Tag Archives: recession

Changing Course

Law Firms Are Altering Their Strategies To Cope With The Recession

The downturn in the economy that is affecting all businesses has not spared law firms. Like all other businesses, law firms have been forced to cope with fewer and thriftier clients. Specifically, law firms have had to deal with sharp reductions in transactional and real estate work, large increases in litigation and bankruptcy matters, and clients who are often unable to pay for legal services. Providing legal services to clients that may declare bankruptcy in the near future has become commonplace.

Law firms have responded to these trying times with various strategies. Many law firms have primarily focused on reducing costs through hiring and compensation freezes, recruiting cutbacks, and event cancellations. Other firms have started to transition transactional attorneys to bankruptcy or litigation work.

Not all strategies, however, are created equal. The reduction of costs is always a worthwhile aim, but when conducted without strategic vision, it can leave a firm with frustrated employees and choke off any avenue for organic growth. The transfer of attorneys to other divisions certainly creates revenue for the firm by keeping otherwise inactive attorneys productive, but the work product can suffer. For example, transactional attorneys will not necessarily provide the highest level of service to a client with litigation or bankruptcy needs.

Firms that take a different approach may be best suited to not only survive the current economic difficulties, but to emerge on the other side as stronger firms. This approach is simple: Focus on the client. While all law firms profess to keep the client’s interest at heart, in these times, paying more than lip service to that ideal is the key to success. Now more than ever, many clients are not able to afford full service legal representation. Obviously, providing the highest quality legal service to the client is always the first priority, but providing value should be a close second. Focusing on the client and its specific needs allows attorneys to add value by identifying and zeroing in on the particular requirements of that client. Once the particular needs are identified, it is simple to eliminate any superfluous services that do not add value, and to concentrate only on the services that really move the client closer to its ultimate goal. This focus keeps the representation more efficient, less costly, and will ensure that the client is satisfied with all of the legal services provided.

One major example of how an increased focus on the client is more important than ever is the looming prospect of bankruptcy. Recognizing that a bankruptcy could be on the horizon for a client is very important to shaping any legal strategy. Most importantly, a bankruptcy provides unique legal challenges and opportunities that need to be addressed in a timely manner. Identifying the possibility for a bankruptcy, and when it might occur, allows the lawyer to properly gauge which long-term strategies will be ineffective, and how to use the limited time and resources as efficiently as possible. Moreover, a possible bankruptcy underlines the client’s absolute necessity for value from legal services. Particular attention from the attorney at the outset of a representation can identify a possible bankruptcy, shape the representation, and let the law firm know which services will be most valuable to the client under the circumstances.

With the need to adjust to the current economic difficulties paramount for all law firms, smaller firms may be the best equipped. Like the tugboat and the ocean liner, smaller firms are more nimble and able to focus resources to needed areas more quickly than larger firms. Most importantly, small firms often provide a higher level of personal attention and a greater focus on the client’s needs. Focusing on the client is the best way to ensure success for both the law firm and the client.

Charles J. Morrow also contributed to this article.  He is an associate at Galbut & Galbut. He can be reached at cmorrow@galbutlaw.com.

chart increase, AZ NASDAQ listed companies

An Analyst’s Look At How Arizona’s Nasdaq-Listed Companies Are Faring This Recession

Arizona has 52 Nasdaq-listed companies and the performance of those with the most capitalization during this economic downturn has been fairly good.

In early June, Stephen Taddie, managing member of Stellar Capital Management in Phoenix, reviewed the top 10 Arizona Nasdaq companies using Thomson Analytics as his data source. Those companies comprise nearly all the capitalization for Arizona Nasdaq-listed firms. They are Apollo Group, First Solar, Microchip Technology, PetSmart, ON Semiconductor, P.F. Chang’s, Amkor Technology, Mobile Mini, JDA Software and TASER International.

There was positive news concerning stock performance and internal company performance for the group as a whole.

Looking at stock performance for the three-month period from April 5 through June 5, Taddie found that “90 percent of the Arizona companies outperformed their peer group as a national comparison and all by a significant margin.”

Taddie next looked at stock prices for the year to date through May 31. While the Standard & Poor’s 500 stock index was approximately even for that period, seven of the top 10 Arizona companies outperformed the index by a fairly wide margin, Taddie says. Those that did not tracked the index closely, he adds. The seven companies were First Solar, Microchip Technology, PetSmart, ON Semiconductor, P.F. Chang’s, Amkor Technology and JDA Software.

“Apollo Group, the largest of the top 10 as measured by market capitalization, fared better than the rest through the first quarter of 2009, but was surpassed by the others as investor confidence rose significantly in April and May, encouraging investors to look past the current economic data and the financial statements of smaller, less capitalized companies to the earnings potential many of these companies will have in a more stable environment,” Taddie says.

Taddie also reviewed a compilation of analysts’ estimates for internal company performance for 2009. As a group — not as individual companies — analysts estimate revenue for the top 10 will be flat this year, up just .49 percent, but that it will grow 13.5 percent in 2010.

“Over the last six months, we saw many analysts lengthen the duration of the downturn but also decrease its severity,” Taddie says. “If we break it down quarter by quarter, the data reflect a fairly dismal first half of 2009, followed by a fairly decent last half of 2009.”

Estimates for next year’s revenue vary widely, Taddie says, because it is difficult to measure the impact of federal stimulus packages and significant cost-cutting measures in many industries.

“A significant capital-expenditure decline has frozen budgets,” says Taddie, who also is a member of the Western Blue Chip Forecast panel for the W.P. Carey School of Business at Arizona State University. “One firm’s cost reduction is another’s revenue shortfall and that has been trickling down the supply chain.”

Taddie says the data paint a picture in which Arizona firms, like many other companies across the country, are trying to preserve shareholder value by more closely aligning capital expenditures with expected revenue growth, or the lack thereof.

“Typically, the larger the company, the more apt they are to take a bet and invest into a downturn, so when the tide turns, they capture more market share,” Taddie says. “The smaller the company, the less apt they are to do that because they can’t take that risk.”

Managing expenses and growth in an environment where revenue expectations are “jumping all over the place” is a challenge, Taddie says.

“References to this period will show up in economics and business-management textbooks for quite some time,” he says. “The data is showing that the Arizona top 10 are faring at least as well as other companies and, when compared to stock-price performance so far this year, better.”

AH Endovascular OR Suite

Executives From West Valley Hospitals Assess The Impact Of The Current Economy

The need for health care services continues to grow across the state, including the West Valley. And under the current recession, hospitals are being asked to do more with less.

Jon Bartlett, CEO of Arrowhead Hospital, says the health care industry is not immune to the impact of the bad economy, but he remains optimistic about the current and future state of the market.

“There are plenty of challenges, but we remain focused and disciplined,” he says.

In fact, he believes West Valley communities are home to some of the finest hospitals around, and the members of the community wouldn’t have it any other way.

“Today, people expect the very best health care outcomes, but they also demand world-class service,” Bartlett says. “It is our responsibility to meet their expectations.”

Arrowhead Hospital has been recognized with three stars in the Society of Thoracic Surgeons’ national database in 2007 and 2008 for its superior cardiovascular surgery outcomes.

Tom Dickson is CEO of Banner Thunderbird Medical Center, a 413-bed acute care hospital that specializes in cardiovascular care, neurology care, pediatrics, obstetrics and emergency medicine. He says the slowing economy has actually allowed West Valley hospitals to catch up with their demands.

“Generally, the West Valley has been underserved in terms of acute care beds,” Dickson says. “Now that the economy has slowed and several hospitals have added additional beds, we are not in as critical condition as we were in recent years.”

With a recent expansion of the South Tower, which can grow to accommodate 600 beds, Dickson says his biggest challenge is retaining existing employees and recruiting additional workers to staff the additional beds and programs and services that are growing as a result of the tower.

“The most critical area of need is registered nurses,” he says. “We also have an acute shortage of physicians and other medical professions, including physical therapists, respiratory therapists, pharmacists and medical technologists.”

