Kansas may delay tax refunds, paychecks

TOPEKA - Income tax refunds and state employee paychecks could be late after Republican leaders and the Democratic governor clashed Monday over how to solve a cash-flow problem.

Payments to Medicaid providers and schools also could be delayed.

"We are out of cash, in essence," state budget director Duane Goossen said.

The move places state taxpayers, workers and schoolchildren in the middle of a political battle over budget cuts.

Republicans, who hold majorities in both chambers, blocked Gov. Kathleen Sebelius’ proposal to borrow $225 million from healthy state funds to cover shortages in accounts used to meet the state’s payroll and issue tax refunds.

GOP leaders said they won’t approve the IOUs until Sebelius either cuts the current budget herself or signs the bill they passed last week slashing $326 million — including $32 million for education — to balance the budget.

Republican leaders said they had no choice, that by law the state can’t borrow any more money from itself.

Sebelius and Democrats disagree and accuse the GOP of playing politics with people’s paychecks.

"Through their refusal to act today, the Republican legislative leadership is jeopardizing our citizens' pocketbooks for no other reason than to play political games — games in which the only ones set to lose are Kansas families, workers and schools," Sebelius said in a written statement.

Replied House Speaker Mike O’Neal: "While we all can agree that these are trying times for Kansas families, seniors and business owners, the Kansas House of Representatives respectfully disagrees with breaking the law in order to gain political capital."

The Senate approved the budget-cutting bill Thursday, but the governor has yet to receive it. It is being proofread and could reach Sebelius as early as Tuesday.

Her spokeswoman has said she will carefully consider it. She could sign it, veto it or veto portions of it.

Lower tax revenues

Kansas’ cash-flow problem stems in part from the worsening recession and lower-than-expected tax revenue.

As a result, the state had only $10æmillion in its checking account Monday morning.

Most immediately, that means the state does not have $24 million to cover payroll for the state's 42,000 employees and about $20 million for payments to Medicaid providers such as doctors, hospitals and nursing homes, Goossen said. Usually the state processes the payments on Wednesday and sends the checks out Friday.

"State employees simply have no more to give. Paychecks shouldn’t be held hostage for political maneuvering," said Lisa Ochs, president of the Kansas Organization of State Employees.

Kansas taxpayers also are due about $12 million in income tax returns. The state stopped payments on the refunds Friday.

Washburn University political science professor Bob Beatty likened the impasse to the 1995 budget battle between President Clinton and U.S. House Speaker Newt Gingrich. That dispute prompted a shutdown of the federal government. He said Kansas legislative leaders are making a dangerous gamble.

"Gingrich went too far," Beatty said. "If you go too far, you lose."

Options for borrowing

The state will pay its bills — "in a lawful manner," said O’Neal, R-Hutchinson.

At issue is whether the state can borrow now from other state funds. Such loans — called certificates of indebtedness — have routinely been used in the past when the state runs short on cash.

The move is similar to a family shifting unused money from one banking account to another to temporarily cover an expense, then putting the money back into the original account later.

The state would borrow unused money from one state agency's fund to pay immediate expenses for another agency, then replenish the borrowed amount later. The money has to be paid back by June 30, when the budget year ends.

State leaders already have authorized $550æmillion in certificates this fiscal year — $300 million last summer and $250 million in December.

In December, Republican leaders worried the state wouldn’t have the money to pay itself back. That’s the concern now, they say.

They say that although the state has borrowed from itself before, it has never borrowed this much in one year.

The Kansas Finance Council — which includes Sebelius and six Republican leaders — must approve any certificates of indebtedness.

"We cannot issue more certificates if the funds will not materialize by the end of the year," O’Neal said in a statement. “Without the revised 2009 budget bill, there is no way that we can legally issue a certificate knowing full well that the money will not be available to retire the debt."

Legislative leaders contend that if Sebelius had made cuts to state programs in late 2008, then the state wouldn’t be facing this problem. She could still make cuts to programs, guaranteeing the money would be available at the end of the year, O’Neal said.

Goossen said even if the governor ordered the cuts, called allotments, it wouldn’t fix the current predicament.

