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| [House Hearing, 114 Congress] | |
| [From the U.S. Government Publishing Office] | |
| S IS FOR SAVINGS: PRO-GROWTH BENEFITS OF EMPLOYEE-OWNED S CORPORATIONS | |
| ======================================================================= | |
| HEARING | |
| BEFORE THE | |
| COMMITTEE ON SMALL BUSINESS | |
| UNITED STATES | |
| HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED FOURTEENTH CONGRESS | |
| SECOND SESSION | |
| __________ | |
| HEARING HELD | |
| APRIL 27, 2016 | |
| __________ | |
| [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] | |
| Small Business Committee Document Number 114-058 | |
| Available via the GPO Website: www.fdsys.gov | |
| ___________ | |
| U.S. GOVERNMENT PUBLISHING OFFICE | |
| 20-073 WASHINGTON : 2016 | |
| _______________________________________________________________________________________ | |
| For sale by the Superintendent of Documents, U.S. Government Publishing Office, | |
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| HOUSE COMMITTEE ON SMALL BUSINESS | |
| STEVE CHABOT, Ohio, Chairman | |
| STEVE KING, Iowa | |
| BLAINE LUETKEMEYER, Missouri | |
| RICHARD HANNA, New York | |
| TIM HUELSKAMP, Kansas | |
| CHRIS GIBSON, New York | |
| DAVE BRAT, Virginia | |
| AUMUA AMATA COLEMAN RADEWAGEN, American Samoa | |
| STEVE KNIGHT, California | |
| CARLOS CURBELO, Florida | |
| CRESENT HARDY, Nevada | |
| NYDIA VELAZQUEZ, New York, Ranking Member | |
| YVETTE CLARK, New York | |
| JUDY CHU, California | |
| JANICE HAHN, California | |
| DONALD PAYNE, JR., New Jersey | |
| GRACE MENG, New York | |
| BRENDA LAWRENCE, Michigan | |
| ALMA ADAMS, North Carolina | |
| SETH MOULTON, Massachusetts | |
| MARK TAKAI, Hawaii | |
| Kevin Fitzpatrick, Staff Director | |
| Emily Murphy, Deputy Staff Director for Policy | |
| Jan Oliver, Chief Counsel | |
| Michael Day, Minority Staff Director | |
| C O N T E N T S | |
| OPENING STATEMENTS | |
| Page | |
| Hon. Steve Chabot................................................ 1 | |
| Hon. Nydia Velazquez............................................. 2 | |
| WITNESSES | |
| Mr. Peter S. Strange, Chairman Emeritus, Messer Inc., Cincinnati, | |
| OH............................................................. 4 | |
| Mr. Jay Hardy, President, Hardy Diagnostics, Santa Maria, CA, | |
| testifying on behalf of the Warren County Chamber Alliance..... 5 | |
| Mr. Alex Brill, Resident Fellow, American Enterprise Institute, | |
| Washington, DC................................................. 7 | |
| Ms. Stephanie E. Silverman, President & Executive Director, | |
| Employee-Owned S Corporations of America, Washington, DC....... 8 | |
| APPENDIX | |
| Prepared Statements: | |
| Mr. Peter S. Strange, Chairman Emeritus, Messer Inc., | |
| Cincinnati, OH............................................. 20 | |
| Mr. Jay Hardy, President, Hardy Diagnostics, Santa Maria, CA, | |
| testifying on behalf of the Warren County Chamber Alliance. 28 | |
| Mr. Alex Brill, Resident Fellow, American Enterprise | |
| Institute, Washington, DC.................................. 40 | |
| Ms. Stephanie E. Silverman, President & Executive Director, | |
| Employee-Owned S Corporations of America, Washington, DC... 49 | |
| Questions for the Record: | |
| None. | |
| Answers for the Record: | |
| None. | |
| Additional Material for the Record: | |
| None. | |
| S IS FOR SAVINGS: PRO-GROWTH BENEFITS OF EMPLOYEE-OWNED S CORPORATIONS | |
| ---------- | |
| WEDNESDAY, APRIL 27, 2016 | |
| House of Representatives, | |
| Committee on Small Business, | |
| Washington, DC. | |
| The Committee met, pursuant to call, at 10:00 a.m., in Room | |
| 2360, Rayburn House Office Building, Hon. Steve Chabot | |
| [chairman of the Committee] presiding. | |
| Present: Representatives Chabot, Luetkemeyer, Brat, Hardy, | |
| Kelly, Velazquez, Hahn, Meng, and Adams. | |
| Chairman CHABOT. Good morning. The Committee will come to | |
| order. | |
| Special thanks to our witnesses who have traveled to our | |
| Nation's capital and taken time away from their busy schedules | |
| to be with us here today. We are pleased to be joined today by | |
| our colleague Mr. Reichert from Washington. Mr. Kind from | |
| Wisconsin, had intended to be with us but something came up he | |
| is unable to be with us today. But they, together, introduced | |
| H.R. 2096, the Promotion and Expansion of Private Employee | |
| Ownership Act of 2015. So it is a bipartisan bill. We have | |
| provided a copy of the section by section bill for the members' | |
| information. | |
| I am also pleased to welcome some very special guests from | |
| the Warren County, Ohio, part of my district, who are in the | |
| audience here today. | |
| With National Small Business Week right around the corner, | |
| we must do all we can to support America's 28 million small | |
| businesses, which are responsible for 7 out of every 10 new | |
| jobs created in America today. As part of that effort, I | |
| believe that small companies in my home State of Ohio have an | |
| important story to tell about what has worked so well for them. | |
| In many ways, Ohio small businesses can serve as a model for | |
| small businesses nationwide. | |
| I am very happy that two of our witnesses, Jay Hardy and | |
| Pete Strange, have strong ties to Ohio, and they will share | |
| their stories about one critical way we can support them and | |
| job creators like them all across America. | |
| Our country was founded on the idea that free markets and | |
| free enterprise provide the best economic compass for a free | |
| people. At the heart of this issue is the relationship between | |
| employers, their employees, and the customers they serve. Too | |
| often, government red tape and our broken tax code interfere | |
| with this relationship, doing a disservice to all involved. | |
| Our economy works best when America's entrepreneurs are | |
| free to make their own decisions, take their own risks, and run | |
| their businesses as they see fit--free from government | |
| interference. That is exactly what employee stock ownership | |
| programs, or ESOPs, do. | |
| If companies so choose, they can convert employees into | |
| owners who share in the profits of the company. This equity | |
| lets them share in the American Dream and have a stake in their | |
| own future. It also helps them save money as they plan for | |
| their golden years. | |
| S corporations have only been allowed to form ESOPs since | |
| 1998. Since then, the research has reinforced what we hear from | |
| small businesses all the time--this structure works, and it | |
| works especially well for small companies. H.R. 2096 would | |
| provide additional help for S corporations interested in | |
| forming ESOPs, strengthening these important vehicles--that | |
| being the ESOPs--as vehicles that more and more companies would | |
| be able to take advantage of to help their employees. | |
| I am looking forward to hearing from our very distinguished | |
| panel of witnesses here this morning, and at this time, I would | |
| like to yield to the Ranking Member, Ms. Velazquez, for her | |
| opening statement. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. Good morning. | |
| As part of their retirement plan, Americans have | |
| traditionally relied on employer-based options. For small | |
| firms, however, providing such plans is a two-prong challenge. | |
| They not only have to set up and administer the plan, but | |
| enroll their employees as well. This resource and time- | |
| intensive process has resulted in only 14 percent of small | |
| firms offering such a benefit. A recent approach to helping | |
| more small companies provide for their employees are through | |
| employee stock ownership plans (ESOPs), a type of defined | |
| contribution retirement plan. Companies using this plan not | |
| only provide a retirement savings vehicle, but also provide | |
| more stable employment than other businesses. Reports have | |
| shown that they even outperformed the S&P 500 Total Returns | |
| Index in terms of total return by participant by 62 percent and | |
| distribution to participants totaled nearly $30 billion in a | |
| decade. These numbers are impressive and merit a closer look at | |
| ESOPs. We must also investigate why more small businesses are | |
| not using this beneficial plan. Today's hearing will give us | |
| that opportunity. | |
| While the S ESOP has only existed for a short while, we are | |
| seeing the benefit to employers, employees, and the national | |
| economy. In fact, the number of ESOPs have more than doubled | |
| since 2002, proving they are worth the trouble and expense for | |
| a business to use. | |
| Nevertheless, the ESOP is still a very foreign concept for | |
| many small business owners. Whether it is due to a lack of | |
| awareness or intimidation from the complex rules, I hope to | |
| find out today where the primary challenges lie for small | |
| firms. But whatever the reason is, we should be doing more to | |
| enlighten employers and make it a more attractive retirement | |
| vehicle. As our population ages, it is critical that small | |
| employers and their employees have access to quality financial | |
| security in their retirement years. We have made strides to | |
| enroll more workers through the my RA payroll deduction account | |
| and state-sponsored retirement savings plans, like automatic | |
| IRAs and multiple employer plans. We can do better and S ESOPs | |
| are one option. | |
| I look forward to hearing from our witnesses about the | |
| advantages of S ESOPs and what challenges face owners who | |
| decide they are the right move for their business. Today's | |
| discussion about H.R. 2096 will also help educate members on | |
| the bill and how it is meant to attract small business | |
| employers to this plan. | |
| In advance of the testimony, I want to thank all the | |
| witnesses for both your participation and insights into this | |
| important topic. With that, Mr. Chairman, I yield back. | |
| Chairman CHABOT. Thank you very much. The gentlelady yields | |
| back. | |
| If committee members have opening statements prepared, I | |
| would ask that they submit them for the record. | |
| I will now take just a couple moments to explain our timing | |
| system that we have here. It is a 5-minute rule that we operate | |
| by. It is pretty simple. You will have a lighting system to | |
| help you out. The green light stays on for 4 minutes and then a | |
| yellow light will come on and let you know you have about a | |
| minute to wrap up. When the red light comes on, we would ask | |
| you to try to stay within that if possible. If you go over a | |
| little bit we will give you a little flexibility but not a lot. | |
| So we would ask you to try to do that, and we hold ourselves to | |
| the same 5-minute rule. We are stricter there than we are with | |
| you all. | |
| We will begin by introducing our witnesses. Our first | |
| witness is Pete Strange, who is chairman emeritus of Messer, | |