Jo Adkins, CEO of West Valley Hospital, says the West Valley currently has an adequate amount of hospital beds, but that may not be the case for very long.

“As growth returns to the West Valley, we will need to look at growth of both beds and services,” she says. “We need to stay in touch with the communities’ needs and grow the services so that we can remain a hospital of choice.”

Meanwhile, West Valley Hospital is already very strong in a number of specialties, including its heart and vascular center, chest pain center, emergency room, electrophysiology and obstetrics. But Adkins doesn’t mince words when it comes to the challenges facing the health care industry.

“(It has) taken a large hit,” she says.

Naming two recent 5 percent budget cuts, she adds, “That has had a $3.6 million impact on West Valley Hospital alone.”

Beyond working to overcome the challenges facing the industry as a whole, the leaders of these hospitals are 100 percent dedicated to providing the superior service they believe their community members deserve.

Bartlett notes that the emergency department at Arrowhead Hospital is making a concerted effort to decrease wait times, promising that patients are seen in less than half an hour.

“Our average wait time is 19 minutes,” he says.

And while Arrowhead Hospital does have plans to expand from 220 beds to 260 within the next 18 months, Bartlett explains that he doesn’t just want to grow, he wants to make sure the hospital is getting consistently better.

Lee Peterson, CEO of Sun Health Services (formerly Sun Health Properties), which recently merged with Banner Health, agrees that providing the utmost services and results for its patients is the hospitals’ top priority.

“Banner has a best-practice strategy that is very much in line with our passion for making a difference in people’s lives,” he says.

Boswell and Del E. Webb medical centers are now Banner Boswell and Banner Del E. Webb.

“By coming together with Banner we were able to bring some immediate technologies, such as electronic medical records, in addition to research institutes, which are such a major part of Banner Boswell and Banner Del E. Webb, to the West Valley,” Peterson says.

With the economy putting a freeze on growth for the most part, West Valley hospitals stand poised for continued expansion. All the while, they are not taking their eyes off their mission — to provide the residents of West Valley communities with first-class services administered by highly trained and compassionate health care providers.

nurses, healthcare, doctors

The State’s Health Care Industry Is Strong, But The Recession Is Taking A Toll

Although I have only been in Arizona 11 years, St. Joseph’s Hospital and Medical Center has been providing high-quality care to Valley residents since 1895. And for the past century, St. Joseph’s has been known for two primary missions: Service to the poor and underserved; and outstanding care, particularly in the neurosciences, driven by groundbreaking innovation.

In the past 25 years, the innovations at St. Joseph’s have been significant, and other hospitals in the state have seen significant growth and expansion of services, as well. We have had unprecedented growth in the Metro Phoenix area, and hospitals have tried valiantly to keep up with the demand for acute care services. In the past 25 years, we have seen many new hospitals built, particularly in the suburban areas, and central hospitals have continued to expand.

Arizona was the very last state in the country to adopt a state Medicaid program in the early 1980s, but the Arizona Healthcare Cost Containment System (AHCCCS) has since been considered a national model of cost effectiveness. We missed out on substantial federal funds for the Medicaid system by being the last state to join, but we have nonetheless run an efficient system with the public dollars Arizona has received.

The health care system has continued to evolve in very interesting ways during the past quarter century. We have seen a clear movement to reduce the length of hospital stays, and many procedures are done in outpatient settings that were once only performed in hospitals.

We have made extraordinary progress in diagnostics and minimally-invasive procedures, which help people recover faster and get treated earlier when disease occurs. In a past era, patients who needed lung surgery had to have their ribcage cracked open and had weeks of extended recovery; now they have it laproscopically and are up walking around the very next day. Cancer used to be a death sentence; now it is often a chronic illness that can be virtually cured. We are better at treating chronic illnesses such as diabetes and heart disease, and we now know how important prevention is to limiting the impact of disease.

But significant challenges still remain. We have evolved into a system of “sick care” not “health care,” and although we know prevention pays dividends, that is not what physicians and hospitals are reimbursed for. The system rewards us when we treat the sickest patients, but not always for keeping them well.

In America, the concept of employer-sponsored health care is considered foundational to our economy. Yet, more than 46 million Americans do not have health insurance, and many of them are vulnerable children. In Arizona, the majority of employees work for small businesses that are under a tremendous strain to provide affordable health insurance. When people transition to public insurance, the reimbursements are declining so much that community physicians are refusing to accept new Medicaid and Medicare patients, while safety-net hospitals struggle to treat all who present themselves at their doors.

The boom-and-bust cycle is hard on the economy, but it is also hard on health care providers. We face a physician shortage in the Valley and a dearth of key sub-specialists for a region this size. In a recession, more people turn to public assistance at the same time the state is trying to cut budgets to compensate for diminished reserves.

Still, I remain hopeful for our state and our industry. Health care continues to be a strong economic engine for Arizona; good paying jobs, great career paths for a wide variety of disciplines and many avenues for innovation. Catholic Healthcare West, of which St. Joseph’s is the flagship hospital, is actively working with the new president and Congress to help shape health care reform so all Americans can have affordable and accessible health coverage. I believe there has never been a time when so much good is possible, and that change can help all of us live better.

money in vice

The Economic Recovery Begins In 2009, But It Will Be Slow Going

The national and state economies are expected to start feeling the effects of a recovery during the last quarter of 2009. However, the recovery over the next year will be slow, with unemployment continuing to rise and economic growth anemic at best. Meanwhile, the state’s expenditures are rising, even as revenue continues to fall, setting the stage for future budget cuts and an expected tax increase.

That was the consensus forecast unveiled by top economic experts from the W.P. Carey School of Business at Arizona State University and the Arizona governor’s office at the annual Economic Outlook Luncheon on May 20. Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at W.P. Carey and editor of Economy@W.P. Carey, provided an overview of current economic conditions on the state and national level, and offered a forecast for the coming year.
“The economy is going to show some signs of recovery in the last part of 2009, but the way I like to look at this is that lots of our economic indicators will still be underwater in a sense — they just won’t be as far underwater,” he said. “We’ll probably see positive growth in GDP, we will see job losses getting smaller, but there will still be job losses. There will still be people claiming unemployment insurance and, of course, unemployment rates will still be going up.
“It’s going to be a deep, sort of U-shaped recovery and 2011 will probably be a pretty good year of job growth,” McPheters added. 
In the meantime, job losses will continue to mount. In March, with an over-the-year employment decline of 7.1 percent and 136,000 jobs lost, the Valley just edged out Detroit as the weakest large metro labor market in the nation. And even as the economy begins to recover, the Greater Phoenix area will still see its labor market contract by 1 percent in 2010, according to McPheters.
Nationally, McPheters stressed that while the current recession has been painful, it still is not on par with the Great Depression. The Great Depression was marked by four consecutive years of decreases in Gross Domestic Product (GDP), while the current recession is expected to result in four consecutive quarters of decrease in inflation-adjusted GDP. In fact, in the first year of the recession, the national GDP actually increased by 1.1 percent.
“During 2008, the first year of the recession, you would expect that the GDP would be decreasing,” he said. “Well, one of the factors holding it up was exports. Exports continued strong in the United States through 2008.”
This year, however, exports are expected to drop by 10 percent. That’s just one example of how the national and state economies will continue to struggle as the recovery begins to take hold. Another example is the expected freefall in the commercial real estate market, especially in Arizona.
“Commercial is the next shoe to drop and we have seen this pattern before,” McPheters said. “Even as you see residential (construction) begin to pick up, I think you can expect that commercial building is going to be very, very weak all the way through 2010 and probably 2011, because what we need to see is population growth come back and job growth to come back. There’s no point in building retail space and office space if the jobs are not there and the consumer is not coming out to shop.”
And it is consumers, who account for 71 percent of GDP, who really hold the key to the economic recovery.
“The consumer is the only part of this economy that can bring us back,” McPheters said. “Consumers are not going to come back into the game until home prices stop falling, until the stock market stabilizes, until they see unemployment rates have peaked out and job losses start to get smaller and smaller. And the consumer has to have confidence to buy, and believe it or not, the consumer has to back off of their inclination to save their money.”
In March, the savings rate as a percent of disposable income was 4.2 percent, up from 2.6 percent six months earlier. While increased savings are considered a good thing in robust economic times, a pullback by consumers as an economy tanks can have devastating effects. McPheters pointed out that for each 1 percent increase in the savings rate, approximately $100 billion are being pulled out of the consumer-spending stream.
However, McPheters expressed confidence that the very calamity that sent our state and national economies reeling will eventually add to Arizona’s attractiveness to new residents and businesses — falling home prices.
“Housing prices have now returned to the traditional level, where Arizona housing prices are now more affordable than the national average,” he said. “In 2005 and 2006, we had come to the point where we were one of the least affordable markets. That has turned around and it has turned around very quickly. Of course that has been very painful.”

