Tag: Mike Johanns

Manufacturers and the Merit of Using Derivatives to Manage Risk

Excellent statement Wednesday from Craig Reiners, director of risk management for MillerCoors LLC before the House Financial Services Committee’s hearing, “Assessing the Regulatory, Economic and Market Implications of the Dodd-Frank Derivatives Title.”

Reiners was testifying on behalf of the Coalition for Derivative End-Users — to which the National Association of Manufacturers belongs — about the use of derivatives by manufacturers to manage risk . Excerpt (with our paragraph breaks):

MillerCoors uses derivatives for the sole purpose of reducing commercial risk associated with our business. At MillerCoors, we brew beer, and our commitment to our customers is to produce the best beer in the United States and to deliver it at a competitive price. In order to achieve these goals, we must find a way to mitigate and prudently manage our inherent commodity risks. I believe the prudent use of derivatives offers end-users of physical commodities the critical risk management tools to provide a necessary degree of predictability to our earnings. The derivatives our organization has approved for use provide the tools to manage volatility intrinsic to commodities, which allows us to manage cash flow expectations within reasonable parameters. Our single largest commodity exposure is to aluminum. Our agricultural risks include malting barley, corn and hops. Our energy risk portfolio includes coal, natural gas, deregulated electricity and diesel fuel. This annual commodity spend of over $2.8 billion must be prudently managed.

In order to properly manage this significant risk, we created a strict Board-approved commodity risk policy that clearly forbids speculation. This policy allows us to use OTC swaps to precisely match the timing and prices of our complex manufacturing and distribution process. For example, we exactly match our OTC swaps for aluminum with our actual use of cans over the same time frame. This risk management technique allows us to prudently manage our costs and reduce price volatility.

We have used this risk management process both prior to and since the inception of MillerCoors with no adverse consequences. In fact, we would create significantly more price volatility in our business by not hedging our business risks. We believe that end-users generally share the concern that if the cost of hedging our risks rises significantly, entering into swaps may no longer be economical. The result could be a reduction in risk mitigation through hedging, which, ironically, could increase risk and exposure to market volatility.

Sen. Mike Johanns (R-NE) and 12 other U.S. Senators recently wrote a letter to the Securities and Exchange Commission urging the SEC to make sure that new regulations not limit the legitimate use of derivatives as a risk-management tool. The Coalition had encouraged Senators to join the letter, noting the potentially painful economic effects of overregulation:

A Business Roundtable survey from last year demonstrated that the imposition of a 3% initial margin requirement on S&P 500 companies alone would drain $269 million in liquidity per company and could reduce capital spending by $5 to $6 billion per year, causing a loss of 100,0000 to 120,000 jobs. Expanding this data to include non-S&P 500 companies and to account for variation margin requirements would substantially increase job losses.

News coverage …

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Senate Votes to Dump 1099 Mandate

Even though the Senate voted on party lines Wednesday to retain the 2011 Patient Protection and Affordable Care Act, a large bipartisan majority voted 81-17 to end the 1099 reporting requirement that had employers up in arms. Intended as a revenue generating measure, the provision would have required businesses to file 1099 tax forms on any transactions with suppliers that exceeded $600 in a year. Paperwork nightmare would be too kind of a description.

In the 111th Congress, Sen. Mike Johanns (R-NE) led the fight to kill the measure, arguing that any revenue shortfall that resulted could be made up by reallocating funds that the federal government had yet to appropriate. Senate Democratic leadership instead wanted to raise taxes on companies with foreign earnings or oil company revenues.

Sen. Debbie Stabenow (D-MI) sponsored yesterday’s amendment to end the 1099 reporting requirement, but it’s Johanns’ arguments that carried the day. From Bizjournals.com:

[The] Senate’s decision to tap unspent money to pay for the cost of 1099 repeal makes it much more likely to be agreed to by the House, which already passed total repeal of health care reform. Business groups hope 1099 repeal is enacted quickly because businesses would need time to change their accounting systems if the requirement does go into effect next year.

Business groups opposed the tax increases in the Democratic amendment, contending raising taxes on oil companies would increase energy costs.

“This amendment will cost good-paying manufacturing jobs,” said Aric Newhouse, senior vice president at the National Association of Manufacturers. “Discriminatory tax policies that pick ‘winners’ and ‘losers’ and pit industry sectors against each other undermine U.S. competitiveness, innovation and job growth.”

The Senate vote Wednesday not only ends a horrible, anti-competitive tax provision, it also demonstrates that the 2010 health care law is not sacrosanct. Whether bit by bit or in one fell swoop, the ill-conceived and badly structured law can be repealed. After that, Congress can start again and get it right.

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Senate Votes to Continue IRS Paperwork Nightmare

Take that, small business!

The Senate today defeated both amendments to change the IRS tax filing mandates included in the health care law discussed earlier here and here.

A cloture vote on the Sen. Mike Johanns’ amendment to strike the onerous filing mandate failed on a vote of 46-52. A cloture vote on Sen. Bill Nelson’s amendment to keep the requirement while changing it on the margins failed 56-42, with 60 votes needed.

Anticipating the vote, The Wall Street Journal editorialized today:

[This] issue won’t go away. The President’s opposition to a clean repeal shows the hollowness of his alleged support for small business, which he expresses at every campaign stop but is less a priority than preserving his health-care legacy.

The larger political story here is that ObamaCare is already under bipartisan siege—and in the same Congress that passed it. The 1099 provision is only one plank, but repealing the law plank by plank may be the right strategy. Sooner or later the whole thing becomes unworkable. Voters should watch this vote to see who’s really on the side of small business.

