March 10, 2011
At least they agree that it should be repealed.
The House of Representatives has approved a repeal of the 1099 mandate, which would require all businesses to file an Internal Revenue Service (IRS) form 1099 for every vendor from whom they annually buy $600 worth of goods or services, beginning next year. However, to pay for the bill, it voted to take another jab at the Democrats' health care reform bill by offsetting the revenue lost with a measure that would require more Americans to repay overpayments of health insurance subsidies should their income become greater than it was when the subsidy was originally calculated.
On the other hand, the Senate, in its February vote, chose to offset the revenue lost by the 1099 repeal with a provision rescinding about $40 billion in funds appropriated but unspent, setting the stage for a duel between both chambers of Congress over how exactly to fund the repeal.
"Clearly there is strong, bipartisan support to repeal the 1099 provisions so that small businesses can focus on what they do bestâ€”creating jobs," said House Ways and Means Committee Chairman Dave Camp (R-MI). "With more than 70% of the House, including 76 Democrats, voting for repeal of the 1099 provisions, I urge the Senate to move quickly to take up and pass this legislation so we can send a bipartisan bill to the president."
While Camp suggests that the House approach's bipartisan pedigree should put it on the fast track to passage in the Senate, the original Senate vote was equally bipartisan, with officials on both sides of the aisle voting 81-17 to repeal the 1099 requirement and pay for it with rescinded funds. The disagreement could hold up the repeal effort as Congress decides exactly how to pay for the measure.
For his part, Senate Majority Leader Harry Reid (D-NV) recently came out in favor of the House's approach, which could signal that Democrats are open to weakening their signature legislative achievement if it allows for a quick, quiet repeal of the 1099 mandate.
Stay tuned to NACM's eNews and Credit Real-Time blog for future updates.
Jacob Barron, NACM staff writer
Words to the Wise
"Ultimately, it is not what we possess that makes us successfulâ€”it's what we become in our head and our heartâ€”how we go out and serve people."
- Tom Flick, 2011 Credit Congress Super Session Speaker
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In what's quickly becoming one of the worst-kept secrets on Capitol Hill, the strong banking lobby has apparently found lawmakers on both sides of the aisle willing to help delay a Federal Reserve proposal that would cap debit-card interchange fees that cost small business millions, perhaps billions, annually.
Behind the scenes, big financial institutions are putting money behind their lobbying efforts in an effort to significantly delay or permanently derail Fed-proposed caps on interchange fees, better known as "swipe fees" charged to businesses when a consumer uses a debit card. Lawmakers in the Senate and House are reportedly already working on proposals to prevent the provisions from being enacted as planned on July 21. Some proposals are calling for a delay of at least two years and a full, likely costly, economic impact study. The new rumblings have even led Fed Chairman Ben Bernanke to predict the original deadline to have the final swipe fee proposal written, late April, may come and go without its completion.
Curiously, the delay movement even has some support from a handful of senators who voted in favor of the provisions just last year. It also appears that powerful House lawmakers are content with waiting on the sidelines to see how the debate plays out in the Senate before pushing its own proposals on the matter.
As part of the Dodd-Frank Act, the sweeping financial reform package inked into law last year, the Fed unveiled a proposal that would set a maximum cap on swipe fees at $0.12 per transaction. The Fed estimated that merchants were charged, on average, $0.44 per transaction, and that revenue from said fees comprised somewhere between $12 and $16 billion for the financial industry in 2009 alone. The Fed noted the proposed regulations would establish standards that are more "reasonable and proportional to the cost incurred by the issuer for the transaction."
The proposal, if implemented without changes, would be a significant victory for small businesses that saw the fees as unfair and a serious financial burden. Subsequently, the move, at best, would leave uncertainty at corporations such as Visa and MasterCard and, at worst, would have a severely negative impact on their revenue streams.
Brian Shappell, NACM staff writer
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A recent Senate hearing focused on the Small Business Administration's (SBA's) efforts to combat waste, fraud and abuse in its myriad contracting programs. Sen. Olympia Snowe (R-ME) was especially incensed by SBA's apparent lackadaisical attitude toward contractors referred for suspension or debarment.
According to the SBA Office of the Inspector General, 26 contractors have been recommended for suspension or debarment since fiscal year 2009, yet the SBA has suspended only three. Additionally, in March of last year, the Government Accountability Office (GAO) reported that extensive fraud existed within the agency's 8(a) program and that 14 ineligible firms had received $325 million in sole-source and set-aside contracts.
"I find it unconscionable that the SBA has dragged its feet when it comes to debarring or suspending contractors who have deceived the federal governmentâ€”and the American taxpayersâ€”by fraudulently obtaining contracts," said Snowe, ranking member of the Committee on Small Business and Entrepreneurship, which hosted the hearing. "Our Committee's utmost responsibility to the American taxpayer is to provide stringent oversight of all of the SBA's programs, and I will use any opportunity I can to probe instances of waste, fraud and abuse, and hold officials accountable for their efforts to eradicate any form of exploitation."