Dennis Hoffman, director of the L. William Seidman Research Institute at W.P. Carey, agreed with McPheters, adding that he believes the state’s economic rebound will be strong.

“This of course is the big question: What kind of bounce will take place? Now, I’ll have to say that the dramatic shakeout in prices in housing, while it has been absolutely disastrous for a number of folk and put a lot of pressure in a lot of different places, it might set us up for a more robust recovery than I would have thought six to nine months ago,” he said. “The thinking is really, very, very simple; an attractive attribute of Arizona has historically been great climate, affordable housing and a place to get a job. That third aspect really doesn’t exist right now, but it could exist if our economy recovers at a little faster pace.”
In the economic downturns of the past four decades, Arizona has bounced back strongly, and Hoffman is confident history will repeat itself, especially if the state and Valley can re-create the environments that people from around the country have found so attractive.

However, a major wrench in making the state attractive again is Arizona’s current budget crunch. In fiscal year 2009, the state’s budget gap stands at $1.6 billion. In fiscal year 2010, that’s expected to almost double to $3 billion dollars. As the economy has worsened, unemployment has soared to almost 8 percent, foreclosures have skyrocketed and businesses have closed their doors. As a result, billions of dollars in revenue from income, property, sales and business taxes have evaporated. Conversely the need for state services has exploded.

“We’re really seeing the effects of the downturn in the economy, both in terms of state revenues — our collections are down at a very significant rate — and likewise, our caseloads are up at a very significant rate, because more of our citizens are in need of services,” said Eileen Klein, director of the Arizona Governor’s Office of Strategic Planning and Budgeting, adding that in the past two months alone the Arizona Health Care Cost Containment System (AHCCCS) has enrolled 50,000 people.
Hoffman pointed out that in the past, $48 to $50 out of every $1,000 of personal income had gone into the state’s general fund.

Rhonda Forsyth President and Chief Executive Officer John C. Lincoln Health Network

CEO Series: Rhonda Forsyth

Rhonda Forsyth
President and Chief Executive Officer
John C. Lincoln Health Network

How would you characterize the health care industry in the Valley?
When I think of health care for the Valley, for the most part we’ve been a growth industry. We have had incredible new facilities that have been built and new partners that have come into town. … But we’ve also been experiencing the downturn in the economy right now, so we are struggling like every other business, and it’s somewhat concerning. Hospitals in particular have been a safety net for our patients, for families, for our community for quite a long time and that is being threatened because of changes in the economy.

Is the health care industry recession-proof?
A lot of people think health care is recession-proof. From our perspective though, we find that we still have people coming in for services … but many people don’t have the ability to pay for their care, and that is why we’ve experienced a downturn; people can’t pay their co-pays, a lot more people are uninsured, so they still need our services and we are here to provide for them … So, I don’t think we are recession-proof. We’ve gone through changes, we’ve had to reduce expenditures, we’ve had to look very critically at some of the services that we provide and assure that they are still mission critical.

What are the major legislative and financial issues facing the Valley’s health care industry?
Well, it’s unclear right now from a legislative standpoint, both how health care reform is going to manifest itself and then on more of a local level, what’s going to happen … the (state) Senate has passed a bill that includes pretty dramatic payment cuts for hospitals, and also reduces accessibility for many people in our community. There are proposals right now to eliminate coverage for a number of children with KidsCare. So those things are really concerning. However, nothing is in its final form and we don’t know. I would just encourage our legislators and our congressmen to really look at what it is that health care provides in the community and be thoughtful about changes that are being proposed.

What are some of the new trends in health care delivery?
It’s an exciting time to be in health care. … one of the great things that has happened is really bringing biosciences and biotechnology to Arizona, and we have really benefited by having those kinds of partnerships with researchers and with some of our scientists in the community. So, when you look at health care out in the future, you really see the opportunity to treat you as a patient on much more of an individual level, so that, through biosciences, we understand you at a molecular level, rather than just say, ‘Well, you have heart disease and the standard treatment for heart disease is X, Y, Z.’ Now we’re saying … ‘We’re looking at you and molecularly this is how you will respond to this kind of drug or this kind of treatment and we know what will work and what won’t work.’

As baby boomers age, what type of competitive edge does that give local health care facilities?
It does concern me — obviously there’s opportunity — but it does concern me from the standpoint that we have people who have far more diabetes, we’re seeing more incidences of certain types of cancers and heart diseases, and many more chronic diseases. So when you look at baby boomers aging and the incidences of chronic disease, there’s opportunity in treating those people, there’s also concern about it potentially overwhelming the health care system. We’re going to need many more nurses, physicians, facilities, and we’re going to need to be smarter about how we take care of people.

How has health care evolved locally?
The most exciting thing that I’ve seen in health care in Arizona is that providers recognize … that we do a much better job of taking care of patients when we work more closely together. So a lot of our initiatives are really bringing a health care team together to look at you as a patient and say what’s going to make sense through an entire continuum of care, and make sure you get the right treatment at the right time. Also, that we work much more cooperatively with you to do preventative work.

To what do you attribute your success at the C-level?
I think I have a great passion for John C. Lincoln and a great passion for our mission. I feel so honored to come to work every day and to work for people who are really making a difference in people’s lives. … I think I’m also analytical, I like to think strategically, I try to think beyond what are the issues of today, but look to where do I want John C. Lincoln, where do I think we should be five years from now, 10 years from now. I also very much value getting the right person in the right job, and we just have some excellent, excellent people here at John C. Lincoln. While I can look to things where I really feel I’ve made a difference here at John C. Lincoln, I know I’ve done that in the context of a really fabulous team of people.

    Vital Stats





  • Appointed president and CEO of John C. Lincoln Health Network in April 2009
  • Joined the network in 1987
  • Held executive posts at both network hospitals
  • The network includes John C. Lincoln Deer Valley Hospital and John C. Lincoln North Mountain Hospital
  • Under her leadership, North Mountain Hospital was recognized for excellent patient care by U.S. News and World Report
  • Earned a Maser of Science in business administration from Arizona State University
  • Is involved with the Better Business Bureau, the Phoenix Boys Choir and the American Cancer Society
nonresidential building outlook

Non-Residential Building Feeling Effects Of Recession

Although non-residential building held up longer than residential activity in the current recession, the non-residential downturn now has started and is expected to continue into 2010.

Non-residential building began to increase strongly at the beginning of 2006, just as residential activity started to sag. Double-digit growth continued in seven of the next 10 quarters, propping up the economy and partially offsetting the drag on GDP created by the residential downturn. But non-residential building hit the skids in the fourth quarter of 2008, with an annualized decrease of 9 percent. However, that was a minor dip compared to the latest GDP figures. In the first quarter of 2009, spending on non-residential building was down a whopping 44 percent. Double-digit quarterly decreases in non-residential building outlays are expected through 2009. If forecasts from Arizona State University’s W. P. Carey School of Business prove to be correct, spending on non-residential structures won’t move back into the positive range until the third quarter of 2010, after nearly two years of decline.

Just as residential building has been hit by a weak economy, non-residential construction is now feeling the effects of reduced demand for office space and facilities of all types.

