Month: March 2002

Your Representatives in Action!

When the state legislature adjourned two weeks ago, politicians from both sides of the aisle breathed a sigh of relief and scurried out of Olympia to begin work on their re-election campaigns. They were only too happy to wash from their hands any gruesome traces of the bad budget bills passed this session.

The onset of the recession and Tim Eyman’s dreaded property-tax-limit initiative blew a $1.6 billion hole in the second year of the state’s current two-year budget. The legislature’s solution, however, is no solution at all.

Two measures are meant to raise new revenue: a risky “securitization” scheme to sell future tobacco lawsuit funds in the form of bonds (which means we’ll only end up with, at maximum, 70 cents on the dollar) and an equally risky move to join the Big Game multi-state lottery. Does gambling increase during a recession or does it fall? You guess.

A third measure drew $325 million from the state’s emergency reserves. But this still left a $716 million hole in the budget. The legislature filled it with budget cuts, primarily to education and social services.

Gov. Locke began his current term with a vow to become “The Education Governor,” yet it took two citizens’ initiatives, passed last fall, to set aside funds for reducing class sizes and increasing teachers’ pay. Those initiatives have been undermined by the legislature’s budget “fix.”

$98.6 million will be cut from public schools, $6 million of this from the Seattle School District alone. Programs that will lose out include: school safety, block grants, reading and math assistance programs, school nursing staff, class-size reduction funds, and teacher training funds. Teachers will lose one planning day a year and be forced to pay more for their health insurance–back-door moves that largely nullify the pay increase that voters approved last November. In addition, the state has changed several formulas for allocating funds to various school districts; this will save the state money, while shifting more of the financial burden for basic school operations onto local school districts and taxpayers.

Higher education took its share of cuts, too. Operating funds to community colleges, which serve a more impoverished and diverse student body, were slashed by 3%, which will mean a 12% tuition increase for students who can least afford it. Four-year universities were cut by 5%, including $23 million from the University of Washington’s budget. The UW has announced plans to hike tuition by 16%, but that will only fill $10 million of the hole. The rest will come from cuts in health care, pension benefits, and cost-of-living increases for UW employees.

Obviously Locke and the legislature have forgotten that, when Boeing execs announced their move to Chicago, they cited the lagging quality of education in Washington schools as a reason.

Social service advocates had braced themselves for deep cuts and were relieved when the legislature didn’t slash as much from the budget as Gov. Locke had originally proposed in his draft budget. But the cuts are still painful, particularly for the disabled.

The state is eliminating Supplemental Security Income payments to folks who receive federal disability payments. State SSI amounts to anywhere from $5 to $25 per month for disabled folks, but every tiny bit helps when you already stand in line at the food bank (behind an increasing number of newly unemployed people) and can’t afford high rents. Even worse, the General Assistance to Unemployable fund was cut by $5.4 million. This money provides an average of $339 per month to people so severely disabled that they will never be able to work–arguably the most vulnerable population in the state.

Another vulnerable population–children–also lost ground. The Early Childhood Education Program (ECAP) was cut by $838,000, Head Start lost $235,000, the Women Infants & Children (WIC) health and nutrition program lost $423,000, and over 25,000 undocumented immigrant children were thrown off state Medicaid rolls. They will qualify for the state’s Basic Health Plan, but there’s already a long waiting list of folks who want to get on the BHP. And once there, these children won’t get free health care; their parents will have to pay a portion or all of the premium, and they won’t have access to interpreter services. In short, these children–whose parents literally provide the food that goes onto our tables–have lost access to health care.

Nearly as heartbreaking is the $24 million cut in Medicaid reimbursements to pharmacies. Medicaid patients will be turned away from many pharmacies and often find it impossible to get prescriptions filled. At the same time, the legislature allowed a promising prescription drug bill to die in committee in the State House. House Democrats showed their love for the state’s biotech industry at the direct expense of the poor and elderly. Let Grandma die; Immunex shareholders must have their guaranteed rate of return!

Speaking of Grandma, the state also cut $2.8 million from Medicaid reimbursements to nursing homes, which will guarantee more substandard conditions in these establishments.

In a year in which the lack of foster families was cited as a major problem in this state, the legislature passed several bills (none of them requiring extra funding) to recruit and provide some services for foster parents; however, it also froze monthly payments to foster families.

This is not the only case where the legislature gave with one hand and took away with the other. It passed a wonderful and long-overdue drug reform sentencing law that called for increased treatment for non-violent drug offenders. But the budget bill cut $4 million in drug abuse support programs. Senseless.

Equally senseless is the cut in job placement services for folks recently kicked off Welfare.

The remaining cuts involve: a state hiring freeze and 900 lay-offs, the loss of cost-of-living increases for state workers, higher health co-payments for state employees, and the loss of funds to county and city governments that suffered severe cuts in the wake of I-695. The state stepped in temporarily to prop up local governments when car tab taxes disappeared, but now those governments–particularly in rural areas where unemployment runs close to 20%–will have to fend for themselves.

As if this weren’t bad enough, the legislature adjourned without voting on a bill to slightly increase liquor taxes; this left Gary Locke with the decision on how to fill the last $31 million hole left in the budget. Locke has said he won’t draw further on the state’s reserves; instead, he’ll make further cuts. In typical Gov. Jellyfish fashion, however, he hasn’t announced yet what those cuts will be. He’s stalling, hoping that the economists’ happy talk is really true, and the recession will soon be over. If only those sales taxes would rise again, then he wouldn’t have to do anything (his favorite modus operandi).

