June 26, 2002

Inside Veritas -
Article 1 - Your health insurance premiums now finance European socialism
Article 2 - Business News & Issues
Article 3 - After 12 Painful Years, Relief on the Architects’ Seal
Article 4 - Taxation and Finance - Financial Records' Retention
Article 5 - Insurance Premiums Choking Employment?
Association News Update
Economic Update - Dollar's decline is cause for concern
BS: Still about Nothing in particular

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Your health insurance premiums now finance European socialism
  
   As if supporting the U.S. government (along with its client states) wasn’t a big enough burden, it’s now quite likely that American businesses, both big and small, subsidize Pierre’s Viagra and Heinz’ Prozac. Yes, those European “democracies” that America saved from Hitler and protected from Stalin, Khruschev and Brezhnev, have become co-conspirators with the international pharmaceutical industry to escalate the already soaring cost of health care in the U.S.A.
   10 years ago, Europe was the biggest pharmaceutical industry market in the world. Today, due to price controls, it represents just 22% of total drug spending, as America’s share, with a much smaller population, grew to 38.5%, and 60% of the industry’s global profits.
   A few issues back, we noted how spending on prescription drugs rose 17% last year, with the highly advertised cholesterol drugs, Zocor and Lipitor, leading the way. Well, not only are their sales up dramatically, their prices are as well.
   In recent years, as prices for drugs were slashed in Europe, each cut’s been met with an offsetting increase in the U.S. to make up for the shortfall. A recent Wall Street Journal article sheds a light on this international drug procurement process, brought on by a continent of nations where the government is the primary insurer and purchaser of pharmaceuticals.
   Since Europe’s governments control the continent’s markets, they dictate prices, which has historically meant annual cuts in what they’ll pay for an existing drug. So the longer a drug’s on the market the disparity between controlled and free market prices. increases dramatically. As a CEO of a drug producing French company told the Journal, “at the beginning of a drug’s life cycle, it (the disparity) isn’t so bad. But each year we increase prices a little in the U.S. And each year we have to decrease a little in Europe ... after a few years down the line, it’s a disaster.”
   For example, last summer the French ordered significant price cuts on 100 drugs, some as high as 15%. So, even a small increase in the U.S. made the disparity appear dramatic.
   To put the pricing in perspective, we can look at a situation that developed in Germany, where the public health-insurance system buys 80% of the nation’s prescription drugs. Earlier this year, the worlds biggest drug producers paid the German’s Health Ministry 200 million Euros ($189 million) to stop it from imposing a 4% reduction in drug prices. In other words, the companies found it more palatable to provide a direct subsidy than to accept a 4% cut in prices. But that subsidy, like the French price cuts, must be recaptured elsewhere. And, that “elsewhere” is defined as “America.”
   As is evident in the chart on page #1, American wholesale drug prices can easily run more than 2.5 times above what Europeans pay. On the “Lipitor” example, the U.S. price is over 160% above the four European countries’ average, while we pay 180% above the average for the ulcer drug “Prilosec.”
   So, while the U.K., Italy, France and Germany spend an average of 8.625% of their Gross Domestic Product on Health Care, the U.S. spends 12.9% of its GDP. And, the rising costs of providing health care are becoming a severe burden to profitability and employment growth, as health insurance premiuims soar while goods' prices remain stable.

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Business News & Issues

   Another “price war” seems to be breaking out in the auto industry as manufacturers are building more cars in spite of slacking sales data. After suggesting this in the June 6 issue, we found that GM’s rebates on mid-sized vehicles rose to $2,500 and the other companies were trying to stay competitive. Now GM pushes early lease returns and finance incentives as well.
   Through June’s first week, vehicle production in the U.S. was up 7.7% over last year, while sales were down 2.7% through May. And, GM’s 2nd quarter production is up 12% from a year ago, while Ford’s was up 4%, with an expected 16% increase in the 3rd. So, look for those incentives to keep coming.

   In a related note, industrial production rose for the second straight month in May while business inventories fell 0.2%. However, the real key to the Federal Reserve report is that factories are only running at 75.5% capacity, which means a lot of equipment is sitting idle and there’s little incentive to buy more.