Moreover, tighter credit standards, originally linked to residential mortgage problems, are now affecting non-residential financing, while commercial real estate borrowing is plummeting. According to surveys of bank loan officers by the Federal Reserve Board of Governors, non-residential construction loan credit standards have grown tighter in each of the past 12 consecutive months. Meanwhile, bank loan demand by builders of commercial real estate declined in each of these months.

A collapse in non-residential building will have a sharp impact on an already weak construction industry in metropolitan Phoenix. In 2005, at the peak of the housing boom, residential permits accounted for approximately two-thirds of the $14 billion total value of building permits for the year, while non-residential made up the remaining third. By 2008, the relative importance of residential and non-residential activity switched, as non-residential permits of $6.6 billion accounted for two-thirds of the total, and residential permits fell from $9 billion in 2005 to less than $3 billion in 2008.

Observers expect the value of non-residential permits will fall by as much as one half this year, offsetting any meager gains if residential housing shows signs of life.

New retail, office and industrial space actually put in place is expected to be less than 10 million square feet this year, down two-thirds from more than 30 million square feet in 2007. And 2010 will be even weaker. The consensus among real estate analysts is that new retail, office and industrial space added next year will not reach 4 million square feet.

Non-residential building has posted many instances of sustained downturns, the most recent being the six consecutive quarters beginning with the fourth quarter of 2001, after the attacks of Sept. 11.

As long as labor markets are weak, financial markets are tight and securitization barely exists, it is unlikely that non-residential building will show strong signs of life nationally or in the Phoenix metro area.

Stimulus Effect

Infrastructure Companies Are Big Winners Under Plan To Jumpstart Economy

Construction companies, big and small, figure to be the primary beneficiaries of some $4.2 billion in federal stimulus money that will flow into Arizona in the months ahead. But economists and industry officials say businesses across the board will share in what could be a spending bonanza.

Clearly not everyone is in construction. Yet, as major projects move from drawing boards to construction sites, laborers and management teams are in a better position to perhaps buy a car or get an old one repaired, purchase a needed washer or dryer, go out to dinner, or shop for clothes for their kids. That’s what many see happening as the money flows downstream.

Industry experts say estimates of the multiplier effect range from 3.5 to 5.5, meaning that for every dollar spent on construction, the impact on the rest of the economy is $3.50 to $5.50. Others say that every $1 billion spent on construction results in 35,000 to 40,000 jobs.

Other businesses in line to benefit include those related to health care, energy efficiency and home improvement. And it will help if a business is savvy about coping with government bureaucracy.

There are debates about whether the Obama administration’s $787 billion stimulus package involves too much government or not enough government, but everyone seems to agree that government has to do something to pull the nation out of the worse economic downfall in decades.

Economics Professor Dennis Hoffman, director of the L. William Seidman Research Institute at Arizona State University’s W. P. Carey School of Business, is among those who expect stimulus money targeted for indigent health care to have a ripple effect, impacting hospitals and health professionals. But, says Hoffman, who has done projects for Del Webb Construction, the Arizona Department of Transportation, the Arizona Department of Environmental Quality and APS, there is more.

“Any private sector business that supports K-12 and to some degree higher education, will benefit,” Hoffman says.

He includes suppliers, and maintenance and construction firms that serve the education field. Above all, construction companies involved in infrastructure and road building will receive what Hoffman calls “a needed shot in the arm.”

“The general contractors have been begging for this,” Hoffman says. “They were absolutely on the front lines working for this injection, because their businesses were dead in the water.”

Of the $4.2 billion in stimulus money, $522 million is allocated for transportation.

David Martin, executive director of the Associated General Contractors, Arizona Chapter, echoes Hoffman’s assessment. “All highway and heavy construction firms will be beneficiaries,” Martin says.

Additionally, contractors who work on education facilities, particularly in lower-income areas, and those that build water-treatment facilities, emergency shelters, and public infrastructure projects, such as streets and sidewalks, should benefit. Martin calls it “neighborhood stabilization.”

David Jones, president and CEO of the Arizona Contractors Association, says companies with experience in public works projects will benefit, especially those that “historically understand red tape and the bureaucratic levels of federal contracting.”

Utility companies should be able to take on energy-related projects, and work should be available for companies that retrofit residential, schools and government buildings to solar energy, Jones says. Women, minority and disadvantaged business enterprises, plus businesses run by war veterans “will have a place at the table,” he adds.

Homebuilders could benefit from projects on military bases, such as single-family units or replacing aging barracks.

Doug Pruitt, president and CEO of Sundt Corp., says contractors such as Sundt are positioned to do well in the stimulus world because of the company’s broad market diversification.

“We do highway work, industrial, water and sewage treatment, university work, K-12 — a whole host of building work,” Pruitt says.

He doesn’t expect much school construction, however, because nationally only 8.3 percent of the $143 billion allocated for construction is set aside for schools. Most of the money will go for highways, bridges and water-related projects, with funds funneled through such federal agencies as the General Services Administration and the Army Corps of Engineers.

Pruitt says Sundt is focusing on its federal divisions and moving personnel from other units that have suffered because of the economy.

At Sunstate Equipment in Phoenix, which rents a full line of hand tools to heavy equipment, CEO Benno Jurgemeyer says it all comes down to “job creation and getting consumers back in a spending mode.” He says his company would benefit directly from highway or vertical construction, and indirectly if the stimulus package keeps office buildings and retail centers rented and full of employees and customers, thus accelerating the development process.

Jeff Whiteman, president and CEO of Empire Southwest, an authorized Caterpillar dealer for heavy equipment including off-highway tractors and trucks, says his firm should see some benefits, but adds: “I think it falls far short of being a true stimulus package and truly creating jobs. What we have is better than nothing. It will help us as construction picks up and hopefully some highways are built.”

Typically, businesses such as Empire Southwest are the first in and the first out of a recession. When housing construction stops, site preparation and development stops, and when housing is ready to resume, site preparation resumes. But in today’s economy, so many improved lots are ready for building that Whiteman says his industry’s recovery will be tied to heavy and highway construction.

merger

The Wave Of Bank Mergers Has Changed The State’s Financial-Services Landscape

The banking industry has plenty of troubles, but in Arizona, the least of its problems is the aftermath of recent mergers. Bankers and industry observers say the state’s financial-services landscape hasn’t significantly changed because of the consolidations. Other than the usual branch closings and potential employee layoffs, they don’t see a big shakeup looming. One expert, however, wonders if continuing mergers nationally will lead to a banking system dominated by giant institutions that no one can afford to have fail.

There have been five bank mergers in Arizona since last summer. JPMorgan Chase & Co. acquired Washington Mutual, Wells Fargo & Company acquired Wachovia Bank and National Bank of Arizona absorbed Silver State Bank branches in Arizona. Mutual of Omaha entered the local market with its acquisition of First National Bank of Arizona, and US Bank acquired Downey Savings & Loan branches in Arizona.

“If you take a look at Phoenix and compare it to other communities, we have a large number of financial institutions,” says Lynne Herndon, Phoenix city president of BBVA Compass, formerly Compass Bank. “If you paint it with a broad brush, while there have been a significant number of mergers, this does not necessarily have the impact one might think.”

The impact would have been much greater in a smaller market, where the number of financial institutions dropped precipitously, Herndon says. But the mergers have generated a few ripples.

Herndon and Doug Hile, chairman and CEO of Meridian Bank, note that the elimination of a handful of players perpetuates the return to more traditional lending standards recently prompted by Arizona’s real estate meltdown and the ensuing recession. Hile also sees a higher concentration of retail deposits flowing into larger banks and shrinking market share for smaller banks.

“Most of the smaller banks are not in a position, or even have an opportunity, to acquire those deposits,” Hile says.

Dwindling market share is somewhat detrimental to community banks because it means Arizona’s large banks are just getting bigger, he notes.

While large banks rule the retail banking realm, community banks are the backbone of commercial banking and likely will remain so, Hile says.

“Business customers often want to have contact with the decision makers at their bank and that’s how small banks operate,” Hile says. “In that regard, the (small) banks that are healthy will have an opportunity to acquire new commercial customers.”

