Thursday, April 30, 2009 Opinion Journal
REVIEW & OUTLOOK APRIL 30, 2009
Gettelfinger Motors The mauling of GM's bondholders reveals Treasury's political hand.
President Obama insisted at his press conference last night that he doesn't want to nationalize the auto industry (or the banks, or the mortgage market, or . . .). But if that's true, why has he proposed a restructuring plan for General Motors that leaves the government with a majority stake in the car maker?
The feds have decided they should own a neat 50% of GM, yet that is not the natural outcome of the $16.2 billion that the Treasury has so far lent to the company. Nor is the 40% ownership of GM that the plan awards to the United Auto Workers a natural result of the company's obligations to the union.
Yet Secretary Timothy Geithner and his auto task force, led by Steven Rattner, have somehow decided that Treasury and UAW chief Ron Gettelfinger will get to own a combined 90% of GM. If there's a reason other than the political symbiosis among the Obama Administration, Michigan Democrats and the auto union, it's hard to discern. From now on let's call it Gettelfinger Motors, or perhaps simply the Obama Motor Company, though in the latter they'd have to change the nameplates.
The biggest losers here are GM's bondholders. According the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday's offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar.
The Treasury, which is owed $16.2 billion, would receive 50% of the stock and $8.1 billion in debt -- as much as 87 cents on the dollar. The union's retiree health-care benefit trust would receive half of the $20 billion it is owed in stock, giving it 40% ownership of GM, plus another $10 billion in cash over time. That's worth about 76 cents on the dollar, according to some estimates.
In a genuine Chapter 11 bankruptcy, these three groups of creditors would all be similarly situated -- because all three are, for the most part, unsecured creditors of GM. And yet according to the formula presented Monday, those with the largest claim -- the bondholders -- get the smallest piece of the restructured company by a huge margin.
This seems to be by political design. GM CEO Fritz Henderson says Treasury insisted that bondholders receive, at most, 10% of the company. "We went to the maximum and offered 10%," Mr. Henderson said. Mr. Rattner's office did not return our calls, so we can't say why Mr. Rattner wanted private risk capital cut out of the ownership of the new GM, but no one has contradicted Mr. Henderson.
Some Treasury officials have told the media that 50% government ownership is important to ensure that taxpayers get repaid for the $16.2 billion in Treasury loans. But this is false logic. Taxpayer-shareholders are likely to be far better off with a smaller stake in a truly private company that is better insulated from political meddling. Private owners are more likely than the Treasury or the unions to try to run the company for profit, and so increase its equity value over time. Treasury says it would be a hands-off owner, but that hardly seems plausible and in any case that would merely leave the UAW in control. At the next labor contract bargaining session, the union would sit on both sides of the table.
GM, the government and the bondholders all insist that a bankruptcy filing would be a disaster. GM's SEC filing on the debt-equity swap also warns darkly that if the requisite 90% of bondholders don't agree to these terms, they may recover little or nothing in bankruptcy court. But given the choice between a 10% stake in Gettelfinger Motors and the independent mercies of a bankruptcy judge, bondholders could be forgiven for taking their chances in court.
Certainly the bondholders deserve to take a haircut like everybody else. But squeezing them in such a blatant fashion has other consequences. Who would be crazy enough to lend GM money in the future? The Treasury also says it wants banks that do poorly in its "stress tests" to try to raise private capital before putting in more public money. The mauling of GM creditors tells investors not to invest in TARP banks because everything this Treasury touches turns to politics.
Monday's offer is so devoid of economic logic or fairness that it confirms the fears of those who said the original bailout would lead to a nationalized GM run for political ends. This fiasco will in part go down on George W. Bush's copybook, since he first decided GM was too big to fail.
But rather than use his early popularity to force hard decisions through the bankruptcy code, President Obama has decided in essence to have the feds run GM and Chrysler. This inevitably means running them for the benefit of the UAW that is so closely tied to the Democratic Party. Next up will be tax changes and regulations intended to coax, or coerce, Americans to buy Gettelfinger Motors cars. This tale of taxpayer woe is only beginning.
Printed in The Wall Street Journal, page A14
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
Copyright ©2009 Dow Jones & Company, Inc. All Rights Reserved
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GM Bondholders Make Counter Proposal (Marketwatch)
Bondholders present plan to win GM control
By Shawn Langlois, MarketWatchLast Update: 10:24 AM ET Apr 30, 2009
SAN FRANCISCO (MarketWatch) -- General Motors bondholders on Thursday will present a counteroffer to the automaker's debt swap that would relieve creditors of their $27 billion of debt in return for a majority stake in the company.
The move, which also aims to ease concerns over the U.S. government nationalizing the Detroit giant, comes as similar talks between Chrysler and its debt holders reportedly were on the verge of collapse.
The ad hoc committee of GM (GM) bondholders said their plan would see them get 58% of the new company in return for debt forgiveness while saving U.S. taxpayers $10 billion in cash.
The union health-care fund, based on the $20 billion in benefits owed, would own 41%. Existing stockholders would receive 1% of the new GM under the plan.
Eric Siegart, senior managing director of Houlihan Lokey Howard and Zukin and financial advisor to the bond group, said the government would not get equity under the scenario because it would not have to reduce any of its $20 billion in loans.
"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," he said.
The group plans to propose the plan to the Auto Task Force on Thursday afternoon, but President Barack Obama's team previously urged creditors to take the original proposed deal or risk getting even less in the courts.
Treasury officials have said that 90% of GM bondholders must take part in the exchange. The automaker has until June 1 to complete the debt-for-equity swap to avoid a bankruptcy filing.
GM shares gained 3.9% to $1.88 in early trades but are still down 92% in the past year.
Copyright © 2009 MarketWatch, Inc. All rights reserved.
By Shawn Langlois, MarketWatchLast Update: 10:24 AM ET Apr 30, 2009
SAN FRANCISCO (MarketWatch) -- General Motors bondholders on Thursday will present a counteroffer to the automaker's debt swap that would relieve creditors of their $27 billion of debt in return for a majority stake in the company.
The move, which also aims to ease concerns over the U.S. government nationalizing the Detroit giant, comes as similar talks between Chrysler and its debt holders reportedly were on the verge of collapse.
The ad hoc committee of GM (GM) bondholders said their plan would see them get 58% of the new company in return for debt forgiveness while saving U.S. taxpayers $10 billion in cash.
The union health-care fund, based on the $20 billion in benefits owed, would own 41%. Existing stockholders would receive 1% of the new GM under the plan.
Eric Siegart, senior managing director of Houlihan Lokey Howard and Zukin and financial advisor to the bond group, said the government would not get equity under the scenario because it would not have to reduce any of its $20 billion in loans.
"We do not believe that nationalizing one of America's largest and most important companies is the right policy decision for our country," he said.
The group plans to propose the plan to the Auto Task Force on Thursday afternoon, but President Barack Obama's team previously urged creditors to take the original proposed deal or risk getting even less in the courts.
Treasury officials have said that 90% of GM bondholders must take part in the exchange. The automaker has until June 1 to complete the debt-for-equity swap to avoid a bankruptcy filing.
GM shares gained 3.9% to $1.88 in early trades but are still down 92% in the past year.
Copyright © 2009 MarketWatch, Inc. All rights reserved.
US Treasury on Buy America Bonds (BAB)
April 3, 2009 - US Treasury Press Release
TG-81
Build America Bonds and School Bonds
Investing in our States, Investing in our Workers, Investing in our Kids
The United States is facing the most severe financial crisis in generations. Extraordinary challenges require extraordinary action by our government to ensure the economy gets back on track and that millions of Americans get back to work. The American Recovery and Reinvestment Act of 2009, along with the Financial Stability Plan, are critical steps. In just two months, the Obama Administration, in conjunction with Congress, has enacted legislation to create or save 3.5 million jobs; give a tax break to 95% of working families; and has put forward detailed programs to address falling home prices, frozen credit markets, weak bank balance sheets and legacy assets.
Creating the conditions for an economic recovery also requires addressing the challenges facing state and local governments in the midst of the current economic climate. Budgets are being scaled back, government jobs are being cut, and services are being curtailed. These cuts contribute to a deeper recession, while restricting access to services at a time when the need for them is greatest. Turning things around requires innovative thinking.
Today Treasury announces two new, innovative bond programs to help states pursue capital projects. This funding means much needed infrastructure projects can begin to revitalize our communities while putting Americans back to work.
BUILD AMERICA BONDS
First, Treasury announces the implementation of the Build America Bond program under the American Recovery and Reinvestment Act of 2009 to provide much-needed funding for state and local governments at lower borrowing costs. This will enable them to pursue necessary capital projects, such as work on public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, governmental housing projects and public utilities.
Traditionally, tax-exempt bonds provide a critical source of capital for state and local governments, but the recession has sharply reduced their ability to finance new projects. Supplementing this existing market, the Build America Bond program is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds in order to stimulate the economy and encourage investments in capital projects in 2009 and 2010.
HOW BUILD AMERICA BONDS WORK
Build America Bonds are a new financing tool for state and local governments. The bonds, which allow a new direct federal payment subsidy, are taxable bonds issued by state and local governments that will give them access to the conventional corporate debt markets. At the election of the state and local governments, the Treasury Department will make a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the Build America Bonds. As a result of this federal subsidy payment, state and local governments will have lower net borrowing costs and be able to reach more sources of borrowing than with more traditional tax-exempt or tax credit bonds. For example, if a state or local government were to issue Build America Bonds at a 10 percent taxable interest rate, the Treasury Department would make a payment directly to the government of 3.5 percent of that interest, and the government's net borrowing cost would thus be only 6.5 percent on a bond that actually pays 10 percent interest.
This feature will make Build America Bonds attractive to a broader group of investors, and therefore create a larger market than typically invest in more traditional state and local tax-exempt bonds, where interest rates, due to the federal tax exemption, have historically been about 20 percent lower than taxable interest rates. They should be attractive to investors without regard to their tax status or income tax bracket (e.g., pension funds and other tax-exempt investors, investors in low tax brackets, and foreign investors).
GUIDANCE TO STATES ON BUILD AMERICA BONDS
The IRS is releasing Notice 2009-26 to provide state and local governments with prompt guidance on implementation of the new direct federal subsidy payment procedures for Build America Bonds so that issuers can begin issuing these bonds with confidence about how these federal payments will be made. This guidance covers the direct federal subsidy payment procedures regarding:
how (on new IRS Form 8038-CP available now) and when (by 45 days before an interest payment date) to request these payments;
when the IRS will begin making these payments (July 1, 2009);
how to make necessary elections to issue these bonds (in writing in an issuer's books and records);
how to satisfy the information reporting requirement for these bonds (modified IRS Form 8038-G); and
future implementation plans (electronic platform in 2010).
Finally, the Notice solicits public comments on all of the plans for this program.
SCHOOL BONDS
In addition, Treasury also announces today guidance on allocations of national bond volume cap authorizations for two innovative tax credit bond programs for schools, known as Qualified School Construction Bonds and Qualified Zone Academy Bonds. The American Recovery and Reinvestment Act of 2009 provided new or expanded authorizations, respectively, for these two programs. These tax credit bond programs allow state and local governments to finance public school construction projects and other eligible costs for public schools with interest-free borrowings. These tax credit bond programs provide this federal subsidy by giving those who buy these bonds a federal tax credit that essentially allows state and local governments to issue these bonds without interest cost.
The guidance that Treasury is issuing today allocates the national bond volume authority for these school bond programs among the states and certain large local school districts pursuant to statutory formulas. These volume cap allocations are important to enable State and local governments to use these low-cost borrowing programs to finance school projects to promote economic recovery and job creation.
For Qualified School Construction Bonds, the guidance divides the $11 billion national bond volume authorization for 2009 among the states and 100 largest local school districts based on Federal school funding.
For Qualified Zone Academy Bonds, the guidance divides the $1.4 billion bond national bond volume authorizations for each of 2008 and 2009 among the states based on poverty levels.
TG-81
Build America Bonds and School Bonds
Investing in our States, Investing in our Workers, Investing in our Kids
The United States is facing the most severe financial crisis in generations. Extraordinary challenges require extraordinary action by our government to ensure the economy gets back on track and that millions of Americans get back to work. The American Recovery and Reinvestment Act of 2009, along with the Financial Stability Plan, are critical steps. In just two months, the Obama Administration, in conjunction with Congress, has enacted legislation to create or save 3.5 million jobs; give a tax break to 95% of working families; and has put forward detailed programs to address falling home prices, frozen credit markets, weak bank balance sheets and legacy assets.
Creating the conditions for an economic recovery also requires addressing the challenges facing state and local governments in the midst of the current economic climate. Budgets are being scaled back, government jobs are being cut, and services are being curtailed. These cuts contribute to a deeper recession, while restricting access to services at a time when the need for them is greatest. Turning things around requires innovative thinking.
Today Treasury announces two new, innovative bond programs to help states pursue capital projects. This funding means much needed infrastructure projects can begin to revitalize our communities while putting Americans back to work.
BUILD AMERICA BONDS
First, Treasury announces the implementation of the Build America Bond program under the American Recovery and Reinvestment Act of 2009 to provide much-needed funding for state and local governments at lower borrowing costs. This will enable them to pursue necessary capital projects, such as work on public buildings, courthouses, schools, roads, transportation infrastructure, government hospitals, public safety facilities and equipment, water and sewer projects, environmental projects, energy projects, governmental housing projects and public utilities.
Traditionally, tax-exempt bonds provide a critical source of capital for state and local governments, but the recession has sharply reduced their ability to finance new projects. Supplementing this existing market, the Build America Bond program is designed to provide a federal subsidy for a larger portion of the borrowing costs of state and local governments than traditional tax-exempt bonds in order to stimulate the economy and encourage investments in capital projects in 2009 and 2010.
HOW BUILD AMERICA BONDS WORK
Build America Bonds are a new financing tool for state and local governments. The bonds, which allow a new direct federal payment subsidy, are taxable bonds issued by state and local governments that will give them access to the conventional corporate debt markets. At the election of the state and local governments, the Treasury Department will make a direct payment to the state or local governmental issuer in an amount equal to 35 percent of the interest payment on the Build America Bonds. As a result of this federal subsidy payment, state and local governments will have lower net borrowing costs and be able to reach more sources of borrowing than with more traditional tax-exempt or tax credit bonds. For example, if a state or local government were to issue Build America Bonds at a 10 percent taxable interest rate, the Treasury Department would make a payment directly to the government of 3.5 percent of that interest, and the government's net borrowing cost would thus be only 6.5 percent on a bond that actually pays 10 percent interest.
This feature will make Build America Bonds attractive to a broader group of investors, and therefore create a larger market than typically invest in more traditional state and local tax-exempt bonds, where interest rates, due to the federal tax exemption, have historically been about 20 percent lower than taxable interest rates. They should be attractive to investors without regard to their tax status or income tax bracket (e.g., pension funds and other tax-exempt investors, investors in low tax brackets, and foreign investors).
GUIDANCE TO STATES ON BUILD AMERICA BONDS
The IRS is releasing Notice 2009-26 to provide state and local governments with prompt guidance on implementation of the new direct federal subsidy payment procedures for Build America Bonds so that issuers can begin issuing these bonds with confidence about how these federal payments will be made. This guidance covers the direct federal subsidy payment procedures regarding:
how (on new IRS Form 8038-CP available now) and when (by 45 days before an interest payment date) to request these payments;
when the IRS will begin making these payments (July 1, 2009);
how to make necessary elections to issue these bonds (in writing in an issuer's books and records);
how to satisfy the information reporting requirement for these bonds (modified IRS Form 8038-G); and
future implementation plans (electronic platform in 2010).
Finally, the Notice solicits public comments on all of the plans for this program.
SCHOOL BONDS
In addition, Treasury also announces today guidance on allocations of national bond volume cap authorizations for two innovative tax credit bond programs for schools, known as Qualified School Construction Bonds and Qualified Zone Academy Bonds. The American Recovery and Reinvestment Act of 2009 provided new or expanded authorizations, respectively, for these two programs. These tax credit bond programs allow state and local governments to finance public school construction projects and other eligible costs for public schools with interest-free borrowings. These tax credit bond programs provide this federal subsidy by giving those who buy these bonds a federal tax credit that essentially allows state and local governments to issue these bonds without interest cost.
The guidance that Treasury is issuing today allocates the national bond volume authority for these school bond programs among the states and certain large local school districts pursuant to statutory formulas. These volume cap allocations are important to enable State and local governments to use these low-cost borrowing programs to finance school projects to promote economic recovery and job creation.
For Qualified School Construction Bonds, the guidance divides the $11 billion national bond volume authorization for 2009 among the states and 100 largest local school districts based on Federal school funding.
For Qualified Zone Academy Bonds, the guidance divides the $1.4 billion bond national bond volume authorizations for each of 2008 and 2009 among the states based on poverty levels.
Bloomberg : Raw Deal for GM Bondholders
GM Offers to Exchange $27 Billion of Debt for Equity (Update3)
By Caroline Salas
April 27 (Bloomberg) -- General Motors Corp. asked its bondholders to exchange $27 billion of claims for equity to help the biggest U.S. automaker avert bankruptcy.
GM, faced with a deadline from President Barack Obama to restructure, is offering bondholders 10 percent of the equity in the reorganized company, according to a news release today. Bondholders will also receive accrued interest in cash if they tender their holdings.
At least 90 percent in principal amount of the notes need to be exchanged to satisfy the U.S. Treasury, and without enough participation by June 1, GM expects to file for bankruptcy, the Detroit-based company said in the statement.
“You have a gun being put to your head saying that ‘If you don’t take this, we have something that’s even worse for you,’” said Shelly Lombard, a Montclair, New Jersey-based analyst for bond research firm Gimme Credit LLC. “It looks like a raw deal for bondholders. I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table.”
Bondholders will be given 225 shares of GM common stock for each $1,000 in principal amount of notes tendered. The offer is contingent on cutting at least another $20 billion in liabilities by reaching a deal with the United Auto Workers over a retiree-medical fund and the U.S. converting loans to equity. GM has received $15.4 billion in aid from the U.S. government.
