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Safety in numbers

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Safety in numbers

It works for some, but merging hospitals into health-care systems isn’t the remedy for all their financial afflictions.
By Edward Martin

In the fog, bare trees loom like skeletons. A sidewalk leads from Fayetteville Street to ornate doors framed by a brace of caduceuses, the entwined serpents that symbolize medicine. From some vantage points on a winter morning in Asheboro, Randolph Hospital looks the same as it did in 1932, when its art deco architecture was new. Behind the façade, the 145-bed hospital — 40 beds originally — is thoroughly modern. It has won awards for pneumonia care and its new cancer center. Visitors enter through a new wing. Here in the geographic heart of North Carolina, they wait in the lobby for word on friends and relatives.

Randolph is an independent hospital in a state dominated by health-care empires —six have headquarters within a two-hour drive. “The risks and rewards run higher,” says Robert Morrison, president and CEO. “You work without a net financially.”

Ninety miles away in Charlotte stands Carolinas Medical Center, flagship of Carolinas HealthCare System, the state’s largest and nation’s third-largest, with 4,300 beds in two states. Around the 861-bed medical center, clinics and doctors’ offices make up a medical city within a city.

Michael Tarwater, CEO of Carolinas HealthCare, enjoys pointing out that, on average, 32 babies are born at Carolinas Medical Center each day. The hospital is one of 15 in a system that had $2.3 billion in revenue last year. Despite his system’s size, he faces some of the same woes as Morrison. Carolinas wrote off $115 million in unpaid bills last year, about 5% of revenue. Randolph took an even bigger hit in proportion to its size — about $12 million in uncollectible bills, nearly 13% of its revenue.

It’s possible that health care, once almost entirely a local endeavor, soon will be delivered only by networks such as Carolinas HealthCare. Many say that wouldn’t be so bad. Large systems offer economies of scale, huge patient volumes that enable them to spot best practices quickly and the ability to offer technology that small hospitals only dream of. Another wave of consolidation might spark cost cutting, they say, especially if the state were to deregulate hospitals. The Federal Trade Commission, for one, says opening health care to market forces would make hospitals lower charges.

But some hospital administrators doubt the public is ready for the tough choices competition entails — such as rationing care to those who can’t pay. Regulation, they say, will remain necessary. “If you don’t care who you hurt, then you can get rid of it,” Tarwater says.

Those who expect a new wave of finance-driven consolidation point to the deal in which Winston-Salem-based Novant will lease and run Brunswick Community Hospital, south of Wilmington, starting this month. “In the next round, there’ll be fewer and fewer independent hospitals and a few large hospitals dominating each state,” says David McRae, president and CEO of University Health Systems of Eastern Carolina in Greenville, which covers 29 counties.

Morrison disagrees, but then his hospital is financially sound. Unlike many of the 157 others in the state, Randolph has operated in the black since 1993, when he took over. It earned $4.5 million in 2005, a healthy 4.8% operating margin, by excelling at procedures that don’t require big-city expenditures for staffing and equipment.

On one point, though, both sides agree. A perfect storm is brewing, for systems and independent hospitals. Factory layoffs, rising insurance costs and other factors last year added 400,000 North Carolinians to more than a million already uninsured. That’s nearly 17% of the population. For those still holding jobs, businesses will pay about $7,000 per employee for medical coverage this year, says Will Sneeden, Hewitt Associates health-care practice director in the human-resources consultant’s Charlotte office. That cost, he says, could double in seven years. Meanwhile, the baby-boom generation is nearing age 65, when medical needs escalate sharply.

Morrison pores over financial charts that show increasing medical costs and a rising tide of uninsured people nationwide. If those lines don’t change, he says, the outcome will be dire. “The system as we know it currently will crash and burn. It is in the process of self-destructing.”

A saloon, barbershop and fruit stand were on the first floor, and a 45-bed hospital was above. Founded in 1903, Presbyterian Hospital, now part of Novant, spent some of its formative years renting rooms in a Charlotte hotel. In 1918, it moved east of downtown, where it’s based now. Another local hospital — Charlotte Memorial, now Carolinas Medical Center — was chartered in 1938.

Through the ’60s, hospitals near one another competed mostly by word of mouth. Charlotte Memorial served a disproportionate number of the poor, while Presbyterian catered to the affluent and insured. An axiom spread: “I’d rather die in the ambulance on the way to Presbyterian than stop at Charlotte Memorial.” In the ’70s, federal and state legislators forced hospitals to get approval for new buildings and expensive equipment to head off medical arms races.

In the mid-’80s, what is now Carolinas HealthCare System began buying up medical practices. Employing its own doctors assured a steady source of referrals. Later, it and other systems began buying or signing management contracts and leases with smaller hospitals, frequently badly managed ones or those in financial straits. But by the late ’80s, another player emerged.

Managed-care companies burst onto the health-care scene. By 1995, 23 were licensed in North Carolina. Hospitals were forced to establish managed-care offices with bookshelves lined with volumes of regulations from each company. Tit for tat, health-care systems bulked up to negotiate better deals with managed-care plans that demanded large discounts, sometimes 50% or more. But the bloom on health-maintenance organizations faded when insurers cut each other’s throats in price wars. Today, the industry in the state has shrunk to seven HMOs. Those left — United HealthCare and Blue Cross and Blue Shield of North Carolina have the biggest — remain able to demand large discounts.

Negotiations can be intense. In June, North Carolina Baptist Hospital — part of a system that includes hospitals in northwestern communities — balked at signing a contract with Blue Cross. Baptist executives complained that the insurer wanted to reimburse them at less than cost. They didn’t sign an agreement until October.

Now, after 15 years of consolidation, the medical landscape shows the impact. Big is in vogue. In a massive complex of glass-fronted buildings, the Wake Forest University and North Carolina Baptist complex sprawls near downtown Winston-Salem. Duke University Medical Center dominates west Durham. Hub of the university’s health system, it is the largest hospital in the state with 1,124 beds. Raleigh-based WakeMed has 752 beds in Raleigh and Cary hospitals, along with nursing homes and other services. In Chapel Hill, UNC Health Care is centered on its 684-bed UNC Hospitals complex. Cape Fear Valley Health System has grown from a 200-bed Fayetteville hospital in the 1960s to four hospitals with more than 600 beds. New Hanover Health Network in Wilmington includes four hospitals with 855 beds.

Administrators say the quality of care improves as patient volumes rise. At Duke University Medical Center, for example, an oncological surgeon will typically perform the same operation more than 300 times a year. A study in The New England Journal of Medicine concluded that a patient operated on by such a surgeon has a better than 95% chance of being alive a month later. With a less experienced surgeon, it’s less than 85%.

Large systems also can buffer financial shocks by spreading costs over a larger base of patients. Don Dalton, a vice president of the Raleigh-based North Carolina Hospital Association, says many need help. In fiscal 2004, 74% lost money or made so little they couldn’t borrow at an affordable rate.

“The future of the small, independent hospital certainly is challenged, and maybe even bleak, unless they do some things like joining forces with a larger system for support,” McRae says. University Health Systems owns or leases five hospitals in Eastern North Carolina. “We see this cycle in which you have a few years of panic, then consolidation, then people relax. Then they go back to saying, ‘We’d better hurry up and pick our partners.’ We see that beginning to happen again in North Carolina.”

