Much of the country is still recovering from the recession, making it difficult for companies to secure financing. Northern California, however, is an exception.
“It’s definitely a bifurcated market right now. The environment for financing is very robust here in Silicon Valley and other tech hubs,” says Kelly Cook, senior vice president and market manager at Bridge Bank. “If you read the Wall Street Journal or the Economist, they say banks are still not really lending. That’s not the case here.”
Smart Business spoke with Cook about the financing environment and methods available for companies to get funding.
Why is the financing environment good locally? Is it the market or the technology industry that’s here?
In the Bay Area, the unemployment rate is low, even for nontech companies. There’s a ripple effect — a lot of nontech companies service the tech industry.
There is a large amount of new capital available from all different investment sources from corporate venture arms, to traditional venture capitalists, to the angel groups that are forming, as well as private equity and hedge funds getting back into the tech financing market. All of that is rippling through the local economy and job market.
When does equity financing make sense?
Equity financing is readily available for entrepreneurs and management teams that have a good track record and offer a new technology or new way to address a big problem in a big market. In the earliest stages of a company, equity financing is the way to go. The decision is about what type of equity to raise.
Options include sweat equity — using the founder’s money and/or knowledge, raising money from friends and family, or angel investors. If you are far enough along in terms of product and initial customers, you may attract institutional equity financing.
There are various theories/approaches on how much ownership stake to give up for that equity. Savvy entrepreneurs know how to raise just enough to reach the next value-creating milestone. Once a company generates annual revenues approaching several million dollars, more choices will open up on the debt financing side.
Do you have to show consistent profitability before banks will offer debt financing?
A lot of entrepreneurs, CEOs and CFOs don’t think they can raise bank debt financing when the company is still cash-flow negative, but that’s not the case. A true technology-focused lending group has a number of solutions including working capital lines of credit, which are underwritten based on the strength of a company’s accounts receivable. There also are invoice-specific financing structures, asset-based lines, and traditional, revolving, borrowing-based lines of credit.
How do you determine what form of debt financing is right for your business?
That’s a consultative discussion among a company and its finance partners. If a company has revenue and cash tied up in the accounts receivable cycle, it should consider a working capital line of credit such as a line tied to specific invoices or a collection of invoices. With regards to a more permanent source of debt financing, a potential lender will look at your business plan and determine whether it can support typical financial covenants and a term debt structure. If so, then typically that’s the least expensive form of term debt financing.
But if a company’s forecast won’t support covenants, or you don’t want to be burdened by managing covenants because there’s too much uncertainty, then a venture debt structure makes the most sense.
Banks also can be used in conjunction with other financing partners. Banks are regulated entities, and are limited in terms of providing venture debt. But they can participate with a venture debt provider and combine that with a working capital line of credit from the bank. That combination can be a powerful solution because it gives short-term financing at a low cost and flexible term debt that extends cash runway to allow a company to execute its business plan.
There are flexible, customized solutions for each company, but it takes some digging into the plan, market and financial history. A good lender will conduct a diligent underwriting process to determine pricing and structure that meets a client’s needs. ●
Insights Banking & Finance is brought to you by Bridge Bank
While political battles and a glitch-prone website have dominated media coverage of health care reform, the Affordable Care Act also has brought about a major change in the way medical service is being delivered.
“We’re in this dramatic transformation where health care providers, hospitals and physicians are coming together in an integrated model,” says Greg A. Adams, executive vice president, group president and regional president of Kaiser Permanente’s Northern California Region, considered a model for the future of health care.
Adams, speaking in November at the EY Strategic Growth Forum® in Palm Springs, Calif., says the health care system is emulating what Kaiser Permanente has been doing.
“They are shifting from a volume-driven, fee-for-service system,” he says. “The shift that’s occurring is a move to a system that’s oriented toward value.”
That means not only focusing on high quality care, but on understanding the value of the care and the outcome.
“We’re shifting from episodic care to really defining a population, understanding that population’s health needs, and keeping them healthy through prevention, through organized technology and systems managing their chronic disease,” Adams says.
With health care approaching 19 percent of the gross national product, it is no longer affordable, Adams says. The average health insurance premium for a family of four is $16,000 annually, and people are paying $4,500 in out-of-pocket costs as well.