Bonds Rise
GM’s $3 billion of 8.375 percent bonds due in 2033 rose 2.4 cents to 11.15 cents on the dollar as of 10:42 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 74 percent.
The Obama administration ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government-supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.
“A debt-for-equity swap has been expected and remains an unattractive option for bondholders -- it’s just kicking the can further down the road,” said Wesley Sparks, a high-yield portfolio manager and head of U.S. credit strategies at Schroder Investment Management in New York, which doesn’t own the automaker’s bonds. “A restructuring of the company is inevitable.”
Proof of Viability
GM is trying to prove it’s viable, a U.S. requirement to keep the federal loans. The original loan terms called for GM to slash two-thirds of its bonds through an exchange offer and for the UAW to reduce a cash contribution to the health-care fund to $10.2 billion from $20.4 billion.
The bond exchange offer is contingent on the health-care fund, known as a Voluntary Employee Beneficiary Association, or VEBA, swapping at least 50 percent of its claims for equity, with the remainder of the obligations paid in cash “over a period of time,” according to the statement.
The proposal is also conditional on the U.S. Treasury agreeing to exchange 50 percent of its loans at June 1, estimated to be $10 billion, for stock. The VEBA and the U.S. Treasury would own about 89 percent of the common stock in the reorganized GM after their debt exchanges, the statement said. The remaining 1 percent of stock would be held by GM’s existing common shareholders.
Retiree Investors
GM has thousands of bondholders ranging from institutional investors including insurers and pension funds to individual retirees. The ad-hoc committee of bondholders, whose members include San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, balked at two other plans it was shown since December.
Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.
Credit-default swaps protecting against a GM default for one year fell after the offer. The contracts dropped 5 percentage points to 79 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $7.9 million initially and $500,000 over a year to protect the debt.
To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net
Last Updated: April 27, 2009 11:24 EDT
By Caroline Salas
April 27 (Bloomberg) -- General Motors Corp. asked its bondholders to exchange $27 billion of claims for equity to help the biggest U.S. automaker avert bankruptcy.
GM, faced with a deadline from President Barack Obama to restructure, is offering bondholders 10 percent of the equity in the reorganized company, according to a news release today. Bondholders will also receive accrued interest in cash if they tender their holdings.
At least 90 percent in principal amount of the notes need to be exchanged to satisfy the U.S. Treasury, and without enough participation by June 1, GM expects to file for bankruptcy, the Detroit-based company said in the statement.
“You have a gun being put to your head saying that ‘If you don’t take this, we have something that’s even worse for you,’” said Shelly Lombard, a Montclair, New Jersey-based analyst for bond research firm Gimme Credit LLC. “It looks like a raw deal for bondholders. I just don’t think they have the negotiating leverage to get anything better than what’s currently on the table.”
Bondholders will be given 225 shares of GM common stock for each $1,000 in principal amount of notes tendered. The offer is contingent on cutting at least another $20 billion in liabilities by reaching a deal with the United Auto Workers over a retiree-medical fund and the U.S. converting loans to equity. GM has received $15.4 billion in aid from the U.S. government.
Bonds Rise
GM’s $3 billion of 8.375 percent bonds due in 2033 rose 2.4 cents to 11.15 cents on the dollar as of 10:42 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 74 percent.
The Obama administration ousted Chief Executive Officer Rick Wagoner last month, saying that GM’s plan to return to profit wasn’t aggressive enough, and ordered new CEO Fritz Henderson to cut the automaker’s debt by more than initially demanded. GM will be forced to go into a government-supported bankruptcy without deeper cost cuts from its creditors by June 1, the administration said.
“A debt-for-equity swap has been expected and remains an unattractive option for bondholders -- it’s just kicking the can further down the road,” said Wesley Sparks, a high-yield portfolio manager and head of U.S. credit strategies at Schroder Investment Management in New York, which doesn’t own the automaker’s bonds. “A restructuring of the company is inevitable.”
Proof of Viability
GM is trying to prove it’s viable, a U.S. requirement to keep the federal loans. The original loan terms called for GM to slash two-thirds of its bonds through an exchange offer and for the UAW to reduce a cash contribution to the health-care fund to $10.2 billion from $20.4 billion.
The bond exchange offer is contingent on the health-care fund, known as a Voluntary Employee Beneficiary Association, or VEBA, swapping at least 50 percent of its claims for equity, with the remainder of the obligations paid in cash “over a period of time,” according to the statement.
The proposal is also conditional on the U.S. Treasury agreeing to exchange 50 percent of its loans at June 1, estimated to be $10 billion, for stock. The VEBA and the U.S. Treasury would own about 89 percent of the common stock in the reorganized GM after their debt exchanges, the statement said. The remaining 1 percent of stock would be held by GM’s existing common shareholders.
Retiree Investors
GM has thousands of bondholders ranging from institutional investors including insurers and pension funds to individual retirees. The ad-hoc committee of bondholders, whose members include San Mateo, California-based Franklin Resources Inc. and Loomis Sayles & Co. of Boston, balked at two other plans it was shown since December.
Before Wagoner was removed, GM had proposed that bondholders swap more than three-quarters of their stake for equity, according to a person familiar with the talks. That offer would have given bondholders 90 percent of the equity of the reorganized automaker and a combination of cash and new unsecured notes, the person said at the time.
Credit-default swaps protecting against a GM default for one year fell after the offer. The contracts dropped 5 percentage points to 79 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $7.9 million initially and $500,000 over a year to protect the debt.
To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net
Last Updated: April 27, 2009 11:24 EDT
it's out: GM OFFER TO BONDHOLDERS swapping stock for debt
This link will bring up more details of the offer:
http://www.gm.com/corporate/investor_information/exchange-offer/
GM to offer $27 billion stock-for-debt swap
By Christopher Hinton
Last update: 8:36 a.m. EDT April 27, 2009
NEW YORK (MarketWatch) -- General Motors Corp. (GMGeneral Motors Corp
GM) said Monday it intends to offer $27 billion in common stock to its debt holders as part of a restructuring plan. According to the Securities and Exchange filing, GM will offer 225 shares of common stock to each $1,000 of debt. The Detroit automaker values the offer at $27.2 billion, and has set a deadline for debt holders to respond by May 26. "Exchange offers are a vital component of GM's overall restructuring plan to achieve and sustain long-term viability and the successful consummation of the exchange offers will allow GM to restructure out of bankruptcy court," the company said in a statement
Business Week: Economic Stimulus for Medical Records
April 23, 2009, 5:00PM EST
The Mad Dash to Digitize Medical Records
GE, Google, and others, in a stimulus-fueled frenzy, are piling into the business. But electronic health records have a dubious history
By Chad Terhune, Keith Epstein and Catherine Arnst
Neal Patterson likens the current scramble in health information technology to the 19th century land rush that opened his native Oklahoma to homesteaders. Cerner (CERN), the large medical vendor Patterson heads, is jockeying for new business spurred by a $19.6 billion federal initiative to computerize a health system buried in paper. "It's a beautiful opportunity for us," the CEO says.
The billions in taxpayer funds—part of the $787 billion economic stimulus—also have energized tech titans General Electric (GE), Intel (INTC), and IBM (IBM), all of which are challenging Cerner and other traditional medical suppliers. Microsoft (MSFT) and Google (GOOG) aim to put medical records in the hands of patients via the Web. Wal-Mart (WMT) is teaming with computer maker Dell (DELL) and digital vendor eClinicalWorks to sell information technology to doctors through Sam's Club stores.
Under the federal stimulus program enacted in February, hospitals can seek several million dollars apiece for tech purchases over the next five years. Individual physicians can receive up to $44,000. These carrots should encourage the proliferation of technology that will computerize physician orders, automate dispensing of drugs, and digitally store patient records. If providers participate broadly, those files are supposed to be accessible no matter where a consumer goes for treatment. President Barack Obama says the changes will improve care, eliminate errors, and eventually save billions of dollars a year. There's also a stick: The federal government will cut Medicare reimbursement for hospitals and medical practices that don't go electronic by 2015.
The incentives are working. R. Andrew Eckert, CEO of tech provider Eclipsys, says one client, a 250-bed hospital that shelved a software order in the fall after losing $50 million in the stock market, has reinstated the order. The move is "100% due to the stimulus," says Eckert (who won't name the hospital). Brandon Savage, chief medical officer at GE's health unit, says his company's technology will leapfrog the competition by not just replacing paper but also guiding doctors to the best, least-costly treatments.
In Washington, where partisan bickering over how to revive the economy flares on several fronts, sweet consensus reigns on health-tech spending. Congressional Republicans sound just as enthusiastic as the White House. Encouraged by former House Speaker Newt Gingrich, now an influential industry consultant, lawmakers cheer electronic records as a business-based remedy for much that ails medical care.
HIGH COST, QUESTIONABLE QUALITY
That rare agreement, however, is obscuring the checkered history of computerized medical files and drowning out legitimate questions about their effectiveness. Cerner, based in Kansas City, Mo., and other industry leaders are pushing expensive systems with serious shortcomings, some doctors say. The high cost and questionable quality of products currently on the market are important reasons why barely 1 in 50 hospitals has a comprehensive electronic records system, according to a study published in March in the New England Journal of Medicine. Only 17% of physicians use any type of electronic records.
Hospitals and medical practices that plugged in early have experienced pricey setbacks and serious computer errors. Suddenly dumping more money on hospitals, which will then funnel the cash to tech vendors, won't necessarily improve the situation, say many doctors and administrators.
Studies have shown that some large networks, such as the Veterans Administration and the Kaiser Permanente system, based in Oakland, Calif., have used electronic records to help cut costs and improve care. But so far there's little conclusive evidence that computerizing all of medicine will yield significant savings. And improvements to patient care may be modest. An analysis of four years of Medicare data published in March in the scholarly journal Health Affairs found only marginal improvement in patient safety due to electronic records—specifically, the avoidance of two infections a year at the average U.S. hospital. "Health IT's true value remains uncertain," wrote Stephen Parente and Jeffrey McCullough, researchers at the University of Minnesota.
Part of the problem stems from a fundamental tension. Info tech companies want to sell mass-produced software. But officials at large hospitals say such systems, once installed, require time-consuming and costly customization. The alterations often make it difficult for different hospitals and medical offices to share data—a key goal. Meantime, the health IT industry has successfully lobbied against government oversight.
"Most big health IT projects have been clear disasters," says Dr. David Kibbe, senior technology adviser to the American Academy of Family Physicians. "This [digital push] is a microcosm for health-care reform....Will the narrow special interests win out over the public good?"
OVERLOOKING RED FLAGS
Britain's experience shows that technology alone doesn't offer an automatic advantage. An $18.6 billion initiative to digitize Britain's government-run health system is four years behind schedule because of software snafus and vendor troubles. Few British doctors have been able to use electronic records, and there's little proof that they have saved money or helped patients. "There is a belief that technology solves all of our problems," says Ross Koppel, a sociologist at the University of Pennsylvania School of Medicine. "[But] more data does not equate to better medical care."
Administration officials insist they are proceeding cautiously and will learn from any missteps. But red flags raised by doctors and researchers haven't gotten much attention in Washington, in part because the health-tech industry has forged strong ties to the President, his top medical advisers, and Republican heavyweights such as Gingrich.
Nancy-Ann DeParle, the new White House health-reform czar, recently stepped down after eight years as a member of Cerner's board of directors. A former administrator of Medicare and Medicaid during the Clinton Administration, DeParle worked from 2006 through 2008 as a managing director at CCMP Capital Advisors, a private equity firm that invests in health-care businesses. She has sold shares in Cerner for about $950,000 and is disposing of investments related to CCMP, according to the White House.
DeParle declined to comment. Obama spokeswoman Linda Douglass says DeParle will delegate any decisions related to Cerner to a subordinate. "She is not going to be involved in implementing health IT," Douglass adds. Cerner CEO Patterson says DeParle's ascension won't benefit his company, which had $1.7 billion in revenue in 2008. "I think that actually works to our disadvantage," he argues. "I'm not sure I'll even be able to talk with her now."
Glen Tullman, CEO of Allscripts-Misys (MDRX) Healthcare Solutions, a big Chicago vendor to doctors, became acquainted with Obama when he ran for the Senate in 2004. The pair worked out at the same Chicago gym and occasionally played basketball. At that time, Tullman gave Obama a personal demonstration of his company's software at Allscripts' headquarters and went on to serve on Obama's Presidential campaign finance committee. "I feel fortunate that before he became President we had the opportunity to help him better understand the value of electronic health records as a necessary condition to fixing health care," Tullman says.
Shortly after the stimulus became law two months ago, Tullman and Gingrich hosted a Webcast for thousands of hospital officials and doctors promoting the financial incentives. Since then, Tullman has worked with a client, the University of South Florida Health system in Tampa, to seek $15 million in stimulus money to hire 130 e-health "ambassadors" who would pass out free samples of Allscripts' prescribing software to physicians. If the funding comes through, the $50,000-a-year representatives would receive a two-week training course from Allscripts, though the marketers otherwise are supposed to be independent of the company.
"This is all about getting doctors moving and considering an electronic health record," Tullman says. "The market is so big, we will get our fair share." U.S. Representative Kathy Castor, a Tampa Democrat, is helping. She has brought the Allscripts proposal to the attention of officials at the U.S. Health & Human Services Dept. whose job it is to dole out the tech incentives. Castor says the program will create good jobs during a recession.
Allscripts' rivals want their share, too. Lobbyists for McKesson (MCK), a large medical supplier based in San Francisco that already generates $3 billion a year in health technology sales, are distributing a position paper to members of Congress and Administration officials that could help steer stimulus dollars toward the company. The document, reviewed by BusinessWeek, addresses the definition of "meaningful use" of electronic records. That is the standard Congress set for hospitals and doctors seeking incentive money; it is now up to the Obama Administration to refine the term. The McKesson paper urges a requirement that recipients "build on existing technologies"—language that could favor products of McKesson and other established vendors.
Dr. David Blumenthal, the new head of health tech at HHS, will play a big role in fine-tuning this language. Formerly director of the Institute for Health Policy at Harvard Medical School, he declined to comment. HHS spokesman Nicholas Papas says: "Health IT has the potential to save the federal government more than $12 billion over 10 years, improve the quality of care, and make our health-care system more efficient. We have work to do to achieve this potential... and we will ensure that everyone has a seat at the table." McKesson says it's just trying to speed the process. "Our big message is: 'Please do this quickly. Uncertainty creates a slowdown,' " says Ann Richardson Berkey, senior vice-president for government strategy.
There are potential benefits to patients and taxpayers if the promise of electronic medical records can be fulfilled. In theory, a computer screen can supplant reams of paper and offer instant access to patient histories, dangerous drug interactions, and allergies. Treatment of diabetes, cancer, and other illnesses can be tracked more effectively.
SPIKES IN PHARMACY ERRORS
Geisinger Health System in Danville, Pa., wanted all that when it spent $35 million to purchase and install software from Epic Systems, a large vendor in Verona, Wis. But in June 2005, during a pilot run of a computerized order-entry system at Geisinger's flagship medical center, errors began appearing at a rate of several a week in the hospital's psychiatric unit. "The pharmacy would interpret an order as one drug at one dosage, and the patients were ordered the wrong medications at different dosages," recalls Jean Adams, a nurse in charge of the IT team. Fortunately, astute staffers discovered the problem after a few weeks and began verifying the computer drug orders using the phone. Full implementation of the Epic system was put on hold. Adams says Geisinger traced the trouble to incompatibility between a common pharmacy database and Epic's system.
Epic CEO Judith Faulkner says the episode at Geisinger, and similar incidents at other hospitals, taught her company that physician orders and pharmacy records cannot use distinct technologies. "It doesn't work when you mix and match vendors," Faulkner says. "It has to be one system, or it can be dangerous for patients."
To resolve its problem, Geisinger spent an additional $2 million on fixes that took 18 months, according to Dr. James M. Walker, the hospital chain's chief health information officer. An internist and former minister, Walker is one of health technology's best-known advocates. Tech boosters frequently cite Geisinger as an illustration of IT's sunny future. But Walker concedes that the stimulus-fueled rush to adopt existing technology could cause other providers to suffer through expensive fixes with potentially harmful consequences for patients. Vendors such as Epic, Walker says, sell relatively rudimentary electronic tools and expect hospitals and doctors to assure accuracy and safety. "This can be very tricky," Walker adds. "A lot of us are trying to say: 'Look, let's slow down.' "
NO WAY TO REPORT PROBLEMS
The Joint Commission, a nonprofit group that inspects and accredits 15,000 health-care organizations, has expressed similar caution. The commission, based in Oakbrook Terrace, Ill., issued a warning in December about problems with complex health-tech systems. It cited one U.S. pharmaceutical database that found 43,372 medication mistakes, or about 25% of the total reported in 2006, involved computer technology. The problems included flaws in data entry, inadequate software, and confusing screens.
Koppel, the researcher at Penn, has sounded some of the loudest alarms. In 2005 he published a study in The Journal of the American Medical Association that examined an Eclipsys system at the university's academic hospital. He found that use of computers introduced 22 new types of medication errors. His goal was to discover why young medical interns make so many errors. He hypothesized that long hours were to blame. To his surprise, the problems stemmed mostly from software installed to prevent mistakes.
Eclipsys CEO Eckert says Koppel's study examined a technology that has been updated. "The industry has grown up," he says. "There are months of testing by the client and us before someone activates a system."
When health technology fails for one medical provider, there is no central mechanism for reporting problems to others who use it. The federal government collects and disseminates this kind of information on drugs and medical devices. But tech contracts routinely bar medical providers from disclosing systemic flaws. Koppel contends this is unethical and risky: "We need to collect what we know and head off [any potential] tragedy."
Companies counter that confidentiality agreements protect their proprietary technology and that privacy laws prevent disclosure of patient and physician information without consent. "To the extent we are required to report information, or are allowed to, we would, of course, like to do that," says Allscripts CEO Tullman. He compares the skeptics of health info tech to doctors who questioned the introduction of the stethoscope in the 19th century: "There have been Luddites in every industry."
