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The Roundup July 28

Contractor remodeling a house

Damned if you do, damned if you don’t. Remodelers are taking half what they did a year ago or selling their businesses at a significant loss.

Just in case you thought it was a good idea to start a home remodeling business . . . (but it is a good idea to get your home remodeled!)

These days, though, with hungry tradesmen chasing fewer homeowner dollars, consumers who may not know the difference between a nail and a hammer have the upper hand. If you’ve got the money, someone who knows his way around a band saw has got the time, and often at a very good price. And chances are, depending on where you live — best spots: the West Coast and the Northeast — he’ll be right over. . . .

More and more contractors are offering deep discounts, especially when three or four competitors show up to bid on a project, no matter how small. “It’s pretty tough right now,” says Paul Witcovich, an independent contractor in Lafayette, Colo. “I know that I’m charging less than I did in 1978, which is about $30 per hour or less.”

This year, U.S. homeowner spending on remodeling projects will continue to drop through the autumn, according to a forecast by the Joint Center for Housing Studies at Harvard University. The center estimates that owner-occupied households spent $122.6 billion on remodeling and repairs last year, compared with $139.1 billion in 2007. And the scope of many projects is small compared to what it was, say, three years ago, when newly built homes, swimming pools and huge additions were more the order of the day than the current crop of bathroom renovations and refaced cabinets.

(“Tables Turned: Contractors Now at Homeowners’ Mercy,” Time, July 28) I’ve been sounding this bell since November in this blog. I have my finger on the remodeling industry because of my consulting work, and right now all remodelers, from general contractors to cabinet makers, are cutting their margins to zero — or less — just to stay in business. Here in southern California, bids are coming in on jobs typically half the size they came in at a year ago. Unless they’re getting some pretty whopping deals from suppliers, that means a whole lot of people are losing money just to keep paying the bills.

California kicks the can down the road.

Gov. Arnold Schwarzenegger vetoed hundreds of millions of dollars in state spending this morning as he signed a budget package aimed at bringing California’s deficit-riddled books into balance. . . .

State lawmakers passed the spending package after an all-night session last week. They made deep cuts across all state services, especially in the biggest areas — education, healthcare, prisons — and also relied on billions of dollars in accounting maneuvers and borrowing.

But the plan fell short by at least $1.1 billion, after the state Assembly blocked a raid on local transportation funds and new oil drilling off the coast of Santa Barbara.

“That effectively wiped out the state’s reserve,” said Schwarzenegger spokesman Aaron McLear. He said the new cuts would partially rebuild the state’s reserve fund.

Further cuts to education funding threaten to run afoul of federal guidelines and state law. Deeper prison reductions are politically unpalatable.

(“Schwarzenegger vetoes hundreds of millions in state spending, signs budget,” Los Angeles Times, July 28) Let me start with a story. Back in my halcyon college days (which lasted, to my deep regret, until I was 31 — if you think that’s bad, my ex-wife didn’t get out of college until she was 34), money was scarce. So, to save money, I stopped paying for some things, like putting oil in the car. Kaboom! Engine goes after a year. Costs a couple thousand to replace. This is what California is doing right now — they’re finding all kinds of inventive ways to save money by not putting oil in the car, just kicking the can down the road. For instance, to shave $1.2 billion off the prison system, Schwarzenegger will release over 21,000 prisoners and totally eliminate the parole system (I agree here — the parole system doesn’t work (80% of parolees recommit in the first year) and eliminating parole has the benefit of allowing released prisoners to leave the state and recommit on someone else’s dime). What’s going to happen to those 21,000 early-released prisoners? 16,000-18,000 will recommit in the next 12 months — mostly in the next couple months because many aren’t ready for release. Which means we’re back to square one on prison costs. Except we have to pay the social costs of the crimes committed, the cost of police work, and the court costs, all of which are considerably greater than the few months of prison time they would have served otherwise. The same can easily be said for closing state parks, shutting down education, and passing an obscene amount of costs along to municipalities and counties. It saves money today, but what’s the cost in six months? One year? Most states are confronting grave fiscal crises, but you still need to put oil in the car. The thing with kicking the can down the road is it gets bigger the more you kick it.