“When you look at someone making $50,000 or $75,000 a year, that’s a problem,” he says.
But the solution — the ACA — has encountered very notable setbacks.
Covering more people
Because of the ACA, 30 million people who previously did not have coverage, often because of pre-existing conditions, are now insured. But that was lost in the furor over President Barack Obama’s campaign statement that if you like your plan, you can keep it.
Adams says that promise wasn’t necessarily broken — you can still keep your insurance carrier, even though specifics of the plan may change.
“If people want Kaiser, they can keep it,” he says. “The issue really is the benefits, and the fact is that benefits are changing and the law requires that certain people were notified that plans were being canceled because they are to shift to a new plan.”
Out of Kaiser Permanente’s 7.1 million members in California, about 120,000 received cancellation notices. But those policies were terminated with the intent that members would go to the exchange and choose a coverage plan from among Kaiser and other carriers.
Of course, the national exchange website had many problems that made it difficult for people to purchase coverage. But that should be kept in perspective, Adams says. Kaiser probably has the largest electronic medical records system in the country, and it took three launches to get its website functioning properly.
“Certainly there are state exchanges where websites are working well. Covered California’s website is working,” he says. “In a very short period of time, they essentially are creating this national infrastructure for a health plan, and that’s a huge undertaking.”
Addressing the long term
Although Adams sees many benefits arising from the ACA, he cautions that short-term fixes like allowing people to keep plans that don’t meet ACA coverage standards could undermine the entire effort.
“The problem with that is the model is based on a large group of people — high risk and low risk — participating in the exchange,” Adams says. Allowing people to keep current plans has limited the group to people with high risk and created problems for health plans, hospitals and providers that based rates for 2014 on a diverse risk pool that was blended.
The ACA might not be perfect, but has steered health care in the right direction, according to Adams.
“We are the most developed country on this globe. Our health care costs are the highest of any industrialized nation. And our outcomes are not there,” Adams says. “This is absolutely changing. You can see us starting to move health care to a place where people are getting great care across the nation; it’s evidence-based; we’re doing the right thing. It’s an opportunity for costs to come down.”
Changing the model
A 2009 Kaiser Foundation study showed a slowing of the increasing cost of health care — to a rate of less than 4 percent. Some of that was due to the recession, but 25 to 30 percent of the improvement was due to fundamental changes in health care systems, Adams says.
“We are shifting from the mindset from ‘do’ to ‘how do we understand a population?’” Adams says. That involves managing health and prevention, and practicing evidence-based medicine that is clear about treatment and enables more predictable outcomes.
Previously, care was provided on a fee-for-service basis and volume dictated payments. The shift is to reward outcomes instead.
Precision medicine, using genetic makeup and markers to predict diseases and outcomes, will become more integrated into the care of medicine, Adams says.
“That’s another reason we need to embrace where we’re going with health care reform, because independent physicians or independent hospitals can’t bring us that. Our clinicians have to be integrated into the systems that allow them access to the kind of information that they need in order to provide us with real time, concurrent treatment,” Adams says.
Technology will allow physicians to bring acute hospital care into the home, he says. “How do we bring teams out and integrate technology so people aren’t coming to the hospital? That’s the vision for how we will evolve health care and keep people healthy. And we’re starting to see that now.”
Adams credits the ACA with providing entrepreneurs with opportunities to create new venues of care that will help drive down costs. He says a massive transformation of the health care system is well underway.
“It is a market-based, competitive model that is shifting the competition from episodic, individual, volume-driven care, which drives up costs, to entities coming together and focusing on population management and health management,” Adams says. “If entities are competing to provide evidence-based care, it brings down the cost of health care. That’s something I, and Kaiser Permanente, would advocate for.” ●
Learn more about Kaiser Permanente at:
How to reach: Kaiser Permanente Northern California Region, (800) 464-4000 or www.kaiserpermanente.org
When James D. White came on-board with Jamba Juice Co. in December 2008, same store sales dipped 8 percent and the company lost $149 million for the year. The recession had prompted consumers to cut discretionary spending, and smoothies just weren’t considered essential.
Management created a road map to get the business back on track.