Luck is relative. A growth in the woman’s breast was malignant, but she detected it early. Once, her surgeon would have removed the breast, underlying muscles and nearby lymph nodes. Instead, on a recent day in the Randolph Cancer Center, a surgeon inserts a balloonlike device in the cavity where the cancer was removed, then bombards surrounding tissue with radiation. Her breast will be spared, and the newly developed treatments will take two to three days rather than being spread over several months. This is one way independent hospitals can survive — excelling at high-demand procedures and leaving exotic ones to larger hospitals.

Researchers at Lakewood, Colo.-based HealthGrades, which rates more than 5,000 of the nation’s hospitals, including those ranked for this issue of Business North Carolina, say small hospitals in the state perform many procedures as well or better than their larger counterparts. For example, HealthGrades found hip-replacement patients at Alamance Regional Medical Center, a 238-bed hospital in Burlington, less likely to suffer complications than those at some of the state’s largest hospitals. At Margaret Pardee Memorial Hospital in Hendersonville, a 222-bed hospital, knee-replacement patients have fewer setbacks than those at Mission Hospitals, an 800-bed hospital in Asheville.

Randolph Hospital and other independent hospitals that have resisted consolidation share other traits. One is competent management. “Some of the hospitals that have merged with larger ones do it for access to resources, both in terms of capital and management expertise,” Dalton, of the hospital trade group in Raleigh, says. “It takes both to successfully operate a hospital nowadays.”

Tarwater says shaky finances and management have pushed hospitals into Carolina HealthCare’s arms. “I’d say between a third and a half either came to us or we reached out to them because they were in real trouble. There are probably three in our system today that are doing OK and meeting the needs of their communities that wouldn’t be around. A third might not have been in dire straits but realized as a free-standing hospital it was going to be more difficult to meet needs.”

In Huntersville, off Interstate 77 near the sprawling suburban developments and strip malls around Lake Norman, stands a $57 million redbrick hospital with 50 beds. It’s part of Novant and the center of debate over the role that competition and state regulation have played in the growth of North Carolina’s health-care empires and the future of its independent hospitals. Presbyterian Hospital Huntersville’s birth took seven years from application to opening in October 2004. Even then, it stayed locked in a regulatory struggle that threatened to close it.

Its competitor in nearby Mooresville, Lake Norman Regional Medical Center, owned by Naples, Fla.-based Health Management Associates, argued that the new hospital wasn’t needed and that the state’s Division of Facility Services should have blocked its construction. But a Presbyterian spokesman says it had more than 70,000 patients its first year. The case went to the N.C. Supreme Court, which ruled last fall in favor of Presbyterian.

Critics of hospital regulation say the case underscores how both health-care systems and independent hospitals use state regulation as a competitive weapon. The critics have powerful allies. The Federal Trade Commission and the U.S. Department of Justice have urged states to drop regulation. “Competition will improve quality and drag down prices, which would improve access,” says a staff lawyer who drafted an FTC report urging states to abandon health-care regulation. “Competition is trying to make footholds in health care. States should let it.”

The stakes are huge — North Carolina has a $55 billion health-care economy. FTC officials say independent hospitals such as Randolph are hurt most by regulation because they don’t have the large financial, legal and other resources needed to fight lengthy battles such as the one over Presbyterian Hospital Huntersville.

But administrators of large health systems and small hospitals say they fear the impact of deregulation — on patients and hospital balance sheets. Dalton is adamant. “There is no such thing as the free market in health care. There is not now and won’t be in our lifetimes.” A major reason is how Americans pay for care.

Mostly, they don’t. At least, not directly. Hospital administrators say 60% to 70% of payments come from Medicare, Medicaid and other federal programs with fixed prices. That prevents hospitals from competing on a cost basis. And while marketing departments tout quality and technological sophistication, analysts say competition already has leveled most of those factors.

Hospital officials say they fear most for-profit companies such as Charlotte-based MedCath, which has developed 12 heart hospitals nationwide. Sans state regulation, for-profits could swoop into the larger markets and cherry-pick lucrative procedures — heart surgery and joint replacement, for example — leaving nonprofits saddled with nonpaying patients or those with chronic illnesses such as diabetes.

Hospital administrators don’t need that. They say they’ve got all the competition they can handle. In Greenville, Pitt County Memorial Hospital spreads in the morning shadow of East Carolina University’s Brody School of Medicine. University Health Systems has staked its claim to a vast expanse of Eastern North Carolina. Now, from Raleigh and other directions, other health systems are encroaching. “We understand the business reasons for consolidation,” McRae says. “We’re prepared to continue growing if we have to.”

North Carolina’s Best Hospitals

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Back to March 2006 home page

North Carolina’s Best Hospitals

Ratings on this page list the state’s top hospitals last year in selected specialties in alphabetical order. Colorado- based HealthGrades Inc. compiled the lists for Business North Carolina using Medicare data risk-adjusted for hospitals that receive sicker patients. It reports on about 5,000 hospitals in 28 procedures and diagnoses. Limited reports are free on the Internet. Detailed reports are available for a fee.

New York-based U.S. News & World Report magazine ranks 50 hospitals in 17 specialties and overall, based on Medicare records, American Hospital Association data, a physician survey and other information. Ratings are free online.

Illinois-based Solucient LLC examines Medicare data and the records of about 3,000 hospitals that handle 80% of U.S. patients. It sells data and consulting services to hospitals and others.

CLINICAL EXCELLENCE

  • FirstHealth Moore Regional Hospital, Pinehurst
  • Lenoir Memorial Hospital, Kinston
  • Mission Hospitals, Asheville
  • Rex Hospital, Raleigh

Ranked among the top 5% of hospitals in the nation for lowest in-hospital mortality rates for coronary bypass surgery and stroke and for in-hospital mortality and complications for at least 21 of 28 procedures rated by HealthGrades.

In early February, HealthGrades released this year’s ranking of top Tar Heel hospitals for clinical excellence:

  • Margaret Pardee Memorial Hospital, Hendersonville
  • Mission Hospitals, Asheville
  • Rex Hospital, Raleigh

HEART

  • Carolinas Medical Center, Charlotte
  • Craven Regional Medical Center, New Bern
  • Durham Regional Hospital, Durham
  • FirstHealth Moore Regional Hospital, Pinehurst
  • High Point Regional Hospital, High Point
  • Mission Hospitals, Asheville
  • Moses H. Cone Memorial Hospital, Greensboro
  • NorthEast Medical Center, Concord
  • Rex Hospital, Raleigh
  • WakeMed, Raleigh

Based on complications, mortality in hospital and at one and six months after release for six coronary procedures that include bypass surgery and angioplasty.


VASCULAR

  • Cape Fear Valley Medical Center, Fayetteville
  • FirstHealth Moore Regional Hospital, Pinehurst
  • Frye Regional Medical Center, Hickory
  • High Point Regional Hospital, High Point
  • Mission Hospitals, Asheville
  • Moses H. Cone Memorial Hospital, Greensboro
  • Nash General Hospital, Rocky Mount
  • North Carolina Baptist Hospital, Winston-Salem
  • NorthEast Medical Center, Concord

Rex Hospital, RaleighBased on complications, mortality in hospital and at one and six months after release for three procedures that treat major arteries outside the heart, including repair of the abdominal aorta.