| Incorporated, which is based in my hometown of Cincinnati, | |
| Ohio. Messer, Inc. is the parent company of Messer Construction | |
| Company, a regional general contractor and construction | |
| manager, and Messer Financial Services, a diversified | |
| investment firm. Mr. Strange served as Messer's chairman from | |
| 1990 through 2013, so for 23 years. He has also served on a | |
| variety of community and industry boards in Cincinnati, | |
| including the Cincinnati branch of the Federal Reserve Bank of | |
| Cleveland and the Cincinnati USA Regional Chamber of Commerce, | |
| among others. | |
| Our second witness is Jay Hardy, president of Hardy | |
| Diagnostics in Santa Maria, California, and also in our | |
| district. This morning, Mr. Hardy will be testifying on behalf | |
| of the Warren County Chamber Alliance of Warren County, Ohio. | |
| Party Diagnostic manufactures over 3,500 different products | |
| used in microbiology laboratories. Currently, they have two | |
| manufacturing facilities, one in Santa Maria, California, and | |
| the other located in Springboro, Warren County, Ohio, which as | |
| I mentioned before, is in our district. | |
| Our third witness today is Alex Brill, who is a resident | |
| fellow at the American Enterprise Institute in Washington, | |
| D.C., here. Mr. Brill is also the CEO of Matrix Global | |
| Advisors, a Washington, D.C.-based economic policy consulting | |
| firm. Prior to this, Mr. Brill was the policy director and | |
| chief economist of the House Ways and Means Committee. He also | |
| served as an advisor to the Simpson-Bowles bipartisan Deficit | |
| Reduction Commission, and as staff economist to the White House | |
| Council of Economic Advisors. | |
| We welcome all three of you here, and I would now like to | |
| yield to the ranking member for the purpose of introducing our | |
| fourth witness. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. It is my pleasure | |
| to introduce Ms. Stephanie Silverman, president and executive | |
| director of the Employee-Owned S Corporations of America. She | |
| is also founder and CEO of Venn Strategies LLC. Before | |
| launching her own firm, Stephanie was a senior advisor in the | |
| Washington, D.C., government relations practice of Manatt, | |
| Phelps and Phillips, a national firm specializing in matters of | |
| national and international policy. She holds an MBA from the | |
| Wharton School of Business and an undergraduate degree from | |
| Duke University. Welcome. | |
| Chairman CHABOT. Thank you. | |
| Now having introduced our panel, we will hear from them. We | |
| will begin with Mr. Strange. You are recognized for 5 minutes. | |
| STATEMENTS OF PETER S. STRANGE, CHAIRMAN EMERITUS, MESSER, | |
| INC.; JAY HARDY, PRESIDENT, HARDY DIAGNOSTICS; ALEX BRILL, | |
| RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE; STEPHANIE E. | |
| SILVERMAN, PRESIDENT AND EXECUTIVE DIRECTOR, EMPLOYEE-OWNED S | |
| CORPORATIONS OF AMERICA | |
| STATEMENT OF PETER S. STRANGE | |
| Mr. STRANGE. Chairman Chabot, Ranking Member Velazquez, and | |
| distinguished members of the Committee, thank you for inviting | |
| me to testify before you today to share my story of inclusive | |
| capitalism and the impact it has had upon hundreds of my fellow | |
| employees at Messer Construction. Thank you for holding this | |
| hearing to learn more about ESOPs and legislation that can | |
| encourage more businesses to become employee owned. | |
| My name is Pete Strange and I began working at Messer | |
| Construction as a project engineer in 1968. I retired from | |
| management a couple of years ago after 23 years as CEO. Mine is | |
| the tale of two careers. In 1968, Messer was a Cincinnati- | |
| based, medium-size, family-owned construction company with a | |
| long history and a good reputation. Like most companies in | |
| construction, it had little in the way of employee benefits. By | |
| 1990, company-funded retirement benefits totaled only a million | |
| and a half dollars on behalf of 99 participants. In 1998, the | |
| last son of the company founder died and we found ourselves | |
| with an uncertain future. The grandchildren of the founder | |
| wanted access to their wealth, and having no connection with | |
| the employees, were not committed to maintaining employment at | |
| the company. | |
| In 1990, the Messer employees were able to buy their future | |
| from the Messer family using the ESOP structure. I led the | |
| employee group through those negotiations, so I can tell you | |
| firsthand that we employees could not have purchased the | |
| company if not for the important tax advantages that the ESOP | |
| model afforded us. Our company's investment in ESOPs allowed 99 | |
| Messer employees to purchase our future, and the engagement | |
| that opportunity created has resulted in growth. Today, | |
| operating from nine regional offices, Messer performs more than | |
| a billion dollars in construction annually, focusing upon | |
| health care, higher education, and life sciences projects. | |
| Here is the measure of the change that our ESOP brought to | |
| our retirement savings. Messer now provides quality jobs and | |
| predictable retirement for over 1,000 individuals and has | |
| company-funded retirement assets for those employees, totaling | |
| more than $220 million. | |
| Through our engagement with the Employee-Owned S | |
| Corporations of America, we have come to know hundreds of | |
| companies with stories similar to ours, and the data from | |
| ESCA's quality research shows that ESOP companies are more | |
| robust, more sustainable, and provide higher levels of | |
| diversified retirement benefits than non-ESOP companies. | |
| The Messer ESOP is in place and it is working well for us. | |
| However, Messer manages a vendor supply chain of small local | |
| subcontractors who are increasingly at risk from forces both | |
| external and internal. Creating a more supportive environment | |
| for those companies to form ESOPs, both for the benefit of | |
| their employees and to reduce the risk and volatility that | |
| results from unplanned succession will be a direct benefit to | |
| our communities, to our customers, and to our company as we | |
| compete in a global economy. | |
| I have had only one employer in my more than 40-year | |
| career, but I have had two completely different employment | |
| opportunities. Messer is a clear example of the power of | |
| inclusive capitalism that results from supporting sub-S ESOPs. | |
| I invite you to visit us or an employee-owned company in your | |
| district or State so you can feel firsthand the pride employee- | |
| owners take in their work and the confidence that employee- | |
| owners have in their future. | |
| Mr. Chairman and committee members, I thank you for this | |
| opportunity to address the Committee and share Messer's story, | |
| and for your consideration of legislation that will allow more | |
| hardworking Americans to share in the American Dream at work. | |
| Thank you. | |
| Chairman CHABOT. Thank you very much. We appreciate it. | |
| Mr. Hardy, you are recognized for 5 minutes. | |
| STATEMENT OF JAY HARDY | |
| Mr. HARDY. First of all, I would like to thank Chairman | |
| Chabot today for inviting me to voice my support of H.R. 2096 | |
| and the proposed incentives to increase employee ownership in | |
| America. I would also like to thank Ranking Member Velazquez | |
| and the other members of the Small Business Committee. | |
| My name is Jay Hardy. I am the president and founding | |
| partner of Hardy Diagnostics, a medical device manufacturer | |
| based in California with a manufacturing facility in Ohio and | |
| Texas. We have been in business for 36 years servicing the | |
| laboratory industry, and we currently have 350 employees. | |
| Four years ago, I sold 70 percent of my shares to our newly | |
| formed ESOP. Last year, I sold the remaining shares, making our | |
| company a 100 percent employee-owned S corporation. I have | |
| never had any regrets in making this decision, which has set | |
| our company on a course of increased growth and prosperity for | |
| the reasons that I would like to describe for you today. | |
| Since becoming an ESOP, our company has grown by 78 | |
| percent, so I think the numbers speak for themselves. The ESOP | |
| structure was defined in Congress as a part of the ERISA laws | |
| in 1974. Just as Abraham Lincoln's Homestead Act of 1862 | |
| created wealth for ordinary citizens by granting them 160 acres | |
| of land, the ESOP also has the potential to create wealth for | |
| all Americans without having to own land. Within the ESOP, | |
| employees are granted shares of the company they work for | |
| without cost to them or taxation. | |
| Currently, there are over 11 million ESOP participants in | |
| America. This number needs to grow, and here is why. Recent | |
| studies have shown that ESOP companies are 25 percent more | |
| likely to stay in business than non-ESOPs. Employee-owners were | |
| four times less likely to get laid off during our last | |
| recession. Employee-owners have two and a half times more money | |
| in their retirement accounts than non-ESOP employees. Employer- | |
| owners receive 5 to 12 percent more in wages than non-ESOP | |
| employees. Employer-owners are 5 to 10 percent more productive | |
| than their non-ESOP counterparts. So you can see that ESOPs are | |
| undoubtedly a very good thing for the American worker, and | |
| thus, very good for the American economy in general. | |
| Today, we hear a lot of talk about income inequality and | |
| capitalism being good only for the privileged 1 percent. Why | |
| can capitalism not be accessible for all American workers by | |
| owning a portion of the companies that they work for? While | |
| capitalism may have its flaws, the modern ESOP provides a way | |
| to correct those flaws. This is why the ESOP has been nicknamed | |
| ``universal capitalism'' or ``capitalism for the masses.'' The | |
| employee-owners turn out to be highly motivated because they | |
| know that their efforts will be directly rewarded through an | |
| increase in share value. This, in turn, makes the American ESOP | |
| more able to successfully compete in the world market. | |
| Today, many workers are afraid that Social Security or | |
| their meager 401(k) savings will not be adequate for their | |
| retirement. The ESOP will substantially supplement those | |
| retirement programs in a very significant way. | |
| The original idea of employee ownership came from Lewis | |
| Kelso, who formed the first ESOP in 1956. He said, ``The | |
| trouble with today's finance is that they are designed to make | |
| the rich richer. None is designed to make the poor richer.'' He | |
| also said, ``If capital ownership is good for the rich, it is a | |
| thousand times better for the middle-class and the poor.'' | |
| The workers at Hardy Diagnostics now know that their daily | |
| work is not drudgery but rather an exciting investment in their | |