“We made a commitment that we’d effectively turn the company around in a three-year-time horizon,” says White, chairman, president and CEO. “I’m happy to report that we completed the turnaround. In 2012, we registered our first year of profitability as a public company.”
That included a 5 percent increase in same store sales. Jamba Juice remained profitable in 2013, although same store sales were flat to slightly up.
Here’s how White and Jamba Juice developed a plan and expanded offerings to set the stage for the turnaround.
Strategies for growth
Management needed to develop a plan that would allow Jamba Juice to grow and return to profitability within three years.
Key to the turnaround was creating the blend plan, which drove strategic choices that were made. First up was facilitating fast growth through aggressive franchising and a move away from the core portfolio of company-owned stores.
“By 2011, we were in the middle of refranchising or selling company stores to become more of a franchise model. Today, roughly 35 percent of our locations are company owned,” White says. “That significant shift in the business model gave us the opportunity to accelerate growth, leveraging local partners in specific geographies.”
Jamba Juice added more than 30 locations in the United States in 2013 and expects to open 50 more this year. Currently, there are more than 800 Jamba Juice stores across the country.
A second component of the blend plan addressed the product portfolio and the creation of more “better for you” products.
“We added products like steel-cut oatmeal, which has been a hit with consumers,” White says. “We added more fruits and vegetables to our smoothie lineup. We also added more food items that pair well with the smoothies.”
Vegetables like kale, beets and cucumbers were added to the menu as items to be blended or juiced.
“Those have become increasingly popular as consumers look to cleanse or add healthier on-the-go solutions to their diet,” he says.
Another component of the blend plan involved expanding into international markets — Jamba Juice went from zero to 50 international locations in a 2½-year span, with the 50th store opening in early 2014.
Jamba Juice executives started the process by picking about a dozen potential markets to explore — including Canada, Mexico, South Korea and the Philippines — prioritizing them and then looking for partners.
“Partners typically have an existing restaurant or retail holding that Jamba Juice would complement,” White says. “In South Korea, our partner, SPC Group, is a multi-billion dollar company that runs 4,500 restaurants. We have a commitment with them to build 200 locations in South Korea over a decade.”
The company expects to hit the century mark in international locations before the end of 2014, with a major focus in Canada and the Philippines.
“Mexico is the fourth market where we have a commitment to build new stores. We expect our first stores to open in Mexico in early 2014,” White says.
He expects Jamba Juice to have about 1,500 locations internationally in the next decade.
“A significant portion of agreements are lined up already with the first four initial markets. We’ll announce other international markets this year, which we’re excited about,” he says.
A final piece of the blend plan was JambaGO, which was piloted in schools to deliver healthier solutions for students. Whether self-service or behind the counter, the dispensers feature high-quality smoothies, White says.
While JambaGO remains heavily focused on schools, the dispensers will also be located in Target stores as part of a recently announced deal.
“Target is a perfect fit for our brand. There’s a good complement between the Target brand and the Jamba brand, and an overlap of customers,” he says.
Keeping management focused
Having a focused agenda, and continually refining it, is a central part of the management philosophy at Jamba Juice.
Focusing on core stores and core operations, including the addition of new menu items, resulted in 2½ years of same store growth until a dip in the third quarter of 2013.
“But that was still at the top of our industry from a performance perspective,” White says, acknowledging that having a focused agenda was critical to the company’s growth.
Management also refined the agenda on a regular basis, although emphasis was placed on keeping it limited to only a handful of tasks.
“You tend to add more things to the agenda over time. If you can keep a tighter agenda of three to five items, that’s about all most management teams can focus on at one time,” he says.
It’s also important to ensure that the right team, with the necessary skills, is in place to execute the plan — and tying that team to the key set of metrics that drive the overall growth strategy.
“One of the ways we were able to pull off the great success we’ve had over the last several years is being very aligned and very focused as a management team around the growth priorities,” White says.
Jamba Juice is on what he calls version 3.0 of a three-year strategic plan that guides choices made around the business, which is broken down into annual operating plans that management reviews on a regular basis.
“We do that every week and it keeps us aligned both on the close, short-term, quarterly milestones that need to be accomplished to deliver the annual plan, but it also keeps us very tightly focused on the longer-term, multi-year game plan,” White says.
