary scheme members had accrued, with the addition of their contributions, to fund a money purchase scheme for a different collection of employees, thus undermining the final salary scheme members' prospects and speeding up a move towards what is now a large deficit in the final salary fund. Either the Ombudsman has mis-interpreted the law, or the law has not protected the reasonable expectations of the scheme members. In this respect the IBM UK members are like the ASW Steel members; no IBM scheme member will suffer to the extent that the ASW members have suffered but the two groups suffer for the same reason: Trust Law and its interpretation have not protected their pension promise."
    • In "IBM Screws British Pensioners" "ibmaccountant" comments. Full excerpt: Looks like the gentlemanly Brits have just found out that IBM doesn't have to give them COLAs. It took 5 years of appeasement by misled retirees to figure this out. What they need to understand is that this is an all out war by big business to get at your hard earned retirement money and that if IBM has legally taken it the only way to get it back is to make it so painful in the marketplace for IBM that it's cheaper to deal with us than with irate customers. They should start with a boycott at the biggest UK retailer using IBM equipment then move to demonstrations at IBM sites. Destroy the image of IBM being a good, honest employer and you'll get Sam's attention.

  • New York Times: A.M.A. Says Government Should Negotiate on Drugs. Excerpts: The American Medical Association says the government should negotiate directly with drug manufacturers to secure lower prices on prescription medicines for the nation's elderly. Under the new Medicare law, signed by President Bush last December, 41 million elderly and disabled people will have access to drug benefits in 2006. Medicare will rely on private health plans to deliver the benefits. The law says the government "may not interfere" in negotiations with drug companies. ... In asserting that Medicare officials should be able to negotiate with drug companies, the medical association said that other federal agencies, like the Department of Veterans Affairs and the Defense Department, had "negotiated favorable rates on prescription drugs on behalf of their beneficiaries, resulting in very substantial cost savings." Moreover, it said, "others delivering medical services under federal health care programs, including physicians, have long been under government-imposed limits on their fees." Doctors and hospitals often complain about federal regulation of the payments they receive under Medicare, and some suggest that it would be an anomaly if drugs were completely exempt from such restraints. Some doctors worry that rapid growth in Medicare spending on prescription drugs could create new pressure to hold down payments to doctors and other health care providers in the program.

  • Forbes: Our Health Cost Delusions. Excerpt: To see how topsy-turvy health care spending can get, there's no need to look back any further than the past two weeks. First, Vioxx, an arthritis drug whose main benefit was a reduction in stomach side effects, was pulled from the market after five years for safety problems. It had reached annual worldwide sales of $2.5 billion, filling the coffers of drug giant Merck. A week later, Chiron said that because of problems at a Liverpool, U.K., plant, it would not be able to supply any influenza vaccine this year. Because only two firms make flu shots in significant amounts, that means the U.S. will have, at best, 18 million fewer flu shots than it did last year. ... What's wrong here? For many patients, Vioxx's stomach-safety benefit was probably cancelled out by its cardiovascular risk. But the market for arthritis drugs--which can cost almost $3 per day--was appealing enough to entice Merck, Pfizer and Novartis. Meanwhile, in the past year Wyeth became the latest drugmaker to exit the flu vaccine business. The flu kills 36,000 Americans per year. But at about $6 per pop, flu shots aren't a profitable enough business to draw drugmakers into what is a rather difficult and expensive business. (The vaccinations are seasonal, and take months to make.)

  • USA Today: Canadians call on Ottawa to ban cross-border drug shopping. Excerpt: Canadians must stop Americans from using Internet pharmacies to raid its medicine chest or face a drug shortage, a coalition of Canadian groups representing seniors, pharmacies and patients has warned. The groups, claiming to represent 10 million Canadians, or about one-third the population, called on the Canadian government Monday to ban prescription drug exports. They argue that Canada cannot afford to address U.S. drug shortages and soaring prescription costs with its own drugs, which are often considerably cheaper for Americans because of Canadian price controls. An estimated 65 million Americans, most elderly, don't have drug insurance coverage or can't afford drugs in the United States. Internet pharmacies and Canadian doctors willing to write prescriptions for Americans send an estimated $1 billion a year in Canadian drugs south of the border. "It is completely untenable to think that Canada could supply their needs and our own for even one month, let alone on an ongoing basis," said Louise Binder of the Canadian Treatment Action Council and Best Medicines Coalition.