Disputes over health-tech failures are often resolved in private, making them difficult to sort out. Seattle Children's Hospital sued Eclipsys in 2002, claiming the company missed installation deadlines and failed to fix software errors. This resulted in "sizeable cost overruns and delays," the suit alleged. Eclipsys and the hospital reached a confidential settlement in 2003. A spokeswoman for Eclipsys says "isolated problems in Seattle don't reflect our company's overall success. Every vendor in the industry has had accounts with implementation issues."
"That was a bad marriage," says Dr. Mark Del Beccaro, chief medical information officer at Seattle Children's Hospital. "It taught us to get a better prenuptial agreement next time." The hospital turned to Cerner for a new system, but Del Beccaro soon became troubled by incidents of children suffering medication overdoses despite alerts from the Cerner software. He asked the doctors involved whether they had seen the alerts onscreen. "They told me, 'I get so many alerts, I click through [them],' " Del Beccaro says. "They do become mind-numbing."
"Alert fatigue" is a common concern at hospitals. The Joint Commission, in its December bulletin, warned about doctors and nurses overriding them and impairing patient safety. At Seattle Children's, Del Beccaro says, it took considerable effort to reduce online warnings. "There are definitely times Cerner could be more responsive to our problems, but we are pretty happy with them," he says.
Children's National Medical Center in Washington, D.C., has had a similar experience. In 2006 doctors and nurses there say they discovered an eightfold increase in dosage errors for high-risk medications. They attributed the trend to a Cerner system installed six months earlier. The mistakes were caught, and no patients were harmed, according to the center. But the hospital reverted to a process using paper notes. "I felt betrayed by a system I was supposed to trust," says Cherise Aldridge, a neonatal intensive-care nurse.
For three years, Cerner has resisted making adjustments to its software, which cost the Children's Center $30 million, says Linda Talley, the hospital's director of nursing systems. Today nurses use the Cerner network in combination with one assembled by the hospital's tech department. Nurses retype drug dosages, babies' weights, and other information from the Cerner computer into the homemade system to double-check how much medicine to administer. This time-consuming process has brought the dosage-error rate back down, says Talley. But she warns that other hospitals use the Cerner system without a backstop like the one her institution cobbled together.
Dick Flanigan, a senior vice-president at Cerner, says the company responds swiftly to requests for improvements and is "absolutely focused on making systems as safe and effective as possible." There are divergent opinions as to which technology works best, he adds. Cerner has developed a more expensive system that uses bar codes for medication and is capable of better integrating a wide array of data, he says. "We are flexible on this, and at times we incorporate what is done by the client." CEO Patterson adds that hospitals "are much safer [with Cerner technology] than without it."
The company faced more questions over its technology at the University of Pittsburgh Medical Center (UPMC). In 2005 researchers there found that at the university's Children's Hospital, patient deaths more than doubled, to 6.6% of intensive-care admissions, in the five months following the installation of a computerized order-entry system. The research on child patient deaths at the University of Pittsburgh found a "direct association between [computerized records] and increased mortality," according to an article published in December 2005 in the medical journal Pediatrics. Digital technology slowed treatment in several ways, the researchers concluded. One example: Doctors and nurses in the intensive-care unit were accustomed to ordering medications and tests while a sick child was en route to the hospital. The Cerner system required that orders be submitted only when the patient arrived, costing crucial time. The authors of the Pediatrics article acknowledged that their work clashed with other studies showing that digitization decreases errors and shortens hospital stays.
G. Daniel Martich, chief medical information officer at UPMC, says the Pediatrics study was flawed. Factors other than the installation of computers, such as the centralization of pharmacy services, also disrupted care, he emphasizes. The problems identified in the 2005 paper have all been resolved, Martich adds. "There were workflow issues," he says. "We learned the hard way because we were pioneers." Over the long run, he says, technology has helped decrease mortality rates and cut medication errors in half at Children's Hospital since 2003 .
CURSORY PRODUCT TESTING
Cerner CEO Patterson says the 2005 Pittsburgh study "certainly got our attention" and prompted an internal review. But that inquiry and others since have found no pattern of ill effects, he says. "We have more clients doing more orders than anybody," Patterson says. "If I had a systemic problem, you'd be reading about it on the front page."
The U.S. Food & Drug Administration has been considering whether to regulate health technology in the manner it oversees medication and implants. That decision now falls to the Obama Administration, which faces opposition from industry groups arguing that additional red tape would impede adoption of helpful technology.
Companies are lobbying the Administration to keep product-testing and standard-setting within the sole jurisdiction of a nonprofit body called the Certification Commission for Healthcare Information Technology. Founded in 2004 with industry money and grants from nonprofits, CCHIT now receives $7.5 million a year under a contract with the federal government. The other half of CCHIT's $15 million budget comes from fees paid by companies.
Mark Leavitt, chairman of CCHIT, is a former tech vendor. He sold his electronic health-records company to GE (GE) in 2002 and later became chief medical officer of the Healthcare Information & Management Systems Society, a trade group in Chicago. Seven of the CCHIT's 19 voting members work for vendors or for-profit tech consulting firms. "We try to strike a fair balance between medical providers and vendors," Leavitt says. "People need to trust what we do."
But another commissioner at the CCHIT, Michael L. Kappel, the senior vice-president for government and industry relations at McKesson Technology Solutions, acknowledges that preserving purely private-sector oversight will be tough in the wake of the financial crisis. "I'm having a hard time with this issue because people read about these financial companies, and there is a feeling that government lacks enough regulation," Kappel says. But regulating health info tech "is a recipe for disaster," he adds. "I am very sensitive to criticism that [CCHIT] is vendor-dominated. That couldn't be further from the truth."
Blumenthal, the new Obama health-tech chief, declined to comment on CCHIT. But in an article published this month in the New England Journal of Medicine, he said the body needs to set stricter standards: "Many certified [electronic health records] are neither user-friendly nor designed to meet [the stimulus law's] ambitious goal of improving quality and efficiency in the health-care system."
Sharona Hoffman, a professor of law and bioethics at Case Western Reserve University in Cleveland, says CCHIT's product testing, typically completed in a single day, isn't rigorous enough. In an article last December in the Harvard Journal of Law & Technology, she and a co-author faulted the group for telling vendors the testing scenarios in advance and for not conducting ongoing monitoring. Without better oversight, she argues, hospitals and doctors probably will not spend their stimulus money wisely.
Barry Hendrix, a primary-care physician in Paragould, Ark., says he paid dearly for just such a mistake, wasting $100,000 on an electronic records system. "It was a complete disaster," he says of the equipment he bought from NextGen in 2005 and abandoned within months. The system generated patient notes with stray asterisks and other gibberish, he says, and it didn't work properly with NextGen's billing software. Hendrix says he couldn't get technical support from the company or its authorized reseller. NextGen, a unit of Quality Systems (QSII) in Horsham, Pa., counters that Hendrix is a rare exception among thousands of loyal customers. It adds that it has terminated the reseller that served him.
Hendrix, however, has advice for doctors looking to go electronic: "Never believe a slick salesman."
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Obama's Point Man on Health IT Weighs In
Businesses angling for a share of federal health- technology stimulus money will want to study an Apr. 9 New England Journal of Medicine article written by the new Obama Administration health info tech overseer, David Blumenthal. Overall, "Stimulating the Adoption of Health Information Technology" conveys a strong sense of caution. "Huge challenges await," Blumenthal writes.
To read the full NEJM piece, go to http://bx.businessweek.com/health-information-technology/reference/
Terhune is a senior writer for BusinessWeek based in Florida. Epstein is a correspondent in BusinessWeek's Washington bureau. Arnst is a senior writer for BusinessWeek based in New York.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
The Mad Dash to Digitize Medical Records
GE, Google, and others, in a stimulus-fueled frenzy, are piling into the business. But electronic health records have a dubious history
By Chad Terhune, Keith Epstein and Catherine Arnst
Neal Patterson likens the current scramble in health information technology to the 19th century land rush that opened his native Oklahoma to homesteaders. Cerner (CERN), the large medical vendor Patterson heads, is jockeying for new business spurred by a $19.6 billion federal initiative to computerize a health system buried in paper. "It's a beautiful opportunity for us," the CEO says.
The billions in taxpayer funds—part of the $787 billion economic stimulus—also have energized tech titans General Electric (GE), Intel (INTC), and IBM (IBM), all of which are challenging Cerner and other traditional medical suppliers. Microsoft (MSFT) and Google (GOOG) aim to put medical records in the hands of patients via the Web. Wal-Mart (WMT) is teaming with computer maker Dell (DELL) and digital vendor eClinicalWorks to sell information technology to doctors through Sam's Club stores.
Under the federal stimulus program enacted in February, hospitals can seek several million dollars apiece for tech purchases over the next five years. Individual physicians can receive up to $44,000. These carrots should encourage the proliferation of technology that will computerize physician orders, automate dispensing of drugs, and digitally store patient records. If providers participate broadly, those files are supposed to be accessible no matter where a consumer goes for treatment. President Barack Obama says the changes will improve care, eliminate errors, and eventually save billions of dollars a year. There's also a stick: The federal government will cut Medicare reimbursement for hospitals and medical practices that don't go electronic by 2015.
The incentives are working. R. Andrew Eckert, CEO of tech provider Eclipsys, says one client, a 250-bed hospital that shelved a software order in the fall after losing $50 million in the stock market, has reinstated the order. The move is "100% due to the stimulus," says Eckert (who won't name the hospital). Brandon Savage, chief medical officer at GE's health unit, says his company's technology will leapfrog the competition by not just replacing paper but also guiding doctors to the best, least-costly treatments.
In Washington, where partisan bickering over how to revive the economy flares on several fronts, sweet consensus reigns on health-tech spending. Congressional Republicans sound just as enthusiastic as the White House. Encouraged by former House Speaker Newt Gingrich, now an influential industry consultant, lawmakers cheer electronic records as a business-based remedy for much that ails medical care.
HIGH COST, QUESTIONABLE QUALITY
That rare agreement, however, is obscuring the checkered history of computerized medical files and drowning out legitimate questions about their effectiveness. Cerner, based in Kansas City, Mo., and other industry leaders are pushing expensive systems with serious shortcomings, some doctors say. The high cost and questionable quality of products currently on the market are important reasons why barely 1 in 50 hospitals has a comprehensive electronic records system, according to a study published in March in the New England Journal of Medicine. Only 17% of physicians use any type of electronic records.
Hospitals and medical practices that plugged in early have experienced pricey setbacks and serious computer errors. Suddenly dumping more money on hospitals, which will then funnel the cash to tech vendors, won't necessarily improve the situation, say many doctors and administrators.
Studies have shown that some large networks, such as the Veterans Administration and the Kaiser Permanente system, based in Oakland, Calif., have used electronic records to help cut costs and improve care. But so far there's little conclusive evidence that computerizing all of medicine will yield significant savings. And improvements to patient care may be modest. An analysis of four years of Medicare data published in March in the scholarly journal Health Affairs found only marginal improvement in patient safety due to electronic records—specifically, the avoidance of two infections a year at the average U.S. hospital. "Health IT's true value remains uncertain," wrote Stephen Parente and Jeffrey McCullough, researchers at the University of Minnesota.
Part of the problem stems from a fundamental tension. Info tech companies want to sell mass-produced software. But officials at large hospitals say such systems, once installed, require time-consuming and costly customization. The alterations often make it difficult for different hospitals and medical offices to share data—a key goal. Meantime, the health IT industry has successfully lobbied against government oversight.
"Most big health IT projects have been clear disasters," says Dr. David Kibbe, senior technology adviser to the American Academy of Family Physicians. "This [digital push] is a microcosm for health-care reform....Will the narrow special interests win out over the public good?"
OVERLOOKING RED FLAGS
Britain's experience shows that technology alone doesn't offer an automatic advantage. An $18.6 billion initiative to digitize Britain's government-run health system is four years behind schedule because of software snafus and vendor troubles. Few British doctors have been able to use electronic records, and there's little proof that they have saved money or helped patients. "There is a belief that technology solves all of our problems," says Ross Koppel, a sociologist at the University of Pennsylvania School of Medicine. "[But] more data does not equate to better medical care."
Administration officials insist they are proceeding cautiously and will learn from any missteps. But red flags raised by doctors and researchers haven't gotten much attention in Washington, in part because the health-tech industry has forged strong ties to the President, his top medical advisers, and Republican heavyweights such as Gingrich.
Nancy-Ann DeParle, the new White House health-reform czar, recently stepped down after eight years as a member of Cerner's board of directors. A former administrator of Medicare and Medicaid during the Clinton Administration, DeParle worked from 2006 through 2008 as a managing director at CCMP Capital Advisors, a private equity firm that invests in health-care businesses. She has sold shares in Cerner for about $950,000 and is disposing of investments related to CCMP, according to the White House.
DeParle declined to comment. Obama spokeswoman Linda Douglass says DeParle will delegate any decisions related to Cerner to a subordinate. "She is not going to be involved in implementing health IT," Douglass adds. Cerner CEO Patterson says DeParle's ascension won't benefit his company, which had $1.7 billion in revenue in 2008. "I think that actually works to our disadvantage," he argues. "I'm not sure I'll even be able to talk with her now."
Glen Tullman, CEO of Allscripts-Misys (MDRX) Healthcare Solutions, a big Chicago vendor to doctors, became acquainted with Obama when he ran for the Senate in 2004. The pair worked out at the same Chicago gym and occasionally played basketball. At that time, Tullman gave Obama a personal demonstration of his company's software at Allscripts' headquarters and went on to serve on Obama's Presidential campaign finance committee. "I feel fortunate that before he became President we had the opportunity to help him better understand the value of electronic health records as a necessary condition to fixing health care," Tullman says.
Shortly after the stimulus became law two months ago, Tullman and Gingrich hosted a Webcast for thousands of hospital officials and doctors promoting the financial incentives. Since then, Tullman has worked with a client, the University of South Florida Health system in Tampa, to seek $15 million in stimulus money to hire 130 e-health "ambassadors" who would pass out free samples of Allscripts' prescribing software to physicians. If the funding comes through, the $50,000-a-year representatives would receive a two-week training course from Allscripts, though the marketers otherwise are supposed to be independent of the company.
"This is all about getting doctors moving and considering an electronic health record," Tullman says. "The market is so big, we will get our fair share." U.S. Representative Kathy Castor, a Tampa Democrat, is helping. She has brought the Allscripts proposal to the attention of officials at the U.S. Health & Human Services Dept. whose job it is to dole out the tech incentives. Castor says the program will create good jobs during a recession.
Allscripts' rivals want their share, too. Lobbyists for McKesson (MCK), a large medical supplier based in San Francisco that already generates $3 billion a year in health technology sales, are distributing a position paper to members of Congress and Administration officials that could help steer stimulus dollars toward the company. The document, reviewed by BusinessWeek, addresses the definition of "meaningful use" of electronic records. That is the standard Congress set for hospitals and doctors seeking incentive money; it is now up to the Obama Administration to refine the term. The McKesson paper urges a requirement that recipients "build on existing technologies"—language that could favor products of McKesson and other established vendors.
Dr. David Blumenthal, the new head of health tech at HHS, will play a big role in fine-tuning this language. Formerly director of the Institute for Health Policy at Harvard Medical School, he declined to comment. HHS spokesman Nicholas Papas says: "Health IT has the potential to save the federal government more than $12 billion over 10 years, improve the quality of care, and make our health-care system more efficient. We have work to do to achieve this potential... and we will ensure that everyone has a seat at the table." McKesson says it's just trying to speed the process. "Our big message is: 'Please do this quickly. Uncertainty creates a slowdown,' " says Ann Richardson Berkey, senior vice-president for government strategy.
There are potential benefits to patients and taxpayers if the promise of electronic medical records can be fulfilled. In theory, a computer screen can supplant reams of paper and offer instant access to patient histories, dangerous drug interactions, and allergies. Treatment of diabetes, cancer, and other illnesses can be tracked more effectively.
SPIKES IN PHARMACY ERRORS
Geisinger Health System in Danville, Pa., wanted all that when it spent $35 million to purchase and install software from Epic Systems, a large vendor in Verona, Wis. But in June 2005, during a pilot run of a computerized order-entry system at Geisinger's flagship medical center, errors began appearing at a rate of several a week in the hospital's psychiatric unit. "The pharmacy would interpret an order as one drug at one dosage, and the patients were ordered the wrong medications at different dosages," recalls Jean Adams, a nurse in charge of the IT team. Fortunately, astute staffers discovered the problem after a few weeks and began verifying the computer drug orders using the phone. Full implementation of the Epic system was put on hold. Adams says Geisinger traced the trouble to incompatibility between a common pharmacy database and Epic's system.
Epic CEO Judith Faulkner says the episode at Geisinger, and similar incidents at other hospitals, taught her company that physician orders and pharmacy records cannot use distinct technologies. "It doesn't work when you mix and match vendors," Faulkner says. "It has to be one system, or it can be dangerous for patients."
To resolve its problem, Geisinger spent an additional $2 million on fixes that took 18 months, according to Dr. James M. Walker, the hospital chain's chief health information officer. An internist and former minister, Walker is one of health technology's best-known advocates. Tech boosters frequently cite Geisinger as an illustration of IT's sunny future. But Walker concedes that the stimulus-fueled rush to adopt existing technology could cause other providers to suffer through expensive fixes with potentially harmful consequences for patients. Vendors such as Epic, Walker says, sell relatively rudimentary electronic tools and expect hospitals and doctors to assure accuracy and safety. "This can be very tricky," Walker adds. "A lot of us are trying to say: 'Look, let's slow down.' "
NO WAY TO REPORT PROBLEMS
The Joint Commission, a nonprofit group that inspects and accredits 15,000 health-care organizations, has expressed similar caution. The commission, based in Oakbrook Terrace, Ill., issued a warning in December about problems with complex health-tech systems. It cited one U.S. pharmaceutical database that found 43,372 medication mistakes, or about 25% of the total reported in 2006, involved computer technology. The problems included flaws in data entry, inadequate software, and confusing screens.