On a monthly or quarterly basis, the team takes a more lengthy look at longer-term, annual or multi-year strategies, to see if any adjustments are needed to make sure resources are lined up behind growth initiatives with the highest rates of return.
“One example would be how we’ve recently taken several of our growth initiatives that would have been incubated in various parts of the company and formalized some of those, and created standalone business units with their own sets of resources to maximize those opportunities,” he says.
Listening to customers
Jamba Juice develops its strategy based on input from a variety of sources, but always takes feedback from customers into account.
“We try to make sure to embed the voice of the customer in every choice, every decision we make, from the launch of our oatmeal platform to the work we’re doing around whole food blending and juicing,” White says.
JambaGO, for example, was developed after talking to school administrators and parents who wanted better nutritional options for students. But it’s not the only program that the company developed from listening to customers.
“Earlier this year, we launched the Jamba First for Kids platform, which moms had been asking us to do for some time,” White says.
Jamba Kids™ meals each contain 2½ servings of fruits and vegetables and a serving of whole grains. There are four smoothie options and two food choices — a Pizza Swirl and Cheesy Stuffed Pretzel.
The kids menu has great growth potential, according to White.
“The kids platform in our stores in growing, and we’re thrilled about the work we’re doing in schools,” he says.
White envisions Jamba Juice playing a leadership role in promoting nutrition for children and supporting parents with better choices for their youngsters.
“We just hosted a town hall related to healthy choices, better-for-you products, and physical fitness for kids in conjunction with the University of San Francisco and the GENYOUth Foundation,” White says.
Success of the kids platform, launched because of consumer demand, illustrates the importance of listening to customers.
“For most businesses, particularly consumer-oriented businesses, you can’t ever have too much input from the consumer,” White says.
That means mining various inputs available to marketers, including social media, to reach out and engage customers that can help shape how solutions and products are built.
“We talk a lot about big data and how to take all of the inputs, whether that’s social media from various channels or other ways we reach out to the customers from a loyalty perspective,” White says.
In addition to listening to customers, Jamba Juice looks at trends worldwide.
“We try to integrate the ideas that make the most sense for the role we see ourselves playing in the world, which is about making better-for-you, great-tasting products,” he says.
The company takes consumer feedback, global trends and other inputs and mixes them together in formulating strategy. White sees opportunity for far more growth on the horizon.
“There is a fair amount of data to suggest that the consumer trend for healthier products, investing more in the foods they put in their bodies from a healthy fuel perspective, is moving well beyond a niche to a big mega trend that will really drive the marketplace moving forward,” White says.
The premium juice category alone is a $5 billion business that has been growing annually at a rate of 4 to 8 percent, he says.
“Jamba Juice is on the forefront of that moving forward,” White says. “We love the early response to the premium juice offering that we’re starting to roll out and we will accelerate the rollout of our whole food juicing and blending platform in 2014.” ●
- Keep management agendas focused.
- Find good partners in international markets.
- Listen to your customers.
The White File:
Name: James D. White
Title: Chairman, president and CEO
Company: Jamba Juice Co.
Born: St. Louis, Mo.
Education: He received a bachelor’s degree from the University of Missouri and a master’s degree in business administration from Fontbonne University.
What was your first job and what did you learn from it? I was a busboy at a burger joint called Jacks Are Better. I learned the value and importance of two things: hard work and showing up on time; and providing great guest service. Those things have helped shape my work over a 30-year career.
What is the best business advice you ever received? My parents taught me the value of hard work and effort. The other lesson was becoming a student of business and staying in a mode of constantly learning. That’s been an accelerator from a career perspective.
What are your favorite Jamba Juice products? My favorite smoothie is the Aloha Pineapple; my favorite food item is the steel-cut oatmeal; and the new lineup of premium juices — any of them with kale are my absolute favorites.
If you could speak with anyone from the present or past, with whom would you want to speak with? Warren Buffet is on my bucket list. His wealth of experience running great companies over time would be fascinating to break bread over.
Learn more about Jamba Juice at:
The environmental due diligence process can be time-consuming, which is why buyers should get started early when entering into negotiations to purchase property.