The Senate subsequently invoked cloture on the underlying small business financing bill, H.R.5297, with 61 votes. Senate Majority Leader Harry Reid called it the biggest most important vote to support small business since the stimulus bill.

Sen. Mary Landrieu (D-LA) then took to the Senate floor saying she’s going to introduce a bill today to repeal the IRS 1099 filing requirement, acknowledging the legitimate protests but arguing that immediate action is not necessary. We have a year and a half to fix 1099, we don’t have any more time to help small business.”

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The Only Fix for this Filing Burden is Repeal

The Obama Administration on Monday signaled its support for amending the onerous tax filing mandate included in the new health care law, which requires any business making purchases of more than $600 from a vendor to file an IRS 1099 to report the exchange. It’s a paperwork nightmare — especially for small business — that the IRS estimates could hit 40 million businesses.

Unfortunately, while acknowledging the problem, the Administration has only endorsed the amendment sponsored by Sen. Bill Nelson (D-FL) that would lift the filing threshold from $600 to $5,000 and apply it only to companies with more than 25 employees.

Talk about an anti-jobs message. Say you’re an small business owner with 22 employees. You really want to expand your product line, have the financing to buy the equipment, but will need to add six new workers to operate the machinery. But then you see that the new hires will push into past the threshold requiring the additional IRS filing. Not only are the burdens and costs of the new paperwork a disincentive, there’s the increased potential error and IRS liability.

Forget it, you say. I just won’t bother.

Isn’t this obvious? The Nelson amendment discourages the growth of small business, which is supposed to drive hiring in the coming years. The National Association of Manufacturers instead supports an amendment sponsored by Sen. Mike Johanns (R-NE) that would repeal the provisions.

In acknowledging the problem, the Obama Administration has at least expressed a willingness to amend the new health care law. It’s not sacrosanct, which is a big political concession.

But the only cure for this horrible IRS filing requirement is its repeal.

Coverage …


Get Rid of This Business-Crushing IRS Filing Mandate

Sen. Mike Johanns (R-NE) has been leading an admirable charge against a bizarre, anti-business provision of the new federal health care law, the requirement that tax filers — including businesses, non-profits and charities — file an IRS Form 1099 anytime they purchase more than $600 from a vendor.

A cloture vote on the Senator’s amendment (No. 4531) to repeal the provision, Sec. 9006 of the health care law, will be considered on the Senate floor on Tuesday as part of the debate on the small business lending bill, H.R. 5297.

Senator Johanns discussed the issue in a conference call with bloggers today, noting that the provision is potentially so burdensome that the even National Taxpayer Advocate at the IRS has expressed serious concerns about its impact on business. In its mid-year report in July, the advocate cited IRS data from 2009: “[About]  40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and more than 100,000 government entities.   All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.”

Forty-million businesses! Johan related a conversation he had over the August recess with a constituent who told him the paperwork and other burdens would cost him $23,000, money his business just didn’t have.

Sen. Bill Nelson (D-FL) is offering a separate amendment (S.Amdt. 4595)  in an attempt to make the provision more palatable, exempting businessees with 25 or fewer employees and raising the reportable purchase amount from $600 to $5,000. But millions of entitities would still be hit by the mandate, and they would still have to follow their purchases in the expectation of reaching $5,000.

Johanns also posed this obvious dilemma about the Nelson amendment: If you’re a small business owner with 24 employees, are you going to expand if the additional hires mean suffering the new paperwork burden? Doubtful.

If this reporting requirement is so horrible, why is the Administration so intent on it? (Beyond the billions of dollars it raises.) One reasonable assumption is that passage would represent the first thread being pulled on the health care law, with the possibility of a full unraveling to follow. Johanns described the political dynamic:

The White House is nervous about this. They don’t want their health care bill touched. They don’t care how much it impacts business. They made that clear when they were trying to get this thing passed. They will be here in the next 24 hours breaking every arm of every Democrat they possibly can. I think this will be regarded as a loyalty vote to President Obama. It’s not about protecting businesses, and I think the White House is going to demand absolute loyalty on this one, so we have to just do everything we can to make the case: Don’t want the plank. Don’t do that. Stand up for your small businesses. Stand up for your businesses, large and small. They’re having a tough time out there. Do everything you can to help us get the votes necessary to get it passed.

The National Association of Manufacturers had previously sent a “Key Vote” letter to the Senate in support of the Johanns amendment, informing Senators that their votes on the measure could be included in the NAM’s year-end tallies of their voting record on manufacturing issues.

The full audio of Sen. Johanns’ call with the bloggers is available here.

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Big Business and Small Business Are Not Foes

Quit playing games with my heart.

The House floor played out today like that tired Backstreet Boys song, as leadership brought up a bill that pitted small business against big business.

At issue was repeal of the onerous 1099 reporting requirements on U.S. businesses that just a few short months ago the House passed into law as part of the health care reform. But to offset the repeal, lawmakers included more than $10 billion in tax increases on American companies that have overseas operations.

They could have just taken the exact text of Senator Johann’s amendment that would have achieved the same goal without raising taxes.

But they simply couldn’t resist putting the business community in a bind. Just like cat versus dog, ketchup vs. mustard — today it was small vs big.

We’ve all fallen for this twisted logic before. But the truth is – like ketchup and mustard and cats and dogs – big business and small business are not against each other, rather they complement one another.

Every big business was once small, most small businesses strive to be big. Without small businesses, big businesses have no suppliers, without big businesses – small businesses have no buyers.

The House played a game and politics may have won the day. But economic growth and job creation lost out.

UPDATE (7:45 p.m.): The House failed to gather the 2/3rd vote for passage of H.R. 5982 under suspension of the rules. The vote was 241-154.

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