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After 12 Painful Years, Relief on the Architects’ Seal

   After twelve years of war, it’s easy to forget what touched off the first battle. That’s what seems to be the case today as few of the 134 legislators who voted to reform the Architects’ Seal threshold had any idea that a stupid little edict in 1990 touched off a bitter battle between two groups which should be allies. And the ensuing decade showed how devious and blatantly untruthful, so called, professional organizations can be.
   Last week the Michigan House concurred with the Senate on its version of a bill that will dramatically alter the requirement as to when an architects’ seal is necessary for 1 and 2 family homes. Although the threshold remains 3,500 square feet of habitable space, there’s a new definition of “calculated floor area” which makes the legislation a significant improvement over the current law.
   Under the new legislation, calculated floor area is restricted to living space only, used for living, eating, sleeping and food preparation. But more importantly, it clearly state’s what will not be included in calculating habitable space as it’s used in determining the need for a professional seal.
   Areas specifically exempted from calculations under the new law include:
All basements (finished or not)
All attics (finished or not)
Utility rooms
Bathrooms
Closets
Hallways
Storage spaces
Decks
“other similar spaces not used for cooking, eating, living or sleeping”
   To put the change in perspective, during committee testimony a building official from the “Detroit” area used an example showing a home with 10,206 calculated floor area under the current law. However, with calculations under the new law, it’s square footage was reduced to 3,455.
   The bill originally passed the house in April. At that time, it raised the threshold to 5,000 square feet, while changing the definition of habitable space, after an agreement had been reached by the MAHB and Michigan’s American Institute of Architects organization. However, as has been the norm for the past ten years, the Architects reneged while the bill was in the Senate committee. (In the current issue of Michigan Builder, MAHB lobbyist Lee Schwartz provides some history of the Architects’ “bad faith” negotiating).
   After the usual bickering by the AIA, the builders’ representatives were given a choice: Raising the threshold or new calculated floor area definitions. And MAHB wisely opted for the latter, which takes us back to that “stupid little edict” that touched off this twelve year war.
   Back in 1990, Ervin Polk, who’d recently gone to work for, what was then, the Bureau of Construction Codes, decided there was a need for sealed review of mechanical, plumbing and electrical systems when homes were more than 3,500 square feet, which included basements when there was a walk-out situation. At that time, all systems inspections for homes in Genesee County were inspected by the state, so it became a serious problem, since nearly any walkout being built at that time would need plan review.
   Adding confusion to the situation was sporadic enforcement, since there was a lack of specificity in the edict. In fact, some at the “Bureau” thought there should be “plan review” for all homes. However, it was only enforced at the 3,500 foot level.
   Genesee County took the brunt of the new rule, as most major building areas had their own systems inspections. So, while fighting the edict, and having considerable success, due primarily to support from local legislators (John Cherry, Joe Conroy, Dave Robertson in particular) in 1991, the “Flint” association was also looking for a permanent solution.
   At the time, MAHB was involved in its first series of negotiations with the AIA, but after an agreement at a 5,400 square foot threshold, the architects backed off. So, in October ‘92, Senator Cherry introduced legislation to completely exempt single family construction (when built by a licensed builder) from the seal requirement, to set it up for reintroduction in the new session that would begin in ‘91.
   In ‘93 the architects tried to sneak their own bill through the house, with the intent of putting builders on the defensive, but that attempt was stopped by a new Representative (Candy Curtis), starting another brouhaha with the architects and a House committee chair.
   In the ‘95 session, and every session since, bills were reintroduced with GOP sponsorship, but were always held up in committee. This time, that Committee’s chair promised it would come to the floor. So, after more than a decade, we now have relief (which will take “immediate” effect) when the Governor signs by early July, and "basement" problem will trouble no more!

