Socialism: justify the long-run rules' numbers: severance only for people let go, equipment measured at original cost, buyouts judged on the seller's book values, and cheaper second opinions for small co-ops

Co-Authored-By: Claude Opus 5.5 <[email protected]>
Claude-Session: https://claude.ai/code/session_01QWPs69B8nQZjtPEUXMKzZx

JoshHeaps.Net/Content/Socialism/downturns.md

@@ -59,7 +59,7 @@ Every co-op's bylaws must include a written layoff order before it has anyone to
 - **Agency and contract work ends first.** Where agency workers or contractors do the same work as people on the payroll, those contracts end before anyone on the payroll is laid off. Their hours already count in [the lock's](the-lock.md) test of who does the work, and a co-op can't use them to dodge it.
 - **The dismissal protections apply.** A layoff that doesn't follow the order can go to the same hearing and outside arbitrator as a dismissal ([Does Sharing the Profit Mean Less Effort?](free-riding.md#when-a-member-wont-do-the-work)). The rules on retaliation, disability and leave apply too. If someone laid off had organized, filed a complaint or led opposition in a vote within the last 12 months, the co-op has to show it followed the order.
 - **Notice.** At least 30 days' notice, or pay instead, or 14 days in a co-op of fewer than 15 workers. The law often requires more. Under federal law, employers with 100 or more full-time workers give 60 days' notice of large layoffs and closings, and cutting someone's hours by more than half for six months counts as a layoff ([29 U.S.C. § 2101](https://www.law.cornell.edu/uscode/text/29/2101), [§ 2102](https://www.law.cornell.edu/uscode/text/29/2102)). A long, deep work-sharing cut can trigger it. Some states require 90 days, including New York for employers with 50 or more full-time workers there ([Cooley, 2023](https://www.cooley.com/news/insight/2023/2023-08-03-new-york-state-amends-its-warn-act-regulations)) and New Jersey, which also requires severance ([Jones Day, 2023](https://www.jonesday.com/en/insights/2023/04/new-jersey-warn-act-amendments)).
-- **Severance** follows the bylaws, and never less than state law requires. The standard bylaws pay one week per year worked, the same as New Jersey requires of larger employers. More than two weeks per year, or more than 26 weeks in all, counts as pay under [the pay rules](the-long-run.md#the-rules).
+- **Severance** follows the bylaws, and never less than state law requires. The standard bylaws pay one week per year worked, the same as New Jersey requires of larger employers in mass layoffs and closings. More than two weeks per year, or more than 26 weeks in all, counts as pay under [the pay rules](the-long-run.md#the-rules).
 - **Lopsided layoffs get checked.** Federal agencies treat a selection rate for any race, sex or ethnic group below four-fifths of the rate for the group doing best as a sign of possible discrimination ([29 C.F.R. § 1607.4(D)](https://www.law.cornell.edu/cfr/text/29/1607.4)). The model uses the same line for layoffs, and adds age. If the share of any gender, race or age group keeping their jobs falls below it, the co-op publishes a written explanation before the layoffs take effect, and anyone laid off can take it to the outside arbitrator.
 