Koppel, the researcher at Penn, has sounded some of the loudest alarms. In 2005 he published a study in The Journal of the American Medical Association that examined an Eclipsys system at the university's academic hospital. He found that use of computers introduced 22 new types of medication errors. His goal was to discover why young medical interns make so many errors. He hypothesized that long hours were to blame. To his surprise, the problems stemmed mostly from software installed to prevent mistakes.
Eclipsys CEO Eckert says Koppel's study examined a technology that has been updated. "The industry has grown up," he says. "There are months of testing by the client and us before someone activates a system."
When health technology fails for one medical provider, there is no central mechanism for reporting problems to others who use it. The federal government collects and disseminates this kind of information on drugs and medical devices. But tech contracts routinely bar medical providers from disclosing systemic flaws. Koppel contends this is unethical and risky: "We need to collect what we know and head off [any potential] tragedy."
Companies counter that confidentiality agreements protect their proprietary technology and that privacy laws prevent disclosure of patient and physician information without consent. "To the extent we are required to report information, or are allowed to, we would, of course, like to do that," says Allscripts CEO Tullman. He compares the skeptics of health info tech to doctors who questioned the introduction of the stethoscope in the 19th century: "There have been Luddites in every industry."
Disputes over health-tech failures are often resolved in private, making them difficult to sort out. Seattle Children's Hospital sued Eclipsys in 2002, claiming the company missed installation deadlines and failed to fix software errors. This resulted in "sizeable cost overruns and delays," the suit alleged. Eclipsys and the hospital reached a confidential settlement in 2003. A spokeswoman for Eclipsys says "isolated problems in Seattle don't reflect our company's overall success. Every vendor in the industry has had accounts with implementation issues."
"That was a bad marriage," says Dr. Mark Del Beccaro, chief medical information officer at Seattle Children's Hospital. "It taught us to get a better prenuptial agreement next time." The hospital turned to Cerner for a new system, but Del Beccaro soon became troubled by incidents of children suffering medication overdoses despite alerts from the Cerner software. He asked the doctors involved whether they had seen the alerts onscreen. "They told me, 'I get so many alerts, I click through [them],' " Del Beccaro says. "They do become mind-numbing."
"Alert fatigue" is a common concern at hospitals. The Joint Commission, in its December bulletin, warned about doctors and nurses overriding them and impairing patient safety. At Seattle Children's, Del Beccaro says, it took considerable effort to reduce online warnings. "There are definitely times Cerner could be more responsive to our problems, but we are pretty happy with them," he says.
Children's National Medical Center in Washington, D.C., has had a similar experience. In 2006 doctors and nurses there say they discovered an eightfold increase in dosage errors for high-risk medications. They attributed the trend to a Cerner system installed six months earlier. The mistakes were caught, and no patients were harmed, according to the center. But the hospital reverted to a process using paper notes. "I felt betrayed by a system I was supposed to trust," says Cherise Aldridge, a neonatal intensive-care nurse.
For three years, Cerner has resisted making adjustments to its software, which cost the Children's Center $30 million, says Linda Talley, the hospital's director of nursing systems. Today nurses use the Cerner network in combination with one assembled by the hospital's tech department. Nurses retype drug dosages, babies' weights, and other information from the Cerner computer into the homemade system to double-check how much medicine to administer. This time-consuming process has brought the dosage-error rate back down, says Talley. But she warns that other hospitals use the Cerner system without a backstop like the one her institution cobbled together.
Dick Flanigan, a senior vice-president at Cerner, says the company responds swiftly to requests for improvements and is "absolutely focused on making systems as safe and effective as possible." There are divergent opinions as to which technology works best, he adds. Cerner has developed a more expensive system that uses bar codes for medication and is capable of better integrating a wide array of data, he says. "We are flexible on this, and at times we incorporate what is done by the client." CEO Patterson adds that hospitals "are much safer [with Cerner technology] than without it."
The company faced more questions over its technology at the University of Pittsburgh Medical Center (UPMC). In 2005 researchers there found that at the university's Children's Hospital, patient deaths more than doubled, to 6.6% of intensive-care admissions, in the five months following the installation of a computerized order-entry system. The research on child patient deaths at the University of Pittsburgh found a "direct association between [computerized records] and increased mortality," according to an article published in December 2005 in the medical journal Pediatrics. Digital technology slowed treatment in several ways, the researchers concluded. One example: Doctors and nurses in the intensive-care unit were accustomed to ordering medications and tests while a sick child was en route to the hospital. The Cerner system required that orders be submitted only when the patient arrived, costing crucial time. The authors of the Pediatrics article acknowledged that their work clashed with other studies showing that digitization decreases errors and shortens hospital stays.
G. Daniel Martich, chief medical information officer at UPMC, says the Pediatrics study was flawed. Factors other than the installation of computers, such as the centralization of pharmacy services, also disrupted care, he emphasizes. The problems identified in the 2005 paper have all been resolved, Martich adds. "There were workflow issues," he says. "We learned the hard way because we were pioneers." Over the long run, he says, technology has helped decrease mortality rates and cut medication errors in half at Children's Hospital since 2003 .
CURSORY PRODUCT TESTING
Cerner CEO Patterson says the 2005 Pittsburgh study "certainly got our attention" and prompted an internal review. But that inquiry and others since have found no pattern of ill effects, he says. "We have more clients doing more orders than anybody," Patterson says. "If I had a systemic problem, you'd be reading about it on the front page."
The U.S. Food & Drug Administration has been considering whether to regulate health technology in the manner it oversees medication and implants. That decision now falls to the Obama Administration, which faces opposition from industry groups arguing that additional red tape would impede adoption of helpful technology.
Companies are lobbying the Administration to keep product-testing and standard-setting within the sole jurisdiction of a nonprofit body called the Certification Commission for Healthcare Information Technology. Founded in 2004 with industry money and grants from nonprofits, CCHIT now receives $7.5 million a year under a contract with the federal government. The other half of CCHIT's $15 million budget comes from fees paid by companies.
Mark Leavitt, chairman of CCHIT, is a former tech vendor. He sold his electronic health-records company to GE (GE) in 2002 and later became chief medical officer of the Healthcare Information & Management Systems Society, a trade group in Chicago. Seven of the CCHIT's 19 voting members work for vendors or for-profit tech consulting firms. "We try to strike a fair balance between medical providers and vendors," Leavitt says. "People need to trust what we do."
But another commissioner at the CCHIT, Michael L. Kappel, the senior vice-president for government and industry relations at McKesson Technology Solutions, acknowledges that preserving purely private-sector oversight will be tough in the wake of the financial crisis. "I'm having a hard time with this issue because people read about these financial companies, and there is a feeling that government lacks enough regulation," Kappel says. But regulating health info tech "is a recipe for disaster," he adds. "I am very sensitive to criticism that [CCHIT] is vendor-dominated. That couldn't be further from the truth."
Blumenthal, the new Obama health-tech chief, declined to comment on CCHIT. But in an article published this month in the New England Journal of Medicine, he said the body needs to set stricter standards: "Many certified [electronic health records] are neither user-friendly nor designed to meet [the stimulus law's] ambitious goal of improving quality and efficiency in the health-care system."
Sharona Hoffman, a professor of law and bioethics at Case Western Reserve University in Cleveland, says CCHIT's product testing, typically completed in a single day, isn't rigorous enough. In an article last December in the Harvard Journal of Law & Technology, she and a co-author faulted the group for telling vendors the testing scenarios in advance and for not conducting ongoing monitoring. Without better oversight, she argues, hospitals and doctors probably will not spend their stimulus money wisely.
Barry Hendrix, a primary-care physician in Paragould, Ark., says he paid dearly for just such a mistake, wasting $100,000 on an electronic records system. "It was a complete disaster," he says of the equipment he bought from NextGen in 2005 and abandoned within months. The system generated patient notes with stray asterisks and other gibberish, he says, and it didn't work properly with NextGen's billing software. Hendrix says he couldn't get technical support from the company or its authorized reseller. NextGen, a unit of Quality Systems (QSII) in Horsham, Pa., counters that Hendrix is a rare exception among thousands of loyal customers. It adds that it has terminated the reseller that served him.
Hendrix, however, has advice for doctors looking to go electronic: "Never believe a slick salesman."
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
Obama's Point Man on Health IT Weighs In
Businesses angling for a share of federal health- technology stimulus money will want to study an Apr. 9 New England Journal of Medicine article written by the new Obama Administration health info tech overseer, David Blumenthal. Overall, "Stimulating the Adoption of Health Information Technology" conveys a strong sense of caution. "Huge challenges await," Blumenthal writes.
To read the full NEJM piece, go to http://bx.businessweek.com/health-information-technology/reference/
Terhune is a senior writer for BusinessWeek based in Florida. Epstein is a correspondent in BusinessWeek's Washington bureau. Arnst is a senior writer for BusinessWeek based in New York.
Copyright 2000-2009 by The McGraw-Hill Companies Inc. All rights reserved.
Financial Times: GM's New Offer to Bondholders
GM plans new offer to holders of bonds
By Bernard Simon in Toronto
Published: April 24 2009 03:00 | Last updated: April 24 2009 03:00
General Motors is set to make a fresh debt-exchange offer to its unsecured bondholders on Monday consisting almost entirely of equity in the beleaguered carmaker, which would be far less generous than previous offers.
GM, which is racing to meet a June 1 restructuring deadline set by the US Treasury, will also soon outline a fresh set of proposals to the United Auto Workers union aimed at reducing labour costs. In February, GM demanded the UAW accept shares rather than cash for half of its contribution to a union-managed healthcare trust to be set up next year.
The plan required unsecured bondholders to exchange at least two-thirds of their holdings, with a face value of $27bn, for equity and other securities. GM's last offer totalled 24½ cents on the dollar, comprising 8 cents in cash and 16½ cents in new unsecured debt.
But the US administration's industry taskforce has demanded deeper sacrifices.
Neither the bondholders nor the union are keen to commit themselves without knowing what deal has been cut with the other. However, legal requirements, such as minimum offer deadlines, have forced GM to give priority to the bondholders.
Separately, the deadline for Delphi, GM's biggest parts supplier, to reach agreement on outstanding issues with GM has been extended to May 4.
Production cuts
General Motors plans sharp cuts in its North American vehicle production this summer to bring down swollen inventories caused by the steep drop in demand for its cars and trucks.
The embattled carmaker also ascribed the cutbacks to concern about the stability of Delphi, its biggest parts supplier, which has been struggling to emerge from bankruptcy protection for more than three years.
GM said the normal two-week summer shutdown would be extended by one to eight weeks at 13 of its 20 assembly plants in an effort to reduce dealer inventories.
Copyright The Financial Times Limited 2009
By Bernard Simon in Toronto
Published: April 24 2009 03:00 | Last updated: April 24 2009 03:00
General Motors is set to make a fresh debt-exchange offer to its unsecured bondholders on Monday consisting almost entirely of equity in the beleaguered carmaker, which would be far less generous than previous offers.
GM, which is racing to meet a June 1 restructuring deadline set by the US Treasury, will also soon outline a fresh set of proposals to the United Auto Workers union aimed at reducing labour costs. In February, GM demanded the UAW accept shares rather than cash for half of its contribution to a union-managed healthcare trust to be set up next year.
The plan required unsecured bondholders to exchange at least two-thirds of their holdings, with a face value of $27bn, for equity and other securities. GM's last offer totalled 24½ cents on the dollar, comprising 8 cents in cash and 16½ cents in new unsecured debt.
But the US administration's industry taskforce has demanded deeper sacrifices.
Neither the bondholders nor the union are keen to commit themselves without knowing what deal has been cut with the other. However, legal requirements, such as minimum offer deadlines, have forced GM to give priority to the bondholders.
Separately, the deadline for Delphi, GM's biggest parts supplier, to reach agreement on outstanding issues with GM has been extended to May 4.
Production cuts
General Motors plans sharp cuts in its North American vehicle production this summer to bring down swollen inventories caused by the steep drop in demand for its cars and trucks.
The embattled carmaker also ascribed the cutbacks to concern about the stability of Delphi, its biggest parts supplier, which has been struggling to emerge from bankruptcy protection for more than three years.
GM said the normal two-week summer shutdown would be extended by one to eight weeks at 13 of its 20 assembly plants in an effort to reduce dealer inventories.
Copyright The Financial Times Limited 2009
How Good is Your 401k ? Rate Your Company's Retirement Plan on Brightscope
Saving on taxes is a great feature of your 401k plan at work (another bonus: the employer matching contribution, if you have it), but make sure to check out your plan choices and fees, and select the best available investments.
MARKETWATCH California BABS Build America Bonds
California sells $6.85 bln in infrastructure bonds
By Laura Mandaro
Last update: 2:12 p.m. EDT April 22, 2009
SAN FRANCISCO (MarketWatch) -- California sold $6.85 billion in general obligation bonds Wednesday, including $5.23 billion in federally subsidized Build America Bonds, its state treasurer's office said Wednesday. The bond sale was expanded from original plans of about $3 billion, and the Build America portion is the largest under that federal program to date. All of the bonds in the deal were taxable, a change from most municipal issues. The U.S. is subsidizing interest payments on the Build America Bonds to help states sell taxable infrastructure bonds to a different group of investors without paying more interest. With the subsidy, the Build America Bonds carry a rate of 4.83%. All are in 25-year and 30-year maturities.
By Laura Mandaro
Last update: 2:12 p.m. EDT April 22, 2009
SAN FRANCISCO (MarketWatch) -- California sold $6.85 billion in general obligation bonds Wednesday, including $5.23 billion in federally subsidized Build America Bonds, its state treasurer's office said Wednesday. The bond sale was expanded from original plans of about $3 billion, and the Build America portion is the largest under that federal program to date. All of the bonds in the deal were taxable, a change from most municipal issues. The U.S. is subsidizing interest payments on the Build America Bonds to help states sell taxable infrastructure bonds to a different group of investors without paying more interest. With the subsidy, the Build America Bonds carry a rate of 4.83%. All are in 25-year and 30-year maturities.
CNN: GM not paying June 1 interest
GM won't make $1B June debt payment
June payment would be due a day after government's deadline for company to submit restructuring or bankruptcy plan.
By Peter Valdes-Dapena, CNNMoney.com senior writer
April 22, 2009: 1:10 PM ET
NEW YORK (CNNMoney.com) -- General Motors won't be making a June 1 debt payment of $1 billion, a company spokeswoman said Wednesday.
The debt is due the day after GM's government-imposed May 30 deadline to have an aggressive restructuring plan in place or be left to face bankruptcy.
GM (GM, Fortune 500) said it wouldn't make the June 1 payment because as part of its restructuring, the company will be offering to exchange bondholder's debt for equity in the company.
"We're going to have an exchange offer open anyway," said GM spokeswoman Julie Gibson.
A press representative for GM bondholders was not immediately available to comment.
While GM CEO Fritz Henderson has said that bankruptcy has become "more likely" in recent weeks, he has also said that an out-of-court restructuring remains a viable option.
GM has received $13.4 billion in federal loans and could receive an additional $5 billion before May 30. Beyond that, the Treasury department task force overseeing restructuring for GM and Chrysler has not said how much more support GM might be eligible to receive if it is able to restructure and reduce its debts and other obligations.
Find this article at:
http://money.cnn.com/2009/04/22/autos/gm_june_debt
June payment would be due a day after government's deadline for company to submit restructuring or bankruptcy plan.
By Peter Valdes-Dapena, CNNMoney.com senior writer
April 22, 2009: 1:10 PM ET
NEW YORK (CNNMoney.com) -- General Motors won't be making a June 1 debt payment of $1 billion, a company spokeswoman said Wednesday.
The debt is due the day after GM's government-imposed May 30 deadline to have an aggressive restructuring plan in place or be left to face bankruptcy.
GM (GM, Fortune 500) said it wouldn't make the June 1 payment because as part of its restructuring, the company will be offering to exchange bondholder's debt for equity in the company.
"We're going to have an exchange offer open anyway," said GM spokeswoman Julie Gibson.
A press representative for GM bondholders was not immediately available to comment.
While GM CEO Fritz Henderson has said that bankruptcy has become "more likely" in recent weeks, he has also said that an out-of-court restructuring remains a viable option.
GM has received $13.4 billion in federal loans and could receive an additional $5 billion before May 30. Beyond that, the Treasury department task force overseeing restructuring for GM and Chrysler has not said how much more support GM might be eligible to receive if it is able to restructure and reduce its debts and other obligations.
Find this article at:
http://money.cnn.com/2009/04/22/autos/gm_june_debt
The New Buy America Bonds (BABS) taxable munis subsidized by Fed (Reuters)
UPDATE 3-California prepares deal as NJ Turnpike sells BABs
Mon Apr 20, 2009 10:30pm BST
By Caryn Trokie
NEW YORK, April 20 (Reuters) - California on Monday outlined for investors what interest rates they may be paid in this week's planned debt sale, the biggest on the week's negotiated calendar, which will include up to $3.5 billion of new Build America Bonds.
California is planning a six-part deal that is expected to total up to $4 billion in BABs and general obligation debt, Tom Dresslar, spokesman for California State Treasurer Bill Lockyer, said last week.
The bond offering includes: four-year bonds expected to price at a yield spread of about 50 basis points over five-year U.S. Treasuries; five-year bonds at a yield spread of about 350 basis points over comparable Treasuries; six-year bonds expected to yield about 370 basis points over Treasuries and seven-year bonds expected to yield about 362.5 basis points over Treasuries.
It also includes 25- and 30-year bonds expected to yield about 387.5 basis points over Treasuries.
"With the 30-year Treasury (yield) last at 3.70 percent, that implies a yield around 7.57 percent," said MMD analyst Randy Smolik. "This would be a net cost to the state around 4.90 percent if the price was locked in currently."
U.S. states, cities and towns are increasingly taking advantage of this new kind of taxable debt that Congress included in its stimulus plan.
