Iowa ESOP Initiative Signed by Governor

As many of you know, we’ve been following Iowa Governor Terry Branstad’s ESOP initiative program since the beginning of 2012. The bill was introduced earlier this year, and mentioned in the Governor’s State of the State speech, and was finally signed in May 2012 by Governor Branstad.

You can read the full text of the law here. The section on the Iowa ESOP initiative begins on page 48.

We’ve also included the text of the bill below:

DIVISION XII

CAPITAL GAIN DEDUCTION FOR SALE TO AN IOWA ESOP

Sec. 133. Section 422.7, subsection 2I, Code Supplement 2011, is amended by adding the following new paragraph:

NEW PARAGRAPH. e, (1) To the extent not already excluded, fifty percent of the net capital gain from the sale or exchange of employer securities of an Iowa corporation to a qualified Iowa employee stock ownership plan when, upon completion of the transaction, the qualified Iowa employee stock ownership plan owns at least thirty percent of all outstanding employer securities issued by the Iowa corporation.

(2) For purposes of this paragraph:

(a) “employer securities” means the same as defined in section 409(1) of the Internal Revenue Code.

(b) *Iowa corporation” means a corporation whose commercial domicile, as defined in section 422.32, is in this state.

(c) *Qualified Iowa employee stock ownership plan” means an employee stock ownership plan, as defined in section 4975(e)(7) of the Internal Revenue code, and trust that are established by an Iowa corporation for the benefit of the employees of the corporation.

Additionally, you can read Governor Branstad’s statement on the close of the 2012 legislation session here.

Here’s what he had to say about ESOPs in his statement: “Legislation passed by this General Assembly will provide our Iowa Economic Development Authority with additional tools to help meet our administration’s ambitious goal to create 200,000 new jobs. We have made significant progress on that goal during this first year and a half and the High Quality Jobs Incentive Fund and Employee Stock Option Plan legislation will help accelerate those efforts.”

J. Michael Keeling, ESOP Association President had this to say: “We here at The ESOP Association are pleased to see this law to encourage the creation of new ESOPs in Iowa. We know what an ESOP brings to a company, to the company’s employees, and to the community where the company is located. Research has proven that ESOP companies are more productive, more profitable, and more sustainable, providing locally-controlled jobs. Obviously, Governor Branstad knows and appreciates what an ESOP company can bring to a community.”

We’ve included several posts about the Iowa bill on the blog this year. Links are below:

Owner Revolution Inc. Welcomes Iowa’s Governor and Lt. Governor

Iowa & ESOPs…Again

Iowa Governor Talks ESOPs

Iowa Governor and ESOPs

Guest Post – Iowa and ESOPs

 

Guest Blog – Employee Ownership Outlook

Today we bring you a guest blog from Corey Rosen, cofounder and former executive director of the National Center for Employee Ownership. He is now focusing his employee ownership work through the Rosen Ownership Opportunity Fund. A bio can be found here.

With all the talk about Iowa’s ESOP initiative, we thought this would be an interesting discussion.

States and Employee Ownership

According to a 2011 study by GoodJobsFirst, states spend about $70 billion per year on economic development, largely through tax incentives to get companies to relocate to or expand in the states (Money for Something: Job Creation and Job Quality Standards in State Economic Development Subsidy Programs). Governing.com  reports that states distributed $1.8 billion in incentives and tax credits to the entertainment industry alone between 2006-2008.

By contrast, states spend perhaps two million dollars on encouraging companies to become employee owned, even though employee owned companies grow 2.5% per year faster than they would have without an ownership plan, distribute billions of dollars a year in ownership benefits to employees that they can then spend on the local economy, and, in many cases, provide a way for owners to transition ownership that does not mean the company will be moved out of state when someone else buys a company or when new buyers reduce or eliminate staff.

States are clearly missing a bet. Experience shows that extremely modest expenditures on promoting employee stock ownership plans can yield major gains in job retention and expansion. Currently, only Vermont, Ohio, and Indiana have such programs. That is why a new initiative in Iowa is so encouraging (and one that can be copied).

Local ESOP company leaders met with state economic development officials and mapped out ideas for encouraging employee ownership. On January 10, Governor Terry Branstad announced that promoting employee ownership would be one of his three top priorities. The proposal has broad bi-partisan support and is expected to pass.

Branstad’s plan has several key elements:

  • Business owners would not have to pay state capital gains taxes for sales to ESOPs. That is a significant 9% in Iowa.
  • The Economic Development Authority (EDA) also would offer technical assistance and legal advice to employee buyers and companies, including to help pay for feasibility assessments.
  • The EDA would also work to make people more aware of ESOPs and how they work.

Existing State Programs

Three states currently have active employee ownership programs. The oldest is the Ohio Employee Ownership Center, based at Kent State University. It was started by the late John Logue, a professor at Kent State, in 1987. It provides technical assistance, training, and outreach to business owners, employee groups, local governments and organizations, and existing employee owned companies. It holds a large annual conference, operates an active network of ESOP companies, publishes books and papers, and holds a very successful series of seminars on succession planning. It is funded primarily by the state, but also receives foundation money and money from operations.