| own personal financial future. | |
| In preparation for this testimony today, I asked the | |
| employee-owners of our company to provide me with their own | |
| thoughts about the ESOP which they own. One of them said, | |
| ``Since becoming an ESOP, I have found an avenue in which every | |
| employee has an opportunity to be engaged in our company's | |
| steady climb of growth. As a manager, nothing is more rewarding | |
| than seeing individuals in my department with such a high level | |
| of enthusiasm for the success of our company, as well as their | |
| own personal growth and achievements.'' Another employee-owner | |
| said, ``Being a part of an ESOP breaks down title barriers. We | |
| all have the same title, owner. Ownership inspires greater | |
| value and satisfaction in our daily work. Our work turns into | |
| an investment. It is no longer just a job.'' | |
| So I think you get the idea. H.R. 2096 is an excellent | |
| piece of legislation that provides the necessary incentives for | |
| S corp business owners to create an employee-ownership program. | |
| This will make the S corp ESOP a very attractive exit plan for | |
| business owners that wish to do the right thing in turning the | |
| ownership of their companies over to workers who made the | |
| business successful. H.R. 2096 also provides incentives for | |
| banks to fund the loans that make this transaction possible. | |
| Capitalism, for all its flaws, remains the best economic | |
| system the world has ever known. Let's improve upon it by | |
| putting true ownership within reach of all American workers | |
| through the wealth-building program of the modern ESOP. I am | |
| passionate about employee ownership, and I enjoy being an | |
| evangelist for the ESOP movement here in America. | |
| I thank you once again, and I would be glad to answer any | |
| questions you may have. | |
| Chairman CHABOT. Thank you very much. | |
| Mr. Brill, you are recognized for 5 minutes. | |
| STATEMENT OF ALEX BRILL | |
| Mr. BRILL. Chairman Chabot, Ranking Member Velazquez, and | |
| members of the Committee, thank you for the opportunity to | |
| appear before the Committee to discuss the role of S ESOPs in | |
| the U.S. economy. Allow me to summarize my written testimony | |
| which has been submitted for the record. | |
| S ESOPs define contribution retirement plans that allow | |
| employees to become owners in their employer exist across a | |
| wide spectrum of industries and include a meaningful number of | |
| U.S. employees. S ESOPs can improve worker commitment, increase | |
| firm productivity, reduce worker turnover, and lower production | |
| costs. S ESOPs proved resilient in the face of the most recent | |
| recession, and thereby, helped mitigate the adverse effects of | |
| the recession on S ESOP suppliers and related business | |
| activities. | |
| A few specific facts. The number of S ESOPs has increased | |
| 131 percent from 2002 through 2013, reaching 2,626 by my count. | |
| This increase has been steady year over year aside from a | |
| slight dip during the recessionary period in 2008. More | |
| important, however, than the trend in the number of S ESOPs is | |
| the increase in the number of employee-owners working at these | |
| firms. The number of active participants at S ESOPs increased | |
| 167 percent from almost 200,000 people in the year 2002, to | |
| over 520,000 in the year 2013. Since 2008 alone, active | |
| participants at S ESOPs have increased 30 percent. | |
| It should be noted that because not all employees are | |
| necessarily S ESOP owners, the number of participants, the | |
| statistics I was just citing, is a conservative estimate of | |
| employment by these firms. | |
| Some of the growth in S ESOP employment is attributable to | |
| firms hiring more workers, and some is attributable to the | |
| rising popularity to S ESOPs generally. In other words, this | |
| large increase in S ESOP employment I just described does not | |
| entirely represent just organic job growth within S ESOPs; it | |
| also reflects firms converting to S ESOP status. I analyzed the | |
| subset of all the S ESOPs, those operating consistently from | |
| the period 2002 through 2014, and found that in these firms, | |
| employment grew 30 percent, while at the same period, overall | |
| U.S. employment grew just 6 percent. | |
| Now, a word about the economic evidence. ESOPs tend to | |
| perform better than their peers, and the mechanism by which | |
| this occurs is at least, in part, the additional commitment | |
| workers make as they become owners in their firms. This is | |
| particularly important in the small business context. The | |
| success of small- and medium-sized enterprises is often reliant | |
| on the ability of firms to ensure their employees work | |
| effectively and cohesively. | |
| Higher worker commitment and lower turnover rates are key | |
| components for small business success in an increasingly | |
| competitive marketplace. By strengthening this worker | |
| commitment to their employer, the S ESOP structure can help | |
| foster efficiency, increase productivity, and grow output. | |
| I would also like to stress that the benefits of S ESOPs | |
| are not limited to just their firms and their employees. The | |
| demonstrated resilience of S ESOPs benefit the whole economy. | |
| For example, during a recession, bankruptcy for small | |
| businesses is not uncommon, and this can have a domino effect, | |
| imposing financial hardships not only on workers, but on the | |
| firm's suppliers and other local businesses. To the extent that | |
| S ESOPS mitigate these effects through their resilience, they | |
| represent and offer a positive externality to the economy. | |
| In conclusion, as the U.S. seeks to rebound from a period | |
| of tepid productivity growth, S ESOPs are a valuable tool in | |
| promoting growth, not only among small businesses, but | |
| indirectly in the economy overall. | |
| Thank you, and I would be happy to answer your questions. | |
| Chairman CHABOT. Thank you very much. | |
| Ms. Silverman, you are recognized for 5 minutes. | |
| STATEMENT OF STEPHANIE E. SILVERMAN | |
| Ms. SILVERMAN. Good morning, Chairman Chabot, Ranking | |
| Member Velazquez, and distinguished members of the Committee. | |
| My name is Stephanie Silverman, and I am president and | |
| executive director of the Employee-Owned S Corporations of | |
| America. Thank you for the opportunity to testify today about | |
| the success of S corporations that are owned by their | |
| employees, or S corporation ESOPs, and on bipartisan | |
| legislation to expand employee ownership. | |
| ESCA represents S ESOP companies in every State, in | |
| industries from heavy manufacturing to construction to school | |
| photography. Since first being allowed to form in 1998, the | |
| nearly 3,000 S ESOP companies in the U.S. now account for $92 | |
| billion in direct output to the U.S. economy each year. Twenty | |
| years ago, Congress passed legislation creating S ESOPs. | |
| Congress's goal was to encourage employee ownership of private | |
| industry, enable workers to benefit from their labor, and | |
| create a path for building meaningful retirement savings. Data | |
| shows that today S ESOPs are doing precisely that. Twenty years | |
| later, private S ESOP companies have been a remarkable success | |
| story, a bright spot in an economy characterized by sluggish | |
| growth, anemic job creation, and worker insecurity. Many | |
| studies by renowned economists from across the ideological | |
| spectrum illustrate how S ESOPs are powerful for workers as a | |
| retirement savings and economic security tool and how they have | |
| contributed to communities and to the national economy. I will | |
| touch on a few key points from the most recent studies. | |
| Earlier this year, economist Jared Bernstein released a | |
| study that shows S ESOPs reduce wage and wealth inequality. | |
| Bernstein also found ESOP companies pay their workers better | |
| wages and provide them with more stable employment than other | |
| comparable businesses. With Congress searching for solutions | |
| for boosting worker savings, job prospects, and wages, the S | |
| ESOP's success story reminds us this goal can be reached | |
| through capital ownership shared among works. | |
| At a time when almost half of working Americans do not have | |
| any retirement plan at work, S ESOPs also provide unparalleled | |
| worker retirement savings opportunities. As Ranking Member | |
| Velazquez recently noted, between 2002 and 2012, S ESOPs | |
| outperformed the S&P 500 and their net assets increased over | |
| 300 percent, allowing them to distribute nearly $30 billion in | |
| retirement savings to their employee-owner participants. | |
| The savings benefit to employees does not come with | |
| additional risk. Moreover, private employee-owned businesses | |
| are proven to be more stable than their counterparts. In 2014, | |
| the National Center for Employee Ownership released data | |
| showing that the default rate on bank loans to private ESOP | |
| companies was an astonishingly low 0.2 percent annually. This | |
| compares to mid-market companies defaulting on loans at a rate | |
| 10 times higher or greater. | |
| Eight years ago, as members of Congress began to hear from | |
| companies and workers in their districts, they began asking, | |
| what can Congress do to encourage more S ESOPs to form? The | |
| answer to that question prompted what is currently H.R. 2096, | |
| the Promotion and Expansion of Private Employee Ownership Act. | |
| First introduced by Congressman Ron Kind in the 111th Congress, | |
| the bill has been introduced in the subsequent three congresses | |
| led by Congressman Dave Reichert and Mr. Kind. Today it has 67 | |
| bipartisan cosponsors, including 21 members of the Tax Writing | |
| Ways and Means Committee, and in the Senate, the counterpart S. | |
| 1212 has 28 cosponsors. In short, that bill would provide | |
| incentives to owners of S corporations to sell their stock to | |
| an ESOP. Today those incentives exist but only for owners of C | |
| corporations. Section 1042 of the Tax Code allows a C | |
| corporation owner to defer the recognition of gains when the | |
| owner sells shares to an ESOP. Expending parody to S | |
| corporation owners is the single-most significant legislative | |
| action that Congress can take to encourage more of the millions | |
| of S corporation owners to choose an ESOP when they consider | |
| how to transition their businesses from their current ownership | |
| structure. It also would encourage banks to lend to S ESOPs to | |
| create more ESOP ownership of companies. Under the proposal, | |
| banks could deduct 50 percent of interest income on certain | |
| loans made to an ESOP. Employees often lack the funds to buy a | |
| company directly, and not all banks understand the ESOP | |
| structure, which may cause them to limit lending to these | |
| vibrant businesses. This incentive can address those | |