“The problem today is we don’t have cash to pay our bills in a timely fashion," he said. "Allotments only allow the governor to hold spending back."

State Treasurer Dennis McKinney, a Democrat, said the legislative leaders' move put the state's reputation as a reliable bill payer, and its credit rating, at risk.

"This is taking a budget fight one step too far," McKinney said.

Other ripples

In addition to payroll spending, the tax refunds and Medicaid payments, payments to schools and cities could be affected eventually if the impasse continues.

The state is scheduled March 2 to pay $185 million to public schools and $25 million to cities and counties to offset money lost when the state abolished the machinery and equipment tax, Goossen said.

Diane Gjerstad, lobbyist for Wichita schools, said she didn’t expect the district to be harmed. She added that the situation pointed to why districts need to have their own contingency fund. "If the state is short, we want to be able to make our payroll," she said.

Andover schools would be able to pay employees for the near future, said district spokeswoman Keturah Austin.

"If the state didn’t make it on time in February, we have enough cash reserves for one month," she said.

Government pension agency braces for recession

WASHINGTON (AP) — The deepening recession spells trouble for a little-known government corporation that insures the pensions of 44 million workers and retirees.

The Pension Benefit Guaranty Corp. already has an $11 billion deficit that seems sure to grow larger as Corporate America suffers through the worst economic crisis since the Great Depression.

With companies reporting shortfalls in their pension funds, it's all but certain that the PBGC will be forced to take over the pension plans of a rising number of bankrupt businesses.

That means more red ink at the corporation before things possibly can improve.

The future financial health of the agency is hard to forecast. It is hinged on interest rates, the length of the recession and the PBGC's own luck in playing the market, where it has billions invested.

The agency has $63 billion in assets. But it is obligated to spend $74 billion on pension benefits in the coming years. The PBGC might have time to rebound, but over the long term it might become insolvent and require a bailout.

"Someday — probably more than 20 years from now — there's a significant chance that somebody is going to have to pay the piper," said former PBGC Director Charles E.F. Millard, a Bush administration appointee who stepped down on Jan. 20 when Barack Obama became president. "In the near- to medium-term, there will be no need for a bailout of PBGC."

The PBGC quietly operates in a brick office building a few blocks from the White House. Its fate is important to the workers covered by the more than 29,000 employer-sponsored benefit pension plans it insures, and to all taxpayers who could be asked to foot the bill if its financial picture worsens down the road.

Congress created the PBGC in 1974 to guarantee the retirement security of workers covered by defined benefit pension plans. These traditional plans, which pay a specified monthly benefit at retirement, are being phased out as companies turn to 401(k)-style programs that require workers to make contributions and shoulder investment risks. The PBGC, which receives no tax dollars, gets its money from premiums paid by companies that sponsor the pension plans, along with revenue from its investments.

The corporation's balance sheet has taken heavy hits in recent years. Nine of the 10 largest pension plan terminations in PBGC's history, including United Airlines, Bethlehem Steel and Kaiser Aluminum, have occurred since 2001.

When a plan is terminated, the PGBC takes over and pays benefits to the retired workers. But they might not get the full amount that their employer promised. The maximum guaranteed amount currently is $54,000 a year for a person retiring at age 65.

Some pension experts shrug their shoulders at the PBGC's $11 billion deficit, noting that the 35-year-old corporation has been operating at a deficit for most of its existence. They say the PBGC has many years to recoup its losses and fulfill its obligations to pensioners.

"Every time the economy bounces around, everybody acts like everything is going to collapse and that they should worry about the PBGC, and then things come back," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington.

Others who pore over the PBGC annual reports predict a bailout is inevitable.

"Barring some absolutely phenomenal gains in the market or what PBGC's new or future investment strategy comes up with, the PBGC will need taxpayer money at some point in time," said David John, a pensions expert at the conservative Heritage Foundation.

For now, the PBGC, which is awaiting a new boss, will remain on the Government Accountability Office's "high risk" watch list for the seventh consecutive year because of worries that the economic crisis could mean more pension plan terminations and swell the PBGC's deficit.