In her testimony, SBA Inspector General Peggy Gustafson detailed how companies are taking advantage of the agency's programs. "Most of our investigations of procurement fraud involve false statements by those who seek to exploit SBA programs for their own personal gain by either (1) falsely claiming to meet eligibility criteria or (2) fraudulently using an eligible business as a 'pass-through' so that an ineligible company will actually perform the work and receive most of the profits," she said. "If ineligible companies improperly profit from preferential contracting through fraud and illegal conduct, legitimate companies necessarily have fewer opportunities to benefit from these programs."
A significant impediment to prosecution in these cases is the fact that, most of the time, this type of fraud results in no financial loss for the government. "Unlike a case where a contractor has falsified invoices for goods or services that were not provided, in many cases of preferential contracting fraud, the government does obtain the particular good or service that it paid for and sought to procure," said Gustafson. "Without an associated and definable loss to the government, criminal prosecutors are often reluctant to pursue action against these companies or, if they do pursue them, may only be able to obtain limited sentences."
Jacob Barron, NACM staff writer
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The word "mistake" gets bandied about a lot during the hard times at a company/within an industry, as does the question "What's the biggest mistake a company can make?" for that matter. Pam Krank, president of The Credit Department Inc., believes the biggest mistake frequently made by companies and their credit departments is not forming a credit committee.
"Too many simply rely on their credit policy and react to problems in the portfolio," said Krank, who will present the NACM teleconference "How to Form an Effective Credit Committee" on March 16 at 3:00pm (EST). "There's a growing chasm between the strategic, high-value-add credit management leaders and those credit managers focused primarily on credit and collection tasks. Surprises happen when no credit committee exists, and sometimes uninformed, non-strategic credit managers lose their jobs."
Krank noted that credit committees are key in helping solve company process issues that affect receivables quality and for managing risks that fall outside of the existing company credit policy. But as more credit managers are asked to do more with less and balance sometimes conflicting mandates to lessen credit risk while growing sales, many credit managers aren't focusing on the bigger picture. Krank's teleconference is designed to offer a framework for credit managers to focus their efforts better through a well established committee. Key issues covered will include:
â€˘ Raising the visibility of the credit department within your company
â€˘ Determining who needs to be a part of the committee
â€˘ Making decisions in the committee
â€˘ Distinguishing the differences between credit decisions and business decisions
â€˘ Setting up a formal process for action items
â€˘ Improving accountability for decisions made within the organization
"Recent bankruptcies have brought to light the importance of credit committees to drive selling strategies in dealing with insolvent companies," said Krank. "Credit managers need a vehicle like a credit committee to build consensus on approaches with these high-risk companies prior to, during and after bankruptcy."
Click here to register for this teleconference.
Brian Shappell, NACM staff writer
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House Ways and Means Committee Chairman Dave Camp (R-MI) is criticizing the White House for promising action on one pending free trade agreement (FTA), rather than all three.
In a response to a letter he received from U.S. Trade Representative Ron Kirk that indicated the president would move forward with a pending FTA with South Korea, Camp reiterated a request that the administration advance two other FTAs pending with Panama and Colombia as well. Specifically, Camp has urged quick action on all three FTAs to allow Congress to consider them by July 1.
"Your letter is completely silent on our pending agreements with Colombia and Panama. As you know, I strongly believe that all three agreements should be considered by Congress by July 1, and I have repeatedly urged the administration to advance the Colombia and Panama agreements," said Camp in his reply to Kirk. "All three agreements are important to U.S. strategic and economic interests and will help support jobs here in the United Statesâ€”250,000 jobs using the president's own measure. Given our continued high unemployment rate, we must explore all possible opportunities to sell to the world and create and support existing jobs in the United States."
Action has been quicker to come on the South Korea FTA than on the others pending with Panama and Colombia, due to lingering security concerns surrounding those countries. However, Camp and several others have noted that as the United States lets these FTAs languish, other countries are snatching up market share.
"Not only will these agreements create new opportunities abroad, I am equally concerned that the failure to move them will severely disadvantage U.S. businesses, workers, farmers and ranchers who now sell their products in these markets," said Camp. "We have already seen U.S. market share drop precipitously for key agriculture commodities in Colombia while Argentina's market share has increased because its agreement with Colombia has entered into effect. The need to move ahead is urgent."
"The time for action is now. Therefore, I again request that you submit your action plan for advancing the Colombia and Panama agreements," he added.