  • Atlanta Journal-Constitution: Sharply differing stances taken on domestic issues. Excerpt: The discussion quickly turned to issues that had yet to be addressed in the presidential debates, including the shortage of flu vaccine, same-sex marriage and the impending fiscal crisis of the Social Security system. To get through the flu vaccine shortage, Bush urged healthy and younger Americans not to get a flu shot this fall. "I haven't got one and don't intend to," the president said. Bush then blamed the threat of lawsuits for a reluctance by pharmaceutical companies to manufacture the vaccine and urged tort reform, which he accused Kerry of opposing. Kerry said the vaccine shortage underscores that "the president has turned his back on the wellness of America, and there is no system and it's starting to fall apart."

  • New York Times: European Health Agencies, Using Many Vaccine Suppliers, Are Facing No Shortages. Excerpts: While patients are panicking over a shortage of flu vaccine in the United States, vaccination programs in Europe are progressing smoothly with a good supply of medicine, health authorities say. "The World Health Organization has not heard of any shortages in Europe, and it's very, very likely we would have heard if there were problems," said Dr. Nedret Emiroglu of the World Health Organization Regional Office for Europe. ... In England, for example, the National Health Service bought the 14 million doses of flu vaccine that it needed from five or six suppliers, said Alison Langley, a spokeswoman for the Department of Health. Two million of those doses were to have come from the Chiron factory in Liverpool. "But we were able to make that up with additional purchases from elsewhere," Ms. Langley said.

  • USA Today: Experts have been predicting flu vaccine shortage for years. Excerpts: This year's severe flu vaccine shortage comes at the peak of the presidential campaign season, and both candidates have wasted little time in using the issue to make political points. President Bush has said the shortage underscores the need for tort reform so that vaccine manufacturers aren't pushed out of the market by liability lawsuits. Sen. John Kerry has said the shortage highlights deficiencies in the administration's health care policies. Reporter Donna Leinwand interviewed a number of experts to determine what is behind the shortage. ... Q: Do lawsuits keep companies out of the vaccine market? A: Congress addressed the problem of lawsuits in 1986 with a law establishing the National Vaccine Injury Compensation Program. Congress was responding to lawsuits over side effects from the diphtheria, tetanus pertussis (DPT) vaccines that were pushing vaccine manufacturers out of the market. Now people who are injured by vaccines file a claim with the fund. They can only file a lawsuit if the compensation program denies the claim.

  • Public Citizen: America’s Neglected Veterans: 1.7 Million Who Served Have No Health Coverage Report of the Study Group on Veterans’ Health Insurance. Excerpts: A disturbingly high number of veterans reported problems in obtaining needed medical care. While only 2.5% of insured veterans failed to get needed care in the past year because of costs, 26.1% of uninsured veterans failed to get needed care due to costs; 29.0% had delayed care due to costs. Among uninsured veterans, 42.1% had not seen a doctor within the past year, and two-thirds failed to receive preventive care. By almost any measure, uninsured veterans had as much trouble getting medical care as other uninsured persons. More than two-thirds of uninsured veterans were employed and 86.4% had worked within the past year; 7% of the uninsured vets worked at two or more jobs. Millions of America’s veterans and their family members are uninsured and face grave difficulties in gaining access to even the most basic medical care. It seems particularly abhorrent that services are denied to those who have served.

  • Communications Workers of America (CWA): Lucent Talks Open with Health Care Challenge. Excerpt: "Lucent's proposal was far worse than what they proposed at early bargaining in June," said Ralph Maly, CWA vice president for Communications and Technologies. "By 2007, the average retiree who has a pension of $920 would be looking at a $700 monthly premium for a pre-65 family of two. Lucent has made a determination to abandon its union-represented retirees." In opening remarks, CWA Representative Mary Jo Sherman accused management of running a company and its employees into the ground. "'Lucent Technologies - we make things that make communications work.' Except they don't anymore. Lucent's bad business decisions and ever changing strategies, despite what the company says, have left Lucent without its core competencies. "Factories have been sold, businesses spun off, and manufacturing outsourced - expanding services while shedding its historically value-based installers. Our occupational work force has been forced to move from one side of the country to the other, or to quit a company that has benefited from their years of service. Thousands of people have been laid off or forced into early retirement."