Investor enthusiasm for the debt, whose interest rates have a 35 percent subsidy from the federal government, spurred the New Jersey Turnpike to move up its planned sale by one day -- and increase its size.
The $1.375 billion offering that priced Monday saved the Turnpike about $100 million, on a present-value basis, according to financial advisor Dennis Enright of NW Financial Group, based in Jersey City, New Jersey.
The deal was oversubscribed, Enright said, adding that investors included "a long list" of money managers, pension funds and life insurance companies.
The bonds, which are due in 2040, carry a 7.414 percent coupon. When the taxable debt's federal subsidy is taken into account, the taxable yields came in at about 4.81 percent, Enright said.
The turnpike also sold $375 million of tax-exempt debt with a top yield of 5.35 percent in the 2040 maturity.
Due to the surging demand, the Turnpike twice tightened yields, which were first estimated at a 387.5 basis point spread, according to IFR.
© Thomson Reuters 2009. All rights reserved.
Mon Apr 20, 2009 10:30pm BST
By Caryn Trokie
NEW YORK, April 20 (Reuters) - California on Monday outlined for investors what interest rates they may be paid in this week's planned debt sale, the biggest on the week's negotiated calendar, which will include up to $3.5 billion of new Build America Bonds.
California is planning a six-part deal that is expected to total up to $4 billion in BABs and general obligation debt, Tom Dresslar, spokesman for California State Treasurer Bill Lockyer, said last week.
The bond offering includes: four-year bonds expected to price at a yield spread of about 50 basis points over five-year U.S. Treasuries; five-year bonds at a yield spread of about 350 basis points over comparable Treasuries; six-year bonds expected to yield about 370 basis points over Treasuries and seven-year bonds expected to yield about 362.5 basis points over Treasuries.
It also includes 25- and 30-year bonds expected to yield about 387.5 basis points over Treasuries.
"With the 30-year Treasury (yield) last at 3.70 percent, that implies a yield around 7.57 percent," said MMD analyst Randy Smolik. "This would be a net cost to the state around 4.90 percent if the price was locked in currently."
U.S. states, cities and towns are increasingly taking advantage of this new kind of taxable debt that Congress included in its stimulus plan.
Investor enthusiasm for the debt, whose interest rates have a 35 percent subsidy from the federal government, spurred the New Jersey Turnpike to move up its planned sale by one day -- and increase its size.
The $1.375 billion offering that priced Monday saved the Turnpike about $100 million, on a present-value basis, according to financial advisor Dennis Enright of NW Financial Group, based in Jersey City, New Jersey.
The deal was oversubscribed, Enright said, adding that investors included "a long list" of money managers, pension funds and life insurance companies.
The bonds, which are due in 2040, carry a 7.414 percent coupon. When the taxable debt's federal subsidy is taken into account, the taxable yields came in at about 4.81 percent, Enright said.
The turnpike also sold $375 million of tax-exempt debt with a top yield of 5.35 percent in the 2040 maturity.
Due to the surging demand, the Turnpike twice tightened yields, which were first estimated at a 387.5 basis point spread, according to IFR.
© Thomson Reuters 2009. All rights reserved.
Frugal Living Ideas: Free Stuff (South Florida Sun Sentinel)
sun-sentinel.com/features/time-money/bargains/sfl-save-money-vasquez-c042009sbapr20,0,5496852.column
South Florida Sun-Sentinel.com
Save money: Let the Web help you cut costs on dining, shopping and more
Use the Internet to uncover cost-conscious dealsDaniel Vasquez on consumer issues
Consumer columnist
April 20, 2009
No free lunch? Actually, you can get that and more if you're a savvy shopper — and online surfer.
Companies are bending over backward today to get business; in some cases giving away stuff and services for free just to get your attention and maybe some repeat business.
Here are 10 ways to live, eat and play for free (and check my ConsumerTalk blog at SunSentinel.com/consumerblog for other free offers).
Kids eat free
It's hardly cheap feeding the little ones, but finding restaurants where they dine free helps. To find them, frequent Web sites that track down neighborhood establishments with family friendly specials.
MyKidsEatFree.com tipped us to Sonny's BBQ, where kids eat free on Wednesdays, and Piccadilly Restaurant, which serves 99 cent meals for children on Thursdays (and from 11 a.m. to 4 p.m. Saturdays). The site also lets users search by state and city.
Also check out KidsEat4Free.com, KiddieMenu.com and coupondivas.com/ kids-eat-free.
Never pay shipping again
Before you waste gas and time visiting your favorite store, check online. Major retailer sites such as Kmart.com and BathandBodyWorks.com often offer free shipping deals.
But if visiting those Web sites now and then is too much sweat, let Web sites do the work for you. Somemonitor free shipping deals from major retailers and send e-mail alerts to your computer or cell phone, even sending you coupon codes.
Check out FreeShipping.org, DealTaker.com and Bargainist.com.
Why pay for Wi-Fi?
For those who live on the Web via a cell phone or laptop, it's crucial to find the nearest no-cost hot spot. McDonald's restaurants are a good bet. And it's smart to check with your carrier for special access deals; AT&T customers with an iPhone or Blackberry get free Wi-Fi at Starbucks.
Public libraries often offer free hot spots, though you may need a valid library card account to access it. Check out WiFiFree.com and jiwire.com.
Note: At airports, be wary of Wi-Fi networks with names like "Free Wi-Fi"; they can be ad hoc, peer-to-peer networks set up as a trap by someone with a laptop nearby.
Books
You can find free books on the Web faster than you can say the phrase three times. For a taste of free lit, check out GetFreeeBooks.com, Fiction.us and ManyBooks.net.
And, of courses, there's also the public library — where you can also rent DVDs, CDs and even video cassettes. (Check Browardlibrary.org, PBClibrary.org or MDPLS.org for catalog lists.)
Legal advice
Would you like to talk to an attorney for free? Maybe you have questions about bankruptcy or foreclosure? Or a dispute with a business. Call LegalLine at 866-596-0399 between 6 p.m. and 9 p.m. on the first Wednesday of each month and anonymously ask away (in English and Spanish).
The Dade County Bar Association help-line dispenses free, basic legal advice for South Floridians. Specialties covered include family, probate, criminal, real estate, condo, landlord-tenant, business and immigration law. The next opportunities to call: May 6 and June 3.
Video games
When you need an arcade game fix but can't afford tokens, go to FreeVideoGames Online.org. You'll fall in love again with old school favorites like Pac-Man, Space Invaders and Tetris. Also, check FreeArcade.com, BoomGames.com and GameTap.com.
Museums
While some museums don't charge admission, some cost $20 or more. But you can still take advantage of free days, half-day specials and nightly discounts offered on a weekly or monthly basis at institutions across the country. Check museum Web sites of any city you plan to visit.
For example, the Museum of Art Fort Lauderdale offers one-hour group tours during regular business hours (must be booked two weeks in advance) and Public Highlight tours Saturdays and Sundays at 2 p.m. Both are free with admission. And the Morikami Museum in Delray Beach offers Saturday Family Fun Programs.
Your employer or bank also may offer discounts.
The first weekend of each month, for instance, Bank of America customers get into eight South Florida museums for no charge. Caveats: It's only good for general admission (no special exhibits or ticketed shows) and you can't combine it with any other discounts.
Just present your ATM, credit card or check card along with valid photo identification. The participating museums are: Miami Art Museum, Miami Children's Museum, Miami Science Museum, The Morikami Museum, Museum of Contemporary Art, Museum of Art Fort Lauderdale, Museum of Discovery & Science and South Florida Science Museum.
Education
Many colleges offer free online courses, such as Carnegie Mellon University and the University of California. Florida International University Online lets you take practice courses at no cost.
Stanford University offers free courses on iTunes. Massachusetts Institute of Technology offers much of its undergraduate and graduate curriculum, and anyone can quickly download course material from 35 departments, including Architecture, Economics and Electrical Engineering and Computer Science.
Pets
Looking for a four-legged best friend but want to avoid pet stores? You'll find plenty of offers from owners on Craigslist Community Pet Listings and Petfinder.com. You also may consider rescuing a pet from a local shelter, though fees can range from $70 to $100.
Phone calls
Use the Web and skip the phone fees. At Skype.com, for instance, download software at no cost and start calling (computer to computer) friends and loved ones who are also Skype users, anywhere in the world. A Web cam will let you see their smiling face too. You just need a working DSL line or cable modem and headset.
Daniel Vasquez can be reached at dvasquez @SunSentinel.com, or 954-356-4219, or 561-243- 6600, ext. 4219. For more Daniel Vasquez columns, go to SunSentinel.com/vasquez.
Copyright © 2009, South Florida Sun-Sentinel
South Florida Sun-Sentinel.com
Save money: Let the Web help you cut costs on dining, shopping and more
Use the Internet to uncover cost-conscious dealsDaniel Vasquez on consumer issues
Consumer columnist
April 20, 2009
No free lunch? Actually, you can get that and more if you're a savvy shopper — and online surfer.
Companies are bending over backward today to get business; in some cases giving away stuff and services for free just to get your attention and maybe some repeat business.
Here are 10 ways to live, eat and play for free (and check my ConsumerTalk blog at SunSentinel.com/consumerblog for other free offers).
Kids eat free
It's hardly cheap feeding the little ones, but finding restaurants where they dine free helps. To find them, frequent Web sites that track down neighborhood establishments with family friendly specials.
MyKidsEatFree.com tipped us to Sonny's BBQ, where kids eat free on Wednesdays, and Piccadilly Restaurant, which serves 99 cent meals for children on Thursdays (and from 11 a.m. to 4 p.m. Saturdays). The site also lets users search by state and city.
Also check out KidsEat4Free.com, KiddieMenu.com and coupondivas.com/ kids-eat-free.
Never pay shipping again
Before you waste gas and time visiting your favorite store, check online. Major retailer sites such as Kmart.com and BathandBodyWorks.com often offer free shipping deals.
But if visiting those Web sites now and then is too much sweat, let Web sites do the work for you. Somemonitor free shipping deals from major retailers and send e-mail alerts to your computer or cell phone, even sending you coupon codes.
Check out FreeShipping.org, DealTaker.com and Bargainist.com.
Why pay for Wi-Fi?
For those who live on the Web via a cell phone or laptop, it's crucial to find the nearest no-cost hot spot. McDonald's restaurants are a good bet. And it's smart to check with your carrier for special access deals; AT&T customers with an iPhone or Blackberry get free Wi-Fi at Starbucks.
Public libraries often offer free hot spots, though you may need a valid library card account to access it. Check out WiFiFree.com and jiwire.com.
Note: At airports, be wary of Wi-Fi networks with names like "Free Wi-Fi"; they can be ad hoc, peer-to-peer networks set up as a trap by someone with a laptop nearby.
Books
You can find free books on the Web faster than you can say the phrase three times. For a taste of free lit, check out GetFreeeBooks.com, Fiction.us and ManyBooks.net.
And, of courses, there's also the public library — where you can also rent DVDs, CDs and even video cassettes. (Check Browardlibrary.org, PBClibrary.org or MDPLS.org for catalog lists.)
Legal advice
Would you like to talk to an attorney for free? Maybe you have questions about bankruptcy or foreclosure? Or a dispute with a business. Call LegalLine at 866-596-0399 between 6 p.m. and 9 p.m. on the first Wednesday of each month and anonymously ask away (in English and Spanish).
The Dade County Bar Association help-line dispenses free, basic legal advice for South Floridians. Specialties covered include family, probate, criminal, real estate, condo, landlord-tenant, business and immigration law. The next opportunities to call: May 6 and June 3.
Video games
When you need an arcade game fix but can't afford tokens, go to FreeVideoGames Online.org. You'll fall in love again with old school favorites like Pac-Man, Space Invaders and Tetris. Also, check FreeArcade.com, BoomGames.com and GameTap.com.
Museums
While some museums don't charge admission, some cost $20 or more. But you can still take advantage of free days, half-day specials and nightly discounts offered on a weekly or monthly basis at institutions across the country. Check museum Web sites of any city you plan to visit.
For example, the Museum of Art Fort Lauderdale offers one-hour group tours during regular business hours (must be booked two weeks in advance) and Public Highlight tours Saturdays and Sundays at 2 p.m. Both are free with admission. And the Morikami Museum in Delray Beach offers Saturday Family Fun Programs.
Your employer or bank also may offer discounts.
The first weekend of each month, for instance, Bank of America customers get into eight South Florida museums for no charge. Caveats: It's only good for general admission (no special exhibits or ticketed shows) and you can't combine it with any other discounts.
Just present your ATM, credit card or check card along with valid photo identification. The participating museums are: Miami Art Museum, Miami Children's Museum, Miami Science Museum, The Morikami Museum, Museum of Contemporary Art, Museum of Art Fort Lauderdale, Museum of Discovery & Science and South Florida Science Museum.
Education
Many colleges offer free online courses, such as Carnegie Mellon University and the University of California. Florida International University Online lets you take practice courses at no cost.
Stanford University offers free courses on iTunes. Massachusetts Institute of Technology offers much of its undergraduate and graduate curriculum, and anyone can quickly download course material from 35 departments, including Architecture, Economics and Electrical Engineering and Computer Science.
Pets
Looking for a four-legged best friend but want to avoid pet stores? You'll find plenty of offers from owners on Craigslist Community Pet Listings and Petfinder.com. You also may consider rescuing a pet from a local shelter, though fees can range from $70 to $100.
Phone calls
Use the Web and skip the phone fees. At Skype.com, for instance, download software at no cost and start calling (computer to computer) friends and loved ones who are also Skype users, anywhere in the world. A Web cam will let you see their smiling face too. You just need a working DSL line or cable modem and headset.
Daniel Vasquez can be reached at dvasquez @SunSentinel.com, or 954-356-4219, or 561-243- 6600, ext. 4219. For more Daniel Vasquez columns, go to SunSentinel.com/vasquez.
Copyright © 2009, South Florida Sun-Sentinel
Paying for College from 0 to 18 (NY Times)
April 19, 2009
Saving for College
18 Years in the Making
By RON LIEBER
Want to pick up the tab at Harvard for a child born today? It will probably cost about half a million dollars come 2027.
Hey, at least you have 18 years to plan. Parents footing the bill for tuition this fall are facing down a perfect storm of ugliness. Unemployment is rising, while bonuses and commissions aren’t what they once were for those who still have jobs. Others have no equity left in their homes thanks to declining housing prices. Those who do may have trouble finding a bank willing to hand out home equity loans that they can use to pay for college.
Beyond a more generous tax credit, President Obama’s moves so far don’t add up to much for most middle-class families. For low-income students, Mr. Obama wants to guarantee Pell grant financing levels and to match inflation increases, and his stimulus package provides more Pell and work-study money. He is pushing to change the way federal loans are dispensed and to expand access somewhat to federal loans. But students who borrow already graduate with an average debt of $22,700.
Meanwhile, the devastation in the stock market has eroded not just families’ savings but university endowments that underwrite scholarships and grants.
How bad is it? Earlier this year, Kevin McKinley, a financial planner and college savings expert at McKinley Money in Eau Claire, Wis., received his first-ever referral from a psychotherapist, who thought the patient could reduce anxiety by seeing a financial professional.
“That’s not something that happens when the markets are doing well,” Mr. McKinley says.
Still, if you can break the process of saving for college into smaller pieces, it starts to seem more manageable. Start by reminding yourself that almost nobody can save enough to pay for four years of private education, let alone for more than one child. That’s not the goal here.
Mr. McKinley suggests an approach he calls “20-20-20.” Take the current average cost of attending four years at a public university: roughly $60,000. Save $20,000 before your child begins college by putting aside $50 a month starting at birth and assuming a 6 percent annual return. Then, pay $20,000 out of current income while the student is in college. Finally, have your child take out $20,000 in federal student loans over four years. The $200 monthly payments afterward are not a horrible burden for people in their 20s to bear, and they’ll be debt free once the 10-year payback period is over.
“It’s all doable with several very small sacrifices,” Mr. McKinley says.
You can aim higher, or lower, but the longer you wait to start, the more money you’ll probably need to borrow later. Better, then, to start at the birth of your first child and follow as many of the steps below as you can.
NEWBORNS AND TODDLERS
For most people, the best way to save for a child’s college education is still through a 529 savings plan. With 529s, you deposit after-tax money, but any earnings are free of taxes as long as you spend them on tuition, room, board and other postsecondary educational expenses.
You can look up your state’s plan at savingforcollege.com, a directory of college saving plans and advice. Most states have their own accounts, and many have two different kinds: investment accounts and prepaid accounts (it’s too early in the life cycle to discuss the prepaid variety, so more later on those).
Investment accounts are a bit like 401(k)’s in that you can usually choose from a handful of mutual funds and other investments, including one that gets less aggressive as your child’s date of college matriculation nears. (Just be sure that the fund manager’s definition of “aggressive” is similar to yours; some 529 investors have been surprised at the extent of their recent losses.)
Credit cards can help feed your savings. Some will reward you with refunds into a 529 account based on how much you spend. The Fidelity 529 College Rewards American Express card, for instance, gives you 2 percent back on all purchases as long as you deposit it into your Fidelity 529 account, including the plans it runs for individual states. (Anyone can invest in any state’s 529 investment plan; you aren’t limited to your own state’s).
Card earnings alone can easily add up to five figures after 20 years, depending on how much you put on the plastic annually. A few caveats, though. If you carry a balance or pay bills late, the interest and fees will more than wipe out the rewards. Credit card companies also often reduce rewards over time. And to maximize earnings, you’ll have to give up using your other credit cards to collect frequent-flier miles.
The Upromise college savings program offers several ways to earn cash for a 529, including 1 percent back on most purchases on its MasterCard; refunds based on what you buy at grocers that link their discount cards to Upromise; and bonuses for shopping at partner retailers online and eating in affiliated restaurants.
Lisa Roll, a financial adviser in Glen Gardner, N.J., has saved about $7,500 toward her two sons’ college expenses in the eight years she has been enrolled in Upromise. She even enlisted her mother-in-law, who can contribute her spending power to Ms. Roll’s account through Upromise’s friends-and-family system. “I went to their house and took her wallet and signed up all of her grocery and credit cards,” she says, adding that she also installed a Web browser toolbar that will help remind her mother-in-law to shop online at partner retailers.