| challenges. It would provide assistance to would-be S ESOP | |
| companies through an employee-ownership assistance office at | |
| Treasury, and it would permit an SBA-certified small business | |
| to remain eligible for SBA programs after becoming majority- | |
| owned by an ESOP. | |
| Quite simply, more S ESOPs mean more worker savings, more | |
| wealth and wage equality, and more job stability. That is why | |
| we hope this committee, and your colleagues in Congress, will | |
| help advance this vital measure. Thank you for the opportunity | |
| to testify, and I would be happy to answer any questions. | |
| Chairman CHABOT. Thank you very much. | |
| We will now go to the questioning part, and I will begin | |
| with myself. I will begin with you, Mr. Strange, if I can. | |
| Where do you expect that your company would be now had it not | |
| converted to an ESOP back in 1990? I know it is impossible to | |
| know that, but if you could try. | |
| Mr. STRANGE. The opportunities that the family considered, | |
| in addition to selling to the employees, were to sell the | |
| assets, we had some equipment and property, or to sell to a | |
| larger construction company. What is certain is that the | |
| company would not exist and would probably not be housed in | |
| Cincinnati, Ohio, if the employees had not purchased it. What | |
| is equally certain is that the math worked in our favor. | |
| Because of the rollover, the sellers were able to get a better | |
| deal from us, and because of the long-term thinking of the | |
| ESOP, we describe Messer as a ``get rich slow'' scheme, we were | |
| able to amortize our efforts in buying the capital over a much | |
| longer period of time than a normal financial buyer would have. | |
| Chairman CHABOT. Thank you. How many employees were | |
| impacted at that time then as a result of this? | |
| Mr. STRANGE. Ninety-nine. | |
| Chairman CHABOT. Ninety-nine. | |
| Mr. STRANGE. There were 99 employees in a recently formed-- | |
| it is 4 years old--profit-sharing plan that had the 1.5 in it. | |
| Prior to that we had no retirement plan because the hearty | |
| independent folk in construction thought we ought to fend for | |
| ourselves. | |
| Chairman CHABOT. Okay. One thing that I can testify to is | |
| when you drive around the greater Cincinnati area, you will see | |
| an awful lot of construction going on with the Messer name on | |
| there, so they do a lot of work all over other place. | |
| Mr. STRANGE. Thank you. | |
| Chairman CHABOT. Thank you. | |
| Mr. Hardy, I will go to you next, if I can. What changes | |
| did you notice in your company, and employees, especially, | |
| after it became employee-owned? | |
| Mr. HARDY. There were a lot of changes. I think one, would | |
| be that people had more enthusiasm for their jobs. In the past | |
| it was kind of a problem. People punch in, they punch out. Some | |
| of them were not fully engaged in what we are doing, but I have | |
| seen a remarkable change over the last 4 years. They were | |
| getting very, very interested, and we are teaching them | |
| business practices. All of our employees learn a little bit | |
| about how to interpret financial statements. They look at | |
| income statements and balance sheets. We are also an opening | |
| book management company, so all the books are open to all of | |
| our employees. They can see how we are doing month-to-month, | |
| and they appreciate that. Whether it is good news or bad news, | |
| they see all that. I think there is more of a spirit of | |
| cooperation. Productivity is up. Sales are up. It has just been | |
| a terrific change for our company. | |
| Chairman CHABOT. Thank you. | |
| Mr. Brill, as you have studied employee-owned companies | |
| over the years, what are the most compelling factors you found | |
| that contribute to their success? Also, what would you say are | |
| the biggest barriers that you have identified to the creation | |
| of more ESOP companies? | |
| Mr. BRILL. Thank you, Mr. Chairman. | |
| The evidence, both the survey evidence and some of the | |
| empirical research, really mirrors the testimony that Mr. Hardy | |
| just offered, that workers are more enthusiastic. The | |
| terminology I used in my testimony is worker commitment, but | |
| these are basically the same notions, that workers feel better | |
| about going to work. They are more willing to work hard, to put | |
| in a little extra, to stay a little late. They are more aware | |
| of their surroundings, more willing to offer suggestions to | |
| their managers about how things could be done better and more | |
| efficiently. There is evidence that employees in ESOP | |
| structures, S ESOPs included, require less management, and that | |
| is a cost savings. If you need fewer managers to keep an eye on | |
| the workers, you are saving money, knowing that the employees | |
| are motivated themselves for hard work. | |
| Chairman CHABOT. Thank you. Are there any barriers that you | |
| have seen? | |
| Mr. BRILL. It does seem surprising that there are not more | |
| S ESOPs, to be frank, and I am not quite sure why that is. | |
| There seems to be some sort of breakdown in the communication | |
| in the marketplace about owners and founders not being aware of | |
| these tools. | |
| Chairman CHABOT. Perhaps because of the huge following that | |
| we have in this Committee over the C-SPAN coverage that we get, | |
| that there will be far more soon. | |
| Mr. BRILL. Hopefully. | |
| Chairman CHABOT. Thank you. | |
| I am almost out of time, but let me turn to you, Ms. | |
| Silverman. How safe are ESOPs when employees have their | |
| retirement savings tied up to the success of the business? | |
| Would you comment on that? | |
| Ms. SILVERMAN. Thank you, Mr. Chairman. The question speaks | |
| to the issue of diversification, and I think that it is | |
| important to understand that S ESOPs provide some of the most | |
| diversified retirement opportunities. First, because ERISA | |
| requires the ESOP structure to allow for diversification. As an | |
| employee gets further along in their tenure and older, ERISA | |
| requires a company to allow employees to begin diversifying out | |
| of the ESOP plan. Second, while most U.S. companies, about half | |
| of U.S. companies, do not offer any retirement savings at work, | |
| the ESOP is a plan in every ESOP company. About 85 percent of | |
| ESCA's members offer at least one additional plan at work. | |
| Usually that is a 401(k) plan, but it can be a profit-sharing | |
| plan as well. I think you will find that the culture of | |
| employee ownership encourages companies to take better care of | |
| their workers. | |
| Chairman CHABOT. Thank you very much. My time has expired. | |
| I will now yield to the ranking member for 5 minutes. | |
| Ms. VELAZQUEZ. Thank you, Mr. Chairman. | |
| Mr. Brill, and maybe Ms. Silverman, I am interested to know | |
| if any of you have analyzed how many minority small business | |
| owners have adopted ESOPs? How can we encourage more minority | |
| small businesses to adopt ESOPs? | |
| Ms. SILVERMAN. There has not been a full analysis of the | |
| question, but I can tell you from anecdotal evidence that there | |
| are too few minority business owners that have adopted this | |
| structure. I would attribute that from my own experience to a | |
| few factors. | |
| Number one, there is a certain level of education that | |
| company owners need to have. Only more sophisticated companies | |
| currently have access to the informational resources that they | |
| need to form these structures. | |
| Number two, as you yourself have noted in the past, there | |
| are capital access challenges for minority-owned businesses | |
| that are, unfortunately, disproportionate to the broader | |
| universe of small companies. We believe that encouraging banks | |
| to provide more capital access for purposes of transitioning to | |
| an ESOP will help to overcome that. | |
| Ms. VELAZQUEZ. Mr. Brill, do you have any comments? | |
| Mr. BRILL. No, I do not. | |
| Ms. VELAZQUEZ. Mr. Strange, you helped lead the 99 | |
| employees in their buyout of Messer. What is the process for | |
| establishing an ESOP, and how expensive and time-consuming was | |
| this process? | |
| Mr. STRANGE. The challenge was coming to common ground with | |
| the sellers. In our case, the sellers were not motivated by the | |
| welfare of the employees or even the continuity or | |
| sustainability of the enterprise. We spent considerable time in | |
| negotiating what was defined as a fair price. I do believe the | |
| perception of expense in creating an ESOP is a significant | |
| barrier for smaller companies. In our case, we used almost all | |
| local consultants. We had one national valuation firm that | |
| worked with us, and we found it to not be unbearably expensive, | |
| which was really important, because we did not have access to | |
| capital. That was very important for us. | |
| Ms. VELAZQUEZ. Thank you. | |
| Ms. Silverman, a major drawback that I see in using an ESOP | |
| is it can jeopardize a small business' eligibility to | |
| participate in both the SBA and VA programs. The treatment of | |
| ESOP stock as either outstanding or excluded is critical to | |
| this determination. In fact, it became a problem for one | |
| service-disabled, veteran-owned small business who lost the | |
| designation because of their ESOP. Can you please explain this | |
| issue generally and how the legislation, H.R. 2096, addresses | |
| it? | |
| Ms. SILVERMAN. I think you raise a very important question, | |
| Congressman Velazquez, and let me say this. There are very | |
| important concerns that remain to be rectified in the area of | |
| preserving minority- and women-owned and veteran-owned status. | |
| There are ways to structure additional provisions which we are | |
| currently looking at. We would be open to working with your | |
| office on, that would enable an ESOP company, if it had that | |
| designation prior to forming an ESOP, to retain that | |
| designation. Not to have special privileges, but simply not to | |
| lose its privileges. There are ways of rectifying that. | |
| Ms. VELAZQUEZ. So do you agree with me that section 6 of | |
| the bill is not enough? | |
| Ms. SILVERMAN. I agree with you that we would love to work | |
| with you on an expansion that includes more companies. Yes. | |
| Ms. VELAZQUEZ. Okay. | |
| I will ask any one of the panelists to comment or react to | |
| this question. We have heard the benefits is a tool for | |
| retiring business owners, but what about employees? What | |
| advantages does an ESOP have for them? | |
| Yes, Mr. Strange? | |
| Mr. STRANGE. The average turnover in commercial | |
| construction across the country is 28 percent per year. The | |
| ESOP, because of the longer term thinking, the deeper | |
| engagement, ours is a very, very small percentage of that. That | |
| level of stability allows employees to have better control of | |
| their future. The ESOP process requires communication with the | |
