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Land of uncertainty

At Land of Yogg, a small, Richmond-based branding agency, everyone is a salaried employee. That will soon change, however, when the firm switches some of its seven employees to hourly pay to comply with a recent change to the U.S. Department of Labor’s overtime rule.

The new rule, which goes into effect Dec. 1, more than doubles the salary threshold at which salaried workers are exempt from receiving overtime pay. After meeting the new salary threshold — $47,476 per year — workers’ duties must still fall under one of the professional exemptions outlined by the DOL. 

The potential impact on business of the new DOL overtime rule is one of several issues explored in the 2017 Economic Expectations Survey conducted by the Richmond-based Virginia Society of Certified Public Accountants. More than 300 CPAs from around the commonwealth participated in the survey. A majority of respondents (52.4 percent) said the new overtime rule would have an adverse impact on their clients. (Click here for complete survey results.)

The DOL says the overtime exemption originally was meant for highly paid workers who had better benefits, job security and opportunity for advancement, but the rule’s salary threshold, last changed in 2004 to $23,660, hasn’t kept up with inflation.

“It has only been updated once since the 1970s — in 2004, when it was set too low,” the DOL says. “As a result, the threshold fails to help employers identify workers who are entitled to overtime pay, and it has left millions without overtime protections to which they should be entitled.”

The new requirement, however, poses a dilemma for businesses that can’t afford to raise previously exempt workers to the new salary threshold. The change could affect more than 119,000 workers in Virginia during the first year of implementation.

Under overtime rules, nonexempt employees who work more than 40 hours per week must be paid one and a half times their regular rate of pay for overtime hours. So, if workers are paid $10 per hour, they must be paid $15 per hour for the extra hours.

Adam Mead, the owner of Land of Yogg, says the new rule will require adjustments at his company. “The challenge will be monitoring our current activity to make sure our team gets everything done within 40 hours versus overtime, and if they are doing less than 40 [hours], making sure they take some time off when we’re slow so they can make more money and crank through overtime hours when we do get more projects in,” he says.

Mead says he understands the need for the regulation but says it represents a major change that will take a few years for many employers to get used to.

Increasing regulations
“I find more and more small businesses are affected by increased regulations,” says Alan Witt, a CPA in Hampton Roads who is a partner and CEO at PBMares, an accounting and business consulting company with eight offices in Virginia and one in Baltimore.

Most respondents in the CPA survey appear to share Witt’s view. They say the regulatory environment is having a negative effect on the overall economic climate (67.3 percent).

In addition to offering their views on specific issues, the survey respondents also shared their outlook on the U.S. economy. Most believe the economy has been moving in the right direction, but they are cautious in assessing how it will perform next year.

“CPAs, in general, tend to be predominantly conservative but also fairly optimistic,” says Dave Cotton, CPA, chairman at Alexandria-based Cotton & Co. “Most of us are hopeful that this upcoming [presidential] election — however, it turns out — is going to resolve some of the government gridlock and improve the business environment for us and our clients.” (Read more from Dave Cotton and other CPAs on the 2017 Economic Expectations Survey.)

American consumers also appear to have a positive, yet cautious, outlook about the economy. According to the latest Consumer Confidence Survey, issued monthly by The Conference Board, the Consumer Confidence Index rose to 104.1 in September, the highest level since the Great Recession.

“Consumers’ assessment of present-day conditions improved, primarily the result of a more positive view of the labor market,” Lynn Franco, director of economic indicators at The Conference Board, said in a statement. “Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects. Overall, consumers continue to rate current conditions favorably and foresee moderate economic expansion in the months ahead.” 

The forecast
The CPA survey shows that, looking at the months ahead, respondents are more optimistic about Virginia’s economy than the national economy. A plurality (41.3 percent) is “somewhat” or “very” pessimistic about the U.S. economy for 2017; 28.3 percent hold a “balanced” view and 30.3 percent are “somewhat” or “very” optimistic.

On the other hand, many (46.4 percent) are “somewhat” or “very” optimistic about the state economy; 29 percent hold a “balanced” view and 24.1 percent have a “somewhat” or “very” negative outlook.

When asked to rate the overall business climate in Virginia, a majority (66.8 percent) said it was “good,” and only 1 percent said it was “poor.” However, a majority of respondents picked the economy as the biggest issue Virginia is facing in the 2017 state election, in which a new governor will be chosen.

In looking at prospects for their own firms, most CPAs had a sunny outlook for 2017. For example, more than half had “somewhat” or “very” optimistic views for their organizations for next year. More than 46 percent also had a positive outlook about the industry they represent.

A majority of respondents said their companies are finding an adequate supply of talent in Virginia, adding they believe there is an acceptable pipeline of workers to replenish the commonwealth’s workforce.

Stephen Fuller, senior adviser and director for special projects at George Mason University’s Center for Regional Analysis, is surprised that CPAs aren’t more concerned about the state’s future workforce.

“They really ought to be because the population is aging — we have more older workers than younger workers,” he says. “Generally, there is a great concern, just about everywhere, about who is going to do the work in 20 years when all the baby boomers are retired.”

While Virginia may need younger workers, the commonwealth should see a higher percentage of employment growth than the U.S. this year and next year, Fuller says. He forecasts the nation will see employment grow 1.7 percent in 2016 and 1.2 percent in 2017, while Virginia’s employment will increase 2.1 percent and 1.7 percent, respectively.

“Virginia is still catching up from the sequester [across the board federal budget cuts] in 2013-14 when it had almost no [job growth] gains, while the U.S. economy has now started to moderate its high job-growth rates from 2014 and 2015,” Fuller says.  “So, while Virginia may look stronger out of context, it has lagged since 2011 and will look more like the U.S. job growth patterns by 2018.”  

Overall, he expects the commonwealth to add 79,600 jobs this year, the best yearly growth since 2005.  “In 2017, I am looking [at] 66,700 net new jobs [in the commonwealth], but there is a lot that could reduce this total that we can’t know until it happens.”  

One thing Fuller is certain of is Virginia’s continued dependence on federal spending, an opinion shared by most survey respondents. Almost 87 percent of respondents say that the commonwealth has not done enough to lessen its dependence on Washington.

“The state has not completed a shift to a less dependent economy on federal spending,” Fuller says. “It’s less dependent [than it used to be], but it isn’t enough — it isn’t like the rest of the country in that regard.”

Navigating changes 
Virginia also resembles the rest of the country in struggling to deal with health-care costs. More than 81 percent of respondents picked health-care costs as one of the top two issues that need to be addressed in the General Assembly’s next session. The other top concern is  the state’s tax climate, chosen by 47.6 percent of CPAs. A majority of survey respondents also listed health-care costs as the top financial problem faced by Virginia businesses (67.3 percent). 

Health-care costs haven’t been the biggest issue for Land of Yogg’s Mead this year, but he has seen dramatic swings in medical costs during the past few years.

The agency saw a large, 44 percent increase in health care costs in 2015, not including dental expenses. Medical costs decreased less than 1 percent in 2016, and are expected to increase 9 percent for next year, although the company also plans to offer more than one health care plan for the first time.

The Alexandria-based Society for Human Resource Management (SHRM), an international organization with 10,730 members in Virginia, says managing health-care costs continues to be a top priority for HR directors, who also must ensure they keep up-to-date with the requirements associated with the ACA.

“We are at that point where most of the [ACA] regulations have already been issued and, now, folks can turn their attention to … honing in with how they are complying with the law,” says Chatrane Birbal, SHRM’s senior adviser of government relations.

