State budget crisis
Gov.-elect Robert L. Ehrlich Jr. enters office this week facing plenty of tough issues. One of the biggest is erasing Maryland's $1.8 billion budget deficit.
That won't be easy. But under state law, Ehrlich has no choice but to trim spending or find ways to generate revenue until the budget is balanced.
Most experts predict layoffs, especially in Baltimore where a large number of the state government's 108,956 employees work.
But Ehrlich doesn't want to cut people or raise taxes. He's looking for alternatives, especially allowing slot machines at state racetracks. He figures that 2,500 slots could pump $800 million a year into the state's coffers. But slot machines would need the legislature's approval.
Other plans to close the gap include selling the state's airplane, its 114-foot yacht and luxury sky boxes at Oriole Park and Ravens Stadium. Those sales could generate $5 million. Other state assets that could go on the selling block include the 28-story William Donald Schaefer Tower at 6 St. Paul St., which is used as a state office building.
Housing
The housing industry's record-setting pace during the past two years has kept home prices growing by double-digit percentages -- a pace so rapid that many observers doubt that sales and values can keep it up in 2003.
While many experts still believe the economy will be able to lean on a healthy housing industry this year, most builders and real estate agents think the market will soften as mortgage rates increase. They still expect strong sales in Maryland, though perhaps not at the record-setting levels of the past two years.
Even so, Maryland's weak supply of homes for sale and strong demand from first-time homebuyers and bargain-hunting Washington-area shoppers are the right ingredients for a healthy market. Home values are likely to stop growing at record paces, experts say, though most predict that prices will increase.
Key questions remain for mortgage interest rates, which hovered near 6 percent for a 30-year fixed loan in 2002. Most predictions call for the rates to creep toward 7 percent by the end of 2003. And buyers -- who at times have had to pay more than the asking price to secure a home -- may see some minor relief in a market that nonetheless figures to remain a boon to sellers.
M&T; Bank Corp.
M&T; Bank Corp., sewing up its acquisition of ailing Allfirst Financial Inc., will enter the region this spring brimming with optimism. Executives of the Buffalo, N.Y.-based bank consider the deal one of their most exciting, allowing M&T; to dive into the vibrant Washington-Baltimore market with plenty of muscle.
When the deal is completed -- sometime in April -- M&T; will be propelled from being the nation's 26th-largest bank to 18th-largest, with $49 billion in assets and more than 700 branches in six states and the District of Columbia.
But folding Allfirst into its operations won't be easy. Reviving morale at the Baltimore bank will be among the challenges.
Allfirst was slammed in February by a currency trading scandal that racked up $691.2 million in losses. Though trader John M. Rusnak pleaded guilty to bank fraud, an independent probe pointed to lax oversight, poor supervision and a failure to invest in adequate staffing and technology. In the aftermath, the bank's top two executives left, a handful were fired, and other executives opted for early retirement.
There will be layoffs, too, as M&T; whittles away Allfirst's overhead. M&T; executives are known for running a tight ship, having built one of the best big banks in the nation. But it could take many months for M&T; to hit its stride in Baltimore.
Wall Street
Market watchers say "no way" to a fourth straight year of negative returns in the stock market. That hasn't happened since the early years of the Great Depression, and many positive signs suggest that history won't repeat itself.
The economy is slowly but surely on the mend, market experts say. Consumers may be weary, but businesses are poised to start spending. Corporate earnings are likely to rise this year, and President Bush wants to exempt dividend income from personal income tax.
All that indicates gains of 8 percent to 10 percent for the Dow Jones industrial average, many say. Of course, all bets are off if there is war with Iraq, a recession or a terrorist attack on U.S. soil.
CareFirst
CareFirst BlueCross BlueShield, a nonprofit since it was created in 1937, continues its quest this year to convert to for-profit operation and sell itself to WellPoint Health Networks Inc., a publicly traded Blue Cross operator based in California.
Owings Mills-based CareFirst -- which insures 2 million Marylanders and more than a million others in Delaware, the District of Columbia and Northern Virginia -- says it needs to be part of a larger entity to thrive. Opponents of the deal fear that a for-profit insurer would fatten its profit margin by raising premiums, cutting reimbursements to doctors or rejecting more claims.
Regulators and lawmakers in Maryland -- and in the other jurisdictions where CareFirst operates -- need to decide how the deal will affect consumers and whether the $1.3 billion sale price is fair, since the money would finance health-related foundations or similar public purposes.