ORTHOPEDICS

  • Alamance Regional Medical Center, Burlington
  • Catawba Valley Medical Center, Hickory
  • Davis Regional Medical Center, Statesville
  • FirstHealth Moore Regional Hospital, Pinehurst
  • Forsyth Memorial Hospital, Winston-Salem
  • Mission Hospitals, Asheville
  • Moses H. Cone Memorial Hospital, Greensboro
  • Nash General Hospital, Rocky Mount
  • New Hanover Regional Medical Center, Wilmington
  • Presbyterian Orthopaedic Hospital, Charlotte

Based on complications, mortality in hospital and at one and six months after release for six orthopedic procedures such as back surgery and hip replacement.

New school buses are heater beaters

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Tar Heel Tattler – March 2006

New school buses are heater beaters
By Arthur O. Murray

Federal regulators might like the 1,300 school buses bought by the state from High Point-based Thomas Built Buses two years ago. They produce fewer emissions. Students who have to ride in them, though, are more likely to gripe — once their teeth stop chattering.

The buses were the first bought by the state on the heels of a 2004 federal anti-pollution law requiring more efficient engines. Unfortunately for riders, the new engines don’t run as hot as older ones. That means coolant pumped to heaters at the front of the bus doesn’t get as hot as before, so the heaters don’t warm the whole bus. The state spent nearly $79 million on the new models, which replaced about 10% of the state’s fleet.

Jay Temple, transportation director for Davidson County Schools, says the complaints started shortly after the first of 22 new buses were delivered for the 2004-05 school year. Ditto for 11 buses in coastal Pasquotank County, says Jerel Winslow, its transportation director, and buses in other counties.

Thomas Built, which has produced about 95% of the state’s fleet, says the buses were built to state specifications. True, says Derek Graham, DPI’s section chief of transportation services. The state ordered what it always had: a model with a heater in the front. No one warned him that the new engines would weaken the heaters.

The state has learned its lesson. It bought about 500 school buses for the 2005-06 school year and specified front and rear heaters. Another manufacturer, Warrenville, Ill.-based Navistar International won the contract with a $31.4 million bid. So far, so good.

As for the cold buses, the state is testing new rear heaters installed by Thomas Built at cost – less than $300 apiece. Winslow and Temple say they have no money for the upfits and wonder who will pay. "We haven’t gotten that far yet," Graham says.

Regardless, Temple doesn’t want another year of shivering bus riders. "To put a kid on a bus where they may have to have a blanket to keep warm is not good business. The adults make the mistake, but the people who suffer are the kids."

Luck of the draw

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Luck of the draw

Charles Sanders knows a doc can’t always pick his patients.
by Tim Gray

The doctor was probing, trying to determine the extent of the injury. How bad was it, Charles Sanders asked Kevin Geddings, a public-relations consultant and member of the N.C. Education Lottery Commission, which Sanders chairs. Before moving to Charlotte, Geddings had helped start the South Carolina lottery and befriended a lobbyist for Scientific Games Corp., which operates the gaming there and wanted to run the new lottery here. His ties to a company vying for a multimillion-dollar contract had critics howling.

In late October, Geddings called Sanders at his office in Chapel Hill to discuss the controversy. “He said, ‘If this is an embarrassment to you, I’ll resign.’” Sanders, a cardiologist-turned-CEO who retired from Glaxo to run for U.S. Senate a decade ago, gave his prognosis. ”And I said, ‘Kevin, if that’s all there is to it, a friendship, I think we can get by that. But if there’s another shoe to drop, we’ve got a problem.’ And he was like, ‘Mr. Chairman, there’s no other shoe to drop, I promise you.’

“Three or four days later, the news came out that he’d made $25,000 from Scientific Games.”

Though he had opposed the lottery, even contributing money to the campaign against it, Sanders says this was the only time he had serious misgivings about agreeing to chair the commission. “He just flat lied,” Sanders says — and Geddings denies — “and I’ve never had anybody do that to me that smoothly.”

Sanders hates surprises. He’s had plenty since the legislature, with last-minute arm twisting and parliamentary shenanigans, passed the lottery last summer and Gov. Mike Easley, in a cunning bit of political jujitsu, asked him to head the nine-member panel overseeing it. Since then, three members — including Geddings — have resigned, and investigators are probing the role a key adviser to House Speaker Jim Black played in getting the lottery passed. According to published reports, Meredith Norris set up dinners for Scientific Games executives with lawmakers and even arranged for the company to suggest language that was written into the legislation. She was not registered as a company lobbyist.

The stakes are high, with the games expected to rake in $1.2 billion next fiscal year and the $425 million profit earmarked for education. But long before the first scratch ticket is sold — that won’t be until March 30 — the lottery had gained an unpleasant odor that, like strange perfume and stale cigarette smoke, has a way of clinging to those who get too close. “It’s looked bad and smelled bad,” says Raleigh lawyer Dan Blue, an opponent and former speaker of the state House, “and you get the feeling that the stench hasn’t subsided.”

Sanders, at age 73, understands the risks. “My integrity is very important to me, and I do not like to have it impugned.” So he’s approaching the job the way he’d treat a diseased heart — dispassionately diagnosing, prescribing and pushing ahead to the next problem, nurturing something he would rather not have seen come into being. But, as he learned long ago, a doctor can’t always pick his patients.

“This isn’t a job I aspired to,” he says. “I’m doing this as a public service.”

As far back as anybody can recall, he’d always said he wanted to be a doctor. “Everybody called him ‘Doc’ in high school, even our father,” says Barefoot Sanders, a federal judge in their hometown of Dallas. The main religion in the Sanders household was achievement, and his parents — his dad, a lawyer; his mother, a homemaker — expected their children to excel. That drive marked him throughout his career, and even today as a rich retiree, he’d rather work, serving on about a dozen boards, than kick back. “Entertaining myself isn’t what makes me tick,” he says. “I want to try to make things better.”

“I’d just as soon not have it. But since we do, I want to make sure we do it the best way we can."

He earned a bachelor’s from the University of Texas at Austin and his M.D. at the university’s medical campus in his hometown. A mentor nudged him toward cardiology and helped him land an internship at Harvard and a residency at Boston City Hospital. That led to a faculty post at Harvard’s medical school and Massachusetts General Hospital, where he founded the cardiac-catheterization lab in 1962. Cardiac catheterization has become routine, but it was cutting-edge then: A physician makes an incision in the groin, then snakes a catheter through a blood vessel all the way into a patient’s heart. The catheter can be used to run tests, open blocked arteries and insert wire stents to keep them open.

You don’t unblock a coronary artery by whining about the injustice of a world where some skinny nibblers end up with bad tickers while some lard-laden gluttons don’t. You ream it out and move to the next one. So it is with Sanders’ view of the lottery. Like many of the state’s educated elite, he wanted to save the little people from themselves: He believes that lotteries too often prey on the poor, offering false hope of quick riches, and still doubts that it’s the best way to fund schools. But he doesn’t agonize over it. “I think it’s a regressive tax, and I’d just as soon not have it. But since we do, I want to make sure we do it the best way we can.”