| employees, both to be successful and by rule. Having the | |
| information to make informed decisions about an individual's | |
| own future and their family's future is a huge differentiator. | |
| Finally, the requirement that you have an independent valuation | |
| each year gives a level of discipline to strategic planning | |
| that we never had before. | |
| Chairman CHABOT. The gentlelady's time is expired. | |
| Ms. VELAZQUEZ. Thank you. | |
| Chairman CHABOT. The gentleman from Mississippi, Mr. Kelly, | |
| is recognized for 5 minutes. | |
| Mr. KELLY. Thank you, Mr. Chairman. I thank the witnesses | |
| for being here. This is for the full panel. What is the ideal | |
| type of company that can benefit from transitioning to employee | |
| ownership? Is it a better fit for any special type of company, | |
| like construction, manufacturing, et cetera, versus other | |
| types? Are there any type of companies that should not become | |
| ESOPs? | |
| Ms. SILVERMAN. I think it is important to understand that | |
| an ESOP can make a good company great, but it cannot make a bad | |
| company good. I can say that from our experience, we do not | |
| believe that the ESOP structure is a good idea for companies | |
| that are in jeopardy or look at it as a way to salvage a | |
| business that is otherwise at risk, for reasons outside of the | |
| ESOP structure. Companies that tend to be more capital- | |
| intensive benefit more from the ESOP structure, but we have | |
| seen ESOPs be very successful and service businesses as much as | |
| in manufacturing and other kinds of companies. It is important | |
| to keep in mind that because, as Mr. Hardy has suggested, they | |
| offer such a thoughtful way to transition ownership from an | |
| existing owner or founder. A company that is founded by an | |
| individual or group of individuals where there is no obvious | |
| successor available makes a very good candidate for an ESOP | |
| substructure, especially when the alternatives are private | |
| equity or a large foreign acquirer. | |
| Mr. KELLY. Mr. Brill, did you have any comments? | |
| Mr. BRILL. Thank you. I would echo Ms. Silverman's | |
| comments. We observe in the data S ESOPs operating across a | |
| wide spectrum of industries today, both capital-intensive as | |
| well as service. The seven largest, for your information, | |
| industries that are home to S ESOPs are health care, | |
| manufacturing, retail trade, financing insurance, professional | |
| services, construction, and wholesale trade. Together, these | |
| seven industries represent approximately 70 percent of all the | |
| active participants in S ESOPs. You see how diverse of a set | |
| that is. | |
| Mr. KELLY. This is for you, Mr. Brill, you might not know | |
| the answer to this. You talked a little bit about during the | |
| recession the formation of S ESOPs was not quite as much, but | |
| how did they weather the recession as opposed to other similar- | |
| type businesses? Did they do better or worse, or do you know? | |
| Mr. BRILL. We do have information on that question, both | |
| from research that I have done as well as other economists who | |
| have looked at that very issue. In general, S ESOPs | |
| outperformed similar companies during that period, 2007, 2008, | |
| 2009. We saw overall in the economy not only a significant | |
| decline in overall employment, but also a very small rebound in | |
| employment, as everyone on this Committee is well aware with | |
| total employment not reaching its previous stationary levels | |
| until sometime in 2014. Within the S ESOP community, there was | |
| a drop-off, as there was across the whole economy, but a rather | |
| sharp rebound. By 2009, I believe, the number of active | |
| participants in S ESOPs had exceeded its previous high. That is | |
| the resilience to which I was suggesting earlier. | |
| That is not only good for the workers who did not lose | |
| their jobs because their firms are more committed to them as | |
| they are more committed to their firms, but it is also good for | |
| the non-ESOPs in their community, whether it be the sandwich | |
| shop across the street or the supplier to those companies. | |
| Mr. KELLY. It is really not surprising to me that when you | |
| allow people to be vested in something, and to have to work and | |
| to earn it, that they appreciate it, and the benefits are | |
| coming to them if they work harder, so I thank you all. | |
| Very briefly, Ms. Silverman, what do you think are some of | |
| the biggest misconceptions that Congress has about the ESOP | |
| companies? | |
| Ms. SILVERMAN. I think that the single biggest | |
| misconception is that it is a lack of diversification; that | |
| employees are at risk somehow because they have retirement | |
| savings tied up in the fate of their company. The truth is that | |
| diversification is a very real phenomenon, more so in an S ESOP | |
| company than virtually any other comparable company in the | |
| economy that we know of. They generate a lot more retirement | |
| savings individually, and they have much more diversified plans | |
| and a much more, thoughtful compliance structure to ensure that | |
| employees are taken care of. | |
| Mr. KELLY. Thank you, Mr. Chairman, and witnesses. I yield | |
| back. | |
| Chairman CHABOT. Thank you. The gentleman yields back. | |
| The gentlelady from California, Ms. Hahn, is recognized for | |
| 5 minutes. | |
| Ms. HAHN. Thank you, Chairman Chabot, and Ranking Member | |
| Velazquez, for holding this hearing, and thank you to the | |
| witnesses for being here and testifying before us. Mr. Hardy, | |
| you mentioned it first, and it is true, every time you turn on | |
| the TV or particularly during this political season, we always | |
| hear someone talking about income inequality. It is clear that | |
| the American people are concerned about that and those wishing | |
| to lead our country in the future are concerned about that. | |
| While we are constantly hearing, I think both sides of the | |
| aisle have been talking about how to address these concerns. It | |
| has been really amazing to hear from our witnesses today that | |
| prove you do not have to choose between people and profits. You | |
| can follow business practices that actually promote both. | |
| Mr. Hardy, I really want to commend you for taking the risk | |
| and making your company a 100 percent employee-owned | |
| corporation. It is clear that your risk paid off. Your growth | |
| has been pretty phenomenal. | |
| What inspired you to make this change? We have heard about | |
| the education that needs to take place to make this transition. | |
| What inspired you, and who answered all your questions that you | |
| must have had going through this? Is there someone in our Small | |
| Business Administration that has been helpful? | |
| Mr. HARDY. Very good question. Well, for myself, | |
| personally, I wanted to make sure that our company would | |
| outlive me. I wanted to see that the company would go on and | |
| not be purchased by an outside company because I wanted to | |
| protect the jobs that we worked so hard to gain. | |
| As far as outside advice, we have a company that we work | |
| with. It is a third-party administrator that gave us good legal | |
| and accounting advice. Going back to what Congressman Kelly | |
| said, we were told at the time that if you have under 25 | |
| employees it could be very costly and very difficult. We had | |
| over 100 at the time. We spent approximately, I think it was | |
| $25,000 to $30,000 in setting up our ESOP with our legal and | |
| accounting fees, which was less than I thought it would cost. | |
| There are some ongoing fees in administering the program, but | |
| it is definitely within reach. There are a lot of people and a | |
| lot of organizations that give help to companies like ours. The | |
| National Centers for Employee Ownership, NCEO, is one of them. | |
| The ESOP Association is another one of them. They have | |
| conventions that they had. They are very supportive. They are | |
| promoting education amongst business owners. | |
| Ms. HAHN. What would be your greatest piece of advice that | |
| you would give other businesses who are considering making this | |
| transition? | |
| Mr. HARDY. Like I said in my testimony, I think it is the | |
| right thing to do. It is good for the employees. My employees, | |
| they are the ones that created the profit, and it is only fair | |
| to them that they get to enjoy the profit that they worked so | |
| hard for. | |
| Ms. HAHN. Thank you. | |
| Mr. HARDY. So they own it, and they are happy to do that. | |
| Ms. HAHN. Thank you. | |
| Ms. Silverman, I was going to follow up on this whole | |
| education piece because you mentioned to a response to our | |
| ranking member's question about women-owned, minority-owned | |
| companies, and you put the onus on maybe lack of education. How | |
| can we improve that? How can we improve that kind of outreach? | |
| What is the right vehicle to actually administer this kind of | |
| education and outreach so that businesses could think about | |
| having more of an opportunity to transition to employee-owned? | |
| Ms. SILVERMAN. Thank you for the question. We believe that | |
| the right central hub for information is probably the Treasury | |
| Department because this is a law that combines tax policy and a | |
| defined benefits policy--or a defined contribution policy. The | |
| combination of ERISA and taxes is a funky place to go for | |
| anybody to go to other than the Treasury Department. As | |
| Congress makes clear that it is more supportive and | |
| encouraging, I think it sends a message to the market. There | |
| was for a time a chilling effect. There was a worry that | |
| Congress would tinker with this in unintended ways and harm the | |
| structure. The more that Congress provides support through | |
| rhetoric, through advancing policy that encourages this, I | |
| think small business owners will get the message. | |
| Chairman CHABOT. Thank you. The gentlelady's time is | |
| expired. | |
| The gentleman from Nevada, Mr. Hardy, who is the chairman | |
| of the Subcommittee on Investigations, Oversight, and | |
| Regulations, is recognized for 5 minutes. | |
| Mr. HARDY of Nevada. Thank you, Mr. Chairman. | |
| Myself, my partner and I started an S corp some 2 decades | |
| ago, and had the privilege of employing quite a few people at | |
| our peak. At the time, when we started trying to distribute | |
| shares out to our company, portions of the company did not know | |
| about the ESOP program until the economy became a little | |
| different. | |
| My question is, the reason we started bringing employees | |
| into our company, during the 2000 era, we were going very fast, | |
| and large corporations from overseas were looking at buying | |
| many companies up in Nevada, particularly construction | |
| companies, and we did not want to sell. We had an opportunity | |