While Maryland Insurance Commissioner Steven B. Larsen expects to rule next month on whether the deal is in the public interest, a review by the legislature, and examination by regulators in the District of Columbia and Delaware, threatens to push the consideration of the deal well into summer.
Trans Healthcare Inc.
Trans Healthcare Inc., a medium-size but rapidly growing Pennsylvania nursing home operator, is poised to become one of the largest companies in the Baltimore area. THI has an agreement to buy what's left of Integrated Health Services Inc., a Sparks-based nursing home company that has been in bankruptcy proceedings for nearly three years.
The deal, scheduled to close in the second quarter, will need a favorable nod from creditors, an absence of higher bids and approval of the U.S. Bankruptcy Court. If the acquisition goes through, THI plans to move its headquarters from Camp Hill, Pa., to the Sparks campus, and it intends to maintain IHS' work force of roughly 675 at the headquarters and 39,000 nationally.
IHS collected $3 billion in annual revenue before a cut in Medicare reimbursements pushed it into Chapter 11. Pieces have been sold off, spun off and shut down, but the company still reports annual revenue of about $1 billion. Privately held THI has more than $500 million in annual revenue, and operates 94 nursing homes, including nine in Maryland.
Convention hotel
Baltimore should learn in the coming months whether it will land the long-sought headquarters hotel next to the city's expanded convention center. Black Entertainment Television founder Robert L. Johnson and Quadrangle Development Corp. of Washington have proposed a 750-room Hilton north of Oriole Park at Camden Yards, on land now covered by parking lots. City officials have set the end of the month as the deadline for other bids.
So far, only one potential competitor has emerged -- Atlanta-based Portman Holdings LP. One of the nation's largest convention hotel developers, Portman has said it intends to submit a proposal.
The convention headquarters hotel is a project that city and tourism officials have talked about for years but been unable to achieve. The hotel is crucial if the convention center's recent $151 million expansion is to live up to its potential, tourism officials say. Without it, they say, many convention planners won't even look at Baltimore.
The hotel project unfolded at the end of a rocky year for the Baltimore Area Convention and Visitors Association, which just underwent a top-to-bottom review. That evaluation was ordered after The Sun reported that the expansion had failed to draw the attendance and conventions projected.
Now the association faces the task of reviewing the recommendations from a team of consultants and putting them into action -- ideas that could transform how the convention and visitors bureau operates.
Allegheny Energy
Allegheny Energy Inc.'s fortunes hinge on one crucial factor: Will bank lenders help the beleaguered Western Maryland power company restructure $1.7 billion in debt?
If negotiations fail to hammer out a deal, the Hagerstown company will likely file for bankruptcy protection.
At last count, Allegheny had total debt of $5.1 billion, it lost $334.4 million in the first nine months of 2002 and its stock price was trading in the $7 range, down 80 percent in the past year. The company is in a dispute over its multimillion-dollar California power contract and is embroiled in a nasty legal battle over the energy trading unit it acquired from Merrill Lynch & Co. Inc.
Analysts are betting that the banks will bail out Allegheny. Bankruptcy could mean chaos for thousands of workers and 1.5 million customers in Maryland, Ohio, Pennsylvania, Virginia and West Virginia. It would also mean a large headache for lenders, shareholders and state regulators.
Bethlehem Steel
This could be the year the Bethlehem Steel name disappears.
International Steel Group Inc. has offered to buy the bankrupt company's assets, including the Sparrows Point plant in Baltimore County, which employs 3,300. A sale has to win the blessings not only of Bethlehem's board but also of the U.S. Bankruptcy Court and possibly federal antitrust regulators.
If the deal fails, Bethlehem Steel Corp. might try to restructure and emerge from Chapter 11 bankruptcy on its own. The steelmaker has enough liquidity to make it through the year on its own, but after that its future would be uncertain.
Whether alone or merged with another company, Bethlehem Steel has tough choices to make this year, particularly with its national work force of 12,000 people. The company needs a new labor agreement with the United Steelworkers of America -- one that cuts jobs, allows more flexible work hours, and ties employee compensation to profit -- so it can compete with domestic and foreign rivals, steel industry experts say.
Cambridge's Hyatt Regency
The Hyatt Regency Chesapeake Bay Resort in Cambridge, created with the vision of reviving the economy of the Eastern Shore community and all of Dorchester County, opens its 150-slip marina in April and will experience its first summer season this year.
