Archive for July 2nd, 2009

NEW YORK: It is one of the touchiest issues in the health care debate: Would a government-run health plan upend the employer-based health insurance system used by 160 million Americans?Senate Democrats behind a key proposal released Thursday say the answer is no.Sens. Edward Kennedy, D-Mass., and Chris Dodd, D-Conn., say their plan would preserve employer-sponsored insurance coverage and create an affordable public option for those who need it.”The … bill virtually eliminates the dropping of currently covered employees from employer-sponsored health plans,” Kennedy and Dodd said in a letter to members of the Health Committee, one of two Senate groups working on health reform.The bill includes a “pay or play” provision that would require employers to provide adequate coverage for their workers or subsidize a system that will.”Pay or play” would require companies to pay the government 750 per full-time worker per year (375 for part-timers) if they don’t offer health coverage, or if they offer “qualified” coverage but pay less than 60% of workers’ premiums. Small businesses that employ fewer than 25 workers would be exempt.The Congressional Budget Office, which analyzed the legislation, estimated that by 2019 the same number of workers would be covered by employer-based plans as would otherwise be the case under the current system. “It tracks what we’re seeing in Massachusetts,” a senior Democratic aide on the Senate Health Committee said on a conference call with reporters.Massachusetts requires companies to pay up to 295 per worker per year if they don’t provide employees with insurance or don’t pay enough for the insurance they do provide.So far, employers haven’t been dropping coverage in Massachusetts.Paul Fronstin, director of the health research program at the Employee Benefit Research Institute, is skeptical that 750 is enough to keep employers from dropping their plans or bumping up what their workers pay for coverage.As Fronstin sees it, the fee would penalize employers already providing insurance but paying less than 60% of premiums.Those employers, Fronstin said, would do one of four things under the Senate Health Committee proposal:pay the 750 per-worker penalty and keep everything as is;pay more than 60% of the premium to avoid the 750 fee.pay the 750, keep the company plan but reduce how much they subsidize an employee’s coverage by 750;or pay the 750 and drop their plan.One goal of the 750 fee is to keep employers in the health-insurance game, to keep their coverage instead of dropping their plans and sending workers to the public plan.”But they’re already in the game,” Fronstin said. “They’re already paying 85% of premiums. Does this 750 stop them from dropping coverage? It doesn’t.”A survey by the Kaiser Family Foundation found that in 2008 employers paid an average of 3,983 per employee for single workers’ coverage and 9,325 per employee with family coverage.Fronstin also doesn’t think the Massachusetts example would apply nationally. For one thing, the state’s fee is not the most onerous provision for companies. Employers must also assume part of the cost of the uncompensated care for workers who can’t afford their health bill. Given how quickly a hospital stay can add up, that may be the strongest incentive for businesses to keep their coverage intact, Fronstin notes.Another reason, he said, is that companies that operate in many states often try to provide uniform coverage for their workforce. So they’re unlikely to drop coverage in just one state. If the fee applies nationally the story may be different.Lastly, Fronstin noted, the Massachusetts system is relatively new and companies typically don’t change benefit policies on a dime.In the case of a 750 employer fee assessed nationally, “The most cost-effective thing may be to drop coverage,” Fronstin said.Keith Ashmus, chair of the National Small Business Association, concurred. “My firm pays a whole lot more than 750 for its employees … in tough times it might be tempting to just say, ‘I’ll pay the 750 dollars.’ “For large employers, the story may be different.Most companies with more than 200 employees voluntarily offer coverage and the majority of them pay more than 60% of workers’ premiums, said Mike Langan, principal of the employer benefit consulting group Towers Perrin. If cost were the only factor, those companies would already have dropped coverage.”It’s part of a compensation, wage and benefit package. Employers see a connection between workplace productivity and health benefits,” Langan said.Still, over time, the cost-benefit analysis is likely to hold sway if Congress passes an employer mandate.”A lot of the decision making will ultimately come down to cost considerations as a voluntary benefit program becomes a mandatory one,” according to a June statement on Towers Perrin’s Web site.Of course, it ain’t over till it’s over. What’s not clear yet is whether the 750 fee — which would be adjusted for medical inflation annually — would be the only cost employers would have to pay if they don’t provide adequate coverage.”I would be surprised if it was just that,” said Helen Darling, president of the National Business Group on Health, which represents large employers’ perspective on national health policy issues And every cost lever adjusted will factor into companies’ decisions about whether to keep or drop the coverage they currently provide.– CNN’s Ted Barrett and CNN Radio’s Lisa Desjardins contributed to this report.