Alex Wilson, senior lecturer at the Eller College of Management at the University of Arizona, has a different point of view. “Your number of choices in commercial banking is disappearing,” Wilson says. “And creativity is lost as it becomes more corporatized.”

Wilson laments two potential outcomes of bank mergers — the weakening of a sense of community and the loss of institutional knowledge when middle and senior management are laid off. “

Well-run big banks know enough to try to reinstate that as quickly as they can,” Wilson says. “Badly run big banks lose that.”

Customers more concerned about fees, interest rates and having a variety of banking products to choose from are assured that competition is alive and well despite the mergers.

“There are still plenty of banks in Arizona and there is still plenty of competition,” says Marshall Vest, an economist at the Eller College of Management. “I don’t think we’re at the point where we have just one or two major players that will dictate fees and rates.”

Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, agrees: “We have a lot of competition. We always have. This is a very popular place for banking.”

Mergers probably have strengthened Arizona’s banking industry, Rotellini adds. “The banks that remain are healthy because of the merger-and-consolidation process and are a testament to our federally insured banking system,” Rotellini says. “Banks that were not healthy were acquired by healthier banks and that was done without any disruption in business.”

But as Wilson watches mergers roll out coast-to-coast, he wonders about the ultimate outcome. “

We’re probably heading for a world of three super national banks and probably a handful of little community niche banks,” Wilson says. “The good-sized regional banks are disappearing from the spectrum very quickly. As a result, (Bank of America) will be there, Wells (Fargo) apparently will be there and there will be Citi (Citigroup). I don’t know who will be left standing. The only ones left may be those little community banks.”

Citigroup, a global behemoth with multiple lines of business in financial services, is struggling and Wilson points to it as an example of the kind of risk that comes with an ever-expanding corporate waistline.

“In normal times, I would say (getting bigger) deepens the balance sheet and creates more international presence,” Wilson says. “But in the face of what is happening … I’m not sure you can make that statement. If one of these biggies falls, the ground is going to shake severely. Bigger is more efficient, but it is not necessarily better.”

| www.azdfi.gov | www.compassbank.com | www.ebr.eller.arizona.edu | www.meridianbank.com |

american flag, protest

Legal Arizona Workers Act Does Not Cause Expected Upheaval

In 2007, the state of Arizona made its first foray into “immigration reform” when it passed the Legal Arizona Workers Act. However, before the Legal Arizona Workers Act (LAWA) even became effective on Jan. 1, 2008, the Legislature went to work on amending the statute, presumably to “cure” some of the more controversial aspects of the law.

While the fundamental purpose and structure of LAWA has not changed, employers need to be aware of the current version of the law in order to limit the chances of being on the receiving end of an enforcement action. For example, the same legislation that tweaked LAWA also criminalized the act of knowingly accepting identity information from someone who is not actually the person represented in that identity information. Nevertheless, recent trends reported by a researcher from the University of Arizona suggest the enforcement tsunami that was expected to hit the business community is, up to now, little more than a ripple in a pond.

LAWA prohibits employers from “knowingly” or “intentionally” employing any unauthorized alien workers after 2007, and creates stiff penalties for employers who do. Penalties for first violations include mandatory probation for, and possible temporary suspension of, all business licenses issued by the state of Arizona. For a second violation during the probationary period, whether knowing or intentional, employers face permanent revocation of their state-issued licenses — thus effectively preventing the employer from doing business in Arizona. LAWA also requires every Arizona employer to verify new hire work eligibility through the federal government’s E-Verify system. However, LAWA created no “penalty” for failure to use E-Verify. So an employer who becomes the target of an enforcement action will likely be presumed to have “knowingly” hired an undocumented worker if that employer failed to use E-Verify. Evidently, most employers have decided either to roll the dice or they simply don’t recognize a risk. According to Department of Homeland Security data, as of late August 2008, only 5.6 percent of Arizona employers have enrolled in E-Verify.

Non-participation in E-Verify is not an option for contractors and subcontractors of any Arizona governmental entity. The LAWA amendments passed last year require those employers to participate in E-Verify as a condition of their government contract. In fact, any Arizona governmental entity (state or any political subdivision) would be prohibited from awarding a contract if the contractor or subcontractor does not comply with federal immigration laws and E-Verify requirements. LAWA requires government entities to ensure that their contractors comply with those requirements, and to include the following terms in their contracts:

  • Each contractor or subcontractor must warrant their compliance with LAWA’s provisions.
  • A breach of that warranty is to be deemed a material breach of the contract, subject to penalties up to, and including, termination of the contract.
  • The government entity retains the legal right to inspect the papers of the contractor and subcontractor employees who work on the contract in order to ensure compliance with the warranty.

Also, employers seeking to obtain an economic development incentive from a government entity must first register for and participate in E-Verify, and show proof of doing so. LAWA further requires the Attorney General’s office to, on a quarterly basis, request a list of Arizona employers registered with E-Verify from the Department of Homeland Security. The Attorney General must make that list available to the public on its Web site.

So far, enforcement actions against employers have been anemic at best. Judith Gans, manager of the Immigration Policy Program at the University of Arizona’s Udall Center for Studies in Public Policy, prepared a study on the preliminary impact of LAWA on immigration trends and businesses in Arizona. She found that not a single superior court enforcement action was filed during the first year of LAWA’s existence. The number of complaints filed with each county attorney during that period was one or none in nine out of Arizona’s 15 counties. The Pima County attorney reported only five complaints, four of which were declined because they involved individuals hired before 2008. The Maricopa County attorney’s office stated that it does not keep track of the number of reported complaints, and those that are filed reportedly are turned over to the county sheriff for investigation. Notwithstanding a number of high profile “raids” conducted by Maricopa County Sheriff Joe Arpaio in 2008, as reported in the local media at the time, no complaints have resulted in a LAWA enforcement action to date.

Finally, LAWA’s potentially adverse impact on Arizona’s economy has been negligible, or is simply undetectable. According to Gans’ study, the current recession has had a disproportionately adverse impact on business sectors that rely heavily on immigrant labor, such as construction. Therefore, because employment of all workers in those sectors, including immigrant labor, has been hard hit as a result of the current economic meltdown, any “LAWA-effect” has been masked.

money stack

Credit Unions Were Well Capitalized Leading Into The Recession

Arizona credit unions are weathering the rocky economy fairly well, but not without some bumps and bruises along the way. More than 20 of the 55 credit unions in the state have seen their bottom lines slip into the red. Even so, conservative and prudent lending policies that steered them away from the risky subprime market, and the fact they are well capitalized, have put credit unions on solid financial ground.

Insiders say the No. 1 measure of solvency is capital, and credit union capital ratios are considered quite healthy.

Credit unions, which are not-for-profit institutions and do not have stockholders to satisfy, nevertheless are feeling the pain of their members who have lost jobs or might even be in danger of mortgage foreclosure or bankruptcy.

Michael Hollar, vice president of business financial services for the 68,000-member Arizona Central Credit Union, describes the percentage of its loans that are in delinquency as “fairly high.” As of late last year, 1.67 percent of Arizona Central’s loans were in jeopardy, compared to 0.5 percent 12 to 18 months earlier.

If a payment is 11 days late, the credit union contacts the member to find out what the problem is. If the payment is 60 days late, steps are taken to ease the member’s financial pain by extending the amortization and lowering the interest rate.

“From a bottom line perspective, we were well into the red in 2008, roughly $6.5 million,” Hollar says.

“The reason is that we put a significant amount of money into reserve for loan losses. Every time we write something off, we put that much into reserve.”

Through 11 months of 2008, Arizona Central had put $10.6 million into its reserve fund, compared to $1.6 million for the corresponding period in 2007, reflecting the result of troubled loans.

“People walk in with the car keys and say they can’t make the payment anymore,” Hollar says. “It’s amazing. We’re lucky to get 50 cents on the dollar on that vehicle when it is sent to auction. Values are down. We’ve had a fair number of home equity loans that we wrote off. There’s no equity in the home anymore. The first mortgage is probably more than the house is worth.”

The goal was to pack as much bad news into 2008, so Arizona Central could hit the ground running in 2009, Hollar says.