What happens when the news goes out of business? Part Twenty

What happens when a place loses its newspaper? Most of the 80 or so local papers that have closed in Britain since the beginning of last year were the second- or third-strongest publications in their markets. But the weekly Bedworth Echo, which published its last issue on July 10th, was the only paper dedicated to the town’s news. A small former mining settlement in the Midlands, Bedworth also lacks a radio station. Although it will still be covered by newspapers focused on its bigger neighbours, it is now a town without news. . . .

Claire Enders of Enders Analysis notes that the people who most need information about local goings-on are the immobile old and the poor, for whom the news that a local clinic is about to close can be vital. They are the people least likely to have access to broadband. As newspapers close, people will seek local news on television and radio, much of it supplied by the BBC. It will not be nearly as detailed.

(“The town without news,” The Economist, July 23) I know the article is old and from across the pond, but the exact same problem is playing out all over the United States in thousands of small towns. The information revolution is sending gray warhorses like The New York Times and Los Angeles Times into crisis, but it’s slaughtering local news without providing real alternatives. If you’re looking for an opportunity and the news is your thing, you may have noticed that no-one has figured out how to profitably replace local news. It’s not just an opportunity, it’s a necessity for democracy to work. Politicians of all stripes love a non-existent press. But when politicians are allowed free rein, that’s nothing but bad news for entrepreneurship and small business.

I don’t know about you, but this is what I thought the clawback law meant.

The US Securities and Exchange Commission’s attempt to use – for the first time – a “clawback” law against an executive who is not accused of any wrongdoing marks a new hard-hitting approach at an agency under pressure to restore its reputation. . . .

The clawback provision in Sarbanes-Oxley, passed in the wake of massive accounting frauds at Enron, Worldcom and other companies, requires executives to return performance-based pay and bonuses as well as stock sale profits if a company is forced to issue an accounting restatement “as a result of misconduct”.

Last week, the regulator asked a court to order the return of $4m (€2.82m, £2.43m) paid to Maynard Jenkins, former chief executive of CSK Auto, whose profits were allegedly inflated by accounting fraud committed by others: Mr Jenkins was not involved. . . .

But Robert Khuzami, SEC enforcement director, said costs of misconduct “need not be borne by shareholders alone”, adding that the personal compensation received by chief executives while the companies they serve engage in wrongdoing can be clawed back.

(“‘Clawback’ marks tougher SEC stance,” Financial Times, July 28) Admittedly, I’ve spent many, many otherwise valuable hours boning up on Sarbanes-Oxley a couple years ago, but all in vain. All in vain. However, my understanding of the clawback law is this: if executives are compensated based on fraudulently overstated earnings, then when that fraud is discovered and the earnings are restated downwards, all the compensation based on the overstatement is due back to the stockholders. Makes sense, right? I’m CEO of CSK Auto. Without my knowledge, earnings are fraudulently doubled through twists and turns and creative accounting. I get a $4 million bonus based on several metrics, but earnings and revenues are the keystone of all those metrics. A couple years later, the earnings for that previous year are halved. Obviously, I didn’t earn that full $4 million because someone cheated the numbers. Not me. But someone cheated and I benefitted from it. Right? If I rob a convenience store and hand the money to my friend to pay off a loan, does that mean he gets to keep it even if I get caught? That the money now belongs to him and not the convenience store that I robbed? No. Even though it was a legitimate loan repayment, it was made with stolen property. And stolen property goes back to the person it was stolen from. Finally, in letter and spirit, Sarbanes-Oxley puts the responsibility for all financial statements squarely at the feet of the CEO and the CFO. A CEO is not “innocent” when they sign off on fraudulent financials (and S-O requires CEO’s to take responsibility for and sign off on all SEC-filed financials). Someone else is “guilty,” but the CEO is “responsible.” Even if you’re a one-person start-up, it does good to remember this. In fact, make it a poster and put it in front of your desk.

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