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Taxation and Finance ---- Convention expenses for self employed

   The Tax Code allows you to deduct the cost of attending work-related conventions, conferences and seminars but your attendance at these functions must be related to your business and they must benefit your business activities.
   The most important limitation on deducting convention and seminar expenses is that your attendance at the meeting will advance your business. For example, Alecia, a self-employed attorney from Atlanta, attends a convention about international tax law in New York. Alecia does not practice international tax law nor does she have any clients in that field.
   So, even though the convention is law-related, Alecia cannot show any actual business benefit that results from her attending the convention. Her convention expenses are not proper deductions.
   Convention expenses include: (1) registration and attendance fees; (2) air and rail fare; (3) taxi and other local transport; (4) toll calls and computer rentals; (5) accommodation; and (6) fifty-percent of the cost of meals. Remember to keep detailed records and daily logs of convention expenses.
   Convention and meeting expenses incurred on behalf of your spouse or dependant are deductible if your spouse or dependant is your employee and he or she has a legitimate business purpose for traveling with you. Your business associates are treated slightly differently. Expenses incurred by your business associates, such as customers, clients, suppliers, agents, partners, or professional advisors, are deductible if they too have a legitimate business purpose for traveling with you.
   Combined business/pleasure meetings take special consideration. You may deduct only those costs associated with the business portion of the convention. If no significant business activities take place during the time allotted for the meeting, time allotted for the meeting, for example, videotaped presentations are given to you to watch at your convenience, the convention is personal travel and no deductions can be taken.
   If you have specific questions or comments, please contact your professional tax advisor.

R, P & T

Insurance Premiums Choking Employment?

   Due to the recent articles on prescription drug costs (and their impact on health care spending), we thought it was time to examine the burden of health insurance premiums. Despite concerns expressed over the past several years regarding the Association health program, even we found the data shocking.
   In February ‘97, the Consumer Price Index (CPI) stood at 160, and the cost of the association’s “one person” group was $184 per month. Five years later, the CPI was at 178, up just 11.25%. However, despite reducing coverage in 2000, the insurance premium was up 104%, to $376 (up 55% in the past 2 years). Furthermore, during the same period, we received calls from members noting monthly payments in the $800 to $1,100 range.
   These seemingly unbelievable disparities between the cost of goods and services and health care premiums may be telling us a lot about why employment growth remains weak, despite strong economic growth early this year. Realistically, the cost of putting another employee on a health care program would pay for a lot of “overtime,” and without raising prices, it becomes an even bigger drain on profitability.
   The lead article in this issue tells how our health care costs ultimately subsidize the Europeans. A recent Fox News segment said the U.S. spends $24 billion annually on health care for undocumented aliens. And, a recent Free Press article said most Southeast Michigan Hospitals are running a deficit.
   In 1993, the business community scoffed at the Clinton administration’s design for national health care. When the issue surfaces again, it may be the U.S. Chamber and the GOP carrying the proverbial flag.

Beyond Seinfeld: It’s still about "Nothing" in particular

A Message in the Arizona Fires
  
   It was rather interesting listening to Arizona Governor Jane Hall during the early days of the raging Arizona fires which, as we write this column, were no-where near being brought under control. Ms. Hall made it clear that the problem with her state’s fire (which is ditto for Colorado) is the fact that the forests are too thick, and should have been thinned out. Or, in other words, logging and clearing would have made the fires manageable.
   While environmentalists fight against the right to cut and thin forests, nature (or forest service employees, as in the Colorado situation) doesn’t pay attention to their pleas for preservation. The result? Not only do we lose millions of acres of wilderness to fire, but homes and lives are threatened while the burden of financing firefighting soars beyond budgetary constraints.
   Ultimately, the problem falls on the American taxpayer with disaster relief payments going to the states, and the victims, of poor forest policy.
   What’s really amazing is that environmental groups (particu-larly the Sierra Club) become heavily involved in politics, targeting legislators with a history of supporting sound forest management practices. But it’s time to ask, who’s really on the side of wilderness preservation?