Most credit unions have a very strong capital base. Any capital ratio to total assets in excess of 7 percent is considered by the National Credit Union Association to be well capitalized. In the past year, Arizona Central slipped to more than 10 percent from 11 percent, still well above the 7 percent plateau.

“We’re still north of 10 percent,” Hollar says. “As far as long-term stability, there are no issues. We’re not panicking by any means.”

The sinking economy, however, led to some changes in Arizona Central’s already conservative lending policies. Home equity loans that were offered for 100 percent of a home’s value, now are limited to 80 percent.

Steve Dunham, CEO of Canyon State Credit Union and board chairman of the Arizona Credit Union League and Affiliates, assesses the industry’s status: “I think we’re doing pretty well.”

He cites such factors as credit unions being not-for-profit organizations chasing quarterly profits, and avoiding higher-risk activities, including subprime and no-documentation lending.

“That helped protect us,” Dunham says. “Capital at credit unions was at an all-time high going into the recession. Credit unions started out with very good capital, and we still have very good capital at this point. By and large, I think credit unions will weather the recession very well.”

At Canyon State Credit Union, the 20th largest in the state with $140 million in assets, the number of members who are encountering financial difficulties is accelerating somewhat, Dunham says.

“As they have difficulty, so do we,” he adds. “As unemployment rises, more members are losing their jobs or having their hours cut. Real estate loans that everybody thought were well collateralized, with the drop in real estate values, now we’re discovering they are not so well collateralized. We’re very conservative as far as identifying what that real estate value is.”

Like other credit unions, Canyon State works with its members to help them through tough times on a case by case basis.

Even though some credit unions are operating in the red, Scott Earl, CEO of the Arizona Credit Union League and Affiliates, doesn’t expect consumer members to see much difference when it comes to borrowing. However, credit unions might require more documentation before awarding a loan than they did a year or two ago, he says.

At First Credit Union, where defaulted loans have increased mostly for autos, Carolyn Cameron, vice president of business development, says membership actually rose slightly in 2008 to nearly 60,000.
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“We stepped up our relationship building, our marketing efforts, working hard to attract new members and retain our current members,” Cameron says.

On the financial side, Cameron says, “Our very strong capital position prepared us to weather fluctuations in economic conditions. We also added provisions for dealing with increased loan losses. We eliminated construction loans, and we came out with an assistance program for members having trouble.”

Assistance may involve deferring or reducing payments, and reducing interest rates to help borrowers get back on their feet, she says.

What is it going to take to turn the economy around? Dunham, chairman of the Credit Union League, says the answer is simple.
“In Arizona, we need to absorb the excess real estate that’s available and get home building started again.”

Michael Bidwill Arizona Cardinals

Q&A: Michael Bidwill, President, Arizona Cardinals

During these difficult economic times, how vital is an organization such as the Greater Phoenix Economic Council (GPEC) to the local economy?
GPEC is vitally important because it is the only regional organization focused exclusively on bringing new business to Greater Phoenix. Because GPEC works closely with companies considering expansion to the region, they know what companies need to make business decisions and gain insight into what steps the state can take to better compete with our Mountain West competitor states.

What can the Valley do to better position itself to succeed once the recession is over?
Diversify our economy and work with public sector leaders to create sensible, new programs that bring high-wage industries to Arizona. During the last decade of the real estate explosion, Arizona was one of the leading job-producing states. Over the last two years, we have fallen to 49th in terms of new job creation. Business as usual will not work. Now is the time to change our metrics and compete for other industries to migrate to Arizona.

Arizona and Greater Phoenix routinely lose projects to less desirable locations because of aggressive relocation programs in other states. GPEC has developed modest, fiscally responsible programs, such as the Quality Jobs Through Renewable Industries program, for the Arizona Legislature to consider. GPEC has vetted these programs with decision-makers in the renewable energy industry. Senior executives within these industries have told us this program would put Arizona in a more competitive position to win projects. GPEC also had Elliott D. Pollack and Company conduct a third-party review of our program to confirm its fiscal impact.

We need to immediately work with the state to develop and implement new programs that make our region more competitive.

What are some of the initiatives and goals you have planned this year for GPEC, and how will you go about achieving those goals?
In addition to solar and renewable energy, GPEC has three other strategies that we feel are meaningful generators of new business. We continue to work aggressively on a foreign direct investment program, as the United States is still an attractive environment to invest in for international companies. Next, in working with many of our public sector leaders, we are actively seeking to locate companies to Greater Phoenix from neighboring states with higher operating costs of doing business. Lastly, health care in Arizona is an untapped resource. In fact, Arizonans routinely seek health care outside of the state valued at hundreds of millions of dollars. We need to work with the health care industry to determine the needs not currently being met in Arizona and look to those opportunities for economic growth.

How did you first become involved in GPEC and how have your own professional experiences prepared you for your current role?
The Arizona Cardinals have long been stakeholders of GPEC, as we believed in its important work. I had no personal involvement until Glendale Mayor Elaine Scruggs asked me to serve on the GPEC board three years ago. I was honored to join and realized quickly how critical this organization is to helping our local economy grow, especially during this downturn and with the state’s budget cuts to the Arizona Department of Commerce.

You’ve seen first hand how important professional sports are to the local and regional economy. How can the Valley capitalize more on that in the future?
Sports are important to Arizona and we need to support what we have now. But, again, we need to focus on diversifying our economy. Like a personal stock portfolio, we cannot become “over-weighted” in any single sector. We have all the teams we need, but it will be important to attract events with significant economic impacts and exposure like the Super Bowl in the future. Our regional success will depend largely on creating a diverse and vibrant economy around many new industries and we can’t look to real estate or sports to take us out of this downturn.

Arizona Businesses Succeeding

Arizona Businesses That Are Succeeding Despite The Recession Offer Lessons And Hope

Economists are the uncomfortable bearers of bad news. In recent weeks, they have been unhappily explaining that these are dark days indeed for Arizona’s business community.

But don’t tell that to businesspeople who have uplifting stories to tell amid the downdraft of Arizona’s recession.

While it’s true that Arizona’s economy is out for the count, many businesses are hardly on the ropes. They are succeeding, each in their own way.

But first, a look at that pesky economy.

It’s surprising some businesses are doing well because the experts are hard pressed to find any corner of Arizona’s economy that is untouched by the recession.

“I wish I had something positive to say,” says Tim James, a professor of economics at the W.P. Carey School of Business at Arizona State University. “It’s quite difficult to see any sector doing well … What could possibly happen to make things worse than they are? I can’t think of anything.”

James does point to one exception — discount stores such as Wal-Mart, Costco and Sam’s Club that sell the necessities of daily living. They are prospering, but “nobody will be immune to any of this at the end, as even the Wal-Marts will suffer,” James says.

Also apologetic is Marshall Vest, an economist at the University of Arizona’s Eller College of Management. Asked if there is any sector of the state’s business community that is well positioned and poised to take advantage of the recession, Vest responds, “The short answer is I don’t know. Most industries are feeling the effects of the recession.”

Yes, it’s tough out there. But there are success stories and those businesses offer lessons on how others can ride out this rough economy.

When Robert Meyer joined Phoenix Children’s Hospital in 2002 as president and CEO, the nonprofit medical center for acutely ill pediatric patients was juggling several urgent problems. Arizona was in a recession, a shrinking investment portfolio had eroded the hospital’s capital base, cash reserves were dangerously low and the organization was facing a $46 million loss for the year while incurring the cost of moving from its location within another Phoenix hospital to its own free-standing building at 19th Street and Thomas Road. Meyer, who had been through five prior recessions in health care, focused on two areas — internal operations and strategic planning — and took steps that got the hospital back on its feet.

The hospital had no internal billing-and-collection procedures, no budgeting system and a few outsourcing contracts that were axed because they offered little value in Meyer’s eyes.

“We developed our own patient accounting department, which yielded tremendous improvement in our ability to bill and collect money,” Meyer says. “We started a budgeting system. The hospital had done a lot of outsourcing with a lot of companies and some of them were terminated.”