Jacob Barron, NACM staff writer
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Reeling from debt and worker demonstrations against austerity measures forced by the European Union and International Monetary Fund, Greece took another shot to the jaw Monday as one of the "Big Three" credit ratings agencies dealt a massive, three-level credit rating downgrade. And, perhaps more significantly, fellow high-debt Spain also felt the sting of a downgrade by Thursday as part of the ratings agencies' ongoing skepticism of the PIIGS nations of Portugal, Ireland, Italy, Greece and Spain.
Moody's Investors Service downgraded Greece's government bond ratings to a level of Ba1, which is considered junk. It has been widely reported that ratings agency Standard & Poor's is also keeping close watch on Greece's present meetings with fellow euro zone member nations over its debt and solutions to address it. It remains possible, if not downright likely, that a similar ratings downgrade could be on the way from that agency, which already values Greek debt at junk levels and its credit rating as poor.
Moody's, which now estimates the likelihood of a Greek default at 20% within the next five years, defended the downgrade decision citing three reasons:
- The fiscal consolidation measures and structural reforms that are needed to stabilize the country's debt metrics remain very ambitious and are subject to significant implementation risks.
- The country continues to face considerable difficulties with revenue collection.
- There is a risk in conditions attached to continuing support from official sources after 2013.
The hits kept coming this week. The ratings agency issued another downgrade to Spain's rating, this one by just one notch, and Moody's followed with a warning that more would come if the nation reeling from banking and real estate collapses missed more financial targets. Spain's rating with Moody's now sits at "Aa2," with a negative outlook. The Spain downgrade was explained as follows:
- Moody's expects the eventual cost of bank restructuring will exceed the government's current assumptions, leading to a further increase in the public debt ratio.
- Moody's has continued concerns over the ability of the Spanish government to achieve the required sustainable and structural improvement in general government finances, given the limits of central government control over the regional governments' finances as well as the background of only moderate economic growth in the short to medium term.
"Throughout the evolution of the economic crisis in Europe, the nation that has loomed as the linchpin to all of this has been Spain. The crisis in Greece and in Ireland can be managed to some degree, although even these states have placed an immense strain on the euro zone," said Chris Kuehl, PhD NACM's economic advisor and managing director of Armada Corporate Intelligence. "The Spanish situation has always been far more serious due to the size and influence of the nation in Europe as a whole...and the crisis in Spain has added to the overall nervousness in the market as a whole. It has been a rough few weeks for bond investors, and that does not bode all that well for the efforts in Europe as a whole."
Greek and Spanish officials, who have regularly bashed the ratings agencies for their own poor track record of ratings in the run-up to the global economic downturn as well as what they perceive as obvious conflicts of interest in their decision-making, again responded to Moody's with vitriol. They've characterized the latest downgrade with words such as "incomprehensible" and "hasty," respectively, much like they did following downgrades that preceded talk of bailout packages, one of which going to Greece, rife with unpopular austerity demands in 2010.
"The ratings agencies are not too popular these days," said Kuehl, who will be speaking at NACM's 2011 Credit Congress in Nashville. "During the boom years, they seemed to lose their ability to remain objective and consistently rated companies, banks and countries higher than now seems justified. These days, there seems to be a new attitude that reinforces strict interpretation. The ratings now are deemed too harsh by some."
Brian Shappell, NACM staff writer
The latest survey tracking the confidence level of U.S. small businesses finds a barely noticeable uptick in optimism; still the stability, lacking in recent years, has given analysts some reason to remain hopeful that levels will continue to remain steady and/or show increases later in 2011.
The National Federation of Independent Business (NFIB) unveiled its Index of Small-Business Optimism, which showed a 0.4-point increase for February. This set the reading at 94.5â€”a historically lackluster, yet solid level compared to recent times.
"This is not a reading that characterizes a strongly rebounding economy," said NFIB Chief Economist Bill Dunkelberg. "But it is the third-best reading since the fourth-quarter of 2009, when the economy was expanding rapidly. So, it gives us cause for some real optimism. Apparently the future is looking brighter for a few more small business owners, although much will depend on what Congress does this year."
Key findings in this month's index include 92% of businesses reporting their credit needs are being met completely, and the vast majority of businesses are uninterested in new credit lines of any kind. Perhaps that's because conditions are still tight, with somewhat undesirable terms from banks. Or perhaps it's because only about 9% of respondents to the NFIB survey believe a significant improvement in business conditions will be realized by summer. Still, there appears to be a widening belief among NFIB respondents that conditions will be better by year's end, and that tentative plans for hiring and spending more toward the end of the year indicate a likely increase in small business activity.
Other interesting findings in the latest index include:
- A majority of small businesses polled characterize their inventory levels as too low.
- Only about 4% of respondents reported financing/credit as their top concern.
- Earnings levels remained steady between January and February, but more than one-quarter of businesses polled registered net-negative earnings.
- Only 21% of those polled reported higher sales over the last three months; 37% reported a decline.
Brian Shappell, NACM staff writer
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