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Your article about the property taxes paid by business ("Poor Move?" February) does not mention that real-estate taxes in the United States are so high because they provide the funding for schools. This is a taxation approach used nowhere else in the world, and it is very destructive.
Taxes are needed to pay the cost of essential government services. Taxes should not just be low; taxation design should be reasonable. There have been many destructively designed taxes in the past. Most are gone, yet the U.S. system of real-estate taxation is still with us.
Many years ago, when the United States was being settled, the only thing the new townships could tax were new homesteads. The real-estate tax made education possible, and made the United States one of the best-educated countries. Now, however, the real-estate tax makes our grammar schools and high schools some of the worst in the developed world.
In California, Proposition 13 attacked only a symptom of this tax design: the high taxes. The result? Lousy schools. Older people and retirement communities try to reduce property taxes. The result? Lousy schools. Businesses try to save money on real-estate taxes. The result? Lousy schools. Wealthy neighborhoods have good schools, poor neighborhoods have poor schools. The result? A class system that is almost hereditary. The solution? Funding schools with another, more-reasonable tax.
CFOs design and define the financial strategies that firms need to be successful. How about helping to design and define a more-successful financial (and educational) strategy for the nation than the current real-estate taxation mess?
Francis de Winter
Francis de Winter & Associates
Passage to India
In your article "India Ink" (NewsWatch, February), you talk about the growing trend of offshoring structured, repetitive tasks in sell-side investment research to junior analysts in India. This move helps reduce costs while increasing coverage. It will be interesting to see how offshoring affects the analyst career path in the future.
Traditionally, the sell-side analyst career path is one in which a junior analyst works in a close mentoring relationship with a senior analyst, acquiring the skills necessary to perform at the senior-analyst level. Only a select few of the aspirants cut the mustard and make it to the top.
Will the industry hire an elite group of junior analysts with potential in the United States and have them work in the company of the senior analyst to groom them? Or will the industry be willing to fill senior-analyst spots in the States with top-performing junior analysts from India?
AlphaProfit Investments LLC
California (Bad) Dreamin'
Your "Stingers" article (January) really resonated with me. I'm the CFO of a California high-tech small business in Silicon Valley. We had two very unpleasant experiences in 2003 with respect to California state taxes.
1. The state suddenly and without much publicity suspended the net operating loss (NOL) carryforward deduction. Our financial planning, based on use of a large NOL from our start-up, was totally derailed and had to be reset—not to mention the additional and unexpected tax expense. What a way to encourage new business start-ups!
2. We employ a relatively large number of consultants in technical specialty areas whose status has been that of independent contractors. The State of California last year performed an audit, declared the consultants to be employees, and served us with a six-figure tax assessment.
After many hours spent researching statute law and tax-court precedents and preparing an appeals petition, I think I have now managed to get the assessment adjusted down to where only one or two of the consultants are still in question. The whole thing was just a big fishing expedition. Or perhaps they used such assessments as state accounts-receivable last year to help justify a phony state budget that they knew wouldn't be real. God help us in California!
President and CFO, EOO Inc.
PepsiCo Takes On the Numbers
In reviewing the results for PepsiCo Inc. that were presented in "Mind the Gap" (December 2003), we discovered errors in the data used to calculate the Excess Cash Margin.
PepsiCo 's revenue numbers for 2000 and 2001 are incorrect, as they have not been adjusted for the accounting change in 2002 of showing revenue net of sales incentive given to retailers. Subsequently, the adjustment to operating cash flow for "Increased Vendor Reliance" is incorrect for all three years.
In addition, we also believe that the operating cash flows should be adjusted for pension contributions. Unlike some other corporations, PepsiCo has made sure that its pension plans are fully funded by making significant contributions to its plans. We believe these high levels of contributions are one-time items and the level of funding will settle down to more-normal levels as the equity markets recover. Therefore, our view is that for this analysis, pension contributions should be treated like other one-time nonoperating items.
PepsiCo's volatility, which in the report was shown as 39.74 percent, would be almost zero if the numbers were adjusted for the incorrect data and our pension contributions.
Lionel L. Nowell III
Senior Vice President and Treasurer
Purchase, New York
Prof. Charles Mulford replies:
(Professor Mulford's study was the basis for the article in question.)
We agree that revised revenue should have been used in our calculations. Doing so, however, would not have significantly changed our results. As noted in the company's 2002 annual report, revised revenue increased to $25.1 billion in 2002 from $23.5 billion in 2001, an increase of 6.8 percent.
Accounts payable, as disclosed in supplemental information to the 2002 report, reported at $1.2 billion on December 29, 2001, rose to $1.5 billion on December 28, 2002, an increase of 24.6 percent. This still suggests to us that, in 2002, the company took longer to pay vendors than in 2001, providing a boost to operating cash flow, which we estimate to be $221 million. That figure is less than the $389 million figure used in our report, but not sufficiently so as to alter our overall observations.
Regarding the pension plan, we did not adjust for the contribution made to the plan in 2002, because we view pension contributions as very much a part of operations. Our decision was, of course, a judgment call. Importantly, however, we did not ignore the likely nonrecurring size of the contribution in 2002. As we wrote in our report on the subject, "The primary reason for its drop-off in operating-cash-flow generation was a sizable increase to $820 million in its contribution to the company's pension plan in 2002.
"As the funded status of the company's plan is restored, such large contributions should not be needed, and the company's operating cash flow should improve."
Editor's note: Because the study covered all 87 nonfinancial companies in the S&P 100 index, it was impossible for space reasons to describe the results in nearly as much detail as Professor Mulford's report does.
Due to an editing mistake, the chart in "The Two Faces of Bank Mergers" (New Deals, March) was incorrect. Union Planters Corp. was acquired by Regions Financial Corp. and Seacoast Financial Services Corp. was acquired by Sovereign Bancorp Inc. We regret the errors.
On page 48 of the February issue, in the sidebar "Hot Seats," the company named was misspelled. It is Audit Committee Advisors.