On 350 acres of waterfront land, the long-delayed hotel is expected to draw leisure travelers and regional meetings from the considerable market within driving distance. As tourism officials watch and wait, they are optimistic that the 400-room luxury resort will be everything promised. So far indications are good, with bookings outpacing projections since it opened in late August.
And the impact of those extra tourists already has been felt in nearby downtown Cambridge, where one restaurateur reports a 50 percent increase in business. Even as the unemployment rate in Dorchester County hovers around 8 percent -- one of the highest in Maryland -- real estate prices in downtown Cambridge and its historic district already have risen sharply.
Ciena Corp.
For the telecommunications industry, 2002 was a year of layoffs and cutbacks. Carriers chopped budgets, and the companies that sell to them -- including Ciena Corp. -- felt the pinch. Ciena, the Linthicum-based fiber-optic equipment maker that soared during the tech boom but has lost money since 2001, has cut its staff nearly in half since the boom years, and analysts don't expect it to return to the black for at least two more quarters.
The company opened offices in Beijing and a customer demonstration lab in London last year, and is expected this year to pursue business in new areas and new classes of products. Ciena says sales should increase this quarter, and the company plans to focus on serving major carriers in 2003, keeping one eye on innovation and the other on its balance sheet. This could be the year that Ciena learns whether its strategy of continuing to invest in its business during the economic downturn will make the company come out a winner.
EntreMed
EntreMed Inc., propelled into the spotlight on inflated hopes that its developmental drugs might "cure cancer" without side effects, has plenty to do if it's going to survive beyond 2003.
The Rockville drug developer is in need of more money, despite a New Year's Eve drug-licensing deal that grossed it $27 million as it was running out of cash. It has been operating without a chief executive officer since co-founder John W. Holaday relinquished the title under pressure in November. (Holaday remains chairman and chief scientific officer.) And it faces the mountainous task of replacing investors who fled EntreMed's shares, pushing them below $1 and prompting a Nasdaq effort to delist them.
As the year began, President and Chief Operating Officer Neil J. Campbell was optimistic as the company switched from focusing on complex injectable protein drugs to cheaper, easier-to-take ones composed of small molecules. The plan, Campbell said, is to "transition to a small-molecule company and to stabilize the finances and spending at about $12 million in 2003 to rebuild and rebirth the company."
Will companies spend?
The falloff in business spending has been one of the major drags on the economy. As companies cut back, jobs are lost or not added, vendors lose business and equipment manufacturers don't book new orders. Here's what some top executives said it would take for them to step up spending and hiring.
James S. Riepe
Vice chairman
T. Rowe Price Group Inc.
Baltimore
Business: Mutual funds, money management
"It will take improved securities markets and increased volumes of transactions; those would be the two key determinants for us.
"Increased market prices would give us increased revenues, which we would be able to reinvest in the business, and increased transactions would require us to add some staff. I think there is a good opportunity for modestly improved markets. We have continued to selectively add some people in areas that we are emphasizing, areas of our business that we see as high-growth areas, our institutional asset management and third-party distribution. I don't mean to say we are hiring large amounts of people."
George Davis
President and vice chairman
Aether Systems Inc.
Owings Mills
Business: Wireless data communications
"We've all passed through the transition from the New Economy back to the retro-economy, and as we go forward we want to make sure we establish a fundamentally sound base that touches growth as opposed to just having a vision for it. The unknowns lie in the flow of homeland security dollars, in the acceptance of our mobile government and trucking solutions and in the broader acceleration of wireless data. We went through the pain of downsizing last year, and unless there's an unforeseeable change we probably won't add. We've got a good base of technology that we're trying to leverage with a smart development team."
Sandy Hillman
Vice Chairman and CEO
Trahan, Burden & Charles Inc. Baltimore
Business: Advertising and public relations
"This has been a good beginning to the new year. One never wants to get too confident, but we started the year with two new clients and a significant expansion of current business with several major clients. My partners in the entire company have been pleasantly surprised by the new business activity. We're feeling somewhat good about the new year, not based on anything that has to do with economics or presidential stimulus proposals. It has to do with our own pulse-taking. I think it's based on individual perspective client needs and perhaps, people are recognizing that they need to be out in the marketplace more forcibly. I spent all morning trying to recruit people. We're in a hiring mode."
Harold L. Adams,
Chairman
RTKL Associates Inc.
Baltimore
Business: Architects
"I think until we see where we're going with this pending war, there is a cloud hanging over the economy. And everyone is reluctant. We are totally dependent on corporations making capital investments before we can. As an architecture firm, we're designing buildings for companies, buildings of all kinds -- hotels, office buildings. Until there's more confidence in our economy and especially more confidence in where we're going and the cost of a potential war, there is a big question mark hanging over us."