Taking over the pension plan of General Motors Corp., which just announced it will cut 10,000 salaried jobs, would more than double the PBGC's current $11 billion deficit. But the PBGC also would inherit substantial assets from the automaker's pension fund.

Companies that have underfunded pension plans, but are otherwise on solid financial footing, pose little risk for the PBGC. It's the companies in danger of going under that present the biggest threat. But declines in the market have left corporate pension plans severely underfunded — to the tune of $409 billion, according to Mercer, a global consulting firm.

The underfunding trend is likely to continue. Even though Congress passed a law in 2006 requiring companies to meet target dates to eventually fund 100 percent of their pension obligations, those restrictions were relaxed in December to help them weather the bad economic times.

The business community is lobbying to further waive the rules during the current economic slump. Because of plummeting asset values, companies this year are faced with having to contribute to their pension funds two to three times what they had expected, said Aliya Wong, director of pension policy at the U.S. Chamber of Commerce.

"Because this is coming out of the bottom line, companies are making decisions not just about freezing their pension plans but whether they can even continue in business," Wong said.

The PBGC successfully shaved nearly $3 billion off its deficit in the 2008 budget year, which ended Sept. 30, primarily because 13 auto parts makers reorganized and didn't dump their pension liabilities on the institution.

Those gains were recorded before the market tanked. Still, Millard insists that a new investment strategy, which allows the PBGC in invest more aggressively in stocks and alternative investments, makes it less likely that it will need a multibillion-dollar congressional bailout.

General Motors' High-Wire Bankruptcy Act

It's Wall Street against Big Labor as GM and Chrysler hint at Chapter 11 filings to frighten creditors and workers into discounting debt

On the eve of a deadline to submit their viability plans to the U.S. Treasury, General Motors (GM) and Chrysler executives continued scrambling on Feb. 16 to cut a deal that would restructure both labor costs and debt. If the companies don't show that they are viable in the long run, the government could refuse to give either one additional money. Without help from the government, Chapter 11 bankruptcy is a real option.

But getting all sides to agree is tough. GM said in December that it wants its bondholders to take 30¢ on the dollar for their GM debt and receive stock to make up for the rest. GM also wants to give a United Auto Workers-led trust fund half the value of $21 billion in obligations in cash and the rest in stock. Both the union and a committee of GM bondholders want the other creditor to make big concessions. "It will be a face off between the union and bondholders with GM in the middle," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

Bondholders are unhappy that they are being offered 30% on their bonds while the union is being offered 50% on its debt. The UAW is wary of taking too steep a cut on the cash portion of the so-called VEBA, or Voluntary Employee Benefits Association Trust. The trust fund is supposed to be set up next year with $36 billion in GM cash and bonds to pay for retiree healthcare for some 80 years. But with GM short of cash, the company can't afford to fund the trust. So the company wants the UAW to take $10 billion in cash and the rest in equity for the remaining $20 billion the company owes.

Federal task force needs time, too

To satisfy Treasury Secretary Timothy Geithner and Lawrence Summers, one of President Barack Obama's chief economic advisors, GM will have to placate both the UAW and the bondholders. Officially, GM has said only that it is talking to all parties.

Privately, GM executives say that they will probably not have everything done by the Tuesday deadline. That may be just fine. The new task force—which is headed by Geithner and Summers but includes members from such other departments as Commerce, Energy, Transportation, Labor, and the Environmental Protection Agency—will probably not make a final decision on funding this week.

If they don't think the automakers' plans go far enough, the task force could ask all parties to get back to negotiating a deal that restructures GM and Chrysler. Thus the Feb. 17 deadline is more likely to start the process of restructuring the two companies. "I highly doubt that the President set up a task force to vote up or down this week," says Rep. Thaddeus McCotter (R-Mich). "This is a first important step in what will be the start of the process between all stakeholders."

Do Bondholders Lack Leverage?

Meanwhile, sources say that GM has looked at the possibility of a bankruptcy filing. But executives say that the company still views that as a last-ditch move. The prospect could also be used as leverage with bondholders, some of whom want to hold out for a better deal than GM has offered. Ultimately, Cole says, "the bondholders are going to have to play."