Source:CNN

NEW YORK: Despite emergency stimulus measures, small business lending continues to fall. In the just-ended quarter, the Small Business Administration’s flagship program backed 30% fewer loans than it did a year ago, and 55% fewer loans than it did in 2007, before the recession set in.The numbers bear out the grim reports from business owners who say that credit is dangerously scarce for small firms. The SBA’s 7(a) program approved 11,580 loans in the quarter ended June 30, valued at 2.5 billion. That’s down from 16,490 loans, worth 3.4 billion, in the same quarter last year.For the full year to date, the situation is even darker. In the first nine months of its 2009 fiscal year, the SBA has approved roughly half as many loans as it did last year.With sales slow, many business owners are looking for financing to help them weather the recession, but banks have clamped down on making the risky loans. Additional incentives from the SBA, authorized as part of February’s Recovery Act, have helped spur some increased lending but haven’t sparked a complete rebound.Still, SBA officials point to post-stimulus lending trends as a sign that the situation is at least better than it would have otherwise been. Comparing the months before and after the February 17 stimulus signing, the SBA reports a 24% jump in the number of 7(a) loans it has backed.”They are having an effect,” SBA spokesman Mike Stamler said of the SBA’s new incentives. On March 16, the agency implemented provisions authorized in (and retroactive to the signing of) February’s stimulus bill. The agency has suspended the fees it traditionally charges for its loan guarantees, and has increased the percentage of each loan it will back to up to 90%. If the small business defaults, the government pays the bank back for the guaranteed portion of the loan.More than 400 lenders that hadn’t made a 7(a) loan since at least September have returned to SBA lending since the Recovery Act passed, Stamler said. Last week, the SBA hit a psychological milestone. For the first time since August, it approved more than 1,000 7(a) loans in one week.One promising sign for borrowers seeking loans: Industry observers say they’re seeing more activity on the secondary market. Banks that make SBA-backed loans often resell bundles of those loans to other investors. That market all but froze last fall, cutting many banks off from the capital they needed to keep lending. But in recent months, secondary-market sales have picked up.”In addition to help from higher guarantees and fee reductions, the price being paid for SBA loans in the secondary market is increasing and helping fuel increased SBA loan volume at many community banks,” said Paul G. Merski, chief economist for the Independent Community Bankers of America. “Some of our community bank members are making more SBA loans this year than last.”Temecula Valley Bancorp (TMCV) in California, which was a top-10 SBA lender last year, dropped out of the SBA program in January because of the poor secondary market conditions. SBA division head Stephanie Bitters said Temecula has noticed the improvement in the market and said her bank hopes to participate again later this year.

NEW YORK: A regional bank in Illinois closed its doors Thursday, bringing the total number of failed banks in the United States to 46 so far in 2009, according to the Federal Deposit Insurance Corporation.Local banks have been dropping like flies as plummeting home values devalued mortgage-backed assets and rising unemployment rates caused an increasing number of consumers to default on their loans. Larger financial institutions have been helped along with government bailouts, but smaller regional banks continue to struggle.0:00
/1:07Citi rapped by JapanState regulators shuttered John Warner Bank, based in Clinton, Ill., and named the FDIC the receiver. The State Bank of Lincoln, based in Lincoln, Ill., will assume all of the deposits of the failed bank.As of April 30, the failed bank had total assets of 70 million and total deposits of approximately 64 million.The three offices of John Warner will reopen on Friday as branches of State Bank of Lincoln. Customers of the shuttered bank will automatically become depositors of State Bank of Lincoln. John Warner was the seventh bank to fail in Illinois so far this year. The total cost of Thursday’s bank failure to the FDIC is 10 million, bringing the FDIC fund’s total cost for failed banks to 11.95 billion this year. That compares with 17.6 billion in all of 2008.The number of bank failures so far this year has already far exceeded last year’s total of 25.The FDIC, which is funded primarily by fees paid by banks, insures individual deposits up to 250,000. The amount was increased from 100,000 late last year in response to concerns about the stability of the nation’s banks.