  • Jobs with Justice: Waste Not, Want Not - How Eliminating Insurance & Pharmaceutical Industry Waste Could Fund Health Care for All [PDF]. Excerpt: The United States is the only industrialized country in the world that does not guarantee health insurance for its population. The U.S. spends far more per person on health care than any other country in the world – in fact more than twice as much as the average for other rich countries. Yet people in the United States do not have good health. The United States ranks near the bottom of the industrialized world in life expectancy, infant mortality, and other standard measures of health. As bad as the health care situation is in the United States, it is getting rapidly worse. Double-digit increases in health care costs are leading more employers to drop health insurance coverage for workers or their family members, and to raise costs for those who keep coverage. The number of people without insurance or with inadequate insurance is rising rapidly, leading more people to become insecure about their access to adequate medical care.

    While everyone agrees that Medicare has been an enormously successful program, many people believe that covering everyone would be too expensive – that the country simply can't afford to insure its entire population. This report sets out to prove the opposite. We already spend more than enough to insure the entire population. The reason that we pay more and get less for our money is that our health care system is enormously wasteful. This report looks at some of the waste in the U.S. health care system. It calculates how much waste could be eliminated at the national level and at the state level, and how many people could be insured with the savings. Specifically, it looks at the waste that results from our fragmented system of private insurers, rather than using a "Medicare for All" approach that efficiently covers everyone. It also looks at the waste associated with government granted patent monopolies for prescription drugs that protect drug companies from selling in a more competitive market. Finally, the report analyses the waste from the additional subsidies for the insurance industry that were part of the recently passed Medicare prescription drug benefit.

  • HealthLeaders News: Real Differences Between the Bush and Kerry Health Plans, By Lawrence S. Lewin. Excerpts: The debate over national health policy, one of the most important issues facing our country, is becoming mutilated in this increasingly combative 2004 Presidential campaign. ... Another important question has to do with whether what we pay for healthcare results in better health. The doctor-patient relationship is an important part of this and it is encouraging that both candidates seek medical liability reform to improve this all-important relationship. But the President's preference for so-called Health Savings Accounts (HSAs), a significant departure from current arrangements, will likely result in strong financial incentives on patients to ignore the advice of their physicians, especially in managing chronic diseases like diabetes, asthma, arthritis and heart disease. HSAs produce savings to employers by shifting the financial burden to consumers, but the results could easily be higher costs and poorer health in the long run - a questionable bargain.

    Finally, there is the accusation that the Kerry proposal will represent a huge government-run system, a government takeover of healthcare, with bureaucrats rather than doctors making clinical decisions for patients, and with extensive rationing of care. This is fear-mongering at its worst and is patently untrue, as many policy experts have noted. Programs that enable the insured to choose their own health plan and physician are what already exist and would not change. In fact, the Kerry plan builds on the most successful insurance plans, like those enjoyed for decades by members of Congress and federal employees. Kerry's proposal would open up a wide range of choices among group insurance options while the Bush plan would drive many of our citizens into the individual insurance market which is more expensive and which discriminates against those with existing health problems. The Kerry plan seeks to extend the choice of insurers and doctors to many who now are deprived of that choice altogether. Using existing programs like Medicaid and SCHIP to serve those currently without insurance reduces, not increases, the need for new bureaucracies. And, for those who currently have no insurance, expanding insurance would provide them with access to doctors whereas now they have none.

  • Chicago Tribune: Rising health costs resonate for voters. Excerpts: Until this year, Ken Kopecki and his family were solidly middle class. Now their savings are gone, the family budget is wrecked and Kopecki struggles with financial anxiety day in and out. The reason: soaring costs for medical care. Last year, the Kopecki family, which has health insurance through Ken's employer, a small security company, paid $2,300 for medical expenses. This year, with higher bills for health insurance and drugs, they expect to spend well over $6,000. "The increase has essentially killed us," said Ken, 38, an electronics technician who has a degenerative autoimmune disease ("not AIDS," he explains). In this swing state, the Kopeckis represent the kind of voters political strategists are watching closely as the presidential election draws near: middle-class families worried about the economy and pocketbook issues--especially health care, a subject frequently discussed by President Bush and Sen. John Kerry in the past month.