It's easy to see why. GM had somewhere around $12 billion in cash before borrowing $9.4 billion from the government. Even if the company still had the $21.4 billion in cash, unsecured creditors stand behind $11.8 billion in secured debt and the government loans. Plus a bankruptcy judge would order the company to pay suppliers first. That could leave bondholders begging in bankruptcy.

But do they believe that GM will go bankrupt? The government will want to avoid that, says IHS Global Insight analyst Aaron Bragman. It would cost more than $100 billion to put workers on unemployment benefits and draw on other social programs should GM fail, says Bragman. The bondholders know this and may use it as bargaining power to ask for more than 30 cents on the dollar. "It may simply be a tactic to try to get the UAW and the company's bondholders back to the negotiating table, Bragman says.

To get a deal done, GM and Treasury officials will have to convince the bondholders that the threat of Chapter 11 is real.

World trade hit by collapsing demand

The global downturn is tightening its grip. Over the past few months there has been a "dramatic" slump in trade, said Ambrose Evans-Pritchard in The Daily Telegraph. All major economies are affected, with US trade activity (imports and exports) down 7% year-on-year in November, and 18% since July.

Japanese exports posted a record decline in November and its overall trade was down by an annual 20%. Chinese trade slipped 9% – it looks set for a hard landing, the World Economic Forum warned this week – and Germany's was down 7%; the four biggest EU economies' exports tumbled by 10% in November alone. Asia is also suffering, with Korean exports down an annual 30% in January.

Trade between Asia and Europe is "an unmitigated disaster", said Charles de Trenck, with some shipping brokers now effectively waiving fees to transport containers. Asian trade to Europe and the US will fall by up to 12% and 7% this year, said de Trenck. Outbound traffic from America's top two ports, Los Angeles and Long Beach, is down 18% year-on-year. "This is no regular cycle slowdown but a complete collapse in foreign demand," said ING's Lindsay Coburn. A dearth of credit to back up trade deals has also hampered global exports. The World Bank now thinks trade could fall by 2.1% this year, the first fall since 1982.

Heading for the 1930s?

We should keep a close eye on trade figures over the next few months, said Martin Hutchinson on Breakingviews. The 66% decline in trade amid mounting protectionism is "what made the Great Depression Great". Averting a "1930s-style death spiral" in trade may soon become "the world's top priority".

Economy Strains Under Weight of Unsold Items

Richie Franklin of the United Auto Workers Local 2999 in Strasburg, Va. The local's plant lost 200 workers as demand for auto parts sags. (By Kevin Clark -- The Washington Post)

The unsold cars and trucks piling up at dealerships and assembly lines as consumers cut back and auto companies scramble for federal aid are just one sign of a major problem hurting the economy and only likely to get worse.

The world is suddenly awash in almost everything: flat-panel televisions, bulldozers, Barbie dolls, strip malls, Burberry stores. Japan yesterday said its economy shrank at an 12.7 percent annual pace in the last three months of 2008 as global demand evaporated for Japanese cars and electronics. Business everywhere are scrambling to bring supply in line with demand.

Downsizing can be tricky, though. No one knows how much worse the economy will get, and while everyone waits for the recession to peter out, businesses are grappling with how to cut costs and survive without sabotaging their ability to grow when the economy picks up.

And there is a lot to cut.

"There is over-capacity in everything," from "retail to manufacturing to housing," said Richard Yamarone, chief economist at Argus Research. "If capacity is too large, you don't need that many people employed, which is another reason we're seeing such high job losses."

As long as capacity far outstrips demand, businesses have little reason to expand, buy new equipment or hire workers. Even if the government funds bridge repairs and banks step up lending, many industries still have to go through massive restructuring before growth can resume. But executives say they have to tread carefully. If they put off critical investments in technology or research for too long, they could hobble their recovery and even the economy's.

Few industries have been as stung as severely by excess capacity as the U.S. auto industry, which produces millions more vehicles than it can sell. In 2008, there were enough automotive assembly plants in North America to churn out 18.3 million vehicles a year, according to the Center for Automotive Research. Analysts estimate that consumers this year will buy about 11 million. At current sales levels, it would take 116 days to sell all the cars and trucks clogging lots.