Source:CNN

NEW YORK: One year ago, on July 3, 2008, oil prices settled at a record high — a once-unthinkable 145.29 a barrelOn Thursday, it settled at 66.73, less than half the record price, following a 2.58 decline.In between, a global demand surge morphed into a global economic slowdown — one that would drive the price of oil as low as 33.87 in December — followed by the partial recovery that has been underway since.A year ago, oil was driven higher by two factors. One was the emergence of new global economic powers such as China, India and Russia, competing with the United States and the West for the world’s oil. The other was a weak dollar, the currency of crude trading. “Last year, we had a very weak dollar at the same time that we had very strong demand, insatiable demand,” said James Cordier, founder of OptionSellers.com, a commodity brokerage.0:00
/4:36T.Boone Pickens: 300 oilBut first, the high oil prices led to a curb in that demand. Then, weakness in the housing market and instability in the banking sector following the collapse of Lehman Brothers began to weigh on the world’s economies — particularly in the United States, the world’s biggest oil consumer. Confidence shriveled, and investors pulled cash out of assets that involved risk — such as oil and stocks — and moved cash into the safe haven of Treasury debt. Oil and Wall Street: Oil prices and stocks have moved in tandem since last fall, dragging each other lower and then helping each other higher. From July 3 to Dec. 19, the S&P 500 fell 30%. But in the same period, oil prices sank 77%.The S&P 500 and the Dow Jones industrial average fell to 12-year lows on March 9. Between then and June 11 — the recent peak for stocks — the S&P 500 gained 43%. The rally in stocks has since stalled. Oil prices, while they fell harder in the fall, also bounced back stronger than Wall Street. Crude futures doubled, topping 70 a barrel in early June. In recent sessions, oil’s run-up has taken a breather, just as Wall Street has. The reason that oil price swings are more extreme than the swings in the stock market is due to the heavy participation in the oil market by speculators, according to Cordier. “We have oil supplies at a 20-year high at a time when demand is falling at the fastest pace on record,” said Cordier. Based on supply and demand, oil should likely still be hovering closer to the yearly low around 33 a barrel, he said.Since taking office in January, the Obama administration has been spending at an unprecedented clip to stimulate the economy. Optimism about a boost in demand pushed oil prices. “This (recent) rally to 75 was extremely speculative,” said Cordier. “It was based on green shoots — it was based on feeling that the economy was going to recover.” Dollar weighs in: Crude is a dollar-denominated commodity. When the dollar weakens against other currencies, the price of crude goes up.Last year, the rally in crude was supported by a weak dollar. A weak dollar helped oil recovered from its lows in December, too. But oil prices only climbed half as high in the front half of 2009 as in the first six months of 2008.”This year, we have a weak dollar, but we don’t have any demand,” Cordier said. He expects the recent rally in the price of oil to lose its legs. “When headlines read in August or September that unemployment hit 10%, that will be a shock to the investors’ system and then oil will start to trade on its fundamentals — and that will be in the 50 to 55 range,” Cordier said.On Friday, the government reported that the unemployment rate increased to 9.5% in June. Gasoline: Gasoline prices have risen along with oil. But the record for a gallon of 4.114 was set two weeks after the crude mark, on July 17, according to the daily survey conducted for motorist group AAA. On Friday, the national average fell 0.1 cent to 2.629 a gallon — about a dollar above its recent lows set at the start of the year.