In Boston, the cath lab’s success brought an invitation in 1972 from Mass General’s trustees for him to run the whole hospital. At 40, he was managing about 8,000 doctors, nurses and other staff. Over the next decade, he spearheaded the creation of an institute for licensing nurses, therapists and dieticians along with the fundraising to renovate the aging hospital. Next came a surprising move for a 20-year academic. He took a job as head of research for what is now Bristol-Myers Squibb, the New York based drug company. It meant not only giving up the prestige of Harvard but entering the corporate world. For the first time in his career, he felt serious pangs of self-doubt. “They weren’t interested in throwing rose petals at what I’d done at Mass General. They were interested in what I was going to do, and at Mass General we’d struggled just to break even. At first, I wasn’t sure I could really make it.”

He wagers on his golf game, has no appetite for poker – and has never bought a lottery ticket.

His days with a stethoscope slung around his neck ended, but one legacy of his time as a medical practitioner is his low-key reserve. “You don’t want to have a doctor running around the room waving his arms and saying, ‘Oh my God, I have no idea what’s wrong with you!’ In any situation, I ask myself, ‘What’s the worst thing that could happen here?’ In medicine, it’s death. In most everything else, it falls short of that.”

He stayed at Bristol-Myers eight years, then moved into the No. 2 job at what is now GlaxoSmithKline’s U.S. subsidiary, based in Research Triangle Park. Three years later, he became its chief executive. Glaxo was thriving, thanks to Zantac, its blockbuster anti-ulcer drug then available only by prescription. His major challenge was being a buffer and mediator between the British parent company’s prickly scientist-turned-chairman Richard Sykes and its American profit engine. “Richard was passionate and arbitrary,” Sanders recalls. “He left a lot of bruised feelings. He could be a pain in the neck, but he was smart as all get-out.”

With mandatory retirement age looming, Sanford decided to run for the Senate seat held by Republican Jesse Helms. He figured his views — he calls himself a fiscal conservative and social moderate — and mix of business and medical experience would appeal to voters. But newspapers around the state tarred him as a corporate carpetbagger, tweaking him for everything from his wealth to his brother’s unusual first name, a family one. In the 1996 Democratic primary, he faced former Charlotte Mayor Harvey Gantt, who had been the party’s candidate six years earlier. Few voted, and Gantt’s populist rhetoric appealed to the ardent liberals who were the most likely to go to the polls. He won, only to be beaten again by Helms.

Sanders settled into the typical life of a wealthy retired executive. When he ran, his financial disclosures listed his net worth as between $11 million and $22 million. He lives on a golf course in an upscale Durham neighborhood and summers at his cottage on Cape Cod. He serves on his boards, corporate and nonprofit, and plays as much golf as he can squeeze in. His golf game, he says, is the only thing he bets on, laying down $1 to $5 wagers with buddies. He has no taste for poker and never has bought a lottery ticket. “I’d rather put my money into something where there’s a greater chance of a return.”

He devotes much of his time to health care. Among the for-profit boards he’s on is that of California-based Genentech, a biotechnology company. “Science really drives the whole operation,” he says, his enthusiasm washing away his normal reserve. “Right now, the most productive part of the pharmaceutical industry is the biotech part. These companies are made up of very smart people who are dedicated, and you don’t have the bureaucracy that says you have to follow this particular path, which is what big pharma is burdened with.”

He has been on the board of Project Hope nearly 20 years, brought on by his friendship with the nonprofit’s founder. It trains health-care workers and equips hospitals in developing countries, plus operates the SS Hope hospital ship, which traveled to Indonesia after the December 2004 tsunami. As chairman, he listens carefully and remembers much of what he hears, seldom needing to write things down, says Dr. John Howe, the president and CEO. “He has a gifted way of bringing the board to consensus. As the discussions evolve, people have confidence he’ll bring out the best of ideas.”

"Charles

Members of the Lottery Commission say he has shown the same skill there. Though he’s far from being a backslapping good old boy, his style belies the patrician label that newspapers tried to tag him with during his Senate campaign. “He doesn’t attempt to dominate the meetings,” says Jim Woodward, the retired chancellor of UNC Charlotte, who replaced Geddings. “He looks for a consensus of views.” Robert Farris, a Wilson lawyer, agrees. “For someone trained as a physician, he has an unusual ability to get along with people. Docs have to have huge egos to go busting open people’s chests and heads. But Charlie knows how to let other people talk.”

As nonexecutive chairman, Sanders’ main duty is running the commission meetings. He sees the board’s role as setting policy and making sure the executive director and his staff meet its goals. He’s not a micromanager. “I give people a lot of authority because I think that’s how you get the best results. You hire good people and make it clear what you expect and pay them well. If they don’t produce, you tell them what they can do better. If they don’t do it, they’re gone.”

He admits he has one quirk: “I don’t like surprises.”

The first resignation came in October when Malachi Greene, a Charlotte businessman and former City Council member, decided he was too busy to serve on the commission. Geddings quit Nov. 1, sending his letter of resignation to the governor. It arrived just days after New York-based Scientific Games revealed in a filing that it had been paying him consulting fees, including a payment the day after he joined the commission. Two weeks later, Gordon Myers left, voicing concerns about conflicts of interest. A former executive with Asheville-based Ingles Markets, he still holds stock in the grocery chain, which likely will sell lottery tickets.

Reached by e-mail, Geddings says, “I am sorry Dr. Sanders feels that I lied to him. That was certainly not my intention. Although I openly admitted to him and the general public my company’s previous work for lottery vendor companies, I should have been more forthcoming about the details of those business relationships given the high profile and very political nature of the lottery.”

Sanders says Geddings’ PR expertise and his experience — he was the only commissioner who had been involved in a lottery startup — could have been very beneficial. “Kevin is very articulate,” he says, “very convincing.” Disclosure of its dealings with Geddings, whom Black had appointed, and Meredith Norris, a former member of the speaker’s staff and later his unpaid political director, didn’t disqualify Scientific Games as a potential vendor because it and West Greenwich, R.I.-based GTECH Holdings Corp. dominate the industry. “We can’t do it without them,” Sanders admitted in January, referring to the bidding process.

Against this backdrop, Sanders and the rest of the commission, bolstered by replacements for those who had resigned, soldiered on. In November, the commission had hired Tom Shaheen, who had been chief executive of New Mexico’s lottery, as its executive director. He had worked for state lotteries in Florida, Texas and Georgia before New Mexico recruited him to turn around its sputtering games. In addition to his $235,000 salary, he’ll get a $50,000 bonus if the games begin on time.

Hiring someone with Shaheen’s experience was critical for a successful startup, Sanders says. Operational blunders could blacken the lottery’s reputation far worse that what has happened in Raleigh. “This has an instant market. We’ve got to start with 4,000 retailers on Day One. Getting them online and equipped and trained, that’s an enormous task. I wouldn’t have the foggiest notion of how to do that, but Shaheen does.” When it reaches full staff, probably sometime late next year, the lottery will employ 200 to 250 people, including six deputy executive directors and 12 departmental directors. Sanders says he confers with Shaheen, sometimes several times a day, by phone or e-mail. “I check in with him to see how he is doing, not to get into operations but simply to show support by asking.” Otherwise, Shaheen runs day-to-day operations as he sees fit.

There is no room for blunders. "This has an instant market. We’ve got to start with 4,000 retailers on Day One."