Automakers are scheduled to submit plans today outlining how they hope to restructure their operations to deal with a smaller marketplace, while still developing the new fuel-efficient cars that may be key to their future.

Auto suppliers are also trying to figure out how to survive in the face of massive excess capacity globally.

At its plant in Strasburg, Va., International Automotive Components, a Michigan-based supplier, secured wage and benefit concessions from workers in 2007 in hopes of staying competitive. But when Ford closed a factory in Norfolk, IAC had to lay off more than 200 workers, a third of the workforce in Strasburg. Since then, IAC has been able to line up more work for the plant.

"The unfortunate thing is we know . . . it comes at the cost of other workers whose plants were unable to survive," said Karen Foster, president of United Auto Workers Local 2999, which represents the IAC employees at the affected plant.

There are echoes of the automakers' plight throughout the economy. Sandra Berg, chief executive of Ellis Paint in Los Angeles, an industrial paint and coating manufacturer, recently found herself confronting over-capacity head on. Her company had been growing steadily since 2000 and was able to hand out bonuses for 2008. The downturn started to affect business toward the end of last year. Then came January, and "we just slammed into a brick wall," Berg said.

Since the new year, as sales have plummeted, Ellis Paint has announced two rounds of layoffs, imposed a hiring freeze and cut pay for management by 5 percent. The company has cut everywhere but sales, marketing, and research and development. "Our goal is to keep our expenses at the level of sales. I don't need to make a lot of money. I just need to break even . . . and look for the opportunities," Berg said.

Non-manufacturing sectors are trying to get rid of excess capacity as well. Retail chains such as Ann Taylor and Gap are closing stores after years of expansion, and others, such as Mervyns, are closing for good. "We've tremendously expanded the square feet of stores but not the number of yuppies occupying them," said Standard & Poor's economist David Wyss.

Some analysts say over-capacity is so rampant that it will stymie government efforts to unfreeze credit markets. Banks have little reason to lend not only because they still have bad debt on their books but also because businesses don't have a pressing need to expand, said Mike Shedlock, an investment analyst with Seattle-based Sitka Pacific who writes the popular blog Mish's Global Economic Trend Analysis.

"What is it that we need more of?" Shedlock said. "Do we need more Wal-Marts, more Pizza Huts, more nail salons?"

Strip malls and stores proliferated alongside housing developments, but many of those houses are empty; there were never enough people to fill them in the first place, and there won't be anytime soon.

Harvard economist Edward Glaeser estimates that from 2002 to 2007, the country's housing stock increased by 8.65 million units, outpacing the number of new households, which increased only by 6.7 million over the same period. Taking into account a rise in the number of vacation homes, Glaeser estimates an overhang of about 1.3 million vacant units. Absorbing that excess, he said, could take an additional two years.

Over-capacity in the housing industry has spilled over into countless other peripheral industries -- forcing cuts at chemical companies, home improvement stores and furniture manufacturers. The slump has prompted layoffs at PPG Industries, a leading paint company; Owens Corning, which makes roof shingles; and Therma-Tru, a door-manufacturing company. Therma-Tru recently moved up plans to close its plant in Fredericksburg later this year, citing "weaker-than-expected business forecasts."

Some businesses that were careful to manage inventories during the boom are facing a hard adjustment.

Ben Anderson-Ray, who runs Hubbardton Forge, a small maker of high-end lighting fixtures in Vermont, said he's had to lay off 26 employees after initially cutting hours, even though he expanded the business steadily and his customers aren't stuck with massive quantities of unsold goods.

For now, Anderson-Ray said, he has not scaled back work on new products; he simply cannot afford to do so. As one of the last lighting companies that manufactures its goods in the United States, Hubbardton Forge has survived in part because of its original designs and constant innovation. It cannot compete with overseas producers on price.

"If our order rates improve, we have the capacity in place to come back," Anderson-Ray said. But if order levels fall further over the next few months, he may have to consider further cuts. "We are watching our orders every day," he said.