Meyer wanted a short, simple strategic plan that covered 18 months to two years — as compared to hospitals’ standard five years — and looked outside the health care industry for a sound planning tool. He found it at The One Page Business Plan Company in Berkeley, Calif. Soon, each of the hospital’s major programs had a one-page plan within a relatively brief strategic plan, and progress was tracked online against milestones.

The payoff came as early as 2003, when the hospital generated $3 million in net income. With its books in the black, the hospital took steps in 2004 to cement future success by implementing several new clinical programs. Profits grew to $49 million in 2007.

In today’s recession, Phoenix Children’s Hospital’s primary business offers opportunities for new growth. Meyer says the number of children in the Valley is expected to increase from 900,000 in 2003 to between 1.5 million and 1.7 million in 2025. To meet the needs of its growing patient base, the hospital began rolling out a $588 million main campus expansion in 2008 — only six years after nearly succumbing to financial ruin.

Paragon Space Development Corporation, a small aerospace engineering and technology development firm in Tucson, is succeeding in tough times because most of its business comes from NASA.

“We’re a little bit out of the consumer economy’s ebb and flow,” says Taber MacCallum, CEO and chairman of the board. “What we are going to feel is the federal government’s response to the recession, not so much the recession itself.”

He expects his company’s work with NASA will continue. But things weren’t so rosy during the last downturn. Founded in 1993, Paragon initially booked more commercial than government work and was hit hard by the 2002 recession. It began playing out a variety of business what-ifs to help it prepare for bad times, and business has grown 30 percent to 50 percent annually the last three years.

“You’ve got to create your business model and then run good-and-bad scenarios and make sure you don’t cut so deep that you can’t respond to the recovery,” MacCallum says. “We call them down-and-out and milk-and-honey scenarios. You can do that with a small retail shop and you can do that with a large industry.”

Taber recommends taking advantage of opportunities that arise when other businesses downsize or close.

“This economy has presented a tremendous opportunity for us,” he says. “We’ve been able to pick up new employees and manufacturing equipment from other companies that have had to sell.”

There is also a beacon of hope in the rubble of Arizona’s mortgage industry. On Q Financial, a Scottsdale-based mortgage banking company, is growing as it serves buyers of condos and single-family homes and arranges residential property refinancing. In 2008, it opened new offices in Phoenix, San Diego and Seattle, and its Valley staff grew from 20 in 2007 to 50. In business since 2005, On Q zeroes in on what it can control, says John Bergman, president and owner.

“Every day, month and quarter, we focus on improving things internally that we can control,” Bergman says. “We can’t control the market.”

On Q strives to hire talented operations staff and constantly troubleshoots internal systems, processes and timelines. Business owners must have a firm grip on their financial performance, Bergman says.

“Every month, have financials reported to you in a manner you can use,” he says. “Look at them. You can always adapt and change according to what’s going on.”

On Q also pays close attention to customer service and market share. “We are really aggressive in offering great products to the consumer, and we negotiate for good pricing for our clients,” Bergman says. “No matter what the market does, there is always an opportunity to take a bigger piece of the pie.” Bergman says it’s critical to keep employees energized.

“Let them know that the tougher things get, the better things are when they turn around,” he says. “So you want to focus on the positives in your industry.”

Reeling financial markets commonly create a phenomenon known as the flight to quality — money moves from the stock market to the safety of bank accounts and certificates of deposit. Such is the case with the current recession, and Northern Trust Bank has seen a resulting increase in deposits and new banking relationships, which in turn has generated increased lending.

“We have, in many respects, been in a very nice situation when there has been a flight to quality in the banking business,” says David Highmark, chairman and CEO of Northern Trust’s Arizona bank. “The flip side during this liquidity crisis is that our loan volume is two to three times our normal amounts. Our earnings will be very strong, because today we are collecting so many new relationships that will materialize into new earnings down the road.”

Highmark emphasizes the importance of successful companies staying focused on their core business, a theme also repeated by Paragon and On Q Financial. Northern Trust’s primary business is lending to and managing assets for wealthy individuals and companies.

“We have never wavered from that core business,” Highmark says. “If there is a formula to survive in bad times, in our case — and I think in general in all industries — it is sticking to your knitting. Don’t vary from your core business.”

wood beam

As Commercial Real Estate Sector Prepares To Be Hit By Recession, Leaders Should Become Proactive

The headlines today have focused on the bailout of the banking industry and the housing market’s severe contraction. Not a lot of attention has been paid to the commercial real estate sector. As with all business cycles, there is a flow-through to the various sectors. The fact that we have lost more than 1 million jobs this year, and have had a severe reduction in housing values and record foreclosures, can only bode ill for retail and other commercial areas.

Since retail traditionally follows housing, how can it not be negatively impacted when fewer homes are being built and more and more people can barely afford their current homes? In recent months Mervyn’s, Linen ’n’ Things, The Shoe Pavilion and Circuit City have all announced either closing of some or all of their stores. The larger tenants oftentimes are the anchors of some of the smaller centers. There is usually a cascading effect on other tenants who feed off the traffic generated by the anchors. We have many clients who talk about tenants leaving in the middle of the night.

At this time, most of the bankers we have talked to have stated that they have few commercial projects on their radar, but most admit this is the next big area to hit them and the economy in general. Are they prepared and how can the lenders minimize the fallout from this?

We would like to outline some of the steps that lenders and others can take to be proactive in the process. Some lenders we have talked to take the position that they will sell the returning assets “as is,” so they do not incur anymore costs on a bad loan. This shortsighted approach will end up costing these lenders and their shareholders money.

We advise lenders to do a thorough analysis of the project in such areas as:

  • What is the current situation with the permits, utilities and other entitlements? This may unfortunately turn up information that the bank should have known about before it made the loan or kept funding it. There is a good case to not have the same people who approved the loans involved in this process. Some of these items may involve minor fixes that could make the project more marketable. For example, assume the contractor had not ordered some of the utilities, which usually involves a long lead time. By the bank being proactive (after they take the project back) and ordering some of the utilities, the project would have more appeal for a potential tenant versus sitting on the asset and waiting for things to happen. A new potential owner may have a tenant, but he needs to get him into the space within a set period of time. If the bank has done nothing but sit on the asset, the buyer may go to a project where he can get his tenant in immediately.
  • What is the status of payments to the contractors versus how much work has actually been performed? Is the project really 50 percent complete but you have paid out 60 percent, for example? Where are materials stored if ordered and paid for?
  • Another problem is when banks have the same people or departments evaluate the project. They are the ones who may have missed some of these issues to begin with. You want a fresh look at what you have. It is difficult to want to spend more money on an asset that will be a loss — but if you can do a proper evaluation of what you have, you may recoup quite a bit of additional money.

Why do Realtors for homes recommend cosmetic fixes to make them more saleable? Because they work. But the real estate owned (REO) departments of many banks do not want to incur additional costs in these areas. We like to assist the lenders by also giving some ideas on how to reposition the property. When clients come to us for an initial project, we frequently work with them on site plans. Even on a project that is partly or fully built, you can analyze how it can be revitalized and repositioned. It may have been poorly designed to begin with. Smart buyers are going to be looking at these ideas before they make an offer. If the lender hires someone to give them some of these ideas it can be very helpful information real estate brokers can use in marketing the asset.

We know of certain retailers developing new concepts to fit into smaller spaces to take advantage of a good location. If you have prepared some estimates of what would be involved to reconfigure the space, that makes it easier on the potential new owner and his tenant.

In summary, retail should be the next area to seriously impact the balance sheets of lenders. Most lenders have not had departments devoted to this problem because the market has been good for so many years. It is important to hire experts who can give an unbiased view of the asset and what can or cannot be done with the project. When a lender uses the same people or moves some of its people over they may not have the expertise to properly analyze the project to obtain the best possible value from it upon a sale.

Dark Days: Recession in Arizona

The Recession In Arizona And The Nation Could Drag On For Another Year

Winters in Arizona may be sunnier than other places, but the economy in the Grand Canyon State has cooled faster than almost every state. Analysts expect 2009 to bring even more bad economic news, and it is likely that the monthly reports on job growth and unemployment will be downright chilling for some time to come.