| to sell our company out, but because we cared about our | |
| employees and enjoyed the type of craft that we were doing, we | |
| decided to work to where our employees could buy us up in a | |
| different direction. Then things changed, so once we heard | |
| about the ESOP it was too late. Do you believe this is an | |
| opportunity for these ESOP companies to help protect against | |
| big overseas companies coming in and diluting, and taking | |
| employees, and changing the environment, which it has in the | |
| Las Vegas valley? Do you see that as a protection for jobs here | |
| at home? | |
| Mr. STRANGE. Absolutely. My answer to why do an ESOP is | |
| because it is a competitive advantage. The return we get on the | |
| professional development and training is longer and more | |
| profound, more engaged. Training that is part of an ownership | |
| culture is more engaging. If you look at the challenge that we | |
| have as project leaders in construction, there are about 7.5 | |
| million employees in commercial construction in this country. | |
| There are more than 500,000 employers. That is an invitation to | |
| someone having a financially-driven consolidation plan, and | |
| ESOPs are protection that creates a people-focused plan for | |
| those companies. We think that we need to do more. | |
| To the ranking member's question about minority firms, once | |
| it becomes not just a matter of how you are going to make a | |
| living but how you are going to live your life, it changes how | |
| you invest in those areas as well. It is a competitive | |
| advantage and it is important protection. | |
| Mr. HARDY of Nevada. This is to anybody on the panel who | |
| wants to answer it. How did you find out about the ESOP | |
| program? | |
| Mr. HARDY. I found out about it through attending some of | |
| the conventions and seminars that I mentioned. These are going | |
| on all the time. It just appealed to me. It is very worker- | |
| friendly. As Mr. Strange said, it is the best thing for them | |
| and their families. There is a lot of information out there for | |
| people that want to seek it out. | |
| Mr. STRANGE. I knew less than nothing so I went to the | |
| library. All I learned in engineering school was two things. | |
| One was not to panic in the face of complexity, and the other | |
| was to respect data. So I just went down to the business desk | |
| and said, ``What does ownership look like?'' They gave me some | |
| articles. | |
| Mr. HARDY of Nevada. Thank you. One of the questions I have | |
| had as an owner myself in the past is the C ESOP, how does it | |
| work with all different levels of the employee class? Can | |
| somebody answer? Recently there was a casino in my hometown | |
| that just got purchased by an ESOP. How does that work with the | |
| different levels of employees? | |
| Ms. SILVERMAN. I can try to answer that. Thank you for the | |
| question. | |
| ERISA requires that you treat all employees equally. There | |
| are guardrails to ensure that highly compensated individuals | |
| cannot take more, or do better. So the casino worker in the | |
| mailroom is treated proportional to the CEO of the company. It | |
| is also true that people receive distributions. They all have | |
| to get distributions once they qualify. You cannot distinguish | |
| between different shares of ownership. Another thing about an S | |
| corporation, which you may recall, Congressman Hardy, is that | |
| you cannot have different classes of stock. Everybody has to be | |
| the same kind of a shareholder. There are also limitations on | |
| how high compensation can be treated for purposes of | |
| proportionality. I think it is about 200 thousand dollars. It | |
| does not matter. They do not treat you as if you had any more | |
| money. It is intended to be a level playing field for everyone. | |
| Mr. HARDY of Nevada. Thank you. I can see my time has | |
| expired. | |
| Chairman CHABOT. The gentleman yields back. | |
| The gentlelady from North Carolina, Ms. Adams, who is the | |
| Ranking Member of the Investigations, Oversight, and | |
| Investigations Subcommittee, is recognized for 5 minutes. | |
| Ms. ADAMS. Thank you, Mr. Chairman, and Ranking Member | |
| Velazquez. Thank you for holding this hearing, and thank you | |
| for your testimony. | |
| Ms. Silverman, SBA-guaranteed ESOP loans exist to help | |
| retiring business owners, how common are these loans and what | |
| can the proceeds be used for? Someone talked about the risks, | |
| and I am curious about how well educated the employees are. I | |
| know you can get information on your own, but what kind of | |
| education do you do maybe as a company? | |
| Ms. SILVERMAN. Thank you, Congresswoman Adams. I am not | |
| familiar enough with the SBA loan program that enables the | |
| creation of S ESOPs, but we can learn more and get back to your | |
| office on that question. | |
| I would say that with respect to risks, ERISA requires | |
| sharing a lot of information with would-be owners before they | |
| become investors in the company. There is also a fiduciary who | |
| is named to be the guardian of the economic interests of the | |
| employee-owners. The fiduciary has to act separate and apart | |
| from the interest of the sellers. That fiduciary is, obliged | |
| under law, to have certain evaluative skills and make decisions | |
| that are intended for the best interests of the employee owners | |
| and not necessarily in the best interests of the individual or | |
| group of individuals who are selling the company. | |
| Ms. ADAMS. Okay. Let me ask in terms of setting up an ESOP, | |
| it seems to be quite complex. Can you describe the impact of | |
| ESOPs on minority-owned firms and other disadvantage-owned | |
| firms? Anyone on the panel. Ms. Silverman, you can start. | |
| Ms. SILVERMAN. I am happy to speak to this but I think | |
| others on the panel may have thoughts as well. I would say that | |
| it is getting easier. The more the S ESOP model proliferates, | |
| the more providers and advisors know about it. While the S ESOP | |
| knowledge corps really existed in a handful of cities, it is | |
| interesting. We have seen that in the early days of S ESOPs, | |
| really, the companies that became S ESOPs sprung up around city | |
| hubs where there were a handful of advisors who knew how to do | |
| these transactions. Now as the companies proliferate and | |
| expand, and as the data show how successful they are, not just | |
| for the companies but for the employee-owners who are amassing | |
| significant retirement savings, more providers and advisors are | |
| becoming aware. | |
| So that there are less hurdles but there are still things | |
| to be done. Ranking Member Velazquez noted in her question that | |
| there are challenges with SBA rules and there are still things | |
| to be done to ensure that a minority-owned business does not | |
| lose that special distinction when, and if, they convert to an | |
| ESOP. That would be an area we would like to continue to work | |
| on. | |
| Ms. ADAMS. All right. Would someone else like to respond? | |
| Yes, Mr. Hardy? | |
| Mr. HARDY. Yes. We had some personal experience with that | |
| just recently. We are growing as a company. We needed another | |
| building to be built on our street, and the first thing I | |
| always do is go to the SBA. I have done this in the past. I | |
| think we have had three or four SBA loans in the past. When I | |
| applied this time, they shut me down and they said, ``No, we | |
| cannot do that because you are now an ESOP.'' That was very | |
| disappointing. I was very glad to see that H.R. 2096 will fix | |
| that problem. | |
| Ms. ADAMS. Yes, sir. Mr. Strange? | |
| Mr. STRANGE. One observation I would make is that as we | |
| have worked with minority- and women-owned businesses because | |
| we have a goal, because we are company cultured to have | |
| inclusion on every project, we are very early in the lifecycle | |
| for so many of these businesses. If we look at our spending | |
| last year was 20 percent of our total buy, it is a couple of | |
| hundred million dollars, but the large majority of those | |
| businesses have only been in business for 10 to 15 years. I | |
| think there is a maturity issue here. As these companies | |
| continue to grow, as their entrepreneurial originators age, if | |
| we have these structures around for them to get the education | |
| and support, we will see a lot more ESOPs. | |
| Ms. ADAMS. Thank you. You know, Enron's employment | |
| retirements were heavily invested in the company, so what | |
| lessons and safeguards can be learned from such a failure? | |
| Anyone? | |
| Mr. STRANGE. I hate Enron. That is a lesson. What I would | |
| observe is what Ms. Silverman said. Bad leadership, bad | |
| strategy, bad ethics cannot be saved by an ESOP. You need the | |
| foundation in place if you are going to build a building on it. | |
| Ms. ADAMS. Thank you very much. I yield back, Mr. Chair. | |
| Chairman CHABOT. Thank you. The gentlelady yields back. | |
| Before we adjourn, I have one quick question. I think I will | |
| direct this at you, Pete. Being in the construction industry, | |
| you have a lot of tools and building materials and things like | |
| that. I know that there is sometimes a temptation for | |
| employees, and things may disappear here and there. With an | |
| ESOP, is there an attitude that, hey, this stuff belongs to me, | |
| too, all of us? This is my stuff. Is there, maybe, a | |
| disincentive for people to do that sort of thing? | |
| Mr. STRANGE. It is dangerous to start me on stories. In the | |
| 25 years we have been an ESOP, we have not had a purchase order | |
| system. Any employee of Messer can walk into any supplier, and | |
| if they are smart enough to rattle off some number as a job | |
| number, they can walk out of there with anything. We have had | |
| almost zero loss and leakage from that. The feeling of | |
| responsibility that this is something that is mine, not | |
| something that is theirs, is transformational. | |
| Chairman CHABOT. Thank you very much. | |
| We want to thank all the witnesses for their testimony | |
| here. Really excellent. We have heard ample evidence that ESOPs | |
| are good for the companies, for their employees, and for the | |
| economy as a whole. As a result of hearing this, I would | |
| announce that I am going to direct my staff to put me on as a | |
| cosponsor of this legislation. We appreciate your testimony | |
| very much. | |
| I would ask unanimous consent that members have 5 | |
| legislative days to submit statements and supporting materials | |
| for the record. Without objection, so ordered. | |
| If there is no further business to come before the | |
| Committee, we are adjourned. Thank you very much. | |
| [Whereupon, at 12:08 p.m., the Committee was adjourned.] | |
| A P P E N D I X | |
| [GRAPHIC] [TIFF OMITTED] T0073.001 | |
| Chairman Chabot, Ranking Member Velazquez, and | |
| distinguished members of the Committee, thank you for inviting | |