In January, the commission accepted bids from Scientific Games and GTECH. That, too, turned into a minor brouhaha. Sanders insisted on keeping bids secret during negotiations to get a better deal, saying the commission would lose leverage if each company knew what the other had bid. In an editorial Jan. 19, The News & Observer accused him of reneging on his vow to keep commission dealings transparent. It called his reasoning preposterous and blasted his stance as “an outrageous and unacceptable repudiation” of his promise.

“I’ve had one sleepless night since becoming chairman,” Sanders admits, “and it was over that editorial. I thought it was blatantly unfair and showed a complete lack of understanding of the bidding process. I try to adhere to the highest ethical standards. To be taken to task by someone who clearly didn’t understand the bidding process really ticked me off. If these people had bothered to do their home-work, they would’ve come to a different conclusion.”

Otherwise, he says the controversies surrounding the lottery haven’t bothered him much. The ability to insulate himself from turmoil seems a holdover from his days as a physician: Involve yourself emotionally with every patient, you’re sure to burn out.

On Jan. 30, the commission awarded contracts for both the instant-win tickets and lotto-style games to GTECH. Its fee: 1.6% of sales, estimated to earn it $19.2 million in the first full year alone. Shaheen managed to wring out concessions that he says could bring the state $30 million or more than projected and moved up launch dates to March 30 for instant tickets and May 30 for the drawing. “By keeping the bid submissions confidential until now,” Sanders says, “the bargaining position that the [commission] had with the vendors was enhanced and we ultimately got the best deal for the state.” The doctor might not be much of a bettor, but he would probably make a pretty good poker player.

When arguing for the lottery’s benefits — he says that, as chairman, it’s part of his job — he exhibits neither a politician’s wordiness nor an executive’s willfulness. He doesn’t try to coax or cajole but calmly outlines the pros and cons and stresses that he’ll make sure advertising underscores the long odds of winning. “If you’re luring people in with the expectation that they’re going to develop a retirement out of this, that’s deceiving. If you’re showing what the benefits are in terms of educational results, that’s fair.”

Won’t making the odds clear undercut people’s willingness to play and thus the lottery’s ability to generate money for schools? “There’s a balance, and I think we can strike it. Shaheen has done it well in New Mexico in terms of this is an education lottery, the odds of winning aren’t great.”

But when asked again about that clinging scent of scandal, his answer sounds like that of the lottery opponent he only recently was. “Why it happened is pure and simple. It’s money, which brings out the worst behavior in everybody. Where there’s a lot of money, there’s a lot of temptation. And it perverts normal human behavior.”

Howling success

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Howling success

Bobby Purcell has managed to bring out the beast in N.C. State boosters. Not bad for a Carolina grad.
by Tim Gray

Most people like to brag about the college from which they graduated. Not Bobby Purcell. He brags about the one he left.

Purcell heads the Wolfpack Club, the money machine that is the fundraising arm of N.C. State University athletics, but earned his bachelor’s at UNC Chapel Hill. Ask him how a Tar Heel could end up as the money man for one of Carolina’s archrivals, and he hustles to point out that he started at State and would have stayed if it had offered him the chance to study physical education or business.

“It was an academic decision. I transferred to Carolina but was a State fan the whole time, even in my fraternity house. My transferring was a hard thing for a lot of people who knew me to understand, including me.” Transferred? To Carolina? Didn’t he know that ABC doesn’t just begin the alphabet but abbreviates a key tenet of the State creed? If the game doesn’t involve the Pack, you root for anybody but Carolina. If State fans could send someone to purgatory, Purcell surely would’ve had to go before returning to Raleigh.

His sin likely has been forgiven. Since becoming boss of the Wolfpack Club in 1997, Purcell has showered State with cash. The club, officially the N.C. State Student Aid Association, has become the top athletic booster among North Carolina’s major universities. It raised $25.8 million in the fiscal year that ended June 2004, the most recent data available, compared with $15.9 million for Carolina’s Rams Club and $18.2 million for Duke University’s Iron Dukes.

Purcell’s fundraising hasn’t just paid for scores of athletes to attend State — public money isn’t used for sports scholarships at State and Carolina. It has bankrolled new facilities for football, basketball, baseball, even tennis. And money matters more than ever in the Atlantic Coast Conference. By expanding to 12 schools, the league has intensified competition in all sports but especially football, the costliest, where it added two national powers: the University of Miami and Virginia Tech.

Purcell, who tools around the parking lot in a golf cart before State football games working the crowd like a pol, is skilled at coaxing money out of alums, but he has been lucky, too. He leads Pack fundraising at a time when State’s academic strength — applied technology — has produced fortunes unimaginable a generation ago.

Two of North Carolina’s four billionaires — Wendell Murphy and Jim Goodnight — are State alumni, as are such recently minted millionaires as two of the founders of Cree, a Durham semiconductor maker. All four are club members, Purcell points out. Murphy gave $26 million for the field house that opened two years ago — the Wendell H. Murphy Football Center.

“Bobby caters to the needs of his whole constituency, not just the big givers,” says Murphy, who chairs State’s board of trustees. “He’s just as concerned about the ones who give small amounts of money. He personally recognizes just about every one of them and can call them by name.”

Purcell’s booster club is behind the addition to Carter-Finley.

Over the last 25 years, State has run through a bench of coaches and athletic directors, but Purcell has endured. Football coach Chuck Amato and men’s basketball coach Herb Sendek get more ink and airtime, but neither has Purcell’s political base — the statewide network of Wolfpack Club chapters — nor his ties to big benefactors. Purcell, who’s 51, boils his life down to a tidy narrative that mixes love of sports and N.C. State with his Christian faith. A Presbyterian, he’s a deacon and a former Sunday-school teacher in his church in Raleigh and shows a touch of the well-scrubbed rectitude common among ministers and high-school principals. He rarely drinks or cusses. And his idea of a rockin’ tune is State’s fight song.

He grew up in Clinton, east of Fayetteville. His dad worked for Nutrena Feeds; his mom taught school. As a kid, he lived for baseball and football, playing first base and tight end in high school. “I wasn’t a real talented player, but I always loved competing.” His hero was an uncle, Gus Purcell, who for two decades coached football at Myers Park High School in Charlotte. He had a summer sideline — the Gus Purcell Quarterback Camp — that offered a glimpse of the possibility of making money in amateur athletics. Purcell, who worked at the camp, began to dream of working in sports.

In 1973, he enrolled at State, alma mater of his dad and his granddad. It offered neither a major in physical education nor business, and Purcell soon figured out that one of those could prepare him for a career in sports. Once he transferred to Carolina, he ruled out phys ed because he didn’t want to teach. That left business.

After graduation in 1977 came a stint with Whirlpool in Raleigh. While there, he lined up informational interviews with the athletic directors at State, Carolina, University of Georgia and Georgia Tech. He asked them how to prepare for jobs like theirs. Each said, “Get a master’s in sports management.” He did, enrolling at Georgia, where he signed on as an unpaid assistant football coach. After graduating in 1981, he landed a job that was even more thrilling for a football-mad young man — a three-month internship with the Atlanta Falcons.

There he got a break. He became friendly with Bill Jobko, a scout and former teammate of Monte Kiffin, State’s football coach at the time. As the internship wound down, Kiffin happened to call Jobko. He wanted to know if the Falcons would consider an N.C. State kicker. “Jobko told Kiffin, ‘We’ve got a kid here who’s a big State fan. I’d like for you to give him a look, too.’ So [the kicker] got a look from the Falcons, and I got one from Kiffin. He hired me over the phone.”