While Birbal believes repeal of the ACA is unlikely, she says there have been many changes to the law and more could be on the way. For example, one ACA provision expanded the definition of a small-group employer to include organizations with up to 100 workers (as opposed to 50 employees). President Obama, however, last year signed the Protecting Affordable Coverage for Employees (PACE) Act, which allows states to decide what businesses are considered “small” for health-insurance purposes. (Virginia chose to keep the cutoff at 50 employees.)

Another change is the postponement of the  ACA’s “Cadillac tax” until 2020. The tax, originally set to go into effect in 2018, places a 40 percent excise tax on high-value, employer-sponsored health-care benefits.

“This delay will likely serve as a catalyst in future advocacy efforts to fully repeal the excise tax,” Birbal says. “Additionally, both Republican and Democratic presidential nominees have expressed support for a repeal of the 40 percent tax.”

Challenges ahead
The ACA is not the only law facing opposition. Several bills have been introduced in Congress to delay or change the new overtime rule. The House of Representatives has passed a bill (HR 6094) seeking to postpone the new rule by six months, but Obama says he will veto the legislation if it crosses his desk.

Twenty-one states also have sued the Department of Labor in an effort to prevent the rule from taking effect. Virginia is not one of the plaintiffs. The U.S. Chamber of Commerce and more than 50 business groups also filed a separate lawsuit challenging the regulation.

“The DOL went too far in the new overtime regulation,” Randy Johnson, senior vice president of Labor, Immigration and Employee Benefits for the U.S. Chamber, said in a statement. “We have heard from our members, small businesses, nonprofits and other employers that the salary threshold is going to result in significant new labor costs and cause many disruptions in how work gets done.”

SHRM hasn’t filed a lawsuit but supports the Overtime Reform and Enhancement Act (HR 5813) sponsored by U.S. Rep. Kurt Schrader (D-Ore). The bill would phase in the new salary requirement over four years and eliminate an automatic increase to the salary threshold every three years established under the new regulation. 

“In the past, this salary level has always been set through notice and comment, and for the first time now [the government] is saying ‘we don’t want to bother with that. We want it to automatically adjust every three years,’”  explains Nancy Hammer, SHRM’s senior government affairs policy counsel. “Our concern with that is there could be something going on in a particular industry, or with the economy that we need to take into account, and it’s just not the way things are done, and we don’t think the statute supports it.”

For now, however, it looks like the overtime regulation is one of many issues that businesses will have to deal with.

It’s a burden that’s tough to bear, says Deb Peery, owner of The Primrose School of Midlothian Village, a preschool and childcare center in Midlothian with 38 employees. Peery is dealing with higher health-care costs in addition to complying with the new overtime rules, which will affect four employees. She says employers want to do the right thing for their customers and workers, but that is a difficult task when revenues aren’t increasing at the same rate as compliance costs. 

“At some point there is going to be a tipping point with some small businesses, and it’s going to put them out of business,” she says. “It’s scary.  It’s not fun being a small business owner too much anymore.”

 

A deeper look

Virginia Business and the Virginia Society of Certified Public Accountants held a roundtable discussion to analyze the group’s latest Economic Expectations Survey.

This year’s CPA panelists were Dave Cotton, chairman of Cotton and Co. in Alexandria; Marty Einhorn, managing shareholder with Wall, Einhorn & Chernitzer PC in Norfolk; Clare Levison, head of Clare Levison Consulting in Blacksburg;  and Gary Thomson, regional managing partner at Dixon Hughes Goodman in Richmond.

The roundtable was conducted by Virginia Business Editor Robert Powell and Special Projects Editor Veronica Garabelli in September at VSCPA’s headquarters in Richmond.  The following is an edited transcript.

 

Virginia Business: The majority of CPAs believe that the national economy is moving in a positive direction.  What are some [examples] of the positive momentum that CPAs are seeing?

Thomson:  In Virginia, I think we’re optimistic because for the first time since the Great Recession we’ve seen our employment numbers return to what they were before 2007-2008.  That in and of itself creates a great sense of optimism: to see people out there working, to see our clients actually have the opportunity for employment and [engagement.] It’s an important, positive sign for us.

Levison:  Because I work so much in the personal finance space, I tend to feel like the economy is moving in a positive direction when the average person feels that it is — when they feel it in their own home budget, their own personal finances, their own pocketbook. We can put out all of the statistics that we want to, but if the average person isn’t feeling it, then it doesn’t mean a lot. We’re starting to see that the average person does feel the economy is moving in the right direction, which is a really good sign.

 

VB: Southeast Virginia CPAs have a more favorable view of the economy, 55 percent, while only 34 percent of those in Southwest have a favorable view.  What do you think accounts for these differences?

Einhorn:  Our economy [in Southeastern Virginia] is dependent on the government, our naval base, and that is both a blessing and a curse.  The blessing being we don’t dip as low as the rest of the economy in the state or nationally when there is a recession because the government tends to remain relatively steady, except for our recent sequestration, which really hasn’t affected our economy that much. Also, by the same token, we tend to rise a little bit slower and not have as high of a peak. There’s a lot of activity in our area, a lot of construction … a lot of new jobs coming into the area.  So I believe that is contributing to the optimism. 

Levison:  For Southwest Virginia, you saw infrastructure and geographic location mentioned in the survey. [Those] probably [are our] two big issues that [impact] Southwest Virginia.  There’s not the same level of infrastructure that you see in the rest of the state.  There are not as many options.  We love our part of the state.  We think it is beautiful, but if you have an economic situation, a job loss, a downturn, things like that, you don’t have as many second choices to turn to as you do in some of the other parts of the state.

Cotton:  I’d like to echo Marty’s sentiment about the government. Northern Virginia is probably more dependent on government than Norfolk and despite sequestration [and] deficit spending, the government continues to spend money. If your primary customers are entities that can print money, then it kind of immunizes you from economic stress in the economy.

 

VB:  More than half of the CPAs responding [in the survey] expect their clients to see adverse effects from the new Department of Labor [DOL] overtime rule.  Could you comment on what effects you’re seeing with your clients?

Thomson:  I don’t think businesses operate well in uncertainty.  When we had the Affordable Care Act passed and we were waiting for all the implementation, there was a great deal of uncertainty, a great deal of pessimism about what that was going to look like, how that was going to cause businesses to restructure.  I think the same type of thing is going on with the DOL overtime standards.  There’s a great deal of uncertainty.  Businesses are looking to how they can restructure the labor force, and again when you’re in that period of uncertainty, despite the fact that I do think as CPAs we’re more optimistic, businesses generally get very defensive and at times pessimistic until we actually see these things rolled out.  I think it’s a natural reaction to the uncertainties.

Einhorn:  I also believe that a lot of the uncertainty concerned about this law is based on the timing … We’re gradually climbing out of [the Great Recession] and then to have these rules hit, there’s a lot of fear that this might slow us down or maybe turn us in the other direction.  I think that has something to do with it.

Cotton:  We’re also in a larger transition in terms of the employee/employer relationship.  People now are asking for more flexible schedules.  Not everybody wants to work the traditional 40-hour week, and I think employers are having to accommodate, adjust and acclimate to that new structure of the relationship.

 

VB:  Last year, more than 40 percent of respondents said small businesses did not have access to adequate credit.  That percentage fell to 30 percent this year.  Has the credit market improved?

Cotton:   We’ve had a substantial increase in government regulation of the credit market with [the] Dodd-Frank [Wall Street Reform and Consumer Protection Act] and Consumer Financial Protection agency, and I think it is more difficult to get financing approved in that greatly increased regulatory environment.

Thomson:  Generally speaking, it has improved, but [there are] alternative sources of financing and capital out there that have become a greater part of our economy … I think the natural economic forces of alternative sources of financing — money being on the sidelines for a long time — have opened the doors a little bit.  Now, not unlike prior years, if you don’t have a lot of equity or a lot of something to back up that money, it’s still going to be a difficult market, but at least they’re seeing more options out there.