The Vermont Employee Ownership Center was formed in 2001 and also “provides information and resources to owners interested in selling their business to their employees, employee groups interested in purchasing a business, and entrepreneurs who wish to start up a company with broadly shared ownership.” It is funded through government and foundation grants, and from contributions from individuals and businesses.

Both the Ohio and Vermont centers are non-profit organizations, not part of the state government.

In 2007, Indiana, State Treasurer Richard Murdock (now a Republican Senate candidate) created a $50 million linked deposit program in which the state links making deposits into banks that make loans to ESOPs. The loan rate for the linked deposit funds is the CD rate plus 3.25%, but not less than 4.25%. Several ESOPs have been formed using the program.

State Programs in the Past

The late 1980s and early 1990s were the heyday of state employee ownership programs. New York, Washington, Oregon, and Michigan all had programs similar to Ohio’s, albeit with fewer staff than the Ohio Center now does. Massachusetts had a smaller program. All focused on providing technical assistance (often by arranging it through providers linked to the organizations), seminars, and publications. There was typically very little funding for feasibility studies. All of these programs succumbed to state budget cuts in the 1990s.

An NCEO analysis of the Ohio, New York, and Washington programs found that they increased the number of new ESOPs by about 30% over what would have been expected. That was an impressive return on investment—these programs typically had significantly less than $1 million in funding. Simply making people more aware of ESOPs created more plans. Harder to measure is the impact the programs had on the quality of plans, but there is good anecdotal reason to believe that by providing opportunities to companies to learn from one another, the plans were more effective.

Moving Forward

The argument for these plans is persuasive. At a nominal cost, they can create many new employee owned companies, often saving jobs and generating new sources of community wealth. By contrast, research on the net job creation impact of tax incentives for economic development is at best mixed. There is no question that the cost per job is very high.

The Iowa experience suggests that simply bringing this idea up with local state officials (generally those in economic development) and state political leaders may be enough to get things moving.

 

Iowa & ESOPs…Again

Iowa is a hotbed of ESOP discussion lately. Look at these recent posts:

Iowa Governor Talks ESOPs

Iowa Governor and ESOPs

Guest Post – Iowa and ESOPs

We know many ESOP Association members in the state are working to further the ESOP cause as well. Which is why when we came across this, we weren’t really all that surprised – Legislative Report from Sen. Pat Ward: Help Iowa Workers Buy Into Employer’s Businesses.

Senator Ward is a member of the Iowa State Assembly.

If you’re curious and would like to follow the discussion, the Iowa State bill is HF 2085. More info here.

Do you live Iowa? Are you following the ESOP debate going on in the state?

Guest Post – Iowa and ESOPs

We posted back in January about this topic:

Iowa Governor Talks ESOPs

Iowa Governor and ESOPs

We know our members in Iowa have been working with the Governor’s office and have been steadfastly promoting employee ownership in the state. When we heard that Mick Slinger, the CFO Van Meter Inc. (an ESOP Association member) sent an essay on ESOPs to The Gazette in Cedar Rapids, IA, we asked if we could reprint his essay here as a guest post.

Thanks to Mick and all our members in Iowa spreading the ESOP message.

The employee owners of Van Meter are pleased to see that Iowa lawmakers are considering a bill to encourage the creation of more Employee Stock Ownership Plans (ESOPs) in Iowa.

We clearly know from experience that ESOPs are good for the state.  They help save and create jobs.   They also help businesses be more competitive and successful, while at the same time creating a mechanism for the employee owners to share in that and accumulate significant retirement savings.  We believe this because we are an employee owned ESOP company.

Van Meter became an ESOP in 1993.  At that time, 30% of the company was sold to the employees through the use of an ESOP.   From 1993 to 2005, Van Meter continued to increase its employee ownership percentage to the point of becoming 100% employee owned in January 2005, where it still stands today.  Our goal is to stay 100% employee owned forever.   From 2005 to today, during periods of high uncertainty and through one of the worst economic downturns since the Depression, our business has grown over 8% annually.  In an industry with significant consolidation and movement of companies around the globe, the ESOP has been an effective growth and succession planning tool allowing our company and jobs to stay within Iowa.

At Van Meter, we work hard at building a culture of ownership and employee empowerment for the long-term success of our business.  The ESOP gives every employee owner a stake in that outcome.  Equity sharing is a benefit that pays for itself by putting everyone in the same boat.  We each share in the risks and rewards of being an owner, rising together as one.   Every employee owner has influence over the direction and success of our business.

We learned early on, however, that giving employees stock is not a magic pill.  Like any other thing, ownership needs to be taught.  We believe in a saying that if we capture the employees’ hearts, their minds will follow.   We invest heavily in the learning and development of our people.   At Van Meter, our company is the product, and our purpose is to create a culture where the right people come to work, stay, and achieve their potential.  We focus heavily on growth and opportunity for our people.  In doing that, our voluntary turnover is less than 4% annually, which leads to significant productivity gains.