Purcell became a part-time assistant coach: “I was a gofer.” That lasted until State canned Kiffin in 1982. A few days later, one of the assistant athletic directors walked into the football office and told Purcell that athletic director Willis Casey wanted to see him. Purcell figured he was being fired, too. When he entered the office, Casey stayed seated, eyeing Purcell over his bifocals. “I’ve been watching you, and you’ve done a good job,” he said. “You’re now a full-time assistant coach. Your salary is $18,000 a year.” He slid open a drawer of his desk, lifted a set of car keys and tossed them to Purcell. “There’s a gray Plymouth sitting out there,” he growled. “Get your butt on the road, see every recruit we’ve been talking to and tell them not to make any decisions until we hire a new coach.”

“I went from making $3,300 a year to making $18,000,” Purcell recalls. “It’s the biggest percentage increase I’ll ever see.” Under the next coach, Tom Reed, he became an assistant and recruiting coordinator — a salesman, in effect, for State football. It was apt preparation for his current job. Reed’s tenure, however, crumbled like Kiffin’s. State ditched him after the 1985 season.

Once again Casey intervened, telling Purcell that he still had a job, at least until the next coach was hired. When Dick Sheridan came to Raleigh that same year, he offered Purcell a tryout as recruiting coordinator. A month into it, Sheridan told him he could stay. “Coach Sheridan had a profound impact on me,” Purcell says. “He’s very thorough and detail-oriented. He never raised his voice or used profanity. And he treated everyone with respect.”

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During the early ’80s, as State football stumbled, men’s basketball had surged under Jim Valvano, who with his “Cardiac Pack” won the 1983 National Collegiate Athletic Association tournament. Valvano also was athletic director and goosed along Purcell’s move to courting donors in 1987.

It began when a friend of Purcell’s at the Wolfpack Club approached him about a job. He was interested; he thought he had done what he could as a recruiter. His friend recommended him to Charlie Bryant, then the club’s boss. Bryant ran his name by Valvano, who gave it a thumbs-up. “It was hard leaving football — I still have a thank-you letter for my time with the team from Coach Sheridan in my safe-deposit box — but a couple of people said it would move me more toward an A.D. job,” Purcell says. And that’s where he wanted to go. Money, he understood, had come to mean as much as muscle and motivation in college sports.

Purcell, in essence, switched from being a traveling salesman to a manager in a statewide retail business, which the booster club resembles. Like a retailer, it sells a product (State sports) over which it has limited influence. Its challenges therefore are marketing (boosting the State brand via media and gatherings) and distribution (handling tickets and parking for club members). It collects revenue through donations and rewards its best customers with prime seats and parking spots. In extreme cases, it chisels their names on buildings. The customers also get tax deductions.

Bryant says he hired Purcell for his people skills. The man is a natural politician. Chat with him, and he acts as if he can spare the day. He neither peeks at his watch nor heeds his chirping cell phone. Asked about his history, he first wants to know yours. “He has a very strong suit in building relationships, and ultimately fundraising is about relationships,” says Joe Hull, head of the University of Maryland’s Terrapin Club, who once worked for the Wolfpack Club.

One way Purcell has done that is by creating subclubs like the Student Wolfpack Club, which cultivates future donors. He dreamed up the Junior Wolfpack Club for children, Varsity Club for former State athletes and Women of the Wolfpack. He insists on personally returning calls from any of the approximately 19,300 members or, for that matter, any State alum. The club’s size has long been a point of pride. In the ACC, only Clemson and Florida State have bigger booster groups.

In 1997, Bryant retired. Purcell inherited a vital club, but many of State’s sports fields and structures were antiquated. A push for a new basketball arena had started under Bryant and came to include local and state government. The RBC Center, which opened in 1999, now houses Wolfpack basketball and the National Hockey League’s Carolina Hurricanes.

Football’s needs, however, fell to Purcell, and he began raising money for the field house that would become the Murphy Center. Its construction took on urgency in 2000 after State hired Amato from Florida State. Amato insisted that the school needed better everything — offices, locker rooms, weight rooms. The Wolfpack nation listened. Alumni were sick of mediocre teams, and then-Chancellor Marye Anne Fox wanted top-flight football and basketball programs.

Purcell’s dream job opened that same year when athletic director Les Robinson resigned, but he lost out when Fox picked Lee Fowler, athletic director at Middle Tennessee State University. Fox, who has since left, talked about bringing in “new blood.” What she didn’t say was that Purcell might be too tight with such powerful donors as Murphy and Raleigh real-estate developer Steve Stroud. Picking Purcell might have meant giving them title to the red Cadillac when they already held the keys. She selected someone over whom she might exercise better control.

Fox’s snub seemed to spur Purcell into trying to show that he should’ve been selected. With the help of his board, he set out to build a state-of-the-art field house. The project got a big assist from Murphy. Besides donating money, he lent his plane to the effort, flying members of the design committee around the country to tour other field houses. The building, which opened in 2003, has drawn envy from visiting coaches. Such football powers as Tennessee and Nebraska have sent staff for tours.

The construction of Vaughn Towers, perched atop Carter-Finley’s west stands, proceeded with similar dispatch. It cost $39 million, though Purcell and his staff didn’t have to raise that much outright. Unlike the Murphy Center, it generates revenue via rental of 51 luxury suites and more than 1,000 club seats. The suites go for $45,000 to $55,000 a season. The structure opened with a black-tie bash in time for this past football season. Purcell already was laying plans for the club’s next project — closing Carter-Finley’s north end with the addition of more than 7,000 seats. That will cost $17 million and should be completed by August.

Purcell is paid well — in fiscal 2004, his compensation totaled $200,000 — and says that he and Fowler get along well. Fowler calls Purcell “one of the best fundraisers in the country” and compliments his creation of the Student Wolfpack Club. Still, working for Fowler has to chafe, even if Purcell’s team-player personality would never let him admit it. But Fowler might not stay in Raleigh the rest of his career. After all, he’s a Tennessean who graduated from Vanderbilt University in Nashville. If he chose to return to his home state, Purcell once again would be a top candidate to be State’s A.D.

Given the Wolfpack Club’s clout and its building spree, a chancellor might have a tough time denying him again. Purcell knows sports and fundraising and has developed a network of friends around the state that’s Bill Clintonesque in its extent and ardor.

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Now if he could just do something about that Carolina degree.

Ex-Dem operative wants Black sacked

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People – March 2006

Ex-Dem operative wants Black sacked
By Kathy Brown

Joe Sinsheimer has long been a master at crafting political messages. His latest one is concise: Jim Black must go. Black, a Democrat from Matthews, is a 10-term state representative in his fourth term as House speaker. He’s also a key figure in the scandal involving the state lottery

Sinsheimer launched www.jim blackmustgo.com Nov. 15. Within two months, it had more than a million hits. The weird part is that Sinsheimer is a Democrat who for years ran a political consultancy helping Democrats get elected. “I wanted to grab my party by the lapels. Everyone knew the emperor wasn’t wearing clothes, but no one wanted to talk about it.”

Despite his latest crusade, Sinsheimer, who turns 44 in April, says he has been retired from politics since late 2004. He’s the managing partner of Raleigh-based Sunflower Ventures I LLC, a venture-capital fund with $1 million under investment in North Carolina technology companies. One, Durham-based Motricity, which distributes music, games and other entertainment for wireless devices such as cell phones, plans to go public this year.