| me to testify before you today to share my story of inclusive | |
| capitalism and the impact it has had upon hundreds of my fellow | |
| employees at Messer Construction. Thank you for holding this | |
| hearing to learn more about ESOPs and legislation that can | |
| encourage more businesses to become employee-owned. | |
| My name is Pete Strange: I began working at Messer | |
| Construction as a project engineer back in 1968; and I retired | |
| from management a couple of years ago after twenty-three years | |
| as CEO. Mine is the take of two careers. In 1968 Messer was a | |
| Cincinnati based, medium size, family-owned construction | |
| company with a long history and a good reputation; but like | |
| most companies in construction it had little in the way of | |
| employee benefits. By 1990 company-funded retirement benefits | |
| totaled only $1,500,000 on behalf of about ninety-nine | |
| participants. | |
| In 1988 the last son of the company founder died and we | |
| found ourselves with an uncertain future. The grandchildren of | |
| the founder wanted access to their wealth and, having no | |
| connection with the employees, were not committed to | |
| maintaining employment at the company. In 1990 the Messer | |
| employees were able to buy their future from the Messer family, | |
| using the ESOP structure. I led the employee group through | |
| those negotiations, so I can tell you first hand that we | |
| employees could not have purchased the company if not for the | |
| important tax advantages that the ESOP model afforded us. | |
| Our country's investment in ESOPs allowed ninety-nine | |
| Messer employees to purchase our future; and the engagement | |
| that opportunity created, has resulted in growth. Today, | |
| operating from nine regional offices, Messer performs more than | |
| a billion dollars in construction annually, focusing upon | |
| health care, higher education, and life sciences projects. And, | |
| here is the measure of the change that our ESOP brought to our | |
| retirement savings. Messer now provides quality jobs and | |
| predictable retirement for over 1000 individuals, and has | |
| company-funded retirement assets for those employees totaling | |
| more than $220,000,000. | |
| Through our engagement with the Employee-owned S | |
| Corporations of America we have come to know of hundreds of | |
| companies with stories similar to ours; and the data from | |
| ESCA's quality research shows that ESOP companies are more | |
| robust, more sustainable and provide higher levels of | |
| diversified retirement benefits than non-ESOP companies. The | |
| Messer ESOP is in-place and working well for us; however, | |
| Messer manages a vendor supply chain of small local | |
| subcontractors who are increasingly at risk from forces both | |
| external and internal. Creating a more supportive environment | |
| for those companies to form ESOPs, both for the benefit of | |
| their employees and to reduce the risk and volatility that | |
| results from unplanned succession, will be a direct benefit to | |
| our communities, to our customers and to our company as we | |
| compete in a global economy. | |
| I have only had one employer in my more than forty year | |
| career; but I have had two completely different employment | |
| opportunities. Messer is a clear example of the power of | |
| inclusive capitalism that results from supporting Sub S ESOPs. | |
| I invite you to visit us or an employee-owned company in your | |
| district or state; so you can feel first-hand the pride | |
| employee-owners take in their work, and the confidence that | |
| employee-owners have in their future. | |
| CONCLUSION | |
| Mr. Chairman and committee members, I thank you for this | |
| opportunity to address the committee and share Messer's story, | |
| and for your consideration of legislation that will allow more | |
| hardworking Americans to share in the American Dream at work. | |
| Addendum 1 to the Testimony of Peter S. Strange | |
| April 16, 2016 | |
| Direct Impact of the Messer ESOP Upon individual Retirement Savings | |
| The measure of success of any retirement strategy is the | |
| replacement income that an individual employee can expect | |
| between the age of retirement and the age of death. Peter | |
| Strange joined Messer in 1968 as a project engineer and | |
| advanced through the company to the position of Vice President, | |
| Operations, in 1984. At the end of 1989, after 23 years of | |
| service, Pete Strange's company-funded retirement savings would | |
| have provided an estimated monthly income (at a 6% annuity | |
| rate) of approximately $250 dollars per month. | |
| The Messer ESOP was implemented in 1990. By comparison, | |
| employees who entered Messer as Project Engineers in 1990 and | |
| remained with the company through 2015 (twenty-five years) have | |
| company-funded retirement savings that would, on the same | |
| basis, provide an estimated monthly income of $5,500 per month. | |
| Three footnotes: | |
| 1. Both calculations are performed as if the employee | |
| retired on the calculation date; while in fact both | |
| Pete Strange and the employees joining in 1990 had/have | |
| substantial periods of time remaining in their careers, | |
| allowing for further growth in their retirement | |
| savings. As a result of increased company growth and | |
| profitability following the implementation of the | |
| Messer ESOP, those additional years would result in a | |
| widening of the retirement savings gap. | |
| 2. The estimated cost of repurchasing retirees' | |
| shares is projected into the Messer annual valuation | |
| model, assuring that sufficient liquidity will be | |
| available when required. | |
| 3. As a result of the Messer board of directors' | |
| actions with regard to dividends, at the end of 2015 | |
| the Messer ESOP trust assets include a balanced | |
| portfolio investment equaling more than 25% of the | |
| value of the allocated Messer shares; providing | |
| diversification for the participants and liquidity for | |
| share repurchase. | |
| Addendum 2 to the Testimony of Peter S. Strange | |
| April 16, 2016 | |
| Return on Investment | |
| The Positive Economic Impact of America's Support for Employee | |
| Ownership | |
| For decades the US tax code has contained significant | |
| support for the creation and success of employee stock | |
| ownership plans. In 1998 the tax code was modified to allow | |
| ESOPs to own stock in Subchapter S corporations--a significant | |
| benefit to further creation and growth of ESOPs. A number of | |
| studies have validated and quantified the big picture benefits | |
| of ESOPs and compared ESOPs to alternative organization | |
| structures. The results of these studies include: | |
| <bullet> ESOP companies grow faster, providing higher | |
| levels of employment. | |
| <bullet> ESOP companies are more resilient, retaining | |
| that employment through economic downturns. | |
| <bullet> ESOP companies provide company-funded | |
| retirement benefits that result in retiree account | |
| balances that are materially greater than competing | |
| models. | |
| <bullet> ESOP companies have a lower failure rate | |
| than non-ESOP, private companies, resulting in lower | |
| risk to employer backed benefit plans. | |
| <bullet> ESOP companies now represent a high level of | |
| economic critical mass, driving our national economy | |
| forward. | |
| The question remains, ``What is the direct return in tax | |
| dollars for the investment that our country makes in an ESOP?'' | |
| This simple study of one ESOP company, Messer Construction, | |
| quantifies that positive return. | |
| Messer's ESOP was created in 1990 and Messer became an S | |
| Corporation taxpayer in 1998. While there are dozens of | |
| variables that might be studied, we have elected to focus upon | |
| two straightforward questions: | |
| 1. What is the level of investment that our fellow | |
| taxpayers made in support of the Messer ESOP? | |
| 2. What is the direct return in tax dollars resulting | |
| from that investment? | |
| OUR APPROACH | |
| We studied the following data over the fifteen year period | |
| prior to creation of our ESOP and the fifteen year period | |
| following creation of our ESOP: | |
| - Average growth rate as measured by dollars of | |
| revenue. | |
| - Average profitability per revenue dollar. | |
| - Average annual employee count, based upon average | |
| revenue dollars per employee. | |
| - Average salary per employee. | |
| - Actual retirement account balances in the company- | |
| funded retirement plans as of 2004. | |
| After we gathered the data for the two study periods we | |
| applied appropriate inflationary adjustments so that all | |
| dollars were measured as of 2004, the end point of the study. | |
| We used the following assumptions: | |
| - A corporate federal tax rate of 35%. | |
| - A personal federal tax rate of 25%. | |
| - That, absent the creation of the ESOP, Messer would | |
| continue to grow at its historical growth rate during | |
| the period between 1990 and 2004. | |
| - That, being an excellent company, Messer would | |
| adopt a generous 401k program--100% company match of | |
| the first 2.5% of employee savings, resulting in a | |
| total 401k contribution of 7.5% per year, per employee. | |
| - That the employer and employee contributions to a | |
| 401k would be tax deductible. | |
| - That funds held in trust, whether in the ESOP or | |
| the 401k plan would grow at at-least the rate of | |
| inflation, after 2004. | |
| OUR RESULTS | |
| Investment received through tax deferral: ($14,203,345) | |
| Additional taxes paid: $41,807,481 | |
| Net benefit in federal taxes: $27,604,136 | |
| A multiplier of 2.94 in same year dollars! | |
| THE MATH: | |
| Question 1: The tax investment: | |
| For the sake of consistency, we have analyzed the data as | |
| if Messer and the Messer ESOP had been the beneficiaries of the | |
| full ESOP benefits, including the S Corporation tax deferral, | |
| beginning in 1990. All calculations have been normalized to | |
| 2004 dollars--the end of the study period. | |
| Messer was a profitable, growing company over the fifteen | |
| years prior to forming its ESOP. The result of the positive tax | |
| code benefits for ESOPs is that Messer's income tax payments | |
| would be deferred until participant retirement. Over the | |
| fifteen years prior to 1990, Messer revenue grew at an average | |
| annual rate of 2.26% over inflation. Projecting continued | |
| growth and profitability at that rate for the fifteen years | |
| following formation of its ESOP, and assuming that Messer | |
| implemented a strong 401k retirement plan, the calculated tax | |
| deferral would have resulted in an investment by US taxpayers | |
| of $14,203,345 in 2004 dollars. | |
| Question 2. Direct return in federal taxes paid--or to be | |
| paid. | |
| With the implementation of our ESOP Messer's growth | |
| trajectory changed. Over the fifteen years following creation | |
| of the ESOP Messer grew at 5.76% over inflation. The marginal | |