NEW YORK (Fortune) — Price competition is coming to the rarified world of genome sequencing.For 48,000, San Diego-based Illumina (ILMN) will sequence your genome — in other words, your entire genetic code.Until now, the only other company offering personal genome sequencing services is biotech startup Knome. It charges 99,500.Genome sequencing can alert individuals if they have inherited genes that cause illnesses like diabetes, Alzheimer’s or cancer. Using the information as a guide, people could alter their lifestyles in an attempt to dodge potentially latent diseases. They also could find out the probability of passing along a genetic disease like cystic fibrosis to their children, or uncover interesting details about their ancestry.Illumina is tossing in an iMac computer loaded with a customer’s genetic data to round out the deal. But spending nearly 50K on a genetic code will not fit most people’s budgets, even though that pricetag is hundreds of millions of dollars cheaper than sequencing the first human genome in 2003. Illumina says it expects just tens, perhaps hundreds, of people to sign up for the service within the next year.”It will be people who want to be among the first 100 people ever to be sequenced on the planet,” says company CEO Jay Flatley. “Or it may be people who have particular diseases like cancer who want to see if there is any way to uncover novel information.”0:00
/1:42On-the-go projectorsIllumina is a leading manufacturer of life science research tools. Last year the company reported a net income of 50.5 million with 573.2 million in revenue, up 56% from 2007. Illumina entered the sequencing business after acquiring Solexa, a gene analysis systems maker, for 600 million in 2007. Since then the company has continued to invest heavily in the technology.So far, personalized genomics make up just a small fraction of Illumina’s revenue. High costs keep sequencing out of reach for most people. But prices will fall substantially as the technology improves. In fact experts say costs could reach 1000 within three to five years, making more people privy to their entire genetic code.For now, the benefits of accessing one’s entire genome are limited to what scientists have already uncovered about our DNA. In the meantime, persons with less cash floating around could opt to get a smaller portion of their genome analyzed for a fraction of what Illumina is charging for the entire genome. The much-hyped genetics startup 23andMe, for instance, will analyze nearly 600,000 genetic markers for just 399.Despite the high costs, Illumina is selling its genome service now with the hopes of getting a jumpstart in the market. It also wants to work out glitches before the service becomes mainstream. Illumina is developing tools to make the service user-friendly in anticipation of that growth.An iPhone application, which the company says could be available within a year, is one plan in the works. Flatley envisions the app as a handy way to access genetic information when visiting a physician or genetic counselor. Illumina also plans to set up a website where clients can voluntarily blog about their sequencing experiences.To gain wider appeal, Illumina foresees customers someday measuring up their genetic makeup to famous people, like bioscience gurus Craig Venter and James Watson.”There are probably a lot more people who would rather compare themselves to George Clooney. But he isn’t in line to be sequenced now,” says Flatley.One area Illumina is not diving into is sequence analysis. Instead, it is partnering with genomics companies Navigenics, 23andMe, deCODE Genetics (DCGN), and Knome, which are developing platforms to decipher the data generated by Illumina. So far, the partners are keeping mum on how much they plan to charge the customers Illumina sends their way. Based on the costs of their current genotyping services, prices could range from a few hundred to a few thousand dollars.Ultimately Illumina could be missing out if analysis doles out sizeable earnings. Indeed, interpretation of genes will become even more relevant as researchers uncover additional information about the human genome. Sequencing the entire genome could be a one-time endeavor, but genetic analysis could continue to reap payoffs for a long time to come.

Source:CNN

WASHINGTON (Reuters) — Private equity groups would have to meet strong capital requirements and pledge to maintain long-term investments before being allowed to buy failed banks, under controversial guidelines proposed by the Federal Deposit Insurance Corp Thursday.The bank regulators who serve on the board of the FDIC openly clashed about the proposals, with some officials arguing the guidelines go too far and could scare away needed capital for troubled banks.The heads of the Office of the Comptroller of the Currency and the Office of Thrift Supervision both voted for the proposals, but said they need to be clarified and may need to be scaled back before final approval.”I do fear that the current articulation of the proposal has standards that go too far,” said Comptroller of the Currency John Dugan. “There is real money and real capital that can provide savings to the deposit insurance fund.”Bank regulators are increasingly looking to nontraditional investors to nurse failed banks back to health as the number of failed institutions continue to rise, draining the FDIC’s deposit insurance fund.The proposals floated Thursday call for private equity groups to maintain strong capital at the banks they invest in, specifically a Tier 1 leverage ratio of 15%, for three years. They would also generally have to maintain the investment in a bank for three years.Further, the requirements call for private equity groups to provide a “contractual cross guarantee,” meaning that, if one firm owns two banks, the healthier institution could provide support to the weaker.The proposed guidelines would limit private equity groups from using the acquired bank to extend credit to their investment funds, affiliates or portfolio companies.0:00
/4:22Bailout culture clashThey also would require the private equity groups to make extensive disclosures, specifically about their ownership structure, so regulators could determine who is behind an investment in a failed bank.FDIC Chairman Sheila Bair defended the strict proposals, saying they need to include strong capital requirements and other provisions to ensure the safety and soundness of the banks.But she said she is open to comments on the proposal and that the FDIC intends to hold a roundtable discussion next week on the topic.”I’m not sure we have it right here, but we do have a solid document,” Bair said.Bair has said she is comfortable with the private equity deals the agency has struck so far for failed banks such as IndyMac (IDMCQ) and BankUnited (BKUNQ), but said there needed to be a more structured process.