“Depending on when environmental due diligence begins, environmental issues might not be discovered until close to the end of the deal. That could result in a transaction not closing for months after initially planned, which was the case in a matter we had this year,” says Meagan Moore, a partner at Brouse McDowell. “Be ready to begin a Phase 1 assessment when you initiate discussions regarding a purchase.”
Smart Business spoke with Moore about Phase 1 and Phase 2 environmental assessments, and the protections they provide buyers regarding potential liability related to contamination.
What is the first step in the environmental due diligence process?
Hire an environmental consultant to perform a Phase 1 study. That will give you a better understanding about the property. Because of the way certain environmental regulations are written, even a purchaser that has no culpability for what is on the property could be responsible for cleanup costs. Therefore, it’s best to know what you’re getting in advance so you can plan for it during the transaction.
Phase 1 is a report intended to identify potential environmental issues associated with the presence of hazardous substances or petroleum products on a property. It involves a review of federal, state and local records, government databases, interviews with people familiar with the property and an on-site inspection by the environmental consultant. The review provides an overview of the property’s history and whether there is any information or visible signs of a release or contamination on the property.
Some sellers may conduct a Phase 1 study in order to expedite the transaction. It is important to note that Phase 1 is only valid for 180 days and typically the environmental consultant must grant third parties authority to rely on the report.
There are some environmental issues that the Phase 1 investigation does not cover, including whether the property has wetlands or the building contains asbestos. Those can be added to the scope of a Phase 1 if a buyer envisions potential issues with a property. Any documented or visible signs of contamination noted in the Phase 1 are considered a recognized environmental condition (REC).
If the Phase 1 report includes a REC, what should a potential buyer do next?
A Phase 2 assessment should be conducted, which typically involves a subsurface investigation. Soil and groundwater samples are taken for lab analysis to determine if there is hazardous material present. It’s not going to delineate the extent of the contamination, but it will confirm or deny the presence of hazardous materials.
If the contamination is confirmed, you’ll have to determine how it should be addressed — whether remediation should be done or if the material can be left in place.
All these concerns can be factored into the negotiation process with the seller. You could include indemnity agreements with the seller and establish an environmental escrow account to pay for any issues that arise.
Do any former uses require a different approach?
A Phase 1 assessment should be done for any industrial or commercial property. But you definitely need an assessment if there was a gas station, dry cleaner, auto repair shop or industrial use of the site. Phase 1 assessment requirements are the same no matter what type of business; it doesn’t matter if it was a textile plant or gas station. But if you’re looking at a property that had historical operations that could have led to contamination, a Phase 1 assessment is necessary to determine the condition of the property so you’re aware of what you’re buying. As a buyer, you want to know everything upfront so that can be a part of the negotiations and you can limit your liability. ●
Meagan Moore is a partner in the Environmental Practice Group at Brouse McDowell. Reach her at (216) 830-6822 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Brouse McDowell
Expansion of the Medicaid program in Ohio was approved by the state Controlling Board because there wasn’t enough support to get it passed in the legislature. But there’s no economic reason for anyone in Ohio to oppose the expansion, says William F. Hutter, CEO of Sequent.
“The battle about Medicaid expansion was based on principle; it was about certain forces resisting an additional expansion of federal government in Ohio. And that somehow expanding Medicaid to the less affluent population in Ohio was an endorsement of health care reform,” Hutter says. “That is one view. I started taking a view that Medicaid expansion in Ohio is good for business and good for the population.”
Smart Business spoke with Hutter about how the Medicaid expansion helps businesses and what companies are doing in response to the program.
Why is Medicaid expansion good for businesses?
Under the Affordable Care Act (ACA), if an individual meets the criteria of having an income of less than 138 percent of the federal poverty level they can apply for Medicaid benefits.
Consider industries like hospitality and retail, which deal with a lower-cost, transient employee population. They’ve taken a position that they have employees they would like to move to full time, but have health care to deal with under ACA and the benefits cost too much. One of the advantages for that group of people, and those industries, in Ohio is that they might qualify under Medicaid.