Some analysts see ending the credit crunch as soon as possible as critical to preventing lasting damage. Harvard economist Diego A. Comin, in his research on Japan's decade-long bout of economic stagnation in the 1990s, found that demand stayed low long enough that businesses didn't make necessary investments. Computer adoption rates, for example, slowed, as did productivity growth. Businesses lost ground to competitors in countries such as South Korea, which made it harder for Japan to emerge from its slump.

Investing in new products and processes matters even more in highly competitive global industries plagued by over-capacity.

"In China, during the boom, there was huge over-capacity in various lines of activity ranging from shoes and clothing, light manufacturing -- all of that stuff. So that is why from the perspective of U.S. companies, we have found it so important to be on the innovative edge," said Harvard business professor Joseph L. Bower. "The only way to create value is to be on the innovative, high-tech, fashion-forward side."

If the credit crunch in the United States persists, "companies will find it difficult to invest in technology for a while, and then once the financial markets are back on track and demand recovers, companies will find themselves in a difficult position," Comin said. "Productivity growth will be declining for a while. They will have a hard time catching up."

McEwen, Goldcorp Founder, Bets Crisis Will Drive Gold to $5,000

By Stewart Bailey

Feb. 11 (Bloomberg) -- Goldcorp Inc. founder Rob McEwen, who has more than $100 million in gold investments, said he expects the metal to top $5,000 an ounce as governments increase the money supply to combat recession.

Bullion will more than double to $2,000 an ounce by the end of next year before rising to McEwen’s target by the end of the cycle, which could take an additional four years, the investor said.

“Politicians around the world are listening to cries from their electorates and they’re giving money to all callers,” McEwen said yesterday in a telephone interview from Toronto.

McEwen, who founded what is now the world’s second-largest gold producer by market value, owns stakes in three Canadian precious-metal explorers worth more than $100 million. He said he also has a “big, big” holding in bullion. Gold gained for the eighth straight year in 2008 amid investor concern the economy would collapse and government efforts to prevent that would increase inflation.

Gold futures for April delivery rose $29.10, or 3.2 percent, to $943.30 an ounce at 11:51 a.m. on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since July 23. The metal climbed to a record $1,033.90 on March 17.

McEwen said he started buying bullion in August 2007, at the beginning of the subprime mortgage crisis. Gold has jumped 40 percent since Aug. 1 of that year, touching a high of $948.20 today, while the Standard & Poor’s 500 Index has dropped 43 percent.

“I realized we had reached an inflection point regarding money,” McEwen said. “It was all about protecting money, and gold served that purpose.”

McEwen is the largest shareholder in Lakewood, Colorado- based U.S. Gold Corp., Vancouver-based Rubicon Minerals Corp. and Spokane, Washington-based Minera Andes Inc. Vancouver-based Goldcorp is the world largest gold producer by market value after Toronto-based Barrick Gold Corp.

Barter Fits the Bill for Strapped Firms

Small businesses, squeezed for cash and unable to get loans, are turning to an ancient payment system: barter.

Daniel Blank, creative director at Bureau Blank Inc., a New York graphic-design and brand-identity company, first used bartering when he started the company in 2004, because it was hard to get capital for a start-up. But he hadn't had to barter since then, until now.

For the past couple of months, Mr. Blank has been getting advice on running his business from Joe Hunt, a former ad-agency owner who has started Workforce Enterprises LLC, a document-solutions company in New York. For about two hours each week, Mr. Hunt helps Bureau Blank with its accounting and finance operations, among other things.

Specialty Moving & Delivery

Eddie Bolch, foreground, sometimes barters his company's moving services.

In return, Bureau Blank is helping Mr. Hunt shape his company's communications strategy, as well as designing the company's logo and Web site.

"It's a result of the economy being a lot tougher now," says Mr. Blank, who estimates the traded work amounts to about $10,000 worth of services.

He adds: "I wouldn't have done the project if I had to pay the cash."

As small businesses find it impossible to borrow money and customers are slower to pay bills, the barter economy is becoming a crucial way for many companies to find the cash they need to keep operating.

"It's really of value to small businesses because it helps them to survive through the recession," says Carmen Bianchi, director of the Entrepreneurial Management Center Business Forum and adjunct professor of family business management at San Diego State University.