THE PRESCHOOL YEARS
Once the grandparents tire of buying baby gear and cute outfits, you might sit them down for a conversation about how they can make a more lasting cash contribution to your toddler’s future. This isn’t always the easiest conversation to have.
“In most otherwise healthy families, the willingness of grandparents to save generally exceeds the willingness of parents to broach the subject with the grandparents,” Mr. McKinley says. “That’s good. It shows that parents aren’t money-grubbing. But it means it’s usually the grandparents’ duty to bring the subject up.”
If you’re a grandparent and your financial plan for retirement is secure, putting aside just one Social Security check a year for 18 years could pay for a good chunk of a child’s college education.
The question, however, is where to park that money during the intervening years. Grandparents can set up their own 529 accounts, which come with a few advantages. “If something were to happen and they really needed the money, they could take it back out of the 529 and pay taxes and penalties,” says KC Dempster, director of program development at the consultants College Money in Marlton, N.J. If there’s a falling out with the kids or the grandkids, they can also change the beneficiary and bestow their largesse on a more-favored family member.
Families wishing to qualify for financial aid, however, should keep in mind that a growing number of colleges and universities are asking whether grandparents or others have set up 529 accounts for a student and taking it into account when awarding their own grants.
Kalman A. Chany, president of Campus Consultants in New York City, advises that grandparents simply give money to the parents, who can then deposit it in their own 529. Many accounts will accept gifts from grandparents. Upromise facilitates 529 giving, too, as does Freshman Fund, an online gift registry.
One other big financial decision looms during the preschool years: when (or if) to have another child. If you have two children in college at the same time, your eligibility for financial aid grows significantly. “My instinct would be that there are still a lot of people out there who don’t understand how this works,” Ms. Dempster says. “They space their children out because the thought of two tuitions and room and board at the same time freaks them out.”
Mr. Chany says, only half-jokingly, that the best option may be to have twins.
GRADES ONE TO NINE
One decision you’ll eventually face is whether to put some (or all) of your savings into a prepaid 529 plan. Not every state offers one, and some states’ plans are closed to new investments. The rest, however, let you essentially pay today for tuition and fees in the future.
There are a number of catches here, depending on the state. You can usually participate only in your own state’s plan, and it often covers only tuition and fees. (Another plan, called the Independent 529, allows you to pay for member private colleges and universities around the country.)
There are also a number of ways states calculate the current “price.” While the idea of locking in a price may sound tempting, it’s crucial to understand exactly what $1,000 today will buy you when your child finally goes to college. What sort of discount do you get for prepaying part of the tuition each year? And what happens if you’re in a state plan and your child decides to attend an out-of-state university?How much of a return will your money have earned in that case? In the Independent 529 plan, for instance, your money won’t have earned more than 2 percent annually (nor can it lose more than 2 percent a year). That sounds good right about now, though investments in stocks over the next 15 years will probably do better.
By the time middle school draws to a close, you should have a clearer sense of your financial picture than you had 13 or 14 years earlier, and whether you’ll have a shot at qualifying for financial aid. The government’s expected family contribution calculator at www.fafsa4caster.ed.gov can help on this front.
Now you have to decide what to tell your child about the money situation and when. Mr. McKinley warns about revealing too much too soon. “Most kids are just so clueless about where they’re going to go and what they’re going to do,” he says. “It just adds one more pressure to start talking about it in eighth or ninth grade.”
By early in high school, however, colleges are already marketing to potential students. “If there are financial constraints, it’s important for the child to understand that,” says Mr. Chany, who is also the author of “Paying for College without Going Broke” (Princeton Review, 2007). “I think it’s not a good idea for them to spring surprises on the child” late in the process.
That said, he adds, perhaps the worst move is to forbid a student to apply to a dream school simply because of money worries. “All you need is one of the child’s friends with similar financial circumstances to get in and get a nice financial aid package and be able to afford it,” he says. “And then the child says to you for the rest of their life: ‘Why didn’t you let me apply to that school?’”
Freshman year in high school is also a good time to ratchet back investments in stocks, if you’ve had an aggressive asset allocation in your 529 funds so far. If you’re in a target-date mutual fund, with the date of your child’s matriculation in its name, check to see what percentage of the fund is in stocks and then reallocate your savings to something safer if you feel the need.
10TH AND 11TH GRADES
This is the moment to consider whether to hire an adviser who will examine your income and assets to better position your aid application. This can easily cost $1,000 in fees, but it may pay for itself if you receive more grants or qualify for better loans because of it.
Whether you hire an adviser or try to sort out the financial aid applications on your own, remember that colleges and universities currently consider the year from Jan. 1 of junior year to Dec. 31 of senior year as the “base” year for figuring out what the family can afford to pay for the first year of college.
That means that if you’re going to make any big changes to qualify for more aid, you need to do it between Jan. 1 of sophomore year and Dec. 31 of junior year — and start planning those moves even sooner.
What sort of moves might you make?
Since financial aid offices will tap some of your assets in calculating what you can afford to pay, there’s no shame in spending them down a bit sooner than you might have. If you need a new roof or new car, spend the money before the base year arrives. And pay down credit card debt. A big balance doesn’t win you a break when applying for aid, but colleges could tap your cash.
Mr. Chany suggests a number of other ideas. Since colleges generally take more from your income than they do from your assets, the base year or right before is a great time to start your own business (assuming your income will fall for a while in the start-up years). And to lower the income number that the financial system uses, front-load individual retirement account contributions before the base year.
By now you may be wondering about the ethics of all of this money moving. Do not lie on financial aid forms, but aid planning, like tax planning, is perfectly legal and appropriate.
SENIOR YEAR
Just as students should apply to at least one college where they know they will be accepted and happy, add at least one school your family is certain you can afford.
“If you’re going to get need-based aid, then you have to target the colleges that have money to give it,” says Ms. Dempster of College Money. “Otherwise, the entire exercise has been pointless.”
The student also has to fit the college personally before you worry about money. “If not, they may drop out or transfer or do poorly,” she says. “They’ll end up doing things that make college last longer, and that just makes it more expensive.”
Then, finally, comes application time, a process you’ll repeat at least three more times because you have to refile each year. The Free Application for Federal Student Aid and other forms you may encounter are intimidating. Fill them out anyway, even if you don’t think you’ll win grants from your chosen college, because you never know where you might end up or how your financial circumstances may change.
If grandparents wish to step in at this late stage, be aware that giving money to parents or making tuition payments directly to the college can have a big impact on aid eligibility. Consider paying off the child’s loans (or the parents’) after college graduation.
Some of you are reading this with aid offers for your high school seniors in hand. If you are, you now know that a fair bit of randomness takes hold once you apply. Financial aid officers can and will do what they want and sweeten packages for more desirable students. While many a parent tries to play one offer off another, Mr. Chany points out: “The decisions of the financial aid officer are final and cannot be appealed to the government. It’s worse than dealing with the I.R.S. There’s no tax court.”
All the more reason, then, to start early. “Parents beat themselves up about having done nothing and then continue to do nothing because they think it’s hopeless or scary,” he says. “That’s the worst thing that anyone can do. The longer they wait, the harder it’s going to get.”
Ron Lieber writes the Your Money column for The Times.
Saving for College
18 Years in the Making
By RON LIEBER
Want to pick up the tab at Harvard for a child born today? It will probably cost about half a million dollars come 2027.
Hey, at least you have 18 years to plan. Parents footing the bill for tuition this fall are facing down a perfect storm of ugliness. Unemployment is rising, while bonuses and commissions aren’t what they once were for those who still have jobs. Others have no equity left in their homes thanks to declining housing prices. Those who do may have trouble finding a bank willing to hand out home equity loans that they can use to pay for college.
Beyond a more generous tax credit, President Obama’s moves so far don’t add up to much for most middle-class families. For low-income students, Mr. Obama wants to guarantee Pell grant financing levels and to match inflation increases, and his stimulus package provides more Pell and work-study money. He is pushing to change the way federal loans are dispensed and to expand access somewhat to federal loans. But students who borrow already graduate with an average debt of $22,700.
Meanwhile, the devastation in the stock market has eroded not just families’ savings but university endowments that underwrite scholarships and grants.
How bad is it? Earlier this year, Kevin McKinley, a financial planner and college savings expert at McKinley Money in Eau Claire, Wis., received his first-ever referral from a psychotherapist, who thought the patient could reduce anxiety by seeing a financial professional.
“That’s not something that happens when the markets are doing well,” Mr. McKinley says.
Still, if you can break the process of saving for college into smaller pieces, it starts to seem more manageable. Start by reminding yourself that almost nobody can save enough to pay for four years of private education, let alone for more than one child. That’s not the goal here.
Mr. McKinley suggests an approach he calls “20-20-20.” Take the current average cost of attending four years at a public university: roughly $60,000. Save $20,000 before your child begins college by putting aside $50 a month starting at birth and assuming a 6 percent annual return. Then, pay $20,000 out of current income while the student is in college. Finally, have your child take out $20,000 in federal student loans over four years. The $200 monthly payments afterward are not a horrible burden for people in their 20s to bear, and they’ll be debt free once the 10-year payback period is over.
“It’s all doable with several very small sacrifices,” Mr. McKinley says.
You can aim higher, or lower, but the longer you wait to start, the more money you’ll probably need to borrow later. Better, then, to start at the birth of your first child and follow as many of the steps below as you can.
NEWBORNS AND TODDLERS
For most people, the best way to save for a child’s college education is still through a 529 savings plan. With 529s, you deposit after-tax money, but any earnings are free of taxes as long as you spend them on tuition, room, board and other postsecondary educational expenses.
You can look up your state’s plan at savingforcollege.com, a directory of college saving plans and advice. Most states have their own accounts, and many have two different kinds: investment accounts and prepaid accounts (it’s too early in the life cycle to discuss the prepaid variety, so more later on those).
Investment accounts are a bit like 401(k)’s in that you can usually choose from a handful of mutual funds and other investments, including one that gets less aggressive as your child’s date of college matriculation nears. (Just be sure that the fund manager’s definition of “aggressive” is similar to yours; some 529 investors have been surprised at the extent of their recent losses.)
Credit cards can help feed your savings. Some will reward you with refunds into a 529 account based on how much you spend. The Fidelity 529 College Rewards American Express card, for instance, gives you 2 percent back on all purchases as long as you deposit it into your Fidelity 529 account, including the plans it runs for individual states. (Anyone can invest in any state’s 529 investment plan; you aren’t limited to your own state’s).
Card earnings alone can easily add up to five figures after 20 years, depending on how much you put on the plastic annually. A few caveats, though. If you carry a balance or pay bills late, the interest and fees will more than wipe out the rewards. Credit card companies also often reduce rewards over time. And to maximize earnings, you’ll have to give up using your other credit cards to collect frequent-flier miles.
The Upromise college savings program offers several ways to earn cash for a 529, including 1 percent back on most purchases on its MasterCard; refunds based on what you buy at grocers that link their discount cards to Upromise; and bonuses for shopping at partner retailers online and eating in affiliated restaurants.
Lisa Roll, a financial adviser in Glen Gardner, N.J., has saved about $7,500 toward her two sons’ college expenses in the eight years she has been enrolled in Upromise. She even enlisted her mother-in-law, who can contribute her spending power to Ms. Roll’s account through Upromise’s friends-and-family system. “I went to their house and took her wallet and signed up all of her grocery and credit cards,” she says, adding that she also installed a Web browser toolbar that will help remind her mother-in-law to shop online at partner retailers.
THE PRESCHOOL YEARS
Once the grandparents tire of buying baby gear and cute outfits, you might sit them down for a conversation about how they can make a more lasting cash contribution to your toddler’s future. This isn’t always the easiest conversation to have.
“In most otherwise healthy families, the willingness of grandparents to save generally exceeds the willingness of parents to broach the subject with the grandparents,” Mr. McKinley says. “That’s good. It shows that parents aren’t money-grubbing. But it means it’s usually the grandparents’ duty to bring the subject up.”
If you’re a grandparent and your financial plan for retirement is secure, putting aside just one Social Security check a year for 18 years could pay for a good chunk of a child’s college education.
The question, however, is where to park that money during the intervening years. Grandparents can set up their own 529 accounts, which come with a few advantages. “If something were to happen and they really needed the money, they could take it back out of the 529 and pay taxes and penalties,” says KC Dempster, director of program development at the consultants College Money in Marlton, N.J. If there’s a falling out with the kids or the grandkids, they can also change the beneficiary and bestow their largesse on a more-favored family member.
Families wishing to qualify for financial aid, however, should keep in mind that a growing number of colleges and universities are asking whether grandparents or others have set up 529 accounts for a student and taking it into account when awarding their own grants.
Kalman A. Chany, president of Campus Consultants in New York City, advises that grandparents simply give money to the parents, who can then deposit it in their own 529. Many accounts will accept gifts from grandparents. Upromise facilitates 529 giving, too, as does Freshman Fund, an online gift registry.
One other big financial decision looms during the preschool years: when (or if) to have another child. If you have two children in college at the same time, your eligibility for financial aid grows significantly. “My instinct would be that there are still a lot of people out there who don’t understand how this works,” Ms. Dempster says. “They space their children out because the thought of two tuitions and room and board at the same time freaks them out.”
Mr. Chany says, only half-jokingly, that the best option may be to have twins.
GRADES ONE TO NINE
One decision you’ll eventually face is whether to put some (or all) of your savings into a prepaid 529 plan. Not every state offers one, and some states’ plans are closed to new investments. The rest, however, let you essentially pay today for tuition and fees in the future.
There are a number of catches here, depending on the state. You can usually participate only in your own state’s plan, and it often covers only tuition and fees. (Another plan, called the Independent 529, allows you to pay for member private colleges and universities around the country.)
There are also a number of ways states calculate the current “price.” While the idea of locking in a price may sound tempting, it’s crucial to understand exactly what $1,000 today will buy you when your child finally goes to college. What sort of discount do you get for prepaying part of the tuition each year? And what happens if you’re in a state plan and your child decides to attend an out-of-state university?How much of a return will your money have earned in that case? In the Independent 529 plan, for instance, your money won’t have earned more than 2 percent annually (nor can it lose more than 2 percent a year). That sounds good right about now, though investments in stocks over the next 15 years will probably do better.
By the time middle school draws to a close, you should have a clearer sense of your financial picture than you had 13 or 14 years earlier, and whether you’ll have a shot at qualifying for financial aid. The government’s expected family contribution calculator at www.fafsa4caster.ed.gov can help on this front.
Now you have to decide what to tell your child about the money situation and when. Mr. McKinley warns about revealing too much too soon. “Most kids are just so clueless about where they’re going to go and what they’re going to do,” he says. “It just adds one more pressure to start talking about it in eighth or ninth grade.”
By early in high school, however, colleges are already marketing to potential students. “If there are financial constraints, it’s important for the child to understand that,” says Mr. Chany, who is also the author of “Paying for College without Going Broke” (Princeton Review, 2007). “I think it’s not a good idea for them to spring surprises on the child” late in the process.
That said, he adds, perhaps the worst move is to forbid a student to apply to a dream school simply because of money worries. “All you need is one of the child’s friends with similar financial circumstances to get in and get a nice financial aid package and be able to afford it,” he says. “And then the child says to you for the rest of their life: ‘Why didn’t you let me apply to that school?’”
Freshman year in high school is also a good time to ratchet back investments in stocks, if you’ve had an aggressive asset allocation in your 529 funds so far. If you’re in a target-date mutual fund, with the date of your child’s matriculation in its name, check to see what percentage of the fund is in stocks and then reallocate your savings to something safer if you feel the need.
10TH AND 11TH GRADES
This is the moment to consider whether to hire an adviser who will examine your income and assets to better position your aid application. This can easily cost $1,000 in fees, but it may pay for itself if you receive more grants or qualify for better loans because of it.
Whether you hire an adviser or try to sort out the financial aid applications on your own, remember that colleges and universities currently consider the year from Jan. 1 of junior year to Dec. 31 of senior year as the “base” year for figuring out what the family can afford to pay for the first year of college.
That means that if you’re going to make any big changes to qualify for more aid, you need to do it between Jan. 1 of sophomore year and Dec. 31 of junior year — and start planning those moves even sooner.
What sort of moves might you make?
Since financial aid offices will tap some of your assets in calculating what you can afford to pay, there’s no shame in spending them down a bit sooner than you might have. If you need a new roof or new car, spend the money before the base year arrives. And pay down credit card debt. A big balance doesn’t win you a break when applying for aid, but colleges could tap your cash.
Mr. Chany suggests a number of other ideas. Since colleges generally take more from your income than they do from your assets, the base year or right before is a great time to start your own business (assuming your income will fall for a while in the start-up years). And to lower the income number that the financial system uses, front-load individual retirement account contributions before the base year.
By now you may be wondering about the ethics of all of this money moving. Do not lie on financial aid forms, but aid planning, like tax planning, is perfectly legal and appropriate.
SENIOR YEAR
Just as students should apply to at least one college where they know they will be accepted and happy, add at least one school your family is certain you can afford.
“If you’re going to get need-based aid, then you have to target the colleges that have money to give it,” says Ms. Dempster of College Money. “Otherwise, the entire exercise has been pointless.”
The student also has to fit the college personally before you worry about money. “If not, they may drop out or transfer or do poorly,” she says. “They’ll end up doing things that make college last longer, and that just makes it more expensive.”
Then, finally, comes application time, a process you’ll repeat at least three more times because you have to refile each year. The Free Application for Federal Student Aid and other forms you may encounter are intimidating. Fill them out anyway, even if you don’t think you’ll win grants from your chosen college, because you never know where you might end up or how your financial circumstances may change.
If grandparents wish to step in at this late stage, be aware that giving money to parents or making tuition payments directly to the college can have a big impact on aid eligibility. Consider paying off the child’s loans (or the parents’) after college graduation.