  • Newsweek, courtesy of MSNBC: Bad Medicine, by Jane Bryant Quinn. Health Care: The candidates promise new initiatives to end patchwork care. But it's mostly money thrown at a broken and crazy system. Excerpts: Given a clean slate, no one—repeat, no one—would design a stupid health system like ours. We brag about it as being "the best," and it does indeed deliver mostly competent care. But a system? Forget it. Every year we spend billions of additional dollars, yet cover a smaller portion of the sick. Massive public subsidies and costly premium payments vanish into the dark pit of private-sector bureaucracy, crazed administrative rules, hard-sell marketing and inefficient care. Whether you get care at all depends largely on where you work (in China they call this the "iron rice bowl"—tying essential life benefits to specific jobs). ... The largest tax savings from HSAs go to people in the highest brackets. There are normally zero savings for those paying no income tax at all. To attract workers earning low and moderate incomes, Bush would subsidize the premiums with refundable tax credits up to $700. Additional credits would help you put, say, $300 into the medical savings account. A Lewin Group analysis finds that Bush could pull 3 million people to HSAs. But Ron Pollack, head of Families USA, disagrees. The plan merely "throws a 10-foot rope to someone in a 40-foot hole," he says. MIT economist Jonathan Gruber thinks that some employees would lose their current health benefits. Small firms might switch workers to HSAs instead.

  • Washington Post: Groups Question Industry-Paid Doctors. Excerpts: They led influential medical groups, starred at prestigious meetings, published in top journals and were undisputed giants in their field. But when these famous doctors advised the government recently on new cholesterol guidelines for the public, something else they had in common wasn't revealed. Eight of the nine were making money from the very companies whose cholesterol-lowering drugs they were urging upon millions more Americans. Two own stock in them. Two others went to work for drug companies shortly after working on the guidelines. Another was a senior government scientist who moonlights for 10 companies and even serves on one of their boards.

  • Houston Chronicle: Exhibit focuses on tragedy without health insurance. Excerpt: Sheila Wessenberg never planned to become the poster child for the plight of America's uninsured. She intended to live happily in a Dallas suburb, working part time and raising her children while her husband, Bob, pulled down a comfortable salary in the booming technology sector. The discovery in 2001 that she had an aggressive form of breast cancer was the first indication that things might not turn out as she expected. Her husband was laid off less than six months later, losing the family's health insurance. Her cancer went untreated for almost two years as the family sold belongings to survive. "I lost everything I worked for my entire life," she said.

  • Washington Post: Words, Actions at Odds on Children's Health Care. U.S. Poised to Take Back $1.1 Billion Despite Bush's Vow. Excerpts: In his convention address in New York, President Bush announced a new $1 billion initiative to enroll "millions of poor children" in two popular government health programs. But next week, the Bush administration plans to return $1.1 billion in unspent children's health funds to the U.S. Treasury, making his convention promise a financial wash at best. The loss of $1.1 billion in federal money means six states participating in the State Children's Health Insurance Program face budget shortfalls in 2005; it is enough money to provide health coverage for 750,000 uninsured youngsters nationwide, according to two new analyses by advocacy organizations. ... Over the objections of the National Governors Association and a bipartisan coalition of lawmakers, Bush opposes giving states more time to spend the money. In previous years he supported an extension, but he struck it from this year's proposed budget. Even if Bush belatedly endorses a bill extending the SCHIP spending deadline, it will come at a price: Congress is required to trim $1.1 billion elsewhere in the budget if it lets states keep the money.

  • Slate: Goodbye, Pension. Goodbye, Health Insurance. Goodbye, Vacations. Excerpts: For some employees near the end of their careers, the golden years may be looking a little more like lead. Both United Airlines and US Airways are making noises about terminating their pension plans. Lucent recently said it would slash retiree health benefits yet again. The inability or refusal of companies to live up to promises and commitments made to workers seems to be largely a cyclical phenomenon, a symptom of temporarily sick industries (airlines) or of a company plagued by poor bets and bad management (Lucent). But it is also a sign of the troubling collapse of welfare capitalism. Welfare capitalism is a term used by historians and economists to define the distinctive style of capitalism that emerged in the 20th century. Until the turn of the 20th century, fringe benefits, insurance, retirement plans, and health benefits—the perks we have come to define as essential to employment—simply didn't exist. Employers had compensated employees solely with wages. ...