 

VB: There is danger that Virginia could see the full force of sequestration coming in future years.  How would that affect the state’s economy?

Einhorn: It will affect the entire state but specifically Northern [and] Southeastern Virginia.  We would be dramatically affected because the way they have implemented it in the past. It’s not incremental.  It is in very large jumps, for example, deciding to close down an entire base or close down a fire squadron or move them, and so it’s something that is very unpredictable, and I think it would have a major impact on the state’s economy.

Thomson: We’ve already seen a significant dip from either direct sequestration or just a peel back in government funding.  The good news is that has created opportunities, particularly when you look at technology, cybersecurity, other fields that are beyond the federal government. But even with all that positive reaction, we still are the largest per-capita recipient of federal funds.  So it, by nature, will have a significant impact, and it cascades through all of Virginia.

 

VB:   This year and last year, the survey showed that CPAs are frustrated by political partisanship at the state and federal level, saying it prevents government from addressing urgent needs.  What are some of the needs that are being neglected because of political gridlock?

Cotton:   What concerns me is that — a product of the partisanship and gridlock — is that we’ve stopped talking about the fiscal uncertainty in the future. Our clients, our businesspeople, they understand that you can’t consistently spend 40 percent more than you take in, and I think there’s a looming crisis.  I’m not sure exactly how it’s going to get resolved.  It’s going to have to get resolved.

Levison:  A piece of that is educating the public about the financial literacy associated with overspending, with government overspending.  Trying to do that in a nonpartisan way, which I think CPAs have done an excellent job, because, at some point, you feel it’s going to have to come from the people pushing it to the government because the government doesn’t seem to be doing it on their own … You wouldn’t be able to survive your own family finances if you [overspent].  I think there is a huge financial education piece that comes along with breaking some of that gridlock, so people understand it’s not a Republican or Democratic issue.  It’s just basic math.

 

VB: Infrastructure, and health-care costs remain the most pressing issues in Virginia according to the survey.  Why do those issues continue to rise to the top?  Do you see any problems with change?

 

Einhorn:  [In regards to health-care issues], as CPAs, we have worked very hard to try to come up with strategies so that businesses can negotiate their way around these rules, and it is not easy.  Not to suggest that we would have them not live by those rules, but it’s very complicated. We’re still in that phase where people don’t understand exactly what is being asked of them, and therefore, it’s a major concern.

When it comes to infrastructure, we’ve been through this period of decades of not doing our deferred maintenance.  We have relied on the engineering and infrastructure dollars that we spent back in the last century to carry us through until we’ve built up this tremendous liability, deferred liability, that is affecting every part of the state, and the prospect of us growing in a double-digit economy is almost scary because the infrastructure is so far behind that. 

We’re in a mode right now, I believe, of just trying to catch up to where we should be. It doesn’t affect the people within the state nearly as much as it affects people who are considering locating into the state, because they look at where we are and what our deferred maintenance is, and they say, “Well, I have other options.  I can go somewhere else [where they’ve] chosen to make those investments.”  It’s very much at the top of my region’s mind, and I’m sure it is also at the top of the minds of the entire state.

Cotton:   We’ve had some issues in Northern Virginia that illustrate just how fragile our infrastructure status is.  We’ve had some issues with Metro trains catching on fire, and so Metro shut down the entire system for two days to do inspections of the system, and, during that period of time, there was traffic gridlock all over Northern Virginia, all over the D.C. metro area. It just illustrates that some minor shutdown in any of our traffic systems is going to have a profoundly disruptive effect on everybody’s business.

Thomson:  There’s a [a diversity of opinions across the state in terms of what we need to fix]. In Northern Virginia, they’ve been talking about something that none of the rest of us can relate to, which is a mass transit system.  They also have this incredible airport, Dulles airport, that I am pleased to see the governor putting some funding into revitalizing Dulles, a critical corridor for us. But when you move out to Clare’s region, in that area [where there’s] traffic on 81, traffic on 64. How do we get new roads back to the great natural resources they have?  When you get to Marty’s region, how do we get another tunnel crossing or something to protect us in case of a natural disaster with just the pure stresses that the infrastructure of the port will put on it? 

Each one is different. Back to the question of partisanship [that was asked earlier]:  There are some really good things that happened where they set partisanship aside, but at the same time, it becomes very regional in where do we want the money to go?  My sense is if you talk to the four of us — based on where we live and geography — we would have a different priority. 
There’s a unanimity that we need to fix infrastructure, but the complexity gets into what do we fix first and all of them have extraordinarily big price tags that come along with it.

Levison:  In our part of the state, we’re very excited at the thought of the Amtrak extension and also just basic transportation things like more direct flights to New York City from [Roanoke-Blacksburg Regional] airport.  So you’re right.  It varies. What people think is that [it] might seem so basic, Amtrak and extra direct flights, but it’s significant for people in our part of the state to be able to have greater access to do their business.

 

VB: More than 81 percent [of survey respondents] see Virginia’s business climate as good or excellent compared to neighboring states.  They also don’t see any reason to lower the commonwealth’s tax rate.  Why do you think CPAs are satisfied with current conditions?

Cotton:   In Northern Virginia our competition is the District of Columbia and Maryland, and we have by far the best tax climate among those three, and I think we tend to be optimistic for that reason.  I’m not so sure about everybody agreeing that the tax rate in Virginia is just fine right now. We’d all like to see it get lower, but I think our environment up there is, [if] you’re going to start a business, you’re looking at starting it in D.C. … Maryland [or] Virginia.  My view is, it’s not really much of a choice.  Virginia is by far the most business-friendly of those three governments.

Thomson:  What’s not to love about Virginia?  When you step back, despite all the good analysis we’re trying to give about the things that maybe aren’t working well, you draw a circle around Virginia about 500 miles, and you’re picking up many, many significant major markets in the U.S. We’re the northernmost right to work state [on the East Coast], so we don’t have some of the issues to deal with that other states do … Overall, whether you’re looking at gas tax rates or at our state income tax rates, we are very competitive.

Einhorn:  In addition to our neighboring states, people compare our commonwealth government to the federal government. I think they feel like they’re getting a better bang for their buck in Virginia, even though most people would like it to be more efficient.  It seems to be operating more responsibly than the federal government. Therefore, it seems like there’s a lot of attention on lowering my federal taxes.  I do believe that the bipartisanship would help us tremendously to get better leverage out of the tax dollars that are being collected today.

Levison: I agree we do have a great state.  In our part of the state, we have the opportunities afforded to us by some fantastic public schools. Virginia Tech, Radford University really bring a thriving business climate to an area that would typically otherwise be quite rural and not have as much of a global mindset or many technology initiatives.  So, we really benefit even in our corner of the state. There’s a lot going on and a lot to offer businesses.

Thomson:  The thing that I would add on taxes is two years ago the Virginia Society of CPAs, working with the legislature, helped reform the way Virginia approaches taxation on international business. If you think about the current tax code, it really is a 20 [to] 30-year-old tax code … VSCPA did a great job helping reform that, but there [are] other elements that maybe need change to be more attractive to the new economy, whether it’s cybersecurity [or] information technology, when we’re dealing with businesses overseas … I think that’s more [of a] forward thinking aspect of taxes as opposed to just, “lower my rate.”

 

VB: Was there anything that stood out in the survey that we haven’t discussed?