Some of you are reading this with aid offers for your high school seniors in hand. If you are, you now know that a fair bit of randomness takes hold once you apply. Financial aid officers can and will do what they want and sweeten packages for more desirable students. While many a parent tries to play one offer off another, Mr. Chany points out: “The decisions of the financial aid officer are final and cannot be appealed to the government. It’s worse than dealing with the I.R.S. There’s no tax court.”
All the more reason, then, to start early. “Parents beat themselves up about having done nothing and then continue to do nothing because they think it’s hopeless or scary,” he says. “That’s the worst thing that anyone can do. The longer they wait, the harder it’s going to get.”
Ron Lieber writes the Your Money column for The Times.
Obama Kids Tax Shelter 529 College Plan (WSJ)
FAMILY FINANCES APRIL 18, 2009
Obamas Pump Up College Savings
Parents Make Big Upfront '529' Investment for Their Daughters' Tuition
Article
By JANE J. KIM
Malia and Sasha Obama's college education appears to be taken care of in a massive contribution that the president and first lady made to a "529" college-savings plan in 2007.
But like everyone else, they have likely suffered big losses.
According to their 2008 tax returns, the Obamas took advantage of a unique feature of 529 plans that allows account owners to front-load five years' worth of contributions, $240,000 in total for the two girls. They did so without triggering gift taxes -- now levied on any gift exceeding $13,000 a year. Form 709, the federal gift-tax form, shows that Barack and Michelle Obama made equal contributions of $120,000 each, or $60,000 to each of the two children in 2007.
Senate disclosure forms released last year show that the contributions were made to Illinois's adviser-sold Bright Directions College Savings Program, in two age-based growth portfolios, which are designed to become more conservative the closer the child is to attending college. Assuming that the Obamas haven't changed their investments, one of those portfolios has lost roughly 35% in the past year through March, while the other one is down about 27%.
The filings offer a peek into how the Obamas are planning to pay for college for their daughters, Malia, now 10, and Sasha, seven. College tuition has soared in recent years, with average tuition and fees at private four-year colleges hitting $25,143 for the 2008-2009 academic year, according to the College Board. Meanwhile, average in-state tuition and fees at four-year public universities jumped to $6,585, up 6.4% from the previous year.
In recent years, tax-advantaged 529 plans have become a popular college-savings vehicle for many parents. In a 529 plan, savers put after-tax dollars into an account that typically offers a wide range of mutual funds.
Distributions and earnings are tax-free as long as they are used for higher education. Investors can invest in any plan, although they may get an additional state tax break if they invest in their own state's plan. The Illinois 529 plan, for example, offers a state-tax deduction for contributions.
A spokesman for the White House confirms that a payment was made in 2007 and that the payment, for reporting purposes, will be prorated over five years.
By front-loading five years' worth of contributions, the Obamas also are cutting possible future taxes on their estate since they have gotten $240,000 -- and any future appreciation on that amount -- out of their estate, says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, or AICPA.
To be sure, not every family has the means to sock away as much money into 529 plans. The five-year gift election is typically used by wealthy individuals or grandparents who want to help pay for college while reducing their taxable estates, says Joe Hurley, founder of Savingforcollege.com. "Most parents don't have that kind of money to put in all at once."
While the Obamas' investments are down with the bear market, there is a silver lining for investors in these plans. Investors who are underwater can liquidate the plan without penalties or taxes. Losses can be claimed as a miscellaneous itemized deduction, which can help reduce investors' taxes to the extent those deductions exceed 2% of their adjusted gross income, Mr. Hurley notes. Those who are in the alternative minimum tax, however, are out of luck since miscellaneous itemized deductions aren't usable under the AMT.
Write to Jane J. Kim at jane.kim@wsj.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
Obamas Pump Up College Savings
Parents Make Big Upfront '529' Investment for Their Daughters' Tuition
Article
By JANE J. KIM
Malia and Sasha Obama's college education appears to be taken care of in a massive contribution that the president and first lady made to a "529" college-savings plan in 2007.
But like everyone else, they have likely suffered big losses.
According to their 2008 tax returns, the Obamas took advantage of a unique feature of 529 plans that allows account owners to front-load five years' worth of contributions, $240,000 in total for the two girls. They did so without triggering gift taxes -- now levied on any gift exceeding $13,000 a year. Form 709, the federal gift-tax form, shows that Barack and Michelle Obama made equal contributions of $120,000 each, or $60,000 to each of the two children in 2007.
Senate disclosure forms released last year show that the contributions were made to Illinois's adviser-sold Bright Directions College Savings Program, in two age-based growth portfolios, which are designed to become more conservative the closer the child is to attending college. Assuming that the Obamas haven't changed their investments, one of those portfolios has lost roughly 35% in the past year through March, while the other one is down about 27%.
The filings offer a peek into how the Obamas are planning to pay for college for their daughters, Malia, now 10, and Sasha, seven. College tuition has soared in recent years, with average tuition and fees at private four-year colleges hitting $25,143 for the 2008-2009 academic year, according to the College Board. Meanwhile, average in-state tuition and fees at four-year public universities jumped to $6,585, up 6.4% from the previous year.
In recent years, tax-advantaged 529 plans have become a popular college-savings vehicle for many parents. In a 529 plan, savers put after-tax dollars into an account that typically offers a wide range of mutual funds.
Distributions and earnings are tax-free as long as they are used for higher education. Investors can invest in any plan, although they may get an additional state tax break if they invest in their own state's plan. The Illinois 529 plan, for example, offers a state-tax deduction for contributions.
A spokesman for the White House confirms that a payment was made in 2007 and that the payment, for reporting purposes, will be prorated over five years.
By front-loading five years' worth of contributions, the Obamas also are cutting possible future taxes on their estate since they have gotten $240,000 -- and any future appreciation on that amount -- out of their estate, says Tom Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants, or AICPA.
To be sure, not every family has the means to sock away as much money into 529 plans. The five-year gift election is typically used by wealthy individuals or grandparents who want to help pay for college while reducing their taxable estates, says Joe Hurley, founder of Savingforcollege.com. "Most parents don't have that kind of money to put in all at once."
While the Obamas' investments are down with the bear market, there is a silver lining for investors in these plans. Investors who are underwater can liquidate the plan without penalties or taxes. Losses can be claimed as a miscellaneous itemized deduction, which can help reduce investors' taxes to the extent those deductions exceed 2% of their adjusted gross income, Mr. Hurley notes. Those who are in the alternative minimum tax, however, are out of luck since miscellaneous itemized deductions aren't usable under the AMT.
Write to Jane J. Kim at jane.kim@wsj.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
WSJ on Annuity Strategies for Retirement Income - Fixed, Variable, Deferred
APRIL 18, 2009
Getting Smart About Annuities These products can be loaded with traps and fees. But there are valuable ways to use them to build a pension -- and salvage your nest egg.
Article in Wall Street Journal Encore Section
By ANNE TERGESEN and LESLIE SCISM
For years, many retirees were content to act as their own pension managers, a complex task that involves making a nest egg last a lifetime. Now, reeling from the stock-market meltdown, many are calling it quits -- and buying annuities to do the job for them.
In recent months, sales of plain-vanilla immediate annuities -- essentially insurance contracts that convert a lump-sum payment into lifelong payouts -- have hit an all-time high.
That's a big change from a few years ago. Then, the hot products were variable annuities whose value fluctuates with an underlying investment portfolio. Many purchase these products with riders that protect against stock-market losses and guarantee a minimum paycheck for life.
Annuities in general have never been popular with many financial advisers. For the most part, the products don't offer the potential for outsized gains. And once you hand over your money to an insurer, you either can't get it back or can do so only by forfeiting at least some of the guarantee you've paid for. Variable annuities, in particular, can be ridiculously complex and loaded with fees and hidden traps.
But for those grappling with investment losses, annuities today have an undeniable appeal. At first glance, they offer a way to restore some financial security to what are supposed to be your golden years. There is even evidence that retirees with regular paychecks are happier than those who rely exclusively on 401(k)s to supplement their Social Security. The latter "are more prone to depression due to concern about running out of money," says Stan Panis, a director in Sherman Oaks, Calif., for Advanced Analytical Consulting Group of Wayland, Mass., and author of a study about annuities and retirement satisfaction.
The problem: While many investors have a general idea of what an annuity is, few understand the strategies available for making these products a part of their holdings. You have to figure out how much to buy, whether to put your money to work immediately or gradually, and how to invest what remains.
Here are some of the best ways to do that.
Immediate Gratification
The immediate annuity is relatively straightforward: It allows you to convert a payment into monthly, quarterly or annual income for life. Most immediate annuities are fixed, which simply means they pay an amount that's established at the outset.
Typically, immediate annuities provide a significantly higher level of sustainable income than you'd be able to produce from your investment portfolio, assuming you stick to the convention of withdrawing no more than 4% of your nest egg per year. For example, a 65-year-old man who buys an immediate annuity today will receive some 8.4% a year of the amount he invested in the annuity.
The extra income is the result of the requirement that you surrender your principal to the insurer. Each payment consists not just of interest, but also of a portion of your principal, prorated over your remaining life expectancy. The payments are guaranteed to continue for the rest of your life. But when you die, they stop -- regardless of whether you've recouped the amount you paid for the annuity.
If you are willing to settle for a lower income, you can buy features designed to overcome some of the drawbacks of a traditional annuity. With one, for instance, your heirs will receive a set number of years of income if you don't live to collect it. (First, though, check whether buying a life-insurance policy would be cheaper.) Another raises payments by 2% or more annually to keep up with inflation -- a key feature, given the way inflation can erode purchasing power.
How much should you put into an annuity? If Social Security plus any pension you receive won't cover your monthly budget, many economists recommend buying an annuity for an amount that bridges the gap.
But if you're worried about leaving something for your heirs, Jim Otar, a financial planner in Thornhill, Ontario, recommends this approach: Annuitize just enough to meet your income needs -- in conjunction with the 4% annual withdrawals from your investment portfolio that most investment advisers consider prudent.
Consider a 65-year-old man with $1 million of investments who anticipates spending $60,000 a year, in addition to Social Security. That amounts to 6% of his $1 million -- a level that exceeds the recommended 4% withdrawal level. To not risk depleting that nest egg, the man would have to pare spending to $40,000 a year, indexed to inflation. Alternatively, he could put about $720,000 into an immediate annuity that would produce some $60,000 a year for life.
Another option from Mr. Otar: Put $450,000 into an annuity, which would give the man a payout of nearly $38,000 a year for life. To produce the other $22,000 needed to cover his annual expenses, he could withdraw the recommended 4% from the $550,000 that remains of his initial $1 million.
Of course, if the $550,000 nest egg declines in value, the man's income will fall, too. If so, he may have to tighten his belt or purchase an additional annuity, Mr. Otar says. But if he dies tomorrow, such an arrangement ensures his heirs will receive much more -- $550,000 versus the $280,000 he would have with an annuity that produces the entire $60,000 in income.
Longevity Rider
Another way to preserve more for yourself or your heirs is to buy a deferred-income annuity with a longevity feature. Like a conventional immediate annuity, this one produces an income for life. But the payments typically don't kick in until the policyholder turns 80 or 85. For $71,300, a 65-year-old man can get a $60,000-a-year payout starting at age 85; that compares with $714,430 for an immediate annuity, according to insurer MetLife Inc., whose product is called longevity income guarantee.
Knowing that this safety net will be in place, you may be able to withdraw a greater percentage of your savings earlier in retirement than would otherwise be prudent -- some 5% to 6% a year, compared with the typical 4%, says Jason Scott, managing director of the Retiree Research Center at Financial Engines, a Palo Alto, Calif., firm that manages 401(k) accounts. Payments may be timed to kick in when you may need help with rising medical or long-term-care costs.
When should you buy an annuity with a longevity rider? "When you retire," says Mr. Scott. The longer you wait, the more you'll pay for a given level of benefits, simply because your chances of surviving to receive payouts improve as you age.
In contrast, with a conventional immediate annuity, economists are divided over whether it's best to buy at retirement, or after age 70. That's when an unpleasant reality sets in: Your peers start dying in big enough numbers that the financial benefits of joining them in an annuity pool start to outweigh the costs.
Wading In
One way to hedge your bets is to "ladder" your purchases -- by buying immediate annuities in bits and pieces over time.
Proponents say that by doing so you'll reduce the odds of buying at an inopportune time. For instance, when interest rates are low -- as is the case today -- insurers offer skimpier payouts because they stand to earn less on the corporate and government bonds that back their payments.
Another reason to stagger your purchases: It gives you some flexibility to adjust your annuity purchases if your circumstances change, says Benjamin Goodman, director of actuarial consulting services at TIAA-CREF, a New York-based provider of low-cost annuities.
How should you construct your ladder? Mr. Otar uses this rule of thumb: First, decide how many years to spread the purchases over. Those who feel they can afford to take some risk may want to spread purchases over as many as four years, he says.
Then, he says, "the amount of premium you pay in the first year should be twice as much as in the second year, and so on." Someone who wants to annuitize $300,000 over three years should commit roughly $170,000 in year one, $85,000 in year two, and $45,000 in year three. By advising clients to buy more upfront, Mr. Otar seeks to reduce the amount of money that an individual would have at risk in the event of a bear market. (Sample Mr. Otar's calculator, which costs $99.99, free of charge at www.retirementoptimizer.com.)
Of course, these days, trusting your future to an insurer -- even a top-rated one -- requires a leap of faith. But in the event of an insurer's insolvency, industry-funded associations provide at least $100,000 in coverage for the guaranteed portions of annuity contracts held at an insolvent company. Check the site of the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com) for links to your state association's Web site, where, generally in the FAQs section, you can find the coverage limit.
So as not to exceed this limit, divide your purchases among highly rated carriers, says David Babbel, a professor of insurance and finance at the University of Pennsylvania's Wharton School.
When shopping, compare quotes from a number of insurers and mutual-fund companies. Web sites such as immediateannuties.com can help.
Upside Potential
While an immediate annuity will generate regular paychecks at once, it does nothing to help rebuild a depleted nest egg. That's where variable annuities with "living benefits" come in.
A variable annuity, in its simplest form, combines tax-deferred savings and, potentially, investment gains -- typically in mutual funds -- with insurance. So when you die, and even if the investments perform poorly, your heirs get a payout. Variable annuities with living benefits have investment-performance guarantees that kick in while the annuity owner is alive -- even if the investments tank.
The most popular form of a living-benefit rider sold in recent years provides a monthly income check from the date you elect benefits to start until you die, with benefits depending on your age at the start date. Some contracts also allow you to buy additional riders that let the income stream continue to a spouse.
These products give you the chance to benefit, after fees, from any market increases, and the insurer protects you on the downside. At a minimum, you get back your initial investment, spread out in monthly checks beginning at some point after you turn 59½, an age set by law. This is called the guaranteed-minimum-benefit base.
Under many living-benefit contracts, the buyer has two, and sometimes three, account balances to monitor. The first tracks the actual value of the stock-fund and bond-fund holdings. The others are different formulations of the guaranteed-minimum-benefit base. When you are ready to tap your income payments, the highest balance is used to calculate the payments.
Many contracts ratchet up the guaranteed base annually to incorporate investment gains in the underlying mutual funds, and many versions sold in recent years promise 5% to 7% compounded annual growth of the initial investment.
The bad news: The best deals are rapidly being pulled from the market. Insurers are trying to bring the guarantees in line with higher hedging costs and to meet stiff capital regulatory requirements showing they can make good on their promises.
So how are variable annuities best used, and who should buy them? In general, these are products for relatively well-off baby boomers, people whose investments total $500,000 to several million dollars. The most logical candidates are people in their 50s who don't need to convert investments into an income stream for at least five or 10 years. Those who need an income stream right away generally are better off buying immediate annuities.
A variable annuity with a guaranteed minimum benefit "gives you the fortitude to be in the market" if your inclination is to hunker down in safe but low-yielding investments as you enter the final stretch toward retirement, says Jerome Golden, president of Massachusetts Mutual Life Insurance Co.'s Income Management Strategies division.
Unlike immediate annuities, guaranteed-minimum variable annuities generally give buyers access to their principal should their plans change. But many contracts contain restrictions that make it costly to do so. Also, if the underlying investments perform badly and the payouts end up based on the higher guaranteed-minimum-benefit base, you must take the money in a stream of payments over years. There's no lump-sum payout of the guaranteed benefit base.
If you want all your money back, you will have to cash out the smaller sum that remains in your stock and bond funds, not the higher guaranteed amount.
Another caveat: If you withdraw more than the designated maximum annual amount, you could damage your minimum-payment guarantee. In such cases, the insurer has the right to reduce the amount it is obligated to pay out over your lifetime. The formulas for reduction vary from insurer to insurer.
What's Selling
For all their shortcomings, these guaranteed-minimum variable annuities appeal to many as a source of retirement income. The top seller is a type with a "guaranteed lifetime withdrawal benefit," under which owners can annually withdraw a specified maximum percentage of their fund account or guaranteed-benefit base, whichever is higher. Contracts sold in recent years generally allow 5%-a-year withdrawals for 60-year-olds, and 6% withdrawals for those in their 70s.
But in what has become a trend, Pacific Life Insurance Co., a top-10 variable-annuity seller, as of Jan. 1 reduced the withdrawal rate to 4%, from 5%, for new customers in their 60s in one of its popular offerings. Numerous other insurers have followed suit in making these reductions, and industry executives and consultants expect more announcements in coming weeks.
The other main type is a "guaranteed minimum income benefit" variable annuity. It generally requires you to annuitize to tap into the guaranteed-benefit base -- although thanks to the competitive frenzy, some contracts offer both withdrawal and annuitization features.
A word of warning: On the annuitization contracts, variable-annuity issuers often use life-expectancy estimates that are favorable to them in determining the level of annual payments. The result: Annual payments that could be significantly smaller than if you had the ability to shop around for the best deal.
Either way, annual fees typically total more than 3.5% of the account balance, and price increases now being pushed through by many companies are bringing costs to about 4%. The fees come out of the owner's fund account, which means they cut into the investment return.
All in all, the complexities of the contracts generally mean they need to be bought through financial advisers.