As in all downturns in the past 50 years, Arizona’s economy will track the national business cycle. There are no forces inherent in the makeup of the state’s economy that would propel Arizona into an independent turnaround. Arizona will recover at approximately the same time as the country as a whole.

And, entering 2009, a rebound for the national economy is nowhere in sight. The National Bureau of Economic Research recently decreed that we have been in recession since the end of 2007. Now that a start date has been identified, it is only natural to wonder how long recessions typically last. The answer is that the average post-World War II recession has been 10 months from peak to trough. This information is perhaps useful for trivia buffs, but in the current environment, the 10-month average is not much of a guideline. This recession has already persisted past 10 months, and may be well on its way to setting a post-war record for length. The recession will certainly be 18 months at a minimum, and could persist for as long as 24 months. Or more.

The list of economic problems facing the country and Arizona continues to grow. Until recently, exports and non-residential building were actually expanding at a double-digit pace, keeping the Gross Domestic Product growth figures in the positive region. As the global economy slows, exports will decrease, probably early in 2009. Arizona has important manufacturing exports, especially in high technology, that will be affected.

Non-residential building (commercial, office, and warehousing) will grind to a halt in 2009 as current projects are completed. When the economy is losing jobs and sales are falling, there is no need for additional offices, retail space or warehouses.

During the first half of 2008, consumers in Arizona and the nation continued to spend, and that bolstered growth. New unemployment claims were mounting during this period, but conditions would have been worse if consumers were not contributing to the economy. The credit crunch hit in the second half of 2008. Combined with a chaotic stock market and continually falling home values, consumer willingness — and ability — to spend hit the breaking point. Arizona retail sales were down sharply in 2008, with auto sales and restaurant and bar sales both off by 25 percent. Consumer spending is expected to fall more during the early months of 2009.

Compared to other states, Arizona’s labor markets are in the deep freeze. Employment in the state is down by more than 75,000 jobs compared to last year at this time. Arizona is just one of 37 states now losing jobs, but conditions are worse here. Arizona ranks 49th among all states in job growth. Only Rhode Island is losing jobs more rapidly. Unemployment rates nationally and in Arizona are destined to increase into the 7 percent or possibly 8 percent range before recovery begins.

And recovery will come, as it always does in business cycles, although this one will be deeper and longer than has been seen since the 1930s. Housing inventory will eventually be worked off, and foreclosures will begin to slow. Home prices will stabilize. The nation adds three million new residents per year, and the pent-up demand created by family formation and population growth will start to translate into new sales.

Arizona benefits from high levels of domestic migration. Even if migration slows temporarily in the down period, the basic attractions of Arizona remain powerful in the longer term.

One of these attractions for many decades has been affordable housing. During the housing boom, home prices in Phoenix increased faster than in many peer metropolitan areas, and Phoenix became less competitive to relocators. Although falling values have caused dismay to Arizona home owners, the resulting new lower prices actually create an environment for ultimate growth.

The table shows housing affordability as measured by the National Association of Homebuilders. Higher numbers indicate housing is more affordable. At the end of the previous recession (third quarter of 2001) Phoenix had an affordability value of 70, which means 70 percent of homes were affordable to families at the median Phoenix income. Phoenix housing was more affordable than the nation and the peer metro areas shown. Two years later, at the peak of the boom, Phoenix was less affordable than Denver, Riverside, Calif., and the nation as a whole. But the most recent values, for third quarter 2008, show Phoenix affordability up by 75 percent over the 2005 figure, and more affordable than the other metro areasandthe nation. The Phoenix housing advantage has been restored.

There is one final optimistic observation to be made, one which is familiar to Arizona economy-watchers. When recovery does begin, Arizona invariably rebounds much stronger than the nation, and more vigorously than most other states. What analysts are still debating is whether this rebound will come in 2009 or is delayed until early in 2010.

money squeeze

Tips On How To Navigate The Current Credit Crunch

The credit crunch is making its way from Wall Street to Main Street and squeezing businesses across all industries. There are some proactive steps Arizona companies can take to prepare for potentially challenging days ahead.

Cash is king

If you have cash on your balance sheet, you have a greater degree of flexibility in your decision making.

Issue: In a slowing economy, understanding and managing cash flow are paramount.

Action Steps: Negotiate aggressive credit terms with suppliers and customers. As soon as invoices are late, begin subtle but firm collection efforts. In the short term, it may be wiser to sacrifice profitability in order to generate cash.

Be relentless on cost control

Look hard at discretionary expenses and remove unnecessary spending — but don’t compromise business strategy.

Issue: To maintain your current levels of profitability, you will almost certainly need to cut costs and spending where possible.

Action: Employ zero-based budgeting to review all costs carefully in terms of their value to the business.

Evaluate customers and suppliers

Understand the financial well-being of customers and suppliers. Look for signs of financial distress and express concerns.

Issue: Challenges in credit markets have put increased pressure on the purchasing power and credit worthiness of customers, resulting in a tightening of credit terms and product availability.

Action: Reevaluate credit terms with customers and negotiate the shortest reasonable terms.

Get smarter on taxes

It is important to look at how to manage those costs and the related impact on a company’s cash flow.

Issue: Taking appropriate advantage of the opportunities available to reduce tax liabilities.

Action: Take advantage of available tax credits, such as the fuel tax credit or deductions for domestic production or property depreciation. Take extra care when considering the calculation of quarterly estimated tax payments.

Reconsider capital investment plans

Is now really the time to invest in new capital assets?

Issue: Investing in new assets in a downturn can bleed you of cash. Carefully consider capital investment plans, and question the proposed value and timing.

Action: Take into account the timing of investments. If it isn’t mission critical, consider delaying or deferring.

Get closer to banks

Take a hard look at your reporting and accounting systems. If these are not quite what the bank would like to see, consider improving them.

Issue: Banks will be more cautious and concerned about credit quality. Borrowing will likely come at a higher price — both in terms of interest rates and fees — and will almost certainly include more restrictive covenants and require increased monitoring and transparency.

Action: Treat the bank as a partner by keeping it informed about the status of the business and giving it plenty of notice if you need help.

Consider financing options

Talk to a professional about arranging financing and consider alternatives to traditional lenders.

Issue: Having issues with your bank can result in a severe restriction in your borrowing capacity. It’s not as easy as it used to be to secure an alternative source of capital.

Action: Consider other financing sources such as leasing, asset-based lenders, factoring companies or even government-supported financing programs. Look at negotiating payments on long-overdue accounts receivable or obtain financing through trade vendors.

Keep an eye out for bargains

Be alert to opportunities where business valuations are falling and where business owners are looking for quick exits.

Issue: The current feeling of uncertainty will drive many shareholders to seek an exit rather than hunkering down and trying to weather the storm independently, creating buying opportunities at depressed prices.

Action: Whether playing the stock market, engaging in real estate or considering acquisitions, the best buys are made in a down market. But make sure the action makes sense with your growth plan.

Protect personal wealth

Before agreeing to become more personally exposed for the sake of the business and less diversified personally, think about options.

Issue: It is likely that businesses will have greater borrowing needs. Solving business cash needs with personal assets will reduce diversification of overall personal net worth and further expose you to the recessionary economy.

Action: Equity financing provides resources if the economy does not improve as quickly as expected. If debt financing is the best course, avoid personal guarantees and pledges of personal assets. Employ experienced counsel to help with the transaction.

Worst case scenario

Get help far in advance of a financial crisis, if at all possible.

Issue: The future is uncertain and trade credit is contracting.

Action: Look at your business without its existing debt and determine its debt capacity based on the most current financialprojections. Do not wait until you are almost out of cash.

The more time you have to identify your options and craft a plan, the better your chances of success. Contact your professional services advisors immediately to discuss your current situation.

Ed O’Brien is the managing partner of Grant Thornton’s Phoenix office. For more information, call (602) 474-3444 or visit www.grantthornton.com