If employees are covered under Medicaid, they are exempted from the full-time equivalent (FTE) count of businesses. That means they aren’t included in determining whether a business has 50 FTE employees and would be subject to penalties starting in 2015 if they do not provide health insurance coverage for employees. Normally, hours of all part-time employees are totaled to compute how many FTE employees are added to the number of full-time employees to see if a business hits 50.
Having more employees exempted from the FTE calculation could allow businesses to hire more people and get them qualified for Medicaid. Employees get medical coverage, the business gets exempted from the ACA and health care providers benefit.
How do health care providers benefit?
Providers complain that they don’t make money on Medicaid patients because reimbursement rates are lower. However, hospitals and urgent care centers do not turn people away; they provide medical care 90 percent of the time whether or not someone can pay. What’s better, to be paid zero for providing $500 worth of medical services, or to be paid $400? From a patient standpoint, while Medicaid might not cover all costs, it takes some pressure off because there is reimbursement from the federal government.
Have businesses developed strategies in response to the Medicaid expansion?
Absolutely. They are trying to get employees signed up for coverage. We’ve been working with clients on helping them with the Office of Healthcare Transformation, which built the Medicaid application portal in Ohio. Director Greg Moody has done a good job creating a portal that makes it easy for people to sign up.
There have been comments that only 30 percent of the people who register get qualified, but it’s a financial qualification — it’s not arbitrary. It’s a set amount based on income being up to 138 percent of the poverty level.
This is one of the more worthy social benefits that helps keep people healthy and is in-line with the intent of the ACA. It will be good for small and midsize businesses and keep more people employed. Yes, it’s not in high-wage positions, but it is an improvement and will move more money into Ohio and create economic flow.
Employers are starting to figure this out. They want to do what’s best for employees, the company and shareholders. For the current circumstances and environment, Medicaid expansion is good for Ohio. ●
Insights HR Outsourcing is brought to you by Sequent
Benchmarking your business to see how it stacks up against industry competitors helps you learn about your company and where operations can be improved.
“If you focus on just sales or profits, you miss other variables and expenses that, with some tweaking, can make a substantial difference in your profit and cash flow,” says Dave Cain, vice president of operations at Rea & Associates.
Smart Business spoke with Cain about the benchmarking process and how to utilize the data that is produced.
Can the benchmarking process be applied to any business in any industry?
Benchmarking compares you to your industry. I’m not aware of any industry where it wouldn’t work — one service we use has a database of 10,000 different entity types that can be used for comparisons. Dental, medical, construction and manufacturing all have some type of benchmarking tools. Software programs are available that allow you to find real-time data and develop benchmarks based on immediate industry information rather than information that might have been accumulated a year ago.
What data should be benchmarked?
Net profit margin and liquidity ratios are two general ones that can be used for any business. If you’re in manufacturing or retail and have accounts receivable, one good benchmark is turnover ratio — how quickly do you collect receivables in comparison to other businesses of the same type?
Industry comparisons have substantial value because you can understand what’s going on in the industry and improve your company’s performance. For example, a manufacturer of plastic bags would be able to find information specifically about plastic bag manufacturers, not just the plastics industry as a whole. If that manufacturer has a sales percentage of revenue ratio of 10 percent, compared to 15 percent elsewhere, it would be worth investigating why competitors can operate at a lower margin.
Who should be involved in the benchmarking process?
Involve your accountant, your internal accounting department and members of senior management. Determine what ratios and analysis are important to your business. If accounts receivable turnover ratio is an area of priority, the person in charge of accounts receivable should be included.
Companies can do benchmarking themselves, depending on the level of experience within the accounting staff and the resources available to them. However, it also takes expertise to determine how to use the information. That’s where a CPA can work with your accounting team and senior management to develop a strategic plan.
Do you need to decide in advance how the benchmarking information will be used?
Benchmarking results will dictate what actions you take. If your inventory cycles through every 90 days, you might think that’s good. But having inventory sitting for three months could be why you have no cash flow. If you find competitors collect receivables in 45 days, you would look at how you can cut down that period and improve cash flow.
The whole idea of benchmarking is to discover areas where you can make an impact. It’s learning about your business to determine best practices. So many businesses only look at sales and profits, which are the basic indicators, but there are always other areas to review. One client increased his revenue by $200,000 and kept focusing on that top line, but it cost him $225,000 in payroll to get that boost.