Cotton:  The biggest challenge in my business, CPA firm … is human resources. … In addition to a shortage of supply [of workers], we’re seeing the millennial attitude of mobility. 
The environment I grew up in — the tradition was you found yourself a career and stayed with that company a long time.  I remember when I was in charge of recruiting [when looking at people’s résumés], if they had a history of changing jobs pretty often, I’d discard those. We can’t do that now.  Kids today will change jobs every year, and it’s very difficult to compete in that environment. What we’re seeing in the group of firms that we compete against is our people are moving amongst those firms, and it’s a very difficult thing to manage.

One of the things that we’ve done to address that is we began participating in “Best Places to Work” surveys. It was nice to get the awards, but more important was we were learning how we could make our employment environment more favorable. That’s been beneficial, but still we’re seeing a lot of churning of people moving from firm to firm, and I don’t know the solution to that.

Einhorn: We have a different issue when it comes to the talent.  Our area struggles to attract quality talent, and I’m not just talking about CPAs.  I’m talking about talent in every area because the rest of Virginia and the rest of the East Coast sees us as a Navy town.  They see Virginia Beach as a resort, and they see Norfolk as a Navy town.  Getting people from outside of the area to come and experience what we have to offer is a real challenge.

Another surprise that I saw in the survey was the fact that so many people responded that they did not know whether the economic revitalization efforts in Southwest Virginia had made a significant progress in the economy.  I think that highlights the regionalism that we deal with and the fact that we tend to only focus on our own region.  I believe we can help break this partisanship, if as businesspeople, we work more closely together as a state.  I think the VSCPA, for example, and also Virginia Business do a very good job of trying to unite us all, but the legislature doesn’t necessarily do a great job of that.  Education and cooperation is something that we’re probably in need of.

Levison:  That’s the same result that I picked up on. The rest of the state said that they didn’t know about those economic efforts, and in Southwest Virginia people said, “No, the economic revitalization efforts have not been a significant progress in the economy.” What I also thought was interesting is that overall, Southwest Virginia mirrored very closely the same opinions of the rest of the state, which I think is a good thing for that unification and for everyone being on the same page to move forward.  It might be more difficult if you saw the people in that region had completely different sets of concerns that were not really on the priority list of other parts of the state, but everyone’s concerns seemed to be pretty closely related to the same top issues and that I think is a positive thing for progress.

Thomson:  When we talk about job growth and job creation we tend to think of new businesses coming in … What was encouraging, it’s not a shocker but a little bit of a surprise [to see that] 19 percent said we’re going to increase capital spending, and … 32 percent said they were going to increase the number of people they were hiring.  The revitalization of Virginia growth is going to come from our existing businesses, particularly our small businesses, [which] I think VSCPA members and CPAs represent so well.  It was encouraging to me to see our clients, our businesses that we touch every day, saying we’re going to increase capital spending, and we’re going to start hiring.  If we have a couple of years of that it will be very good for Virginia.

The health-care squeeze

Virginia hospital executives want to make one point abundantly clear: They do not operate in a free-market environment.

Hospitals treat all patients regardless of ability to pay, and they serve Medicare and Medicaid patients despite being paid less than the cost of care.  

“We’re fundamentally different. You’re not going to get a highway construction firm to build the state’s highways [for less than] what it costs them,” says James B. Cole, the president and CEO of  Virginia Hospital Center in Arlington. “We care for anyone whether they can pay a nickel or not, and that’s not standard in the business world.”

Cole, past chair of the Virginia Hospital & Healthcare Association board, was one of four VHHA officers who sat down with Virginia Business editors to discuss issues facing their industry.

The others were: Mary N. Mannix, president and CEO of Augusta Health in Fishersville, who is the current chair of the VHHA board; Michael V. Gentry, chief operating officer at Sentara Healthcare in Norfolk and the board’s vice chair; and Mark H. Merrill, president and CEO of Valley Health in Winchester who is the board’s secretary-treasurer.

During the discussion, the hospital officials said they have not given up hope of expanding Medicaid in Virginia despite stiff resistance from the General Assembly. In fact, a plan proposed by VHHA during the past legislative session remains on the table. Under that proposal, money generated from a provider assessment on hospitals would be used to draw down matching federal funds for Medicaid.

Because of the losses hospitals have in­­curred from charity care and low payments from government programs, their profitable services, such as surgery and imaging, have to subsidize unprofitable services.

That is one reason, the executives say, they oppose the elimination of Virginia’s certificate of public need law (COPN). Without COPN, competitors would be allowed to “cherry pick” profitable services in a region without being required to serve all patients regardless of their ability to pay, the executives say.

“What happens with certificate of need is that it helps distribute those services evenly, and it also protects those organizations that have a high amount of charity care or high number of Medicaid patients,” Mannix says. “It protects those organizations from losing those services that offset those that are reimbursed below cost.”

Virginia business editors Robert Powell and Paula C. Squires talked with the hospital executives on Aug. 30 at VHHA’s headquarters in Glen Allen.

 

Virginia Business:  What would Medicaid expansion in Virginia mean for your hospitals? Have you given up on that ever happening?

Cole:  There is a lot of difference of opinion about Medicaid expansion nationally and probably among our members and certainly within the General Assembly … [[Under the Affordable Care Act, reductions in Medicare funding to hospitals treating indigent patients], by 2022, I think are going to grow to about $1 billion less than we would have had otherwise.  So that’s having a tremendous impact.  If you pile on top of that the effect of sequestration [across the board federal budget cuts], it’s placing tremendous cost pressure on all hospitals, and especially hit hard are the rural hospitals.  When we look at the issue of Medicaid expansion, it’s certainly a way to increase coverage for more folks, and it’s something that we initiated a discussion about last year.  We’re prepared to continue that, with all parties, to try to find a way, within that Virginia mode, to bring about Medicaid expansion.  Certainly a number of other states with differing sort of prevailing political opinions have found ways to expand, even Indiana Governor Mike Pence’s state. Obviously he’s a Republican nominee for vice president.

Mannix:  [The objective is] to reach 400,000 of our fellow human beings that don’t have access to care. They are falling into this gap where they’re not eligible for Medicaid, yet they don’t have the financial means to be able to sustain their health, pay their bills and pay a premium for insurance. Their access to health care becomes very limited. We care about those Virginians, and we haven’t given up.

Merrill:  I would just add our health system operates in two states:  Virginia and West Virginia.  We have four critical-access hospitals … Our two critical-access hospitals in West Virginia are benefiting from the Medicaid expansion there.  They are not financial homeruns, but they are getting close to where they can break even because their level of uncompensated care has been decreased, whereas our two critical-access hospitals in Virginia continue to operate at a deficit and are subsidized by the rest of the health system in order to keep those facilities open. 

Gentry:  Much of what we need to do in America is to slow down and have dialogue about the health-care choices that we’re all making and how that impacts chronic disease, complex disease.  It’s a very challenging undertaking to have an educational session in an emergency department [where many uninsured patients are treated] and to influence lifestyle behaviors.  Those are really driven so much better in a primary-care setting. To the extent that you don’t have Medicaid expansion, or you don’t have a Medicaid rate that really makes that workable at the primary-care level, that puts us in the ongoing challenge that we’re in today. I think our answer is: We certainly haven’t given up, but we are realists, and we’re trying to work with the situation that is in front of us today.

 

VB:  There was talk during the General Assembly session of instituting a provider assessment to pull down Medicaid dollars.  Is that still on the table?

Cole:  The [Virginia Hospital & Healthcare Association] made a proposal to place an assessment on ourselves in an attempt to draw down matching federal dollars, and that was really a change from our longstanding position.  What prompted that [change] were the economic conditions I referred to earlier. The squeeze is getting so tight that there is the opportunity to provide, in effect, the state’s portion of matching dollars from a private source, the hospitals in the state. We made that offer, and that’s still out there. But I want to be clear. We also proposed some conditions that we’re very serious about. Number one is that those matching funds be controlled by a private entity, [second] that the funds in effect be walled off to be used for health care in the state — not to subsidize the general fund —  and, third, that the state would maintain its current level of spending on Medicaid.  In other words, these funds should not be used to supplant the state’s commitment to Medicaid funding.  We’re very strong on the offer and equally strong on the set of conditions under which we would make that offer.