 ## Coming back

JoshHeaps.Net/Content/Socialism/the-long-run.md

@@ -76,7 +76,7 @@ That leaves four ways the horizon problem can still get in.
   - **It's checked, not claimed.** The auditor checks the home address against a lease or state and local tax records, and checks the site logs. The co-op also reports its share of pay above the going rate without the raised line, so any use of it shows.
   - **The floor is what counts for tax.** The raised line only decides what the reserve takes. It isn't a claim about what pay is reasonable. The going rate that [the tax argument](taxes.md#wages-first) relies on is the floor.
   - **Contractors and workers abroad.** Pay to contractors doing a regular job for the co-op, and to staffing or employer-of-record firms supplying workers, counts as pay under this rule, both for the floor and for the line. Workers abroad are held to the co-op's own figure as their floor, with no raised line, and the auditor checks their contracts and payment records. That largely rules out hiring abroad to pay less for the same job. It's a choice: the going rate exists to stop pay being cut because of who does the work, and where they live is part of that. It costs co-ops some hires, and a co-op in an expensive city will hire fewer remote workers in cheaper places for the same reason.
-- **It counts total pay.** Employer retirement contributions above 6% of pay, bonuses, severance beyond two weeks' pay per year worked (up to 26 weeks), and perks like a car, housing or loans to members, valued at cost, all count as pay. So does pay to non-members and to people working through a related company, and the value of any deal with a member or their family on better than market terms, like buying from a relative's firm above the market price. Co-ops can't promise pensions or retiree benefits they don't pay for in full each year.
+- **It counts total pay.** Employer retirement contributions above 6% of pay, bonuses, severance beyond two weeks' pay per year worked (up to 26 weeks), and perks like a car, housing or loans to members, valued at cost, all count as pay. So does pay to non-members and to people working through a related company, and the value of any deal with a member or their family on better than market terms, like buying from a relative's firm above the market price. Co-ops can't promise pensions or retiree benefits they don't pay for in full each year. The severance line is there to stop severance from becoming a payout to departing insiders, so it only helps people let go against their will: laid off, or dismissed for anything short of serious misconduct. If the job is filled again within a year, it wasn't a layoff. Severance on retiring or quitting counts as pay in full. Anything the law requires never counts as pay. The weeks are valued at the person's average pay over their last three years, as New Jersey does, so a raise just before leaving doesn't inflate them. For comparison, New Jersey requires one week per full year in mass layoffs and closings ([P.L.2019, c.423](https://pub.njleg.state.nj.us/Bills/2018/PL19/423_.HTM)), and Ontario requires one week per year, up to 26 weeks, of larger employers once someone has worked there five years ([Ontario](https://www.ontario.ca/document/your-guide-employment-standards-act-0/severance-pay)). This line allows twice the rate per year, with the same 26-week cap. The factor of two is a judgment.
 - **How it's settled.** Thirty percent of the excess goes to the reserve, first out of the member's profit share for that year, before it's paid or credited, and then out of their [capital account](capital-accounts.md). No new cash has to be found, because the members already took that money as pay. Taking it from this year's share first avoids a second round of tax on money already credited ([How a Locked Co-op Is Taxed](taxes.md#capital-accounts)). If that isn't enough, the rest comes out of their future account credits, or out of their payout when they leave. For pay to non-members, it comes out of that year's members' profit pool.
 - **There's a precedent.** US tax law already treats salaries that aren't "reasonable" as disguised profit ([26 U.S.C. § 162(a)(1)](https://www.law.cornell.edu/uscode/text/26/162)), so owners can't dodge tax by calling profit pay. This rule stops the same disguise being used to dodge the reserve. The tax test is judged case by case. This one is mostly a fixed formula, so it's cruder but much harder to argue about. The one judgment call is who counts as fully remote, and the auditor checks that against records.
 
@@ -95,7 +95,7 @@ That leaves four ways the horizon problem can still get in.
 
 - **If the year ends in a loss,** the part of the loss up to the pay above the going rate, in that year and the year before, is charged to the people who got that pay, in proportion to how much each got. It comes out of their [capital accounts](capital-accounts.md), and out of their payouts if they've left since. The 30% rule 1 already moved from their accounts counts toward it, so nobody pays twice. The rest of the loss is shared as usual.
 - **An example.** A co-op loses $50,000. Its managers were paid $30,000 above the going rate that year, and rule 1 already moved $9,000 of that into the reserve. The managers' accounts are charged $21,000 more. The other $20,000 of the loss is shared between the reserve and all members' accounts in the usual way.
-- **What their accounts can't cover** comes out of their future profit shares, above the cash they need for tax, and nobody's above-going-rate pay can rise until it's repaid. After three years, anything still owed is written off.
+- **What their accounts can't cover** comes out of their future profit shares, above the cash they need for tax, and nobody's above-going-rate pay can rise until it's repaid. After three years, anything still owed is written off. Three years is a judgment. Much shorter, and the best-paid could wait out a charge. Much longer, and one bad year would hang over people's savings for most of their time at the co-op. Whatever is written off falls on the reserve, which means on the people who work there later.
 - **Pay above the going rate to non-members** is charged to all members in proportion to their profit shares, since members chose to pay it. Members whose household income is under twice the poverty line are left out, and so is the insured slice of anyone's account.
 - **It never touches pay already earned.** Wages and bonuses already paid or earned stay paid. The charge falls on savings in the co-op, not paychecks.
 
@@ -118,12 +118,12 @@ That still leaves two real ways to run it down, and both come from how accountin
 - **Skipped upkeep.** Repairs count as a cost in the year they're done, so skipping them raises this year's profit, and members share it.
 - **Machines that are "paid for."** Accounting spreads a machine's cost over its expected life, its *depreciation*. Once that time is up, the machine stops counting as a cost, even if it's still running. If nobody replaces it, profit looks higher every year, and members split the difference. That's not savings. It's the machine wearing out.
 
-**6. Worn-out equipment keeps being charged.** For the profit split only, buildings and equipment that are fully written off but still in use keep being charged at their last yearly rate, adjusted for inflation. That money goes to the reserve, not the split. So a co-op running on old machines builds up the money to replace them, instead of paying it out. Co-ops whose buildings and equipment are worth less than a tenth of their yearly revenue, like most service firms, can skip this.
+**6. Worn-out equipment keeps being charged.** For the profit split only, buildings and equipment that are fully written off but still in use keep being charged at their last yearly rate, adjusted for inflation. That money goes to the reserve, not the split. So a co-op running on old machines builds up the money to replace them, instead of paying it out. Co-ops whose buildings and equipment still in use, at what they originally cost and including leased ones, come to less than a fifth of their yearly revenue, averaged over three years, can skip this. Revenue here leaves out materials and subcontracted work passed on to customers at cost. Measuring at original cost means letting equipment run down can't bring a co-op under the line, and counting leased equipment means selling it and leasing it back can't either. For a rough sense of who that leaves out: on 2022 corporate balance sheets, buildings and equipment at original cost came to about 14% of sales in professional services, 8% for building contractors and 22% for specialty trades like plumbing, 22% in the group that includes home health care, 27% in cleaning and other building and office services, 37% at restaurants and 41% in manufacturing ([IRS, Table 1](https://www.irs.gov/statistics/soi-tax-stats-corporation-complete-report)). Those totals are weighted toward big companies, and the smallest ones don't report balance sheets, so they're a guide, not a measurement. A home care co-op that owns a few laptops is far under the line. The charge only falls on equipment that's fully written off anyway, so for a co-op near the line little turns on which side it's on.
 