Is the process different with internal benchmarks?
Yes, because then you’re measuring against yourself to ensure consistency. Whether by department or location, you look at the revenue and expenses, as well as the contribution margin to the rest of the organization. Then those metrics are applied to outside data information to see how you compare against your industry.
Benchmarking is usually done at year-end, although you might do an interim report to analyze if adjustments you’ve made are having the desired impact on your business.
Benchmarking is really learning about your market and your business, and helping you determine best practices. ●
Insights Accounting is brought to you by Rea & Associates
The early 2014 legislative priorities for the Ohio General Assembly include the mid-biennium review (MBR), the state’s capital budget, the Public Works Commission bond fund reauthorization and the municipal income tax uniformity bill (House Bill 5).
“House Bill 5 will be front and center because it is a top priority of the business community and affects all municipalities,” says Lloyd Pierre-Louis, a director at Kegler, Brown, Hill + Ritter.
While everyone agrees with the concept of uniformity, changes in tax rules create winners and losers, and thus, controversy, Pierre-Louis says.
Smart Business spoke with Pierre-Louis about HB 5 and other major Ohio legislative changes that may affect businesses in 2014. HB 5 passed the House late last year and is now in the Senate.
Why are some groups and cities opposing uniform municipal tax rules?
I have never talked to anyone who outright opposes reform. Everyone agrees that there should be uniform forms and filing dates. The average businessperson would be interested to know that the greatest threat to getting a municipal tax uniformity bill passed in 2014 is not the lobbying efforts of cities, but the overreaching efforts by a group of trade associations that are using the guise of uniformity to mask municipal income tax cuts that are targeted to suit selected industries, clients and taxpayers.
For example, there has been an effort to alter the currently uniform ‘casual entrant’ rule that determines how many days a non-resident may work in a city before tax liability attaches. The current rule requires 12 days of work, but the business groups want to expand it to 20 days.
There has also been an attempt to exempt supplemental executive retirement plans from municipal taxation even though they are taxable under federal law. Legislators who we talk to are increasingly uneasy that the advocates of HB 5 are asking to cut funding for municipalities rather than really trying to achieve uniformity.
What else will state legislators be working on that will affect businesses?
Gov. John Kasich is expected to introduce his MBR in February. In essence, it’s a revisit to the state budget one year into the two-year cycle to make adjustments and, as has been the case with this governor, to make significant public policy reforms.
The MBR’s tax treatment of hydraulic fracturing (aka fracking) will be interesting because there are competing viewpoints between the governor, who wants the drillers to pay higher rates to fund an income tax cut, and House Republicans, who introduced a bill that would phase-in higher rates over the next five years.
A number of proposals will be brought forward as to how to use the state’s $400 million in savings from Medicaid expansion. Some legislators suggest additional tax cuts, and others want to address Ohio’s increasing unemployment debt.
Ohio has borrowed more than $1 billion from the federal government to pay unemployment benefits and the debt service alone causes annual unemployment insurance premium increases. A pending bill aims to use Medicaid savings to pay down the principal, decrease the debt and stop the premium increase.
The capital appropriations bill, which will be introduced in February, will impact the construction industry since it will fund state-supported capital projects. Construction of and improvements to university buildings, arts facilities and community projects all will be funded by this legislation.
The construction industry, local government and ancillary businesses will also closely watch the public works reauthorization bills, Senate Joint Resolution 6 and House Joint Resolution 2, which will place an infrastructure bond package on the May primary ballot if it is passed by both legislative chambers. If approved by the voters, the proposal would provide about $1.9 billion of funding for public works projects over the next 10 years.
Those are the primary legislative issues statewide that will affect businesses in the first half of 2014. ●
Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter
“It’s not something you try and then decide whether you maintain it. A good program requires a well thought out strategy and budget,” Howe says.
As for the wellness program itself, it should function outside of your health insurance provider so it doesn’t need to change if you switch carriers. Programs should include biometrics screenings — basically a blood draw. Conduct screenings at the workplace to make it easy for employees to participate.