| growth driven by our ESOP resulted in employment growth of an | |
| additional 233 employees over the fifteen year period. Applying | |
| the calculated average gross pay to those employees as they | |
| entered the payroll, and applying the assumed individual tax | |
| rate to those marginal employee earnings results in additional | |
| federal tax payments of $38,719,967 in 2004 dollars. | |
| The actual account balances for the Messer retirement plans | |
| at the end of 2004 totaled $71,036,326. The calculated total | |
| balances in 2004 for a 401k plan that would have resulted from | |
| the pre-ESOP growth rate in employment and the assumed total | |
| annual contributions of 2.5% from the company and 5% from the | |
| employee would be $58,686,273. With the assumption that the | |
| funds held in either trust would grow until retirement and | |
| mandatory withdrawal at at-least the rate of inflation, the | |
| federal government will receive tax at the assumed personal | |
| rate on the difference between the two trust funds, or | |
| $12,350,053. At 25% personal tax rate the result is additional | |
| federal tax payments of $3,087,513 in 2004 dollars. | |
| Adding the two sources together results in total calculated | |
| additional federal taxes resulting from the Messer ESOP of | |
| $41,807,481 in 2004 dollars. | |
| CONSERVATISM IN THE CALCULATIONS: | |
| The two direct tax sources calculated above materially | |
| understate the actual benefits of the ESOP to our local, state | |
| and national economies. Additional metrics that could be added | |
| include: | |
| - The multiplier effect of the added spending by the | |
| additional employees, resulting in additional federal | |
| tax from the profit on their purchases. | |
| - The savings in federal benefit costs post- | |
| retirement resulting from the more robust ESOP | |
| retirement accounts. | |
| - The taxes received at the state and local level as | |
| a result of the additional employees and their post- | |
| retirement spending. | |
| - The fact that hundreds of employees who receive | |
| robust retirement benefits will spend far more post- | |
| retirement as compared to receiving the 401k level | |
| benefits. | |
| - The fact that the ESOP is fully funded by the | |
| company, resulting in all Messer employees, at every | |
| income level, having a marginal 5% (the employee | |
| contribution to the 401k) to spend during each year of | |
| employment. | |
| - The fact that Messer has continued to grow, | |
| resulting in ever more employment, ever more retirement | |
| benefits--and ever more federal income tax payments. | |
| - The fact that, since 2004, the Messer ESOP has | |
| actually grown at a rate more than double the rate of | |
| inflation, which will lead to tax payments by | |
| participants at withdrawal far greater than those | |
| indicated in 2004. | |
| - The fact that Messer has in place, alongside its | |
| ESOP, a substantial, voluntary 401k retirement plan, | |
| not included in our retirement savings calculations. | |
| - And many more benefits at both the enterprise level | |
| and at the employee level. | |
| [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] | |
| Good morning Chairman Chabot, Ranking Member Velazquez, and | |
| distinguished members of the Committee. My name is Stephanie | |
| Silverman and I am the President and Executive Director of the | |
| Employee-owned S Corporations of America (ESCA). Thank you for | |
| the opportunity to testify today about the success of S | |
| corporations that are owned by their employees--so-called ``S | |
| corporation ESOPs''--and on bipartisan legislation that would | |
| expand employee ownership and in doing so generate significant | |
| new economic benefits to workers, companies and communities | |
| around the country. | |
| ESCA represents S corporation ESP companies operating in | |
| every state, in industries ranging from heavy manufacturing to | |
| constructions to grocery stores to school photography. There | |
| are almost 3,000 ESOPs in the U.S. accounting for $92 billion | |
| in direct economic output. The top four industries by | |
| employment are manufacturing (94,000), professional services | |
| (80,000), retail trade (73,000) and construction (48,000). | |
| It was twenty years ago that, thanks to the efforts that | |
| began with discussions in this committee, Congress ultimately | |
| passed legislation creating S corporation ESOPs. Congress' goal | |
| in 1996 was to encourage employee ownership of private | |
| industry, enable workers to benefit from their labor, and | |
| create a path for building meaningful retirement savings. Data | |
| shows that today, S ESOPs are doing exactly that. I'm here to | |
| report that Congress did something very right. Twenty years | |
| later, private employee-owned companies have been a remarkable | |
| success story, a bright spot in an economy characterized by | |
| sluggish growth, anemic job creation, and worker insecurity. | |
| Many studies, including those by renowned economists from | |
| across the ideological spectrum, tell the story about how S | |
| ESOPs are powerful for workers as a retirement savings and | |
| economic security tool, and how they have contributed | |
| substantially to communities and the broader national economy. | |
| I will just touch on a few key points from the most recent | |
| studies: | |
| <bullet> Earlier this year, economist Jared | |
| Bernstein, formerly Vice President Biden's chief | |
| economist, released a study that shows that ESOPs | |
| reduce wage and wealth inequality. Moreover, Bernstein | |
| found, ESOP companies pay their workers better wages | |
| and provide them with more stable employment than other | |
| businesses. With Congress searching for solutions to | |
| improve savings rates as well as job prospects and | |
| wages for American workers, ESOPs tell us that we can | |
| achieve this goal by increasing capital ownership among | |
| our workers. | |
| <bullet> At a time when almost half of working | |
| Americans do not have any retirement plan at work, | |
| ESOPs also provide unparalleled retirement savings | |
| opportunities for many workers. Employee-owners are | |
| able to amass more retirement savings if they are in an | |
| ESOP. Indeed, EY's Quantitative Economics and | |
| Statistics practice found that, from 2002-2012, S ESOPs | |
| outperformed the S&P 500 in terms of total return by | |
| participant by 62%, net assets increased over 300%, and | |
| distributions to participants totaled nearly $30 | |
| billion. | |
| <bullet> The additional savings benefit to employees | |
| also does not come with additional risk to them: S ESOP | |
| companies are a safe investment for their employee | |
| owners as private, employee-owned businesses are proven | |
| to be more stable than their counterparts. In June | |
| 2014, the National Center for Employee Ownership | |
| released data showing that the default rate on bank | |
| loans to ESOP companies during the period 2009-2013 | |
| was, on average, an unusually low 0.2 percent annually. | |
| This compares to mid-market companies defaulting on | |
| loans at an annual rate of 2 to 3.75 percent. | |
| <bullet> Finally, it's worth noting that in ESCA, | |
| nearly 80 percent of our companies offer not just ESOP- | |
| based savings, but at least one other defined benefit | |
| or defined contribution plan. | |
| About eight years ago, as Members of Congress began to hear | |
| from companies and workers in their districts the tremendous | |
| benefits of employee-owned companies, they began asking, ``What | |
| can Congress do to encourage more ESOPs, and with them more | |
| savings, job security and wage equality?'' | |
| The answer to that question prompted what is currently H.R. | |
| 2096, the Promotion and Expansion of Private Employee Ownership | |
| Act. First introduced by Congressman Ron Kind in the 111th | |
| Congress, the bill has been introduced in the next three | |
| Congresses, and led by Congressman Dave Reichert and Kind. Last | |
| April, Congressman Reichert and Kind were joined by six | |
| additional members of the House Ways and Means Committee as | |
| original cosponsors of HR 2096--Reps. Tiberi, Neal, Boustany, | |
| Blumenauer, Paulsen and Pascrell. Today, that measure has 67 | |
| cosponsors, including 21 members of the Ways and Means | |
| Committee. In the Senate, the counterpart measure--S. 1212--has | |
| 28 cosponsors, including 8 members of the tax-writing Senate | |
| Finance Committee. | |
| In short, it would: | |
| <bullet> Provide incentives to owners of existing S | |
| corporations to sell their stock to an ESOP. Today, | |
| such incentives exist only for owners of C | |
| corporations: Section 1042 of the Tax Code allows a C | |
| corporation owner to defer the recognition of gains | |
| when the owner sells shares to an ESOP when the | |
| proceeds are reinvested into other securities. | |
| Extending parity to S corporation owners is the most | |
| significant legislative action that Congress could take | |
| to encourage more of the millions of S corporation | |
| owners to choose an ESOP when they consider how to | |
| transition their business from their current ownership. | |
| <bullet> Encourage banks to lend to S ESOPs for the | |
| purpose of creating more ESOP ownership of a company. | |
| Under this proposal, banks could deduct 50% of interest | |
| income received on certain loans made to an ESOP. This | |
| incentive is vital because employees often lack the | |
| funds to buy the company directly, and not all banks | |
| understand the ESOP structure, which may cause them to | |
| limit their lending to these vibrant businesses. | |
| <bullet> Provide assistance to would-be S ESOP | |
| companies by providing for an S Corporation Employee | |
| Ownership Assistance office at the Department of | |
| Treasury that can aide business owners who may be | |
| interested in forming an S corporation ESOP and, | |
| finally, | |
| <bullet> Permit an SBA-certified small business to | |
| remain eligible for SBA programs after becoming | |
| majority-owned by an ESOP as long as employee | |
| demographics remain the same. | |
| Quite simply, more S ESOPs means more worker savings, | |
| wealth and wage equality, job stability and national economic | |
| benefit. That is why we hope this Committee and your colleagues | |
| in Congress will help advance this vital measure. | |
| CONCLUSION | |
| Mr. Chairman and committee members, on behalf of ESCA and | |
| the thousands of employee-owners from our member companies, as | |
| well as the almost half a million Americans who work for S ESOP | |
| companies today, we thank you for holding this hearing to | |
| highlight the savings and other economic benefits of S | |
| corporation ESOPs and employee ownership. We look forward to | |
| working with all of you to grow support for and move H.R. 2096. | |
| I would be happy to answer any questions. | |
| [all] | |
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