Without addressing our screwed-up tax structure and plugging some of the tax loopholes for big businesses, the legislature will return to the same problem next year, when they’re likely to face a $1 billion budget shortfall. Unfortunately, we don’t have either a governor or Democratic Party (forget the Republicans) with the guts to do what’s necessary.

Qwest and Immunex: Your Local Enron Wannabes

Enron is on everyone’s lips. It’s sparked over 30 separate bills introduced in Congress to reform everything from accounting to 401(k) plans. But the Enron road–a too-fast expansion followed by a spectacular collapse–is not unique. A couple of local examples quickly come to mind.

Last week, Immunex, the local high-flying biotech pharmaceutical company, admitted that it had a $671 million off-balance-sheet liability from the construction of its waterfront headquarters in Seattle. Like Enron, Immunex had used a tricky accounting move (setting up an outside partnership) to hide the debt and construction costs from investors, thereby inflating its earnings. Immunex called it a “synthetic lease.”

Now, I’d love to ask my landlord for one of those, but he wouldn’t go for it. Neither should we. Immunex bought the Elliott Bay property from the Port of Seattle, after finagling a new, publicly-financed $19 million overpass so its employees wouldn’t have to stop at a train crossing. That $19 million came from the City, Port of Seattle, King County, and the federal government. That money could have filled a lot of potholes and financed partial construction of a monorail through the same area, instead, it’s money down the toilet.

With the recent news that Immunex is being bought out by California-based Amgen, an obvious question arises: what will happen now to the Elliott Bay headquarters construction? Immunex originally said it would build 15 separate buildings, including its new headquarters and a state-of-the-art research facility, on that 19-acre parcel over a period of 15 years. Everything is now up in the air, especially after Immunex’s bombshell.

The original cost of the construction was estimated at $450 million in 2000, but Immunex’s liability is now $671 million. With costs spiraling upwards, Amgen may abandon all or a part of Immunex’s plans, sell the property, or, worst of all, simply let the property sit idle while it appreciates in value. Or Amgen could do what Dynegy did to Enron: cry foul and reverse its decision to buy Immunex.

This would leave Immunex with a big, newly disclosed debt on its balance sheet. But that’s not its only problem. Last week, Zymogenetics filed a lawsuit charging that Immunex infringed on six of its patents when producing Enbrel, Immunex’s cash-cow drug. And a month ago, the medical journal Lancet reported that 4 patients in a Chicago hospital had developed lupus from taking Enbrel. Lawsuits are expensive and eat into cash flow. Even more expensive would be a drug recall, because Enbrel is Immunex’s main money-making product, and none of the other drug it has in development are nearly as promising.

You would think that the local newspapers and TV stations would be all over this story, but you’d be wrong. Local companies can do no wrong, as Microsoft, Amazon, and Boeing (who’s no longer local, but still benefits from favorable press here) have discovered.

So a company based in Denver, Colorado, which has a virtual lock on local phone service in a 14-state region (including Washington State) and a reputation for shoddy customer service should be fair game, right? Not so.

I’m talking about Qwest, of course. Nearly everyone I know has a story to tell about double billing, denial of service, a DSL line that unaccountably stopped working, getting billed for services not ordered, waiting weeks for a line to be installed, and a host of other complaints about Qwest.

Qwest has traveled a long way down the Enron road. After two years of rapid expansion, including the purchase of UW West in 2000, Qwest has billions of dollars of debt on its balance sheet and no cash. It recently drew on a $4 billion line of credit to pay its day-to-day operating expenses (similar to using your credit card to pay rent, buy food, and pay your other bills).

All of this debt adds up to trouble. This summer, Qwest will have $850 million in debt payments coming due; that amount will rise higher as it draws on its line of credit. In addition, last week Moody’s Investors Service cut Qwest’s credit rating down to one level above junk status and warned that Qwest’s rating could fall further. That means Qwest’s interest payments on its debt will soon be skyrocketing.

Qwest says it has a plan to boost cash flow and eventually pay off its debts: sell some of its assets, cut its expenses, and issue “equity-based securities.”

These moves will probably add to the company’s woes. Now is not the time to be selling off assets. All the other big telecom companies are in bad shape, too, with too much debt and too little cash flow, so there are no buyers. Cutting expenses–in particular, laying off employees–will only drive customers away and mean additional fines for Qwest, who already owes its Washington State customers over $3 million for service problems. The vague term “equity-based securities” could mean nearly anything in today’s free-for-all accounting climate. Investors, however, are becoming wary of derivatives, junk bonds, and other risky financial schemes. Qwest may find that no one wants to pay very much for bits and pieces of a falling telecom empire.

Probably Qwest will default on some or all of its debt. That means bankruptcy. And if you think that it’s hard to get good customer service from Qwest now, just try when it goes into Chapter 11. Bankruptcy also can mean a big jump in rates or an expensive taxpayer bailout (as with California utility companies)–or both at the same time.

The Seattle Times and P-I should be on top of this story, since it has the potential to effect everyone who has a telephone. Instead, they’re busy writing flattering stories about Microsoft and Boeing and engaging in happy talk about the end of the recession (it’s coming any day now!). They’re sleepwalking, instead of practicing journalism.

Remember, you read it here first.

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