 There's no fair way to set how much every business should spend on upkeep, so this model doesn't try. Instead there's a warning light:
 
 - **Every year, the co-op shows members how much it spent on new buildings and equipment**, including new leases, next to how much its existing ones wore out that year, adjusted for inflation.
-- **If spending stays below wear for three years running, an independent inspector reports** on the condition of the main buildings and equipment. The lock-holder picks the inspector and the co-op pays. The report goes to every member, and to the bank if it's still owed money. The first five years after a buyout or conversion don't count, because buying a business makes its old equipment look like it's wearing out fast.
+- **If spending stays below wear for three years running, an independent inspector reports** on the condition of the main buildings and equipment. The lock-holder picks the inspector and the co-op pays. The report goes to every member, and to the bank if it's still owed money. After a buyout, buying the business puts its used equipment on the co-op's books at today's value, spread over the few years it has left, which makes it look like it's wearing out fast. So for the first five years, wear is measured on the seller's old book values instead. The upkeep the seller put off, which the [pre-sale check](buyouts.md#a-fair-price) already counts, is the starting point: spending that doesn't catch up on it counts as falling behind. A conversion without a sale doesn't re-value anything, so nothing changes for it.
 - **A co-op that's shrinking on purpose,** because its market is, says so in a written plan its members vote on. That's a warning light, not a spending order.
 
 ### Spending it badly
@@ -139,7 +139,7 @@ The danger is real, but reserve money isn't free to members.
 
 The risks that remain are the ones Fagor shows: big bets that members can't judge, losses that show up after the people who voted have left, and help from other co-ops that keeps a failing business going. So:
 
-- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases and guarantees, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Related commitments within two years are added together. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
+- **A second opinion on big commitments.** Some commitments need an independent written opinion before members vote: a single investment, a purchase of another business, or borrowing, including leases and guarantees, bigger than a quarter of the co-op's own capital (its reserve plus members' accounts) or $250,000, whichever is larger. Anything bigger than the co-op's whole capital needs one too, if it's over $50,000. So does buying any business for more than $350,000, the price above which the SBA requires an independent valuation before it backs a loan to buy a business ([SBA SOP 50 10 8.1](https://legacy.sba.gov/sites/default/files/2026-09/SOP%2050%2010%208.1%20Technical%20Policy%20Updates%20effective%2010.1.2026.docx)). The SBA rule protects a lender's price, not members' judgment, but it marks where a purchase is big enough to need an outside look. Related commitments within three years are added together, and the dollar figures rise with inflation. An outside opinion can easily cost thousands of dollars, so for commitments under $250,000 the federation's staff can give it for a flat fee, and the federation's fund pays that fee for co-ops with less than $250,000 of their own capital. The lock-holder picks the adviser from an approved list, and the co-op pays. A lender to the project can't give the opinion. The opinion comes with a one-page plain summary, including what the plan means for members' jobs, and there's a members' meeting to ask questions before the vote. It's advice, not a veto. The co-op publishes it with the result of the vote, and three years later reports how the project did against the plan. Replacing worn-out equipment like for like, and loans the bank has already checked, don't need it, except for buying a business. [Spin-offs](growth.md) get a similar opinion at a lower threshold.
 - **Losing parts of the business are visible.** Where a co-op has separate lines of business, each one reports its own results to members every year ([Does Sharing the Profit Mean Less Effort?](free-riding.md#small-teams-open-books)). A line losing money for years can't hide inside the total.
 - **A board that can follow the plans.** The federation offers training in reading the accounts, on paid time and open to every member, not just the board. The standard bylaws let members elect outside directors, from other co-ops or with business experience, but never more than a quarter of the board. The members choose them and can remove them.
 - **Limits on propping up a firm, decided in advance.** The [federation's fund](federation.md) helps a co-op through a bad year. Help to keep a firm going comes with a recovery plan and a limit set before any crisis, and cuts to members' pay or jobs in that plan need the members' vote. Help for the *workers*, like finding them jobs in other co-ops if the firm closes, has no such limit. Mondragon kept supporting Fagor and then said no. It's better to agree on where the line is before anyone's firm is on the wrong side of it.