Hunter R. Hollar
President and chief executive officer
Sandy Spring Bancorp Inc.
Olney
Business: Regional bank
"Our current plans call for us to continue hiring in 2003 to staff new offices and to move forward on other capital projects; for example, technology already in some stage of implementation. Any signs that the economy is improving and that interest rates will not decline further would tend to bolster our confidence and make us more aggressive in hiring and in capital spending. Another important indicator for us is the demand for new loans, both consumer and commercial. If demand is robust in 2003, we are more likely to move forward with spending plans."
Barry F. Rosen
Chairman and CEO
Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC
Baltimore
Business: Law firm
"The fact is we are hiring and we are making capital expenditures, so I think our performance in 2002 is what gives me the confidence to hire and make capital investments in 2003. In some ways, law firms are recession-proof. We do perhaps more negative things in down markets and more positive things in up markets. In other words, in up markets we might do more mergers and acquisitions and in down markets people sue each other more. We just bought the building next to ours, the Vickers Building, and we're going to build a bridge over to it to give us more space to help us hire more lawyers."
Will consumers spend?
Consumer confidence declined again in December, the sixth downturn in seven months. Demonstrated by a weak holiday shopping season, the decline poses a critical concern for the consumer-driven U.S. economy: How secure do Americans feel? Will they keep spending? Or will they close their wallets? Here are the views of some Baltimore-area consumers.
Janet L. Knox, 51
Residence: Parkville
Occupation: Instructional associate, Baltimore schools
Household status: Single
Outlook: Worried
Knox has been with Baltimore schools for 29 years, where she evaluates the progress of children with special needs and monitors programs designed to help them. She hopes to retire in two years, and is cutting as many costs as she can. Knox has put off plans to refurbish a deck, and wears hand-me-down clothes from family members. She is nervous about Maryland's budget deficit, state pension fund losses, the stock market and the possibility of war.
"Those things make me leery and concerned. There may not be the money that I need to retire. I am cutting back and really looking, 'Do I really need this?'"
Lawrence R. Burch, 36
Residence: Chase Occupation: Independent contractor
Household status: Divorced, 3 children
Outlook: Optimistic
Burch recently spent about $36,000 on a new Dodge Ram pickup truck for his business. But he has cut personal spending, going without new living room furniture and a big-screen television. His apartment and home-rehabilitation business has been strong.
"I'm busy, but I don't have the amount of money rolling in right now that I would like to have. I think the economy is doing pretty well. Everybody is ringing my cell phone off the hook. Hopefully, things do get a little better in 2003. I think it is going to be a good year."
Geoffrey A. Harris, 43
Residence: Hampden
Occupation: Stagehand / artist
Household status: Single
Outlook: Concerned
Harris runs an art business bending wire into sculptures and turning beer cans into pull toys. Most of his income comes from setting up stages for rock concerts and conventions. Last year that business boomed, and he has work lined up this year.
Harris, who doesn't have a credit card, has kept a lid on spending. He worries that if consumers spend too much and there are more corporate scandals and business failures, everyone will be hurt.
"I'm thinking there is a good possibility that things are going to recover. But if businesses don't hold their end of the bargain, the balloon will definitely deflate. If the economy's tumble continues, then the conventions are going to stop and even the rock-and-roll shows will stop. Then, my work will go away, too."
Shannon Duffie, 30
Residence: Woodlawn
Occupation: Beauty salon owner
Household status: Single
Outlook: Hopeful
Business at her You Too Hair Salon in Pikesville has slowed in the weak economy. While women are still getting their hair styled and nails done, they aren't spending as much as in the past. Duffie didn't buy the new car she wanted and doesn't entertain as much as before.
"I have been on a massive budget and haven't gone out and splurged. The economy has definitely affected me, but I believe it will pick up. The stock market rose and then it dropped. I am not counting on that happening again."
Mary Scheufele, 55
Residence: Ferndale
Occupation: Sales specialist, First Mariner Bank
Household status: Married, adult child, three grandchildren
Outlook: Confident
Scheufele is raising three grandchildren and has a 22-year-old daughter at home who plans to become a nursing student. She and her husband refinanced their home for a $300-a-month savings and plan to buy a new SUV.
She's paid bonuses for selling financial products to customers and receives $100 for each first mortgage that she refers and the bank settles. Recently, she racked up 17 settlements.