    In the 1920s, competitive pressures led companies to become more paternalistic to unskilled workers. But now, the pressure is all in the other direction. With each passing year, more and more retailers have to compete with Wal-Mart, and more and more manufacturers have to compete with China. Even enlightened employers like Starbucks can't ever hope to offer the sort of programs that International Harvester and Ford did back in the 1920s. And so welfare capitalism is slipping away. Health care insurance has increasingly become decoupled from work. According to this Kaiser Family Foundation study, 61 percent of workers are covered by employers' health insurance, down from 65 percent in 2001. And pension plans, which guaranteed a retirement income to employees, are being replaced by 401(Ks), which offer no such certainties. Most free marketeers would argue that this is simply the price of progress. Now that we're competing in global markets, welfare capitalism as practiced in the mid-20th century is simply untenable. And companies that aren't burdened with expensive benefit programs can be more agile and thus more profitable. But it isn't just the workers of Lucent and US Airways who are going to pay for the long goodbye of welfare capitalism. We all will. When companies decide they no longer want to—or can't—meet the promises they made to employees, they push them wherever possible onto the federal government.

  • Communications Workers of America (CWA): Bush Campaigners Call OT Protesters "Labor Thugs". Excerpt: Bush campaign workers confronted this week with union members calling attention to the devastating effects the overtime rule changes will have on working families dismissed the demonstrators as "thugs" and ignored their message. CWA members and hundreds of other activists in 20 cities across the country attempted to deliver 200,000 postcards to Bush-Cheney campaign offices decrying the administration's rule changes that strip overtime rights away from at least 6 million workers. Several offices wouldn't accept the postcards at all, and others called police, making grossly exaggerated claims about the chanting, sign-waving demonstrators. A spokesman for the Florida GOP, Joseph Agostini, complained to the Tampa Tribune that just hours before the vice presidential debate, "we have these organized labor thugs using terror tactics in America." Rob Ray, a Democratic Party official in Tampa, where one of the protests took place, told the paper, "That's what they always try to say about working people - that when you demonstrate together for a cause, you're being a mob or a thug. No one was hurt. We abided by what the police officers asked us to do." A police spokeswoman confirmed that protestors stayed in the public area of the headquarters or on the street and left when asked. "They didn't threaten anybody," she said.

  • San Jose Mercury-News: HP, IBM, Dell set `code' for treatment of workers. Excerpts: Hewlett-Packard, IBM and Dell, which were accused earlier this year of having "dire working conditions" at factories outside the United States, announced Wednesday that they have agreed on a "code of conduct" for the treatment of workers and the environment. ... In January, the Catholic Agency for Overseas Development, a non-profit organization based in the United Kingdom, issued a report stating that workers who make computer components for IBM, Dell and HP in Mexico, China and Thailand are suffering "atrocious conditions for extremely low pay."

  • New York Times: Counting the Hidden Costs of War, by Anna Bernasek. Excerpts: It'S often said that truth is the first casualty of war. During a presidential campaign, that may be more apt than ever. Consider a seemingly simple question: What is the cost of the Iraq war to the United States? President Bush and Senator John Kerry have given different answers, but both candidates have ignored what may be the biggest cost item: the war's impact on the overall economy. After all, the real cost of war is not only the money spent but also the economic effects, good or bad. ...

    But if Mr. McKibbin and Mr. Stoeckel are correct in their estimate, the real cost of the war to date, including direct spending and lost economic growth, is in the neighborhood of $270 billion. Most economists would agree that the war has hurt the economy, mainly through higher oil prices and continuing uncertainty. The war's effect on oil prices is hard to disentangle from factors like higher global demand and supply disruptions, but it is commonly thought that the war's role has been significant. "It isn't a coincidence that we have oil prices breaching the key $50-a-barrel threshold one and a half years into this war," said Stephen S. Roach, Morgan Stanley's chief global economist. Mr. Zandi says the war has clearly "had a very large impact on our economy and on the psyches of business and consumers." He explained it this way: First, in the period before the war, fear and uncertainty held back the economic recovery. Then, as the initial invasion succeeded, the economy recovered strongly and found its footing again. Now, as the war drags on, higher oil prices and shaky confidence are dampening the pace of growth and job creation.