 

VB:  Do you have a round figure of what percentage of your costs that Medicaid and Medicare are actually covering?

Gentry: Medicaid, [74 cents on a dollar of cost].  I believe for Medicare, it is 89.

Cole:  Probably statewide it’s pretty close to 50 percent of our patients fall into one of those two categories [Medicaid and Medicare], and certainly in the rural areas, it’s even higher, 60-plus percent.  Of course, the field that we are in, we accept all patients whether they can pay or not. So there’s a huge charity level.  I hope, as the policymakers look at these issues, they don’t labor under the false assumption that somehow hospitals are a free-market enterprise.  We’re fundamentally different. You’re not going to get a highway construction firm to build the state’s highways for [less than] what it costs them … The government is our largest payer, and we’re open 24/7.  We care for anyone whether they can pay a nickel or not, and that’s not standard in the business world.

Mannix:  I can tell you that from my organization it’s about 64 percent of the services that we provide are reimbursed below our cost or not at all … It becomes a real challenge in terms of making sure that you are providing the services that the community needs regardless of the economic model of those services — whether they make money or they don’t make money — and really being true to your not-for-profit mission of improving the health of the community.

 

VB:  With that level of reimbursement, do other services have to compensate for that to make up [the loss]?

Mannix:  Absolutely.  Just like you manage your retirement fund with the right portfolio, that’s what we have to do.  So, number one, it’s driven by what are the needs of the community — what are the services that are needed? Then it’s also driven by: How am I going to make this work?  How am I going to put together this portfolio of services so that I’m offering all the services that the community needs, but I’m also offering those services in an economically responsible way? [I have to ensure] those services that don’t have a positive bottom line can be underwritten by those services that do have a positive line, keeping in mind that the least common denominator of all services is that they’re needed by the community.

Cole:  There’s another form of subsidy to make all this work. Government payers do not pay cost, and therefore commercial insurance companies who insure all of us pay a higher rate to help to subsidize that. In effect, it is a hidden tax. That is not always clear to the public.

 

VB:  I’m curious to know what services are more likely to make money to help you make up for the services where you are not getting 100 percent reimbursement?

Mannix:  Services like surgery — especially inpatient surgery — and imaging … are the two types of services that typically have a positive bottom line … You really want to work hard to make sure that those services that do have that positive bottom line are able to subsidize those services that are needed by the neediest people in the community.

 

VB:  We have seen a lot of consolidation around the state, especially with rural hospitals joining larger health-care systems.  What do you think is driving that trend?  Is it financial performance?

Merrill:  Certainly financial performance is part of that … It’s also been access to technology and capabilities.  For instance, some of our small critical-access hospitals just could not afford to buy an electronic health record [system], which is now required for participation in Medicare.  There’re also benefits [in being part of a larger system] in terms of cost reductions, leveraging the supply-chain purchases of our smaller hospitals to take advantage of our size and scale to help reduce costs … We have been able to deploy clinical services in our rural hospitals that they would not be able to support on their own.  For instance, we have cardiologists, pulmonologists, urologists, orthopedic surgeons who will go to these underserved areas and open clinics and are there one day a week or three days a month … It’s services, technology; it’s financial; it’s access to capital. 

Gentry:  It’s really resource need. Those needed resources may be physician subspecialties.  They may be technological expertise.  It may be the resources necessary to deal with regulatory burden, which is substantial. Just the complexity of operating and maintaining compliance with all the organizations that have an interest in our operations could create a financial need.  It certainly could be related to technology.  To put in an electronic medical records system is $40 [million] to $50 million for an average-size hospital. That’s moved from being something that maybe you would want to do to being a minimum standard in the category of what you have to do. Those are the things organizations that we’ve talked to are interested in … I think what any organization wants to do in Virginia is to figure out how do you put that package together to improve the clinical outcomes … Clinically, how do we get better?  How do we have a safer environment for the patients?  And then you get to all those resources that I was listing and that Mark was describing that are necessary for that to happen.

 

VB:  There’s been some discussion about the financial situation of many rural hospitals. From the last reports that we saw, close to half of them were in the red.  Is it likely we will see more rural hospitals close? 

Mannix:  I think that the risk is very prevalent.  Rural hospitals have got some challenges that some of the urban hospitals or the more metropolitan hospitals don’t.  We talked about the percent of patients that come there that are either [covered by] government payers — Medicaid or Medicare — or are self-pay, which eventually could become bad debt.  Those percentages tend to be much higher in the rural areas than what you see in some of the more urban areas.  Additionally, it can be challenging to recruit [physicians and other health-care talent] to a rural area … I think it’s very possible that you could see closures in the future if we don’t solve this conundrum that we are in as it relates to the economic strength of all hospitals throughout Virginia.  You might see more of the mergers and acquisitions as well.

 

VB:  It does look like there will continue to be debate about certificate of public need in the next General Assembly session.  Does COPN serve a public need or does it prevent competition?

Mannix:  I think it’s really important to take a step back to ask: Why does COPN exist and why do the majority of states in the United States have intact certificate-of-need systems? …  The purpose of having certificate of need is: number one, to validate that the service is needed in that particular community, make sure we’re not throwing good money after bad; and number two, to make sure that the service can be provided … in a high-quality way.  The third reason for having certificate of need is to assure that we take all comers, regardless of their ability to pay. In fact, when the state issues a certificate of need, it will put a charity-care condition on that approval that says you have to make sure that this service meets the test of providing X percentage of the revenues related to this service as charity care. So we all have those conditions every time we get a certificate of need … That’s the right thing to do, and that’s very consistent with the mission of our respective health-care systems, and it’s very consistent with taking care of all Virginians …

You asked us a question before: Do some services make money and do some services lose money? And the answer to that question is yes, and the bottom line is that they’re all needed by our respective communities.  What happens with certificate of need is that it helps distribute those services evenly, and it also protects those organizations that have a high amount of charity care or high number of Medicaid patients.  It protects those organizations from losing those services that offset those that are reimbursed below cost …

We talked about having that right portfolio … and certificate of need will keep everything in balance so that the imaging and the surgery — for my own organization, Augusta Health — aren’t cherry-picked by another health system that wants to come in but only wants to offer those high-margin services and doesn’t have to be open on a 24/7 basis.  [Without COPN, a competitor] doesn’t have a charity-care requirement and doesn’t have the requirement to accept all comers regardless of their ability to pay and doesn’t participate in the preparedness for disasters that we all have to be on standby for on a 24/7 basis. … [COPN] does even the playing field. 

Do I think that it reduces competition?  I think if you were talking about a free market, then something like that would, but health care … is anything but a free market based on those requirements.  We’re there to take care of our community, and so if we started to cherry pick who we’d care for and who we wouldn’t care for, you would see a significant degradation and quality of life of a community.

Medical breakthrough with a hitch

For the Charlottesville-based Focused Ultrasound Foundation, this is a big win. In July, the U.S. Food and Drug Administration gave its approval to a focused ultrasound device to treat essential tremor, a condition that affects several million people in the U.S. The tremor can affect any part of the body but often occurs in the hands, making many everyday tasks difficult to perform.

The foundation promotes the adoption of focused ultrasound technology in a wide range of treatments. Focused ultrasound uses magnetic resonance imaging (MRI) to aim the ultrasound waves. They create enough heat to destroy the brain tissue causing the tremor. That means no surgery is involved, and patients are awake and responsive during the treatment.