You could bring educational support in to the office — a nutritionist to host healthy cooking demonstrations, a fitness instructor to conduct stretching and yoga. The idea is to change behavior, and making it fun makes it easier. Furthermore, the same data can drive strategy related to the medical plan design;
“The ones that have been with you for 20 or 30 years are the most problematic,” says Scott Swearingen, a partner at Moss Adams LLP. “They’re trusted more, so more opportunities for fraud arise.”
This particular kickback involved delivery charges: The employee would add another hour or two for traffic and split the difference with the vendor. Cases involving collusion outside the company, such as kickback schemes, are difficult to uncover. More control or oversight of pricing or tracking may have allowed the client to see that one employee had more travel time compared to the company average or their peers.
Auditors refer to a fraud triangle where opportunity, rationalization and motive all exist. Unfortunately, we bucket things into thirds. One third of people would never steal, even given the opportunity; another third will look for chances to steal no matter what; and the final third wouldn’t ordinarily steal but will if given the right situation with weak or little controls. Internal control practices address that final third.
We’ve seen fraud cases where employees have the ability to authorize credits on accounts receivable for returns and realize they can put a credit on their personal credit card as well. One clerk was building credits on her card to move out of the country. No
Don’t wait for something to happen before taking the control environment more seriously. ●
While tax laws continue to affect estate plans, protection of assets has become an increasing priority as baby boomers age.
“There’s been a lot more conversation in the last five years about asset protection, not just about the client’s assets, but also about protecting the assets the children will eventually inherit,” says James P. Cashman, a partner at Berliner Cohen.
Smart Business spoke with Cashman about trends in estate planning and what has occurred in response to the American Taxpayer Relief Act of 2012, which changed estate, income and gift tax laws.
What has changed with estate and gift taxes?
Large estates — the applicable credit for each individual is now $5.34 million per person — i.e., the amount that can be passed to family members (or anyone else for that matter) without any estate or gift tax. In the last several years the credit has grown from $1million to what it is today. Married couples can now shelter up to $10.68 million from estate taxes.
Because of that change, we expected married couples with estates of under $10 million to want to simplify their existing plans by leaving everything to the surviving spouse and then to the children; however, such has not been the case. Married couples with estates under $10 million are still opting for dividing the estate into two parts upon the death of a spouse. In so doing, each spouse wants to make sure that if they die first, their share of the estate ends up with the children rather than the surviving spouse’s new spouse or someone else.
How has the end of the Bush-era tax cuts affected estate plans?
Especially in California, which now has a state income tax rate of 13.3 percent on top earners, more estate planning decisions are being made based on income tax and capital gains tax issues than ever before.
Not only do people want to know about estate transfer taxes when they die, they also want to limit or avoid income or capital gains taxes while they’re alive. Therefore, the conversation of shifting income to family members in a lower bracket and charitable gifting techniques has increased tremendously.
That includes increased interest in charitable remainder trusts or gift annuities, where a person can donate a highly appreciated asset in return for a guaranteed income stream for a term of years or their lifetime and avoid having to pay capital gains tax.
More people also are inquiring about moving to jurisdictions without state income taxes, like Florida, Texas and Nevada. They have businesses in California and want to know how to detach from the state, as rules regarding how California recognizes residents are becoming stricter.
For example, one client with substantial real estate holdings all over the country wanted to move to Florida; he’s a better candidate than someone with real estate only in California. But my advice was that if he wanted to be a Florida resident, he must give up all (or most all) of his contacts in California, including, but not limited to, his California business office, his California license and his California voting registration.
But not all estate planning trends are about taxes. Protection of assets for children and grandchildren has been a growing concern.
Why has protection of assets become more important?
Baby boomers like to be very clear about what they want. They worry about where assets would go if a child got divorced or owed creditors. Perhaps people have become more aware of our litigious society, and they now are talking to professionals to review all options.
Baby boomers are also concerned about who inherits their personal effects. Traditionally, personal property distribution was covered in wills. Now, in many instances, this is covered by a letter of instruction form that the client can update easily.
This trend also extends into other areas, such as health care directives. Clients are getting more clear about what they want — feeding, hydration, CPR — and want to be able to make these choices clearly in their health care directive or the POLST. ●
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