Atlanta Refrigeration Service Co. worked out a deal with a local sandwich shop that was 90 days overdue on a $1,500 bill: The sandwich shop paid $500 and agreed to cater lunch to Atlanta Refrigeration's office five times over the next six months.

Bartering is "critical to us in this recession," says Dave Brautigan, chief operating officer of the Atlanta-based refrigeration company. "As more and more of our clients find themselves in positions where they cannot pay the bill in full, it becomes our responsibility to figure out how to get that money in."

Although companies do bartering one on one, many deals are conducted via membership networks in barter companies, where technology and tracking software have modernized the centuries-old system.

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Typically, a small business sets up an account at a barter company, similar to a checking account at a bank, for a one-time fee. "Trade dollars" earned for services rendered are deposited into the account and can be spent on any product or service in the network. Companies regularly find others willing to barter via the barter site's online directory of services, email newsletters, referrals or by contacting a firm's account manager.

On top of the setup fee, both parties pay the barter company a transaction fee of about 5% to 6% on each deal.

In 2008, about 250,000 North American companies conducted barter transactions worth more than $16 billion, according to the International Reciprocal Trade Association, a nonprofit based in Portsmouth, Va., that regulates and provides standards for modern trade and barter-service companies. The amount for small businesses climbed to an estimated $11 billion last year from $10 billion in 2007. David Wallach, the association's president, says if the trend continues he expects a 15% gain this year to about $12.7 billion.

NuBarter.com, a barter company in Savannah, Ga., has seen its sales grow -- from $285,000 in transactions in the first quarter of last year to $464,000 in the fourth quarter. In addition, the number of transactions has doubled in the past six months, to 650 per month from 310 a month. NuBarter has 800 members, up from 400 a year ago.

"Companies that had turned us down a few years ago are joining now," says Gary Field, NuBarter's president.

Similarly, Seattle-based BizXChange Inc. saw a 40% increase in new members to 1,300 last year. Its transactions were up 55% to $5.5 million.

FloridaBarter.com of Orlando, Fla., saw membership rise 25%, or 400, to 1,600 clients in 2008 and finished the year with $16 million in transactions, up 8% from 2007. Scott Whitmer, FloridaBarter's president, says members in the construction and real-estate industries were new to the network.

Bartering has been helpful to new start-ups. Viscape Ltd., an Arlington, Va., company whose online listings site for vacation properties went live in July, would be hard-pressed to find the cash to send its executives to places to promote the company. So it has given clients free ads on its site -- in return for discounted or free hotel rooms.

"It's all good for everybody," says Dan Engfer, Viscape's founder and chief executive. "They get an ad for more business. We get cheaper accommodations to do onsite PR stints."

Mr. Engfer, who says he has saved about $10,000 by bartering, would obviously prefer to sell the ads. But he didn't feel like he had much choice.

In addition, Mr. Engfer has used the bartering strategy to hire staff, who were all willing to take a pay cut to be able to potentially stay at the vacation properties that they sell. The 10 employees just have to pay their own way to get there, he says.

Other small-business owners who have done bartering in the past have seen their bartering activity increase, as their businesses take a hit. Eddie Bolch, owner of Specialty Moving & Delivery in Savannah, Ga., says he conducted about $10,000 worth of bartering last year, about 30% more than in 2007. Among other things, he was able to trade moving services for business cards, as well as to rent monthly storage units.

Saving the cash was important, since the housing market's woes cut his revenue to $140,000 in 2008, from $200,000 in 2007.

Companies whose services aren't widely used must be prepared to spend a lot of effort finding another business that wants its services in a barter deal.

"It takes work," says Matthew Weiss, president of Weiss & Associates PC, which fights traffic tickets on behalf of clients. "Sometimes, you call three painters...and they're not interested." Recently he wanted to hire a caterer for an event in downtown New York, but couldn't find one wanting to barter for his services, so he had to hire someone out of pocket.

"It doesn't always work," says Mr. Weiss, who is a member of two barter companies and saved his company $10,000 worth of barter transactions in 2008, including flower purchases and theater tickets. "And even if it does work, you must be willing to invest the time."