Sierra Club Pushes Auto Makers/Ford

  William Clay Ford jr.’s “good friends” at the Sierra Club are rolling out a “3 year campaign” against the “Big Three” to pressure them for higher fuel efficiency standards. And, in doing so, they’ve begun by targeting the self-described environmentalist himself.
   A Wall Street Journal report said the club unveiled a series of TV and radio ads, and have promised “grass roots actions” at auto dealerships and, possibly, even auto shows.
   The radio add, according to the WSJ, includes a call specifically to Mr. Ford “to do his part” to build more fuel efficient cars.
   Mr. Ford responded that “the Sierra Club targeted Ford, and me personally, because we’re seen as leaders.” Well, if he and his company are actually “leaders,” the market share and balance sheets don’t show it. In fact, they look more like that other family enterprise (Lions).

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Association News and Events by Laura

  

BAMF GOLF OUTING    It happened again! The Golf Outing sold out within 14 days and the waiting list has begun. Those who have made reservations will enjoy a full day of fun on Tuesday, August 6th at "Copper Ridge" in Davison.    The event starts with a shotgun start at 10:00 a.m., sponsored contests on holes, burgers/hot dogs for lunch, full buffet dinner at 5:00 p.m., and, of course, refreshments available on carts as well as at the clubhouse.    Contest winners and large door prizes will be given out during dinner. It is guaranteed that no golfer will walkout empty handed. If you don't golf, but would like to join us for the dinner portion of the day, the cost is $30.00 (RSVP by 7/26/02).    And, finally, there are a few hole sponsorships available at the mere cost of $100.00 if sponsor supplies the prize; $150.00 if we purchase the prize for the sponsor. (Sponsors get a sign at the hole as well as recognition that evening).    If you are interested in sponsoring a hole or dinner on the 6th, please call the Association Office at 603-2200.

FALL PARADE OF HOMES    Even though the Spring Parade ended about a month ago, plans have begun for the Fall event. This year's Fall Parade of Homes will open on Saturday, October 5th and run through Sunday, October 20th.    The Parade contracts were sent out last week to Association home builder members with the first entry deadline of July 22nd ($2,500.00). The final deadline is August 12, 2002 (2,700.00).    The weekend hours for the Fall Parade are Saturday & Sundays, noon to 6:00 p.m., Thursday & Friday hours are 4:00 p.m. to 7:00 p.m. (Parade models are closed Monday, Tuesday and Wednesday).    And speaking ot the Parade................ Fall Housing Quarterly contracts and information will be sent out the second week of July to members.    If you are interested in any part of the fall promotion, we ask that you act promptly and abide by the stated deadlines, thereby assuring us an organized and professional event that so many southeastern Michigan residents look forward to.

BITS AND PIECES    The June Regional Meeting at Little Joe's in Grand Blanc went well, with Grand Blanc & Goodrich building officials answering any questions presented to them by the attending builders.    The west side of the county will be the target area for the next "Regional Summer Meeting". Details will be forthcoming in future issues of Veritas. ***************** HABITAT HOUSE UPDATE... Construction on the "BAMF Habitat for Humanity House" has had a slight delay in getting started due to the "typical permit process" that many of you go through all the time (but the permit is promised this week!).    Our Habitat House Team Leaders are anxious to get rolling and to keep in the scheduled time frame in order to assure the house entry for the Fall Parade of Homes.    We need our members' involvement with this project, so please contact us of you can donate your time, labor, materials, etc. (Call the Association Office at 603-2200 or President Steve Edwards at 694-4000).

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Economic Update: Inflation’s nil; employment stays weak