Source:CNN

NEW YORK: Unemployment hit 9.5 % today. Since the beginning of the year, almost 3 and a half million people have lost their jobs. And it’s not just about losing a paycheck, it’s also a way of life. 1. Reach outIf you’re unemployed, you’re certainly not alone. Reach out to other people in the same boat. Check out meet. This site will have information on local groups of unemployed people who meet to exchange feedback on resumes, cover letters and interviews. You can also check out layoff – a community of people who have lost their jobs. Even if it’s just to vent your frustrations, it’s important to have people willing to listen AND understand. And don’t be afraid to tell your colleagues, customers and friends that you’re unemployed. Be up front. 2. Get on a scheduleOne of the hardest things to get used to when you don’t have a job, is having an entire day with no structure. So, treat your job search project as you would a regular full-time job. Get out of the PS and put on something you would wear to work at your old job. If you can, do some volunteer work or take on a part-time job.3. Explore going back to schoolGoing back to school to further your education IS an option. But, you really should consider if it will pay off. If getting a degree will significantly give you an advantage and you’ll reap the rewards with higher pay down the road, by all means, explore this path. You can save a bundle by going to community college or taking some classes online. But don’t go back to school just because you need something to do. That’s an expensive lesson. 4. Help for veterans Veterans have been hit particularly hard. The jobless rate for vets who served in Iraq and Afghanistan is historically high.Now, there are some things that are being done. For one, as part of the American Reinvestment and Recovery act, businesses that hire vets are eligible for a 2,400 tax credit. So, if you’re a veteran, or you know someone who is a veteran looking for work, the Labor Department has a special Web site that focuses specifically on helping Vets find work. That Web site is Hirevetsfirst.com. On this site you can get a list of military friendly employers, get the latest info on career fairs or access resume writing tips for vets. — CNN’s Jens Haley contributed to this article.Got a financial dilemma? Go to CNNMoney.com/helpdesk to submit questions, read the Help Desk articles and check out new Help Desk videos. And tune in to CNN’s Newsroom Tuesdays and Fridays, when Gerri Willis and other experts answer your questions.