    What really worries economists, though, is the future economic impact. "The longer this war runs, the weaker our long-run growth will be," Mr. Zandi said. That is because spending on things like the occupation and peacekeeping in Iraq does not do anything to bolster the American economy's productive capacity. And it adds to the growing budget shortfall. "With a budget deficit already at 3.5 percent of G.D.P.," Mr. Roach said, "that's a really big deal."

  • Suburban Chicago Newspapers: Public not invited to the Carlyle Group party. Excerpts: You'd sooner be able to flap your arms and fly than become a shareholder of the Carlyle Group. The Carlyle Group is a tightly exclusive fraternity whose members at one time held powerful and influential government positions in their respective countries. Carlyle partners are covertly selected for their ability to guide the favorable placement of government contracts especially in the aerospace and defense industry, information technology, oil & gas, construction and telecommunications. Some renowned Carlyle shareholders or affiliated persons include former Secretary of State James A. Baker, former Defense Secretary Frank Carlucci, former Office of Management and Budget Director Richard Darman, former Federal Communications Commission Chairman William Kennard and former President George H.W. Bush. Other notables include former Securities and Exchange Commission Chairman Arthur Levitt, former Internal Revenue Service Commissioner Charles Rosotti, former Philippines President Fidel Ramos, former British Prime Minister John Major and Luis Tellez, former energy secretary of Mexico. Meanwhile the Saudis, Koreans, Japanese, Germans, etc. are also influential owners in the Carlyle Group. Oh, by the way, Louis Gerstner (former chief executive officer of IBM and Philip Morris) is the active chairman of Carlyle. In fact, there are some 80 or so other high-profile partners around the world and you'd recognize many of those names too. ... The Carlyle Group is an immensely profitable company that has made multiple billions of dollars in net profits during the past couple dozen years because its partners can influence to whom their respective governments' contracts are awarded. Those profits have been distributed among its 90-plus partners and in an unique tax-favored manner.

  • Annex Bulletin: Analysis of IBM’s Third Quarter Business Results. Slow Quarter No Longer. Solid Growth Across the Board, But Some Challenges Remain. Excerpts: Back to real life from poetry and metaphors, the biggest disappointment to us were the new contract sales and backlog numbers that IBM Global Services (IGS) reported. The “biggest” - because IGS is now IBM’s largest and most important unit. In the old days, people used to say, “as goes the mainframe, so goes Big Blue.” Nowadays, “as go the services, so goes Big Blue” is more appropriate. IGS’ ups and downs now pretty well shape the Big Blue future, as most of the services contracts are multi-year deals. Anyway, IGS’ new contract sales were down 36% in the third quarter from the corresponding period a year ago. At $9.8 billion, the latest new business signings were the lowest since 3Q02, and only the third time in the last 20 quarters that new business signings were in single digits (i.e., below $10 billion). Nor is this just a one-time disappointment. For the first nine months of 2004, they new contract signings were also down - 40%. As a result, the IGS backlog is now $10 billion lower than at the start of the year, having dropped $8 billion in the latest period alone. Which means that $18 billion of the IBM backlog disappeared in various cancelations/expirations/ ”rescopings” during the third quarter – a record decline, compared to $13 billion per quarter average losses this year, and $7 billion only four years ago.

  • Vault's IBM Business Consulting Services message board is a popular hangout for IBM BCS employees, including many employees acquired from PwC.
    • "This year may be bad, too" by " IGS_Consultant. Full excerpt: Has anyone seen the "report card" for IGS/BCS on W3? It looks like this will be another bad year to have a good year. Once again, we'll probably have to sacrifice our variable/bonus pay so that Ginnie and Doug can have theirs.
    • "Dose of reality" replies in "It's by design". Full excerpt: The planning process here is designed to produce unachievable targets on the front lines. There are multiple layers of “stretch targets” and sandbagging manipulated at the upper levels, so that those responsible for directly delivering revenue and profit end up with targets that have no basis in economic reality. This cascades all the way down to non-sustainable utilization targets and mediocre salary levels in the core level 6 – 8/9 which are necessary to make the numbers work. The result is that the vast majority of the organization fails to meet their targets, while the upper echelon makes theirs. While this is not an uncommon planning practice, we take it to an absurd and oblivious extreme.