He grew up in Cleveland and came to North Carolina to attend Duke University, where he graduated with a double major in history and religion in 1983. He jumped into politics, moving to Iowa to work on California Sen. Alan Cranston’s presidential campaign. The next year, he returned to North Carolina to aid Jim Hunt’s bid for Jesse Helms’ Senate seat. In 1987-88, he was the Southeast political director for the Democratic Congressional Campaign Committee.

After a year at grad school at the University of Virginia, he returned to politics and in 1991 set up the Sinsheimer Group, a seven-employee consultancy in Raleigh. Through 1996, it handled close to 90 Democratic campaigns across the country. Burned out, he retired from politics, got married and moved to Denver in 1997, buying into Digital Education Systems, a technology startup. When his wife, a college professor, got an offer from N.C. State in 2001, he sold his stake, and they returned to Raleigh.

He planned to focus on venture-capital opportunities but says he got pulled back into politics. He helped Ed Rendell, former mayor of Philadelphia, get elected governor of Pennsylvania in 2002, and soon his phone was ringing off the hook. In 2004, he helped Illinois state legislator Barack Obama win a U.S. Senate seat and retired from politics again.

Companies keep kicking the coverage off workers

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Economic Outlook – March 2006

Companies keep kicking the coverage off workers

The number of Tar Heels with employer-provided health insurance dropped by more than half a million between 1999-2000 and 2003-04, according to the Economic Policy Institute, a Washington, D.C.-based think tank. The percentage of the state’s population covered by such plans dropped 6.7 points, the second-largest decline in the nation. Adam Searing is director of the North Carolina Health Access Coalition, a nonprofit that tries to educate the public about health-care reform options.p>

BNC: Why the big drop in coverage here?

Searing: First, health coverage costs a lot more than it used to even a few years ago. Last year, we saw premium increases of over 10% for job-based health insurance. Since the year 2000, we have seen premium costs increase by 59%. It’s simple economics. When something costs more, there are more people who can’t afford to buy it. The second reason is that North Carolina has lost a lot of higher-paying manufacturing jobs over the last five years. We have more service jobs, which usually don’t have good health coverage.

Is this a Tar Heel phenomenon or part of a national trend?

According to a recent national study by the Kaiser Family Foundation and Health Research and Educational Trust, there has been a 9-percentage-point decrease between 2000 and 2005 in the percentage of companies that offer health insurance to their employees.

Is it any different here?

No. North Carolina, in many health-related factors, mirrors the country as a whole. We have a higher percentage of people who are uninsured, so we may have more companies that are dropping coverage here.

What can be done?

The North Carolina Institute of Medicine, a state-funded nonprofit policy group, has been considering a plan similar to the Healthy New York Plan, where the state sets up a $40 million-to-$50 million pool and takes over certain risks for some small-employer insurance plans. An insurance company would sell the plan, but the plan would be backed by the state pool. Any costs that are above a preset threshold, say $50,000, are taken over by this large health-insurance pool. This means that a small-business health-insurance product can be offered for a lot less money than other products that don’t have that subsidy. That also means you have a lot of businesses that can suddenly afford health coverage. The institute is also looking at a more limited health-insurance package that would save money by covering almost everything except really expensive hospital stays.

What are other insurance options?

For those who do not have coverage through their employer, some carry individual coverage, which is very expensive for people who may be older or have health problems like asthma or high blood pressure.

What about Medicaid?

Of those half-million people who lost job-based health insurance, about 200,000 were children and women in lower-income families who were able to get insurance through Medicaid. But that, of course, increased costs to the state. What a lot of people don’t understand is that no matter how poor someone is, if they don’t have children they will not qualify for Medicaid. Medicaid historically has been limited to children, some low-income parents and people with disabilities.

Why should the insured care about the uninsured?

People who are uninsured are unlikely to get preventive care. When they do get care, possibly in the emergency room, problems that could have been solved cheaply are now very expensive.

Who foots the bill?

Everyone. Federal and state governments pay more to hospitals, which translates into our tax dollars. Employers pay more in premiums because hospitals charge more for services to try to recoup some of the costs.

How has the middle class been affected?

In the last five years, people at the bottom and middle of the income scale have not seen their earnings rise while people at the top have seen huge increases. In North Carolina, someone who is in the middle or bottom 20% in income pays about 10% of their income in state and local taxes. Someone in the top 20% pays about 6%. We have this growing inequity in how much money people have, and one thing that we have found over and over again is that the poorer people are, the fewer healthy choices they have. There is a direct correlation between a family’s income and the risk of premature death.

What’s the ultimate solution?

More and more there is agreement that we should cover everyone with health insurance. Our system really does not make any sense. But I don’t see any agreement on tackling what I think is a problem for the government and for employers: the increasing cost of health care. It is foolish to talk about solutions to our health-care problem without trying to rein in the costs, and I do not see the political will or interest in doing that.

BB&T has low view of high court’s ruling

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Tar Heel Tattler – March 2006

BB&T has low view of high court’s ruling

By Edward Martin

Looking back, what made BB&T Corp.’s highly publicized stand against eminent domain unusual was that the Winston-Salem-based bank took a stand at all. Banks usually don’t. A Wachovia spokesman says that bank doesn’t comment on loan policy. A Bank of America flack says it doesn’t have a policy on eminent domain.

That’s why many were surprised when BB&T CEO John Allison announced out of the blue that the bank would not lend money to developers that used government’s power of eminent domain to seize a homeplace to build a Taco Bell or replace a Motel 6 with a Ritz-Carlton. Maybe they shouldn’t have been. Allison often seems as interested in philosophy and principle as in principal and interest. “The idea that a citizen’s property can be taken by the government solely for private use is extremely misguided,” he says.

BB&T’s action stems from a 2005 U.S. Supreme Court ruling that allows local governments to seize property for private developments that serve a public purpose. That could be creating fast-food jobs or simply paying more property taxes. The case involved a Connecticut town that condemned a neighborhood to make way for a hotel, condos and offices.

“Surprised? Absolutely not, not with John Allison,” says Paul Stock, executive vice president of the North Carolina Bankers Association in Raleigh. Stock says a few banks expressed opposition to North Carolina’s lottery, but other than that, most turn tail — closed-door lobbying is a different matter — when hot potatoes come along.

No one doubts Allison’s sincerity. In August, the bank’s charitable foundation gave UNC Charlotte $1 million to study the moral foundations of free enterprise. But opposition to eminent domain is in many ways the equivalent of lining up on the side of motherhood — a pretty safe position. Ken Chalk, BB&T’s chief credit officer, acknowledges that North Carolina doesn’t allow condemnations like the one in Connecticut. Nor do most of the 10 other states where BB&T operates. Most use it only for roads, schools and similar public purposes.

Chalk concedes that the bank’s loans to developers involved in eminent-domain projects are next to nil. “It would be very, very insignificant. We do a lot of business with small businesses, and property rights are one of the things we hear a lot about. If we took a poll, I’ve got a feeling our client base would be in agreement.”

Urge to merge could surge among smaller N.C. banks

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2006 industry report: banking

Urge to merge could surge among smaller N.C. banks

Bank notes

TREND: Expansion. Big banks have revved up the merger machines again. The state had a bumper crop of startups in 2004, but the pace has slowed since.