The Right Blend
In addition to protecting a portion of your nest egg, annuities can -- at least in theory -- help you rebuild the rest. The logic, says Moshe Milevsky, an associate professor of finance at the Schulich School of Business at York University in Toronto, is that with some income guaranteed, you may feel comfortable investing more of your portfolio in stocks. The big decision those in or near retirement face, he says, is "how much to allocate to regular stocks, bonds and mutual funds, versus" annuities with income guarantees.
To solve this puzzle, first figure out how much of your portfolio you'll need to annuitize. The percentage will depend on how much income you need as well as whether you use variable or immediate annuities.
For example, a 65-year-old man with a $1 million nest egg can generate $50,000 a year by putting about $600,000 into an immediate fixed annuity. Alternatively, he can get the same $50,000 with a variable annuity that allows for a 5%-a-year withdrawal -- but only if he puts the entire $1 million into the contract.
He also can use a combination of the two. For example, he might put $400,000 into an immediate annuity that produces $33,500 a year and $325,000 into a variable contract that plugs the $16,000 or so gap -- assuming it has a 5%-a-year withdrawal feature.
To figure out how to invest the $275,000 that remains of his $1 million, this individual would first have to figure out which bucket -- conservative or risky -- his annuities belong in.
With immediate fixed annuities, it's straightforward: "These are substitutes for bonds," says Tom Idzorek, chief investment officer at Ibbotson Associates, which designs portfolios of stocks, bonds and annuities. So, if the man above with the $1 million portfolio were to put $400,000 into immediate fixed annuities, he would effectively hold 40% in bonds.
Variable contracts with income guarantees, on the other hand, can be treated as either stocks or bonds -- and their classification may change over time. Such an annuity should be viewed as a bond substitute when the money invested substantially declines in value. That's because the insurer guarantees that, at the very least, you'll receive a bond-like 5% annual return on your initial deposit for the rest your life, says Prof. Milevsky. If, however, the investment fares well, you should treat it as part bond and part stock.
How much should be assigned to each? First, look at the way the money in the variable account is invested. Ideally, those who buy these products should pick the riskiest blend allowed -- say, 70% in stocks and 30% in bonds. (As insurers try to reduce their exposure to risk, many are requiring annuity buyers to put at least 30% into bond funds.)
But due to the guarantee, the variable annuity's actual risk profile is more conservative than it appears. Assuming an investment horizon of 20 or more years, a 70/30 investment mix would behave more like a 50/50 combination, says Mr. Idzorek.
As a result, a 65-year-old man who puts $325,000 into a variable-annuity contract for all practical purposes has 50% of the value, or $162,500, in stocks and 50% in bonds.
As a percentage of his $1 million portfolio, this translates into 16% in stocks and 16% in bonds. Combined with the $400,000, or 40%, he invested in immediate fixed annuities -- in the example above -- the man would have a total of 56% in bonds and 16% in stocks. If his goal is to achieve an overall portfolio mix of 40% in stocks and 60% in bonds, he ought to put the vast majority of the $275,000 that remains in his portfolio into stocks, says Mr. Idzorek.
—Ms. Tergesen is a staff reporter for The Wall Street Journal in New York. Ms. Scism is a news editor for the Journal in South Brunswick, N.J. They can be reached at encore@wsj.com.
Printed in The Wall Street Journal, page R1
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
Getting Smart About Annuities These products can be loaded with traps and fees. But there are valuable ways to use them to build a pension -- and salvage your nest egg.
Article in Wall Street Journal Encore Section
By ANNE TERGESEN and LESLIE SCISM
For years, many retirees were content to act as their own pension managers, a complex task that involves making a nest egg last a lifetime. Now, reeling from the stock-market meltdown, many are calling it quits -- and buying annuities to do the job for them.
In recent months, sales of plain-vanilla immediate annuities -- essentially insurance contracts that convert a lump-sum payment into lifelong payouts -- have hit an all-time high.
That's a big change from a few years ago. Then, the hot products were variable annuities whose value fluctuates with an underlying investment portfolio. Many purchase these products with riders that protect against stock-market losses and guarantee a minimum paycheck for life.
Annuities in general have never been popular with many financial advisers. For the most part, the products don't offer the potential for outsized gains. And once you hand over your money to an insurer, you either can't get it back or can do so only by forfeiting at least some of the guarantee you've paid for. Variable annuities, in particular, can be ridiculously complex and loaded with fees and hidden traps.
But for those grappling with investment losses, annuities today have an undeniable appeal. At first glance, they offer a way to restore some financial security to what are supposed to be your golden years. There is even evidence that retirees with regular paychecks are happier than those who rely exclusively on 401(k)s to supplement their Social Security. The latter "are more prone to depression due to concern about running out of money," says Stan Panis, a director in Sherman Oaks, Calif., for Advanced Analytical Consulting Group of Wayland, Mass., and author of a study about annuities and retirement satisfaction.
The problem: While many investors have a general idea of what an annuity is, few understand the strategies available for making these products a part of their holdings. You have to figure out how much to buy, whether to put your money to work immediately or gradually, and how to invest what remains.
Here are some of the best ways to do that.
Immediate Gratification
The immediate annuity is relatively straightforward: It allows you to convert a payment into monthly, quarterly or annual income for life. Most immediate annuities are fixed, which simply means they pay an amount that's established at the outset.
Typically, immediate annuities provide a significantly higher level of sustainable income than you'd be able to produce from your investment portfolio, assuming you stick to the convention of withdrawing no more than 4% of your nest egg per year. For example, a 65-year-old man who buys an immediate annuity today will receive some 8.4% a year of the amount he invested in the annuity.
The extra income is the result of the requirement that you surrender your principal to the insurer. Each payment consists not just of interest, but also of a portion of your principal, prorated over your remaining life expectancy. The payments are guaranteed to continue for the rest of your life. But when you die, they stop -- regardless of whether you've recouped the amount you paid for the annuity.
If you are willing to settle for a lower income, you can buy features designed to overcome some of the drawbacks of a traditional annuity. With one, for instance, your heirs will receive a set number of years of income if you don't live to collect it. (First, though, check whether buying a life-insurance policy would be cheaper.) Another raises payments by 2% or more annually to keep up with inflation -- a key feature, given the way inflation can erode purchasing power.
How much should you put into an annuity? If Social Security plus any pension you receive won't cover your monthly budget, many economists recommend buying an annuity for an amount that bridges the gap.
But if you're worried about leaving something for your heirs, Jim Otar, a financial planner in Thornhill, Ontario, recommends this approach: Annuitize just enough to meet your income needs -- in conjunction with the 4% annual withdrawals from your investment portfolio that most investment advisers consider prudent.
Consider a 65-year-old man with $1 million of investments who anticipates spending $60,000 a year, in addition to Social Security. That amounts to 6% of his $1 million -- a level that exceeds the recommended 4% withdrawal level. To not risk depleting that nest egg, the man would have to pare spending to $40,000 a year, indexed to inflation. Alternatively, he could put about $720,000 into an immediate annuity that would produce some $60,000 a year for life.
Another option from Mr. Otar: Put $450,000 into an annuity, which would give the man a payout of nearly $38,000 a year for life. To produce the other $22,000 needed to cover his annual expenses, he could withdraw the recommended 4% from the $550,000 that remains of his initial $1 million.
Of course, if the $550,000 nest egg declines in value, the man's income will fall, too. If so, he may have to tighten his belt or purchase an additional annuity, Mr. Otar says. But if he dies tomorrow, such an arrangement ensures his heirs will receive much more -- $550,000 versus the $280,000 he would have with an annuity that produces the entire $60,000 in income.
Longevity Rider
Another way to preserve more for yourself or your heirs is to buy a deferred-income annuity with a longevity feature. Like a conventional immediate annuity, this one produces an income for life. But the payments typically don't kick in until the policyholder turns 80 or 85. For $71,300, a 65-year-old man can get a $60,000-a-year payout starting at age 85; that compares with $714,430 for an immediate annuity, according to insurer MetLife Inc., whose product is called longevity income guarantee.
Knowing that this safety net will be in place, you may be able to withdraw a greater percentage of your savings earlier in retirement than would otherwise be prudent -- some 5% to 6% a year, compared with the typical 4%, says Jason Scott, managing director of the Retiree Research Center at Financial Engines, a Palo Alto, Calif., firm that manages 401(k) accounts. Payments may be timed to kick in when you may need help with rising medical or long-term-care costs.
When should you buy an annuity with a longevity rider? "When you retire," says Mr. Scott. The longer you wait, the more you'll pay for a given level of benefits, simply because your chances of surviving to receive payouts improve as you age.
In contrast, with a conventional immediate annuity, economists are divided over whether it's best to buy at retirement, or after age 70. That's when an unpleasant reality sets in: Your peers start dying in big enough numbers that the financial benefits of joining them in an annuity pool start to outweigh the costs.
Wading In
One way to hedge your bets is to "ladder" your purchases -- by buying immediate annuities in bits and pieces over time.
Proponents say that by doing so you'll reduce the odds of buying at an inopportune time. For instance, when interest rates are low -- as is the case today -- insurers offer skimpier payouts because they stand to earn less on the corporate and government bonds that back their payments.
Another reason to stagger your purchases: It gives you some flexibility to adjust your annuity purchases if your circumstances change, says Benjamin Goodman, director of actuarial consulting services at TIAA-CREF, a New York-based provider of low-cost annuities.
How should you construct your ladder? Mr. Otar uses this rule of thumb: First, decide how many years to spread the purchases over. Those who feel they can afford to take some risk may want to spread purchases over as many as four years, he says.
Then, he says, "the amount of premium you pay in the first year should be twice as much as in the second year, and so on." Someone who wants to annuitize $300,000 over three years should commit roughly $170,000 in year one, $85,000 in year two, and $45,000 in year three. By advising clients to buy more upfront, Mr. Otar seeks to reduce the amount of money that an individual would have at risk in the event of a bear market. (Sample Mr. Otar's calculator, which costs $99.99, free of charge at www.retirementoptimizer.com.)
Of course, these days, trusting your future to an insurer -- even a top-rated one -- requires a leap of faith. But in the event of an insurer's insolvency, industry-funded associations provide at least $100,000 in coverage for the guaranteed portions of annuity contracts held at an insolvent company. Check the site of the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com) for links to your state association's Web site, where, generally in the FAQs section, you can find the coverage limit.
So as not to exceed this limit, divide your purchases among highly rated carriers, says David Babbel, a professor of insurance and finance at the University of Pennsylvania's Wharton School.
When shopping, compare quotes from a number of insurers and mutual-fund companies. Web sites such as immediateannuties.com can help.
Upside Potential
While an immediate annuity will generate regular paychecks at once, it does nothing to help rebuild a depleted nest egg. That's where variable annuities with "living benefits" come in.
A variable annuity, in its simplest form, combines tax-deferred savings and, potentially, investment gains -- typically in mutual funds -- with insurance. So when you die, and even if the investments perform poorly, your heirs get a payout. Variable annuities with living benefits have investment-performance guarantees that kick in while the annuity owner is alive -- even if the investments tank.
The most popular form of a living-benefit rider sold in recent years provides a monthly income check from the date you elect benefits to start until you die, with benefits depending on your age at the start date. Some contracts also allow you to buy additional riders that let the income stream continue to a spouse.
These products give you the chance to benefit, after fees, from any market increases, and the insurer protects you on the downside. At a minimum, you get back your initial investment, spread out in monthly checks beginning at some point after you turn 59½, an age set by law. This is called the guaranteed-minimum-benefit base.
Under many living-benefit contracts, the buyer has two, and sometimes three, account balances to monitor. The first tracks the actual value of the stock-fund and bond-fund holdings. The others are different formulations of the guaranteed-minimum-benefit base. When you are ready to tap your income payments, the highest balance is used to calculate the payments.
Many contracts ratchet up the guaranteed base annually to incorporate investment gains in the underlying mutual funds, and many versions sold in recent years promise 5% to 7% compounded annual growth of the initial investment.
The bad news: The best deals are rapidly being pulled from the market. Insurers are trying to bring the guarantees in line with higher hedging costs and to meet stiff capital regulatory requirements showing they can make good on their promises.
So how are variable annuities best used, and who should buy them? In general, these are products for relatively well-off baby boomers, people whose investments total $500,000 to several million dollars. The most logical candidates are people in their 50s who don't need to convert investments into an income stream for at least five or 10 years. Those who need an income stream right away generally are better off buying immediate annuities.
A variable annuity with a guaranteed minimum benefit "gives you the fortitude to be in the market" if your inclination is to hunker down in safe but low-yielding investments as you enter the final stretch toward retirement, says Jerome Golden, president of Massachusetts Mutual Life Insurance Co.'s Income Management Strategies division.
Unlike immediate annuities, guaranteed-minimum variable annuities generally give buyers access to their principal should their plans change. But many contracts contain restrictions that make it costly to do so. Also, if the underlying investments perform badly and the payouts end up based on the higher guaranteed-minimum-benefit base, you must take the money in a stream of payments over years. There's no lump-sum payout of the guaranteed benefit base.
If you want all your money back, you will have to cash out the smaller sum that remains in your stock and bond funds, not the higher guaranteed amount.
Another caveat: If you withdraw more than the designated maximum annual amount, you could damage your minimum-payment guarantee. In such cases, the insurer has the right to reduce the amount it is obligated to pay out over your lifetime. The formulas for reduction vary from insurer to insurer.
What's Selling
For all their shortcomings, these guaranteed-minimum variable annuities appeal to many as a source of retirement income. The top seller is a type with a "guaranteed lifetime withdrawal benefit," under which owners can annually withdraw a specified maximum percentage of their fund account or guaranteed-benefit base, whichever is higher. Contracts sold in recent years generally allow 5%-a-year withdrawals for 60-year-olds, and 6% withdrawals for those in their 70s.
But in what has become a trend, Pacific Life Insurance Co., a top-10 variable-annuity seller, as of Jan. 1 reduced the withdrawal rate to 4%, from 5%, for new customers in their 60s in one of its popular offerings. Numerous other insurers have followed suit in making these reductions, and industry executives and consultants expect more announcements in coming weeks.
The other main type is a "guaranteed minimum income benefit" variable annuity. It generally requires you to annuitize to tap into the guaranteed-benefit base -- although thanks to the competitive frenzy, some contracts offer both withdrawal and annuitization features.
A word of warning: On the annuitization contracts, variable-annuity issuers often use life-expectancy estimates that are favorable to them in determining the level of annual payments. The result: Annual payments that could be significantly smaller than if you had the ability to shop around for the best deal.
Either way, annual fees typically total more than 3.5% of the account balance, and price increases now being pushed through by many companies are bringing costs to about 4%. The fees come out of the owner's fund account, which means they cut into the investment return.
All in all, the complexities of the contracts generally mean they need to be bought through financial advisers.
The Right Blend
In addition to protecting a portion of your nest egg, annuities can -- at least in theory -- help you rebuild the rest. The logic, says Moshe Milevsky, an associate professor of finance at the Schulich School of Business at York University in Toronto, is that with some income guaranteed, you may feel comfortable investing more of your portfolio in stocks. The big decision those in or near retirement face, he says, is "how much to allocate to regular stocks, bonds and mutual funds, versus" annuities with income guarantees.
To solve this puzzle, first figure out how much of your portfolio you'll need to annuitize. The percentage will depend on how much income you need as well as whether you use variable or immediate annuities.
For example, a 65-year-old man with a $1 million nest egg can generate $50,000 a year by putting about $600,000 into an immediate fixed annuity. Alternatively, he can get the same $50,000 with a variable annuity that allows for a 5%-a-year withdrawal -- but only if he puts the entire $1 million into the contract.
He also can use a combination of the two. For example, he might put $400,000 into an immediate annuity that produces $33,500 a year and $325,000 into a variable contract that plugs the $16,000 or so gap -- assuming it has a 5%-a-year withdrawal feature.
To figure out how to invest the $275,000 that remains of his $1 million, this individual would first have to figure out which bucket -- conservative or risky -- his annuities belong in.
With immediate fixed annuities, it's straightforward: "These are substitutes for bonds," says Tom Idzorek, chief investment officer at Ibbotson Associates, which designs portfolios of stocks, bonds and annuities. So, if the man above with the $1 million portfolio were to put $400,000 into immediate fixed annuities, he would effectively hold 40% in bonds.
Variable contracts with income guarantees, on the other hand, can be treated as either stocks or bonds -- and their classification may change over time. Such an annuity should be viewed as a bond substitute when the money invested substantially declines in value. That's because the insurer guarantees that, at the very least, you'll receive a bond-like 5% annual return on your initial deposit for the rest your life, says Prof. Milevsky. If, however, the investment fares well, you should treat it as part bond and part stock.
How much should be assigned to each? First, look at the way the money in the variable account is invested. Ideally, those who buy these products should pick the riskiest blend allowed -- say, 70% in stocks and 30% in bonds. (As insurers try to reduce their exposure to risk, many are requiring annuity buyers to put at least 30% into bond funds.)
But due to the guarantee, the variable annuity's actual risk profile is more conservative than it appears. Assuming an investment horizon of 20 or more years, a 70/30 investment mix would behave more like a 50/50 combination, says Mr. Idzorek.
As a result, a 65-year-old man who puts $325,000 into a variable-annuity contract for all practical purposes has 50% of the value, or $162,500, in stocks and 50% in bonds.
As a percentage of his $1 million portfolio, this translates into 16% in stocks and 16% in bonds. Combined with the $400,000, or 40%, he invested in immediate fixed annuities -- in the example above -- the man would have a total of 56% in bonds and 16% in stocks. If his goal is to achieve an overall portfolio mix of 40% in stocks and 60% in bonds, he ought to put the vast majority of the $275,000 that remains in his portfolio into stocks, says Mr. Idzorek.
—Ms. Tergesen is a staff reporter for The Wall Street Journal in New York. Ms. Scism is a news editor for the Journal in South Brunswick, N.J. They can be reached at encore@wsj.com.
Printed in The Wall Street Journal, page R1
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
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