Source:CNN

NEW YORK: It looks like someone may have sprayed a healthy dose of Ortho Weed B Gon on those economic green shoots.So much for the notion of “less bad” numbers being good enough to get people excited about the economy. There was nothing “less bad” — let alone good — in the latest monthly employment report.The number of jobs lost in June was higher than in May and worse than expected. The unemployment rate inched up again, continuing its steady march toward 10%. And the length of the average workweek slipped to a record low while wages were flat. That means that for those who do have a job, they are working fewer hours and getting a smaller paycheck. “Let’s start with the good news. There is none,” said Stuart Hoffman, chief economist with PNC Financial Services in Pittsburgh.”There is no silver lining in this report. The economy is still in the grips of the recession.”The June jobs report is a reality check to those who thought that the recession had actually ended earlier this year as well as to investors that giddily bid up stocks in the past three months on the hopes of a quick, robust recovery.Not surprisingly, stocks plunged Thursday morning, with the major indexes all losing at least 2%.Talkback: How high will the unemployment rate go? Are you worried about your own job security? Leave your comments at the bottom of this story. Now don’t get me wrong. The weak job numbers for June are not necessarily a sign that the economy is on its way back to the truly scary levels of late last year and earlier this year. After all, the monthly job loss of 467,000 in June is still an improvement, if you will, over the average loss of 691,000 jobs a month in the first quarter of 2009.Along those lines, the jobs report for July will be an important indicator of whether the economy is really slipping or if the recovery is just unfolding at a slower pace.”I wouldn’t make much of the June report. If we have another decline of more than 400,000 jobs in July that would be a problem,” said John Canally, economist for LPL Financial, an independent broker-dealer based in Boston.Canally added that the one-tenth of a percentage point increase in the unemployment rate in June is an encouraging sign considering that the joblessness rate had been rising at an average of about four-tenths of a percentage point a month since the collapse of Lehman Brothers in September.Hoffman conceded that there may be some unique factors that made the June jobs report worse than it might otherwise have been, most notably the shutdowns of General Motors (GMGMQ) and Chrysler plants due to their bankruptcies.But he added that until employers are comfortable enough to start looking for new workers, there’s little consolation in the fact that the unemployment rate is rising more gradually than before.”You could make the case that number of layoffs are declining but there is still no hiring. I don’t draw much comfort from a small uptick in unemployment,” Hoffman said. Some economists also fear that the monthly loss of “only” 322,000 jobs in May may have been an anomaly and that there could be more months similar to June ahead before the job market truly gets better.”The jobs number in May was the aberration,” said Martin Regalia, chief economist with the U.S. Chamber of Commerce. “We’re pulling out of the steepest part of the decline but still declining at this point. Everybody got a little overexuberant with the May jobs numbers.”0:00
/5:20Is stimulus helping jobs?Regalia said he expects job losses to persist until the first quarter of 2010 before the labor market begins to stabilize. He added that the unemployment rate, which hit 9.5% in June, will probably peak between 10% and 10.5%. That’s clearly not good news. Even though the unemployment rate has tended to keep rising even after past recessions have technically ended, it’s hard to envision a full-blown economic rebound as long as consumers are scared about their job security and cutting back on spending.”We’re not catapulting into the abyss anymore. But the fact that wage growth was zero, combined with falling hours of work, will constrain any consumer spending growth. This puts families in a bind,” said Lawrence Mishel, president of the Economic Policy Institute, an independent think tank based in Washington.Consumer spending is still the biggest component of the nation’s economy. So it’s silly, not to mention dangerous, to believe that the economy is going to come roaring back to life later this year if we’re in for another jobless recovery.”The economy may finally stop shrinking sometime later this year, but we could still be losing jobs for many months,” Mishel said. “To say employment is a lagging indicator is dismissive of the economic impact on real people.” Anyway, I hope that everyone enjoys a great, safe 4th of July weekend. It’s now time for an early summer break. The Buzz will be back on July 15.Talkback: How high will the unemployment rate go? Are you worried about your own job security?
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(breakingviews.com) — A battle is brewing over U.S. state sales taxes on online purchases. Internet retailers Amazon.com and Overstock.com are scaling back their operations in states that demand they collect these taxes. While this won’t dent their revenues much, it foreshadows a larger clash over the taxation of internet commerce. Cash-strapped states are firing the first shots.Most online sales escape being taxed because internet firms only collect them in states where they have a physical presence. (Buyers are legally bound to pay them, but many do not.) However, Amazon (AMZN, Fortune 500) and Overstock (OSTK) allow independent companies to sell merchandise through their systems for a fee. This means the online giants have to collect taxes in any state where their independent partners have operations.New York passed a law last year implementing this rule. Amazon and Overstock both challenged it in court and lost. Now Hawaii, North Carolina and Rhode Island have passed similar measures. In response, both companies have cancelled their so-called associate programs in those states.That’s not too painful; only about 10% of Amazon’s sales come from associate sales, according to Forrester Research. And these indirect sales generate lower margins than the company’s main business.But it could become a bigger problem over time. The amount of business done online has grown rapidly — it is expected to hit nearly 160 billion this year, says Forrester. That has led bricks and mortar retailers — which feel at a disadvantage because they must collect sales taxes — to call for online retailers to be required to do so also. States desperate for more revenues are beginning to agree.Indeed, there’s no reason why online retailers shouldn’t be forced to collect sales taxes like other businesses. They once argued that doing so would inhibit the growth of online businesses. But that’s clearly an out-of-date position. Tax codes should be updated to reflect the growing importance of internet commerce.