"People always need money. People are always going to want to do improvements on their home and want to invest. That is where I come in. I feel pretty good about the economy. As far as my job is concerned, I feel really confident."
Floyd Wright, 50
Residence: Baltimore
Occupation: Senior accountant, Morgan State University
Household status: Married, adult child
Outlook: Cautious
Although state government workers are threatened with layoffs in the face of the state's budget deficit, Wright is not worried. He thinks his job is secure because his accounting skills will be valued more than ever.
He recently spent $2,600 on a new computer, but he is examining expenses more closely. He wonders if he needs a cell phone and various cable television services.
"There is a reason to look at things more closely. 'Do I really need this service?' I feel relatively comfortable. Working in a financial environment, we are the ones who have to make the numbers happen. We are the ones who have to be watching expenses."
The Baltimore region has had its share of high-profile cases involving allegations of financial misdeeds, some now resolved and others still unwinding. Here are four that are scheduled for court action this year.
Time of reckoning
The Baltimore region has had its share of high-profile cases involving allegations of financial misdeeds, some now resolved and others still unwinding: Here are four that are scheduled for court action this year.
John M. Rusnak
John M. Rusnak, the Allfirst Financial Inc. currency trader who vaulted to international notoriety after losing $691.2 million in one of the biggest banking scandals in history, is scheduled for sentencing Friday in U.S. District Court in Baltimore.
Rusnak pleaded guilty in October to one count of bank fraud and faces 7 1/2 years in prison. Over a five-year period, Rusnak hid massive losses on currency bets by entering fake trades into Allfirst's computer system, and made it look as if the bank were booking profits. He even created a fictitious businessman with a mail drop at a Mail Boxes Etc. in New York to confirm a bogus trade with Allfirst's independent auditors.
Though he never stole any money, Rusnak reaped about $400,000 in bonuses. In the process, he shook Allfirst to its foundations.
Brian and Elizabeth Weese
Brian D. and Elizabeth G. Weese, owners of the defunct Bibelot bookstore chain, face a number of court actions. The couple were sued by creditors who accused them of shifting assets to evade repayment of business loans, the bulk of which Elizabeth Weese had personally guaranteed.
The millionaire Weeses allegedly sold artwork and cars, transferred real estate titles and shifted $25 million in personal assets to an offshore trust in the Cook Islands. The moves rendered the couple insolvent and left Bank of America, Bibelot's largest creditor, scrambling for the $15.5 million in loans that it made to the company. Allfirst Financial Inc. is owed $1.7 million.
Trials are pending in U.S. Bankruptcy Court, the Cook Islands and Baltimore County Circuit Court. A settlement could resolve the dispute.
Martin L. Grass
Martin L. Grass, the flamboyant former head of Rite Aid Corp., and a current and two former top executives of the drugstore chain face criminal and civil charges for allegedly plundering the company and inflating its profit by $1.6 billion.
An executive vice president goes on trial March 3 and jury selection for the other three is to begin May 5 in U.S. District Court in Harrisburg, Pa. Grass and the others face 27 counts, including charges of obstruction of justice and fraud in connection with the purchase or sale of securities. Timothy J. Noonan, Rite Aid's former president, is testifying against Grass. He wore a wire and taped Grass and another executive planning ways to throw off the FBI in its investigation of the company, according to federal documents.
Grass is the elder brother of Elizabeth G. Weese and, until the Rite Aid blowup, lived on an estate in Green Spring Valley, where he irritated his neighbors by commuting to Rite Aid's headquarters in Camp Hill, Pa., in a helicopter.
William P. Trainor
William P. Trainor, accused of being the hidden architect of a mid-1990s scheme involving Novatek International Inc. in Columbia, faces trial in U.S. District Court in Fort Lauderdale, Fla., on 24 counts of fraud, money laundering and tax evasion. A January trial date was postponed for sometime later in the year.
Also the target of a civil complaint by the Securities and Exchange Commission, Trainor allegedly masterminded an elaborate scheme in which an ailing steel fabricator was taken over at virtually pennies per share and seemingly transformed into a high-flying seller of medical diagnostic kits.
By announcing deals that never existed and promoting the firm's purportedly brilliant prospects, Trainor and partner Vincent D. Celentano and other insiders pumped up the price of Novatek's stock. Investors lost millions when the scheme was exposed and the stock crashed. Novatek also obtained millions in bank loans -- parts of which the government alleges were siphoned into Trainor-controlled entities. Novatek subsequently filed for bankruptcy protection in 1996.