The expanded use of focused ultrasound is an important development. “It opens the door for [treating] Parkinson’s disease and epilepsy and all those other” conditions related to brain function, says Dr. Neal Kassell, the founder and chairman of the foundation and a professor of neurosurgery at the University of Virginia.

FDA approval of the essential tremor treatment “validates the technology for all the other conditions,” Kassell says. “Because it treats a condition deep in the brain, that makes it much more likely to work in the rest of the body.”

The FDA’s action is a big deal, and the next step might be even more important. The Center for Medicare and Medicaid Services (CMS) is now deciding how much the federal government is willing to pay for the treatment. CMS’ proposed Medicare payment — about $5,800 per treatment — isn’t enough to encourage health-care providers to start using the technology, its supporters say.

“They approved it at a level that’s too low,” Kassell says.  “From the perspective of the treating physicians and the facilities, it’s not enough.”
Pivotal payment

Medicare payment is a critical step in the adaption of this newly approved device and in the effort to increase the use of focused ultrasound. Medicare payment has a big influence on what commercial insurers will pay. Plus, the majority of patients who might need this treatment are old enough to be eligible for Medicare. So whatever payment CMS sets will likely be what most providers will get.

In a sense the payment issue is a matter of bad timing. CMS payment review took place shortly after FDA approval was announced. Kassell and others say CMS is somewhat hamstrung because the focused ultrasound treatment hasn’t been used enough to show what its actual costs are. “It’s not like CMS is doing anything wrong,” Kassell says. “If you’re in their shoes, they’re trying to save taxpayers’ money” by taking a conservative approach to deciding reimbursements.

The FDA-approved focus ultrasound device used in the essential tremor treatment is called the ExAblate Neuro. It is produced by Israel-based InSightec, which has a U.S. office in Dallas. Dee Kolanek, Insightec’s vice president of reimbursement, agrees that the CMS payment decision could at the very least delay implementation of the new device “because hospitals may not invest in the technology,” she says. That investment could be between $1.5 million and $3 million.

In addition to the equipment costs, there is the price of having a trained physician and the support staff needed. Even with the FDA’s approval, getting the system up and running soon will be challenging. “It’s a huge capital expenditure,” she says.

Kolanek says that, while Insightec is disappointed with CMS’ initial $5,800 proposal, the company understands why the agency settled on that figure. “There’s no way to figure a cost without claims data,” and CMS didn’t have enough data to go on, she says.

Collecting enough data
If CMS approved a higher payment, Kolanek and Kassell say the few health-care providers with the ExAblate Neuro system would at least be encouraged to keep using it. After a couple of years of use treating a few hundred patients, CMS could have enough data to more accurately set the reimbursement. Only about a half-dozen hospitals now have the ExAblate Neuro system, so it wouldn’t cost a lot of taxpayer dollars to fund treatments at a higher rate.

Kolanek says Insightec is pursuing FDA approval for other uses for its focused ultrasound technology. “We have clinical trials going right now for many other indications including Parkinson’s Disease …  and we have a clinical trial for prostate cancer,” she says.

FDA already has approved focused ultrasound therapy for palliative care for bone metastases. The treatment lets end-stage cancer patients avoid radiation therapy, possibly reducing their need for pain medications. The FDA also has approved the treatment of uterine fibroids using focused ultrasound.

CMS accepted public comments until Sept. 6 on its reimbursement proposal for the essential tremor treatment. The feedback included comments from Dr. Jeffrey Elias, a neurosurgeon at the University of Virginia Health System, one of six clinical trial sites for the treatment. In an August letter to CMS, he said more than 200 people called his office in the days after the FDA approval. What’s more, U.Va. already had a list of 3,000 people interested in getting the focused ultrasound treatment, Elias said.

U.Va. invested $8 million in building a focused ultrasound center five years ago to support testing, he says. “I am hopeful that focused ultrasound will eventually be proven to significantly help with all kinds of conditions of the brain,” he wrote.

Now, proponents of this new treatment must wait to see if CMS changes its proposed reimbursement. “We really have no idea what decision is going to be made and what they’re going to do until the decision is posted,” Kolanek says. A decision is expected in November. “What we would hate for Medicare to do is finalize the hospital payment as is, which could have a significantly adverse impact on the development of this technology… because it can help many people.”

The ‘iron triangle’

The governing boards of Virginia’s public colleges and universities can face a vexing choice.

Should they keep tuition low to make the school accessible to the public or build the university’s financial strength so that it can attract top faculty and build state-of-the-art facilities?

Peter Blake, director of the State Council of Higher Education for Virginia (SCHEV), says there’s a name for the challenge facing boards of visitors. “It’s what we describe as ‘the iron triangle of affordability, access and quality.’ As one one of those increases, the other decreases.

“If you increase access, it could impact on quality. Those are the trade-offs trustees make,” Blake says.

Perhaps the conundrum might be better understood in the context of two landmark actions in state higher education, one passed by the legislature in 2005 and the other, in 2011.

In 2005, Virginia profoundly changed its relationship with its public colleges and universities through the Restructuring Act. The law gave institutions greater autonomy in setting tuition and managing their finances during a period of wide swings in state funding for higher education.

Then, six years later, the legislature approved the Higher Education Opportunity Act, or “Top Jobs Act.” Its primary objective was awarding 100,000 additional degrees between 2011 and 2025, while increasing access and affordability.

The ripple effects of those two laws are being felt in nearly every aspect of college operations, in decisions about tuition, enrollment and finances.

In August, top officials of the University of Virginia were summoned to the state Capitol, in part to see whether U.Va. was upholding its end of the deal public universities had struck with the state.

U.Va., Virginia Tech, the College of William and Mary and Virginia Commonwealth University have been granted the greatest autonomy (Level 3) under the Restructuring Act in handling their finances and other aspects of governance.

On the hot seat
The money committees of the House of Delegates and the state Senate put U.Va. on the hot seat in reaction to accusations by Helen Dragas, a former rector, of the existence of a secret “slush fund.”

In an op-ed piece in The Washington Post, the Hampton Roads real estate developer said the university’s governing board created the $2.3 billion fund for “pet projects” instead of using the money to reduce tuition.

Dragas noted in her opinion piece that, since 2009, tuition at U.Va. has increased 74 percent.  Tuition for students entering U.Va. in the 2009-10 school year was $7,496. In 2016-17, it was $13,060 for first-time students.

SCHEV officials, however, stress that the cost of going to college will vary because of multiple factors, including the incomes of students and their families.

Nationally, since 1990, the average tuition at public four-year public institutions has skyrocketed more than 160 percent, according to the the National Conference of State Legislatures.
Virginia’s four-year comprehensive colleges are now the sixth most-expensive public institutions in the nation, and its doctoral institutions are 12th most-expensive, according to SCHEV’s most recent tuition and fees report.

U.Va. says its $2.3 billion fund, which goes up or down depending on market conditions, is best characterized as a “strategic investment fund,” which can generate as much as $100 million annually to improve the university without the use of tuition or tax dollars.

In mid-September, the board approved $26 million from the fund for 13 projects that ranged from increased financial support for doctoral students to the acquisition of a suite of tools to help faculty and students pursue large-scale research opportunities.

It is not surprising that U.Va.’s fund became a political issue. In an era of high student debt, college tuition has become a focal point for many members of the state legislature.

A college education has become progressively less affordable for many Virginia families. State funding has been one of the culprits. As state support decreases, tuition almost invariably rises.

Virginia has a long-stated target goal of providing 67 percent of the cost of a student in public higher education, but it has missed the mark time and again.