      This whole mechanism is predicated on employing static planning models – i.e. those that presume that changing an assumption (that translates into a real effect on someone’s job) will not generate any reaction. For example, let’s change utilization targets to 95% - look what that does to the bottom line plan results. Nothing else will change in the P&L. Why not increase them to 105% - then we’ll really be rolling in money. Granted, this is an exaggeration, but the concept is very real. Bean counters, with no idea about the real economics and human dynamics of the industry drive the mechanics, and a select privileged few at the top drive the assumptions that benefit themselves and no one else. The result is that the organization will have a strong tendency to implode, and we rely on having a steady stream of fresh meat for the grinder to be able to level off at some sub-optimal level. But the amount of future equity we leave on the table is huge – all in the name of padding the pockets of the elite while they are here. You didn’t pick a bad year to have a good year – you picked a bad company to have a good year in.
Coverage on H1-B and L1 Visa and Off-Shoring Issues
  • DevX: Offshoring: It's Not Too Late to Change. Excerpt: There's a great deal of information, innuendo, and rumor circulating concerning offshore outsourcing, more widely known as offshoring: the practice of moving jobs from a host country to a different country. Offshoring is a controversial topic because it affects people's emotions powerfully on several different levels simultaneously; offshoring affects our sense of fair play, our sense of national identity, and our hopes for prosperity and the future. But whether offshoring at the macro level is a net negative, net positive, or something in between is a popular subject for debate. Many prominent economists and business leaders have expended much ink trying to assure U.S. workers that offshoring is no different than other large labor trends of the past two centuries; from farm to factory, from manual labor to automation, and from factory to service industries. In fact, offshoring, many say, is a beneficial process that improves the quality of domestic jobs and salaries. I've listened closely to these arguments, hoping for some reassurance; sadly, my assessment of the offshoring trend remains grim.

    (Editor's note: This is a "must read" article. It covers all aspects of the off-shoring issue in depth and destroys many of the misconceptions that the off-shoring professional jobs cannot be stopped or slowed.) If link is broken, view Adobe Acrobat version [PDF--35 KB].

  • Computerworld: Brief: Job cuts in tech sector soar, report says Job cuts in technology jumped 60% between July and September. Excerpt: Manufacturers in the sector are having trouble making money since they have been forced to lower prices in order to attract consumers, Challenger said. So they end up firing workers in order to maintain healthy profit margins. Worse yet, the growing number of layoffs isn't being countered by any move to hire, Challenger said.

  • WashTech News: Uncommon activists: Job offshoring prompts a diverse group to action. Excerpt: The news from the Department of Labor that jobs had again not kept pace with demand came as no surprise to most. Paired with the news that layoff announcements are up 40 percent from a year ago, and the job bust in high-tech has lingered for three years, there will be no shortage political grist heading down the election stretch. But while the candidates will argue over the true meaning of the numbers, those who have felt the sting of the report the only question is this: what is being done to level the playing field for American workers left to the mercy of corporate decision makers? This is a profile of four activists who all in their own ways have taken it upon themselves to push back against an IT industry overseen by passive legislators and run with a profit-over-all-else ethos. These activists have been drawn to this issue because they fear that the American middle-class as we have known it for the last half century will continue its disappearing act if offshoring and H-1b visa issues are not resolved. All of these activists echo each other in saying how imperative it is for workers to understand that to passively stand by and hope for a better future is tantamount to holding a one-way ticket headed for the negative side of the Department of Labor's statistics.

Now on the Alliance@IBM Site:
  • Pension Lawsuit Questions & Answers. Read this to determine how this lawsuit affects you. Updated 10/24/04. Excerpt: Below is a list of frequently asked questions about the class action lawsuit against IBM's 1995 and 1999 pension plans. On July 31, 2003, a federal district court judge ruled in favor of the employees in this case. IBM has said it will appeal the judge's decision. On September 28, 2004, IBM and the legal team on Cooper v IBM announced that an agreement has been negotiated that settles some of the claims and sets the amount of damages that IBM will pay to the class if IBM's appeal of the district court's age discrimination rulings is unsuccessful.

  • IBM Ireland employees jobs offshored to India.

In Politics—
Note: The views expressed in the news articles and editorials in this section are those of their authors. They do not reflect the views of the Alliance@IBM. They do reflect the views of the editor of www.ibmemployee.com.


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