OUTLOOK: Bigger deals possible in 2006. Expect smaller Tar Heel banks to merge with each other to bulk up.

After yawning their way through the first half of 2005, the state’s three biggest banks got busy buying in the second half. Even Winston-Salem-based BB&T — which had sworn off mergers in 2004 after struggling with two earlier purchases — got back in the game, pulling the trigger in December on a $623 million deal for Atlanta-based Main Street Banks, which should close in the second quarter. And BB&T isn’t done. It wants to grow assets through acquisition by about $5 billion this year. Main Street’s $2.5 billion gets it just halfway. “We’re still looking, and we’d like to do additional deals but at a measured pace,” says Burney Warren, executive vice president for mergers and acquisitions.

The two biggest Tar Heel banks, Wachovia and Bank of America, both based in Charlotte, spent much of 2005 consolidating earlier acquisitions. Wachovia, the second-largest, took all year to integrate Birmingham, Ala.-based SouthTrust, which it bought for $14.3 billion in 2004, but still found time for a few deals late in the year. In September, Wachovia said it would buy Irvine, Calif.-based Westcorp for $3.9 billion, giving it a large auto-loan originator that has 19 California branches. Within two weeks, it bought the international banking business of San Francisco-based UnionBanCal for $245 million and San Diego-based mortgage originator AmNet Mortgage for $83 million.

Bank of America, the largest bank in the state, took a break after its $47 billion purchase of FleetBoston Financial in early 2004 but struck a $35 billion deal in June to buy Wilmington, Del.-based MBNA, one of the nation’s largest credit-card issuers. MBNA held about $30 billion in deposits, potentially enough to tip BofA over a federal limit that bars banks from getting more than 10% of U.S. deposits by acquisition. BofA shed deposits to stay below the cap and closed the deal in early January. Domestically, BofA likely will try to add banking and financial services without adding deposits, but it’s shopping overseas. In September, it bought 9% of China Construction Bank, plus a five-year option to increase its stake to 19.9%, for $3 billion.

“We will see a fairly significant number of mergers and acquisitions in North Carolina, but among our own banks,” says Harry Davis, professor of finance at Appalachian State University and economist for the North Carolina Bankers Association. A large number of new banks over the past few years — a record 12 were chartered in 2004 — may signal a wave of consolidation as community banks, usually those with less than $1 billion in assets, look for ways to gain economies of scale.

Banks of every size are profit-ing from a combination of factors. Loan demand is high, interest-rate spreads are favorable, and problem loans are scarce. Earnings are expected to remain healthy in 2006. Long-term rates are expected to edge up, which may not be good for consumers but should help bank margins.

State Banks Commissioner Joseph A. Smith Jr. says most new banks will follow a similar growth pattern: Within three years, they will have turned a modest profit and will have amassed around $100 million in assets. Failure is unlikely. Despite the loss of tens of thousands of manufacturing jobs, the state hasn’t had a bank failure in more than 10 years. “It’s stunning how well the banks weathered it,” Smith says. “So far, it has been silly to bet against them.”

Despite all the startups, deposits are still concentrated in a few banks. The seven largest account for 84% of Tar Heel deposits, about the same share as five years ago. But Smith says small banks are stealing business from big banks by pitching more personal service. “Deposit concentration has not resulted in a lack of competition. There is still intense competition.”

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Tar Heel shoppers find reasons to keep buying

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2006 industry report: retail

Tar Heel shoppers find reasons to keep buying

Checkout

TREND: Consumers have more money to spend. Personal income in North Carolina rose about 3% to $266 billion during the first three quarters of 2005.

OUTLOOK: Growth in income will continue, and economists predict another record year for retail sales.

With energy costs, personal debt and bankruptcies rising, Tar Heel shoppers could be excused for leaving their money under their mattresses this year. But Jim Smith, a finance professor at UNC Chapel Hill’s Kenan-Flagler Business School, thinks merchants will ring up more sales. “It’s all functions of income and confidence.”

A surprisingly strong economy boosted personal incomes 3% in the state through the first nine months of 2005, according to the U.S. Bureau of Economic Analysis. Still, Smith says, some households will have to make changes because of rising energy costs, and few economists would be surprised by volatile prices in 2006, similar to those of 2005. Gasoline prices in North Carolina averaged about $2.30 at the end of December, up about 30 cents from a year earlier. “Obviously for people who are carefully watching their budget, it’s way above a year ago,” Smith says. “They’ll have to cut back to some degree.”

Consumer confidence got a boost when gasoline prices dipped before Thanksgiving. That helped many families decide they could spend a little more on Christmas gifts. “It was right in time,” Smith says. Some Tar Heel retailers were having a good year even before Christmas. Sales at Lowe’s, the Mooresville-based hardware chain, were up 16.2% to $32.4 billion through the third quarter. Sales for stores open longer than 13 months were up 5.5%.

But the good fortune didn’t extend everywhere, including to the nation’s top retailer, Bentonville, Ark.-based Wal-Mart. The company said its national same-store sales increased only 2.2% in December, less than analysts had expected. Other retailers that reported disappointing December sales included San Francisco-based Gap and Hoffman Estates, Ill.-based Sears Holdings, the parent company for Kmart and Sears, Roebuck and Co. Minneapolis-based Target and Seattle-based Nordstrom were among the national retailers that did well.

In the year ahead, N.C. State University economist Michael Walden expects retailers to contin-ue efforts to lure older shoppers, who often have more money than younger ones. Some stores, including Charlotte-based Belk and Menomonee Falls, Wis.-based Kohl’s, have offered discounts to customers who can prove they’re at least 55 years old. Belk sales grew more than 15% to $1.9 billion during the first three quarters, partly because it bought 47 Proffitt’s and McRae’s stores from Birmingham, Ala.-based Saks in July and opened 12 stores. Comparable-store sales grew just 0.4%. Net income fell more than 27% to $37 million. “We expect to return to our normal levels of profitability once the initial integration costs for the Proffitt’s and McRae’s stores are behind us,” CEO Tim Belk says.

At the other end of the spectrum, penny-pinching shoppers, new stores and coolers that permitted the sale of perishable foods helped Matthews-based Family Dollar Stores boost sales more than 10% in the fiscal year that ended in August. Comparable-store sales for the discount chain grew more than 2%. About 1,000 of its 6,000 stores got coolers in fiscal 2005, and 2,500 more will get them in fiscal 2006.

Internet sales continued to grow more than 10% a year in 2005, but economists don’t consider them a major factor yet. They account for about 5% of retail sales in North Carolina. “They’re a godsend for people who can’t get out of their homes,” Smith says. “But for the most part, people use the Internet to see what’s available, then go to the store and buy it. It’s the same way catalogs used to be used.”

Walden expects stores to reach out to the burgeoning Hispanic population. In January, a study by the Frank Hawkins Kenan Institute of Private Enterprise, affiliated with the Kenan-Flagler Business School, estimated that more than 600,000 Hispanics live in North Carolina and concluded that they generate about $9 billion for the state economy. Some stores are wooing Latinos by emphasizing ethnic holidays such as Three Kings Day in January. That trend, Smith says, represents the one unchanging aspect of retail sales. “It’s a very dynamic industry. It always has been.”

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