In 2017, the state is expected to pay only 47 percent, while students (and their families) pay 53 percent, according to SCHEV.

The General Assembly had increased appropriations for higher education last year with the hope that tuition increases could be held to a minimum.

No ‘inquisition’
At the joint legislative hearing, Tommy Norment, the Republican majority leader of the state Senate, offered an assessment of what was to come for U.Va. officials.

“The tone of the presentations should be factual. [It] will not devolve into an inquisition,” he said.

Eric Sandridge, director of higher education in the office of the state Auditor of Public Accounts, swiftly threw cold water on accusations of mismanagement. “I didn’t see anything that would indicate a slush fund of any kind,” Sandridge says. “As far as hiding assets, there is none of that there.”

He added that there were no general funds or tuition income in the fund. Instead, it is a pool of money drawn from cash reserves, as well as investment gains that had accumulated over the years.

U.Va. President Teresa Sullivan told legislators that, besides making the best use of its financial resources, the university was keeping its bargain on moderating tuition increases and providing access to more Virginians.

She noted that U.Va. had reduced a previously announced tuition increase of 3 percent for continuing students to 1.5 percent, thanks to a higher appropriation from the state.  (In-state freshmen at U.Va. pay varying tuitions depending on whether they take an option that will secure a guaranteed four-year tuition rate.)

According to the university, the state’s contribution of $144.7 million represents about 10 percent of the university’s academic division budget of $1.39 billion in fiscal 2016-17.  Of the university’s total approved operating budget of $3.2 billion for all divisions, including the University of Virginia at Wise and the university’s medical center, the state money amounts to less than 5 percent.

More spots for Virginians?
On providing greater access at U.Va. to more Virginians — a sticking point with many legislators about Virginia’s elite public institutions — Sullivan said that as a result of an enrollment growth plan implemented in 2011 (as part of the “Top Jobs Act”) the university has awarded undergraduate degrees to an additional 938 state students in the past five years.

Under the growth plan,  U.Va. expects to enroll 1,673 more undergraduates by the 2018-19 academic year, an increase of 11.9 percent from 2010-11. Of these, 1,171 (70 percent) will be Virginians.

By 2019, Sullivan says, the university, which now has a student body of nearly 22,000, would be awarding degrees to an additional 385 in-state students annually. (About a third of U. Va. students are from outside the state. However, in-state students represent 69.3 percent of this year’s entering class, exceeding existing enrollment goals.)

U.Va. officials say they are committed to maintaining excellence alongside access and affordability. The U.Va. board of visitors will hold a one-day, called meeting on Nov. 11 to discuss possible uses of the strategic investment fund.  College affordability is expected to be on the agenda. 

“U.Va.’s dual roles as a public university and as a state flagship should never be contradictory or mutually exclusive. U.Va. must be public and excellent, affordable and excellent, accessible to Virginians and excellent,” Sullivan asserted before the money committees.

Looking at other schools
Other public institutions also could find themselves under intense scrutiny by the legislature.

The money committees have asked SCHEV, in conjunction with state auditors, to examine how other institutions are managing their finances with additional autonomy.

The current pacts between the state and its public colleges and universities point to a big issue for former state Sen. Edd Houck. He served in the Senate for 28 years and helped guide the creation of the Restructuring Act.

“Historically, higher education in many ways has been a stepchild of state funding in the commonwealth, and it’s gotten worse and worse. K-12 has been at the head of the line,” Houck says.

Virginia’s constitution does not mandate state support for higher education.  K-12, on the other hand, has had since 1999 a committed source of funding: profits from the state lottery. (A constitutional amendment confirming that commitment passed in 2000.)

In fiscal year 2016, those profits totaled $588 million, the best results in the lottery’s 28-year history.

Houck says, however, declining state support is not the only thing making colleges expensive. He also cited rising institutional spending.

“I have been resistant to tuition increases, because you have to give up some things,” he says. “Even during the most difficult days of the recession, college and university budgets were growing.”

Houck, a member of the University of Mary Washington’s board of visitors, emphasizes that he is in no way speaking for the university or its governing board. Instead, he is expressing his frustration at what he views as overspending by colleges and universities generally.

Houck echoes some of the concerns expressed by the members of other college governing boards to the Joint Legislative  Audit and Review Commission (JLARC) in a 2014 survey of college costs: “About half of the current board members responded that they have a limited ability to influence decisions about institutional efficiency or non-academic spending.”

U.Va. Rector William H. Goodwin Jr., a man known for his financial acumen and philanthropy, was careful when asked what the university’s governing board should have as its top priority: Keeping tuition low or building its financial strength?

“With all honesty, I can’t answer that,” Goodwin says. “You’re asking two different questions with a broad range of strategies.”

Changing the face of commercial real estate

Once a month Susan Jones, a veteran commercial real estate broker for the Richmond office of Colliers International Inc., touches base with a younger female colleague in Toronto who works for Colliers' Canadian National Hotel Team.

Jones, a senior vice president and Richmond director of retail brokerage, is a mentor to her company-matched peer, a woman in her 20s who is four years into her career.

“Each time we get on the phone, I share a win, a loss and a challenge, and she shares one with me, and we talk about how to deal with it,” says Jones. 

While their fields are different, there’s plenty of common ground.  “She hasn’t done a whole lot of networking, and that’s how I built my career.” So Jones encourages her to join professional industry groups. “She knows I’m going to ask her, ‘What did you do this month?’ I tell her, “Don’t sit with your buddies. Go sit with a bunch of strangers and meet someone.” 

Colliers’ mentoring project is part of a larger Women’s Diversity Program. The international real estate company launched the effort in February with a groundswell of support from its senior female executives. 

Today, there are 58 mentor relationships in a program designed to help young women advance in their careers. Besides one-on-one coaching, the women can attend special programming and events, with scholarships available for conferences sponsored by industry groups as such as CREW (Commercial Real Estate Women) or ULI (Urban Land Institute.)

“We should be developing more female leaders because that reflects the marketplace in general,” says Colliers’ Karen Whitt.  Based in Washington, D.C., she’s president, U.S. Investor Services and Real Estate Management Services and one of the executives overseeing the diversity program.  Yet companies must do more than just hire diverse candidates, she adds. “You have to make sure there’s a career path of success for them. You need mentoring, training, outside resources brought in to make sure those candidates are supported. That’s how we intend to change it at the C-suite level. If you just hire them and don’t support them in their growth, you’re not aligning where the marketplace is going.”

Changing agenda
Colliers’ program is one example of how the commercial real estate industry is moving diversity to the top of its agenda. In a $300 billion industry where numbers are key indicators of success, the numbers lag when it comes to the hiring and promotion of women and minorities. 

A 2013 Commercial Real Estate Diversity report, based on information from the Equal Employment Opportunity Commission, said that white men held the majority, 77.6 percent, of the industry’s senior executive jobs (at least at private companies with more than 100 employees, which are required to report the composition of their workforces to the EEOC). By comparison, white women held 14. 1 percent of the top jobs; Hispanic men, 2.9 percent; Asian men, 1.6; and African-American men, 1.3 percent.  Minority women held less than 1 percent of the jobs. 

Throughout the career ladder, white men held the majority of 166,554 jobs in four of five categories, the report said, with the exception being clerical workers.  “Gender and ethnicity are each barriers to advancement,” the report said. “A white male midlevel manager has a one-in-three chance of advancing to senior executive. A black female midlevel manager has a 1 in 12.6.”

Considering the overall composition of the U. S. population and the increasing percentage of female college graduates, some critics say the real estate industry is way behind. In 2014, the U.S. Census Bureau reported that 38 percent of the country’s residents are minorities, a number expected to rise to 56 percent by 2060. Meanwhile, about 58 percent of all college graduates in the U.S. are women.