Our culture is based on our core values, what we call our 5Ps.  People – our culture is committed to the development and well-being of our people.  We strive for 100% engagement.   Providers – take care of our customers and suppliers who provide us the opportunity to be in business.  Continuous imProvement – everyone everyday making improvements in the business;  Place – giving back to the communities where we blessed to work and live in;  Profit – we don’t run our business to make a profit, we make a profit to run our business.  In a nutshell, we are extremely committed to our employees, our communities and Iowa.

Since 2008, the beginning of the so called Great Recession, Van Meter has done just the opposite of what our competitors and what we hear many others have done and are doing.   Our motto was “why waste a good recession”.  So during this latest economic downturn, the employee owners of Van Meter committed to having no layoffs or workforce reductions.  We continued to invest and hire new people while everyone else was cutting back.  We believed that as the economy recovered we would be in a much stronger position in the long run, growing market share and providing additional job security and growth to our employee owners here in Iowa.  This has proven to be a good decision.

Not only do we invest heavily in our people, the ESOP has helped us to make significant investments in facilities across Iowa.  Since the great recession, employee ownership has allowed us to create fifty-five new jobs and add more than four million dollars in payroll, and also to invest over $8 million dollars in new inventory and $32 million in new facilities in Cedar Rapids, Iowa City and Sioux City and machinery and equipment.   This year, we have plans to build two more new facilities in Des Moines and Muscatine.

On the intangible side, we have things like an annual poster contest to help discover what employee ownership means to our people.  Outcomes have been phrases like; “Let’s pull together and brighten our future”; “The ESOP helps see our future more clearly”; “Where will you leave your footprint with employee ownership”; “Your ticket to our ESOP future – get in the game”; and “Get your two cents worth – it all adds up”.  Through the ESOP, employees recognize the opportunity they have to create financial security for themselves and for one another.

But beyond the numbers, the real success stories for Van Meter’s ESOP come from the heart.  We recently had an employee owner who retired early to pursue his real passion, going back to the family farm with his dad.   He had just turned fifty and had been with Van Meter over twenty years and participated in the ESOP since day one.  He shared the success of the Van Meter ESOP allowed him the financial freedom to retire early and he felt incredibly blessed for the opportunity to do this.   This is what makes our ESOP so special.

So if ESOPs are so great, why do we need legislation to encourage them?  In today’s credit environment, banks are hesitant to finance 100% of the ESOP transaction so sellers usually have to carry some of the debt.  The legislation creates a $1 million dollar fund to help defray some of the costs of setting up an ESOP and it would exempt business owners from capital gains tax.

We believe from what we contribute to our community in payroll and taxes that this legislation will more than pay for itself by stimulating economic growth in the state.  We became an employee owned company because we care deeply about our employees, communities and our state.  It would be devastating for our towns if locally owned businesses or profits were moved out of the state.  We need to save all the jobs and business we can.  In an ESOP company, we are dealing directly with owners who have a shared, vested interest in the long-term success of the business and community in which they live.  This legislation is a great way to promote growth, investment and job creation in Iowa.  We appeal to Iowa lawmakers: let’s keep our home grown businesses right here in Iowa.

Iowa Governor Talks ESOPs

Last week, Iowa Governor, Terry Branstad, gave his annual State of the State speech. We won’t get into the specifics of the speech but if you’re interested, you can read the full speech here. It’s also posted here on the Iowa state website.

What we were surprised and happy to hear was this:

“We must work to keep Iowa companies in Iowa, even when an ownership change takes place.

This is not just a tool for Iowa businesses; it is a tool for Iowa communities–Iowa communities where these companies represent so much more than jobs; where these companies represent our families, friends and way of life.

Many of these companies have operated in Iowa for years, operated by owners committed to the local way of life.  And when these owners wish to retire, they must have options for keeping their company local.

I am proposing legislation that will encourage the formation of Employee Stock Option Plans to encourage the sale of these local businesses to the very employees who have made that company a profitable success.

Our plan will encourage more Iowans to own a stake in their company, to reap a greater share of the fruits of their own labor, and to help protect the quality of life in their local community.

Employee ownership is great for the Iowa communities in which these businesses, jobs, and careers exist.”

Yes, Iowa Governor Terry Branstad is encouraging ESOP creation in the state.

Obviously, we here at The ESOP Association are pleased to see a proposal to encourage the creation of new ESOPs in Iowa, and to assist our existing companies, take root in Iowa. With 28 corporate members in the state, one of which we honored last year as the ESOP Company of the Year, Van Meter, Inc., we know what an ESOP brings to a company, to the company’s employees, and to the community where the company is located. We can only surmise that Governor Branstad understands that ESOP companies are more productive, more profitable, and more sustainable, providing locally-controlled jobs.