Source:CNN

NEW YORK: President Obama is pouring 13 billion into an ambitious high-speed rail project. Some say it will never make money. Some say it will. And still others say profit is not even the point.Obama’s plan is “to jump-start a potential world-class passenger rail” in 10 major corridors, linking cities within the Northeast, California, Florida and other regions with “bullet trains” that exceed 110 miles per hour. State governments are in the process of applying for the federal funds.Sam Staley, director of urban growth and land-use policy at the Reason Foundation, a libertarian think-tank, said the project is risky, and that forecasts used to promote high-speed rail are “notoriously unreliable” because they “overestimate ridership and underestimate cost.”California, the nation’s most heavily populated state, is undergoing the most ambitious project: high-speed rail system that would link San Diego to San Francisco and Sacramento.Mehdi Morshed, executive director of the California High Speed Rail Authority, estimated that the San Francisco-to-Anaheim leg will cost 34 billion, nearly half of which would come from the federal government.Morshed believes it’s worth every penny. In addition to creating hundreds of thousands of jobs, he says the high-speed rail will make money.”Once completed, revenues will exceed operating maintenance costs by over 1 billion per year,” he forecasted. “It will make a profit.”0:00
/2:54High-speed rail on trackNazih Haddad, staff director of the Florida Department of Transportation, also believes profitability is a possibility for a high-speed rail link between Miami, Tampa and Orlando. The Orlando-Tampa leg is expected to cost up to 2.4 billion, according to the state’s estimates.”We’re probably one of the only states around where we have conducted an investment grade ridership study,” said Haddad. “Ridership proceeds would exceed operating maintenance cost.”But Ron Utt, a railroad expert at the Heritage Foundation, a conservative think-tank, does not believe the incentive is enough for travelers to leave their cars at home.”It’s not realistic at all because it’s not competitive on price and it’s not competitive on convenience,” said Utt, referring to the Florida plan as an example of why high-speed rail wouldn’t work financially. “I don’t think it’s got much to do with car culture. I think it’s got to do with people making rational decisions with their money.”A working exampleMorshed believes detractors are confusing high-speed rail with traditional lines, which are slow and infrequent.”High-speed train services around the world make a profit while their transit and conventional services lose money, just like ours..”Morshed points to Amtrak’s Acela Express in the Northeast as a success story.The Northeast corridor, linking Washington, D.C. to Boston, is the nation’s most highly developed high-speed rail service, according to the U.S. Department of Transportation. Most of it is controlled by Amtrak, a federally-funded railroad company that relies on government help, receiving more than 5 billion in federal appropriations and stimulus funds over the past three years, according to Amtrak spokesman Clifford Cole.Amtrak’s high-speed rail, the Acela Express, is its strongest link: Ridership rose 6.5% to 3.3 million passengers during its 2008 fiscal year, according to Amtrak, while Acela revenue jumped 16% to 468 million during that time.Cole confirmed that the Acela unit is profitable, even though Amtrak as a whole is not.The elephant on the tracksBut when measuring Acela’s profit, one has to take a new look at the old adage — it takes money to make money.”It is a fact that no nationwide passenger rail system anywhere in the world is considered profitable when all costs — including capital — are accounted for,” wrote Cole, in an e-mail to CNNMoney.com. “Like all national rail systems worldwide, Amtrak requires annual funding to support both its capital and operational needs.”High-speed rail backers, including the White House, look overseas for success stories. But Amtrak released a study in April to demonstrate that Europe’s system is heavily subsidized. Germany’s high-speed rail network, the most expensive in Europe, required average annual subsidies of 11.6 billion during the 10-year span that ended in 2006, according to the Amtrak study.Japan’s system is often cited as the most financially successful high-speed rail in the world, according to Ron Utt, but “that’s because in the 1980s they wrote down all the debt to zero,” he noted. “We’re talking about several hundred billion dollars in debt.”Sam Staley said it’s possible for a well-designed high-speed rail to cover its operating costs, but even the best-run rail system won’t be able to cover the capital costs stemming from its development.”I would really like to see high-speed rail work because I really like trains,” he said. “I just have trouble getting over the fundamentals. These things shouldn’t even move forward unless they can cover their operating costs.”Otherwise, said Staley, high-speed rail could become “a black hole for government finance.”But profit and loss are hardly the point, according to Vukan Vuchic, transportation professor at the University of Pennsylvania, who believes that high-speed rail — like other transportation networks — offers quality of life and is therefore worth the price.”Why do you build high-speed rail?” he asked. “Is it to make money? No. It is to provide public service. Cities that offer you decent choices in high-speed rail are better than those who only offer you highway.”

Source:CNN