   The employment headlines for May sounded promising; “Employers added jobs for the second consecutive month as the jobless rate falls to 5.8%.” Yet the story behind the headlines would be considered anything but promising because analysts were expecting a far bigger rise in employment than 41,000 jobs. And, it appears that few of the millions of those laid off by big corporations over the past couple of years are back to work despite, as we noted in the June 6th issue, the manufacturing sector’s been growing for four consecutive months. In fact, the number of unemployed has climbed by 2.8 million since October 2000, when the jobless rate hit its lowest point of 3.9%, and its primarily due to cuts by major corporations.
   On the other hand, the inflation news was “promising” at all levels in May as wholesale prices fell, while consumer, and even import prices, remained flat.
   At the wholesale level, the Producer Price index fell 0.4%, following a 0.2% decline in April. The decline suggests wholesale prices for finished goods fell 2.7% below their level a twelve months earlier. And, at the same time, prices paid by consumers are up just 1.2% over the same period, which may well bring us to this employment caveat: If prices of finished goods can’t rise, can manufacturers really afford to hire additional employees?
   When we began to lose those 2.8 million jobs in ‘00, the Consumer Price Index was at 174.2. In May, a full 19 months later, the CPI stood at 179.5, up just 3%, which comes to an annual rate of around 1.9%. However, wages have continued to climb and, as highlighted in our lead article, the costs of health care benefits have literally exploded (up 54% in our example since 2000).
   In other words, despite productivity being way up, some employment costs are far outpacing price increases and, perhaps, are becoming far too big a burden on major employers. In fact, if we look at it from a health insurance perspective, the 2.8 million fewer employees since October ‘00 are conceivably saving American corporations roughly $34 billion annually, if premium costs are in the $1,000 per month range. When the layoffs began, the cost of insurance for that number of employees was likely in the $20 billion range (and, of course total insurance costs were also about 2/3 of current levels).
   So, don’t look for a big upturn in employment, at least not in high benefit, unionized workforce, sector for some time. The costs just won’t bear it.

   Economic Notes: Projections on the current fiscal year’s deficit keep rising as, in mid-June, Congressional analysts finally said it will go above $100 billion. Back in April, we said the $154 billion in prescription drug spending by Americans would be roughly equal the deficit. Well, the deficit stood at $149 billion at the end of May (it was a $137 billion surplus a year earlier). So, who's more accurate: the CBO or Veritas?

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Housing Industry Update

   Last Wednesday the Michigan house approved the Senate’s version of Architect’s seal reform (in relation to new housing), thereby ending a 12 year battle with architects and a few regulators. Rather than changing the 3,500 square ft. threshold, the bill redefines habitable space that’s to be calculated in determining whether or not a seal’s required, eliminating a number of items from hallways, bathrooms and closets to basements.

.For the seventh consecutive quarter, Michigan’s homes appreciated at a slower rate than the national average, ranking 26th in the first quarter House Price Index (HPI) published by the Office of Federal Housing Enterprise Oversight (OFHEO) for this year’s January through March period. While the average twelve month rate of appreciation across the nation was at 6.05% from the first quarter of 2001 to the same period in ‘02, Michigan’s home values rose at a 4.81% clip.
   Furthermore, Michigan fell out of the top ten for its 5 year rate, which is now 38.45%, slightly higher than the national average. In the late ‘90s and well into 2000, Michigan’s five year rate of growth in home values was always at, or near the top. However, currently there are 5 states, and Washington (D.C.) with five year rates above 50%, and five additional states with 40% or better.
   As somewhat of a surprise, it was Flint (4.29%), Detroit (4.75%) and Grand Rapids (4.65%) that were the state’s slowest appreciating areas. The big college towns of Lansing (5.81%) and Ann Arbor (5.33%) led the state.
   While communities in suburban Boston and Northern California continued to lead the nation in growth in property values, there was a surge in south Florida values that hadn’t been evident in years. In fact, three of its communities were in the top twenty, all with annual rising values of 10 to 12%.

Mortgage Bite Soars
   Today's historically low interest rates are having an interesting impact on homebuyers’ disposable income. Soaring real estate prices and loose lending practices now have new homeowners paying their highest percentage of disposable income since the Federal Reserve began tracking such data — up 45% since 1980.
   Not only are many homes being financed with 3% (the new average for first time buyers), and even 0% down, but rules have been changed when considering how high a percentage of income is necessary for qualification for a loan. For example, according to the Wall Street Journal, lenders now allow buyers to qualify for loans requiring as much as 50% of their income for regular mortgage payments. Historically the norm was 28% and as high as 32%. The result is that people now qualify for homes that would have been out of reach just a few years ago.
   The problem is, from a historical perspective, loans are made under the premise that borrowers’ income, like home values, will continue to rise in future years. However, that’s not always the case as so many individuals are impacted by economic conditions.
   The new standards, along with low interest rates, are primary reasons why home prices have soared for more than a decade. However, they are also susceptible to the reverse impact. So, watch out!

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