With the face of America changing, large, public international real estate companies such as Colliers, JLL, Cushman & Wakefield and CBRE Inc. have rolled out initiatives to promote a diverse workforce that reflects their clients and communities.

“Sadly, I don’t think we are where we need to be,” says Liz Steele, commercial transactions counsel for the Richmond office of Stewart Land Title Services and president of the Richmond chapter of CREW. “I believe some inroads have been made, and there has been some progress, but I think we have a long way to go.” 

Room to improve
The CREW 2015 Benchmark Study Report of the U.S. industry bears out Steele’s concerns. It found that men continue to outnumber women in C-suite positions, with 17 percent of the men surveyed (among a group of 2,182 real estate professionals) vs. 9 percent of women, holding these jobs.  

That percentage, however, is higher than the number of women CEOs leading America’s Fortune 500 companies. This year’s annual ranking of the country’s largest companies by revenue found that 21 of 500 CEOs were women, or 4.2 percent.

While CREW’s latest report found progress  — “women in commercial real estate are closer to the C-Suite than ever” — income differences between men and women remain. The report said the median total annual compensation, including bonuses and profit sharing, was $150,000 for men and $115,000 for women in commercial real estate, or an income gap of 23.3 percent. 

JLL, an international commercial real estate and investment management company with a presence in Virginia, is winning accolades for its commitment to diversity. Efforts to move women into top spots won recognition this year by the National Association for Female Executives, which named JLL one of its 2016 Top Companies for Executive Women.

JLL has created five diversity resource groups. They are: the Latino Employee Resources Network, The African American Business Network, Building Pride Business Network, Women’s Business Network and the VETNet Business Network.

Other visible signs of the company’s diverse workforce? Sheila Penrose, the firm’s highest-ranking woman, is chairman of the board of Chicago-based JLL, which has 62,000 employees in 280 corporate offices around the world. Penrose became chairman in January 2005. Of the board’s independent directors, 44 percent are women. Women also hold two of the top spots at JLL, with Christie Kelly as global chief financial officer and Trish Maxson as global chief human resources officer.

Closer to home in JLL’s Tysons office, Betsy Peck serves as chief operating officer for JLL’s Americas Markets business. In this role, she implements operational efficiencies, assists the firm’s front-line producers and works with marketing partners. 

Peck says JLL regularly reviews diversity efforts to create a pipeline of diverse leaders. One event, a two-day woman’s summit, ensures that female employees with leadership potential are exposed to senior leaders.  The company also continues to add women to its production/brokerage side. “If you look at our success stories, at some of the most successful and iconic transactions that we deliver, they include a diverse team. That’s how we deliver creative solutions to our clients,” says Peck. 

Sending a message
Women in high-profile jobs send a message that companies are serious about diversity. Colliers in Richmond — one of the region’s oldest real estate firms, dating back more than 100 years to its origins as Harrison & Bates — changed the public face of its executive suite in fall 2013 with the hiring of Daphne Berkowitz.  As a senior vice president/director of brokerage services, she presides over an all-male staff of 30 office and industrial brokers in the firm’s Richmond and Norfolk offices. 

Berkowitz came to Colliers with 30 years of experience and many contacts in the Richmond market from previous jobs as director of business development with Branch & Associates Inc., business development manager for EDC and director of marketing and asset management for the real estate division of Figgie International.   In her new assignment, “this position is more of a strategic position of bringing on a noncompeting real estate professional who could offer guidance in operations and commission-based sales and training,” she says.

Overall, Colliers has 45 employees in its Richmond and Norfolk offices, and 10 of them are women. Susan Jones, one of the company’s top three producers in 2015 along with two other female retail brokers, was appointed to the company’s board of directors in February 2010. She’s the first and only woman to serve on the board. “It was a learning experience for the rest of the board to hear a different perspective on things,” says Jones. “It has worked out really well.”  

Colliers will continue to update its image with a move to a new office next month in the Glen Forest Office Park in Henrico.

A witness to change
Richmond-based Cushman & Wakefield|Thalhimer, a private company of 450 employees in eight offices in Virginia and South Carolina, will have access to a diversity program, the Women's Integrated network, that C&W launched in October. According to Ann Albrecht, vice president of human resources, Thalhimer's mix of employees is 60 percent men and 40 percent women. Overall 16 percent of the employees are minorities, she says. 

Albrecht is the company’s highest-ranked woman on the corporate side, and she’s the sole female member of the firm’s leadership team. “I provide some balance at times from a female, diverse viewpoint and the HR function is more well-rounded,” she says.

In the past two years, Thalhimer has hired eight women as brokers, according to Albrecht, and half of those hires were millennials. New agents are paired with mentors. Currently women make up 25 percent of the firm’s brokers, a group typically paid by commission, a model that doesn’t appeal to everyone, she notes.

One of those brokers is Connie Jordan Nielsen, a senior vice president. Nielsen, who started out in real estate in Denver as a temp answering the phone, has been a force behind some of the biggest retail deals in the Richmond region, including the recent debut of two Wegmans grocery stores. 

Nielsen says she has witnessed dramatic change in the industry.  “When I started doing brokerage about 20 years ago, I was the only woman who was a broker at a lot of conferences.” Today, on the retail side, she says, the breakdown is more like 50/50 between men and women.

“I really do think that the opportunities are out there. You just can’t think that someone is going to give it to you. If you ask and you push and put yourself out there, then you prosper,” she says.

Lee Warfield, Thalhimer's president and CEO, says “it's great that firms have adopted programs or initiatives for hiring women. It's been our focus for a long time … Whether it is in brokerage, finance, HR, or IT, women have consistently earned key positions within our firm.”

Steele of Richmond’s CREW looks for progress in diversity to continue. “As long as we’re talking about it, progress can be made. When you’re not having the conversation, that’s what leads to stagnation. So let’s keep the conversation going.”

More than numbers

As chief operating officer for one of the largest lodging real estate investment trusts (REITs) in the country, Krissy Gathright enjoys learning all she can about a business. During her 17-year tenure with Apple Hospitality REITs, she has participated in mini-boot camps at two of the company’s 236 upscale hotels. During the camps, she works shoulder-to-shoulder with employees in every department — from the front desk to housekeeping. 

“Numbers tell you one piece of the story, but from my perspective and Apple’s perspective we want to learn from the inside of the hotel by stepping into the shoes of employees,” she says. “That will give you a more complete picture.”

She found the experience eye opening. “You really get an appreciation of how hard the work is, and that it takes somebody special that understands people to bring it all together,” she says.

Apple REITs began in 1999 in Richmond with Apple Suites, and Gathright has been with the company since its inception. Over the years, the company established and operated a total of eight hospitality REITs, four of which were taken full cycle through private equity transactions.

Apple Hospitality REIT was formed following the mergers of Apple REIT Seven, Apple REIT Eight and Apple REIT Nine in March 2014. While Apple was a public company, its stock initially was not traded. That changed in May 2015 when the Richmond-based company joined the New York Stock Exchange under the ticker of APLE. This September, Apple continued to stretch its economic muscle by completing its merger with Apple REIT Ten Inc., creating an upscale lodging REIT valued at $5.7 billion.  

Gathright joined the company after serving as assistant vice president and investor relations manager for Cornerstone Realty Income Trust, a REIT that owned and operated apartment communities in five states, including Virginia. Before that she was asset manager and regional controller of the northern region operations for United Dominion Realty Trust Inc., a REIT.

She embodies Apple’s simple, efficient and detail-driven approach to business. “We collect lots of data, and we analyze trends,” she says. “Early on we didn’t have as much data as we have now. We had to ask a lot of questions.”

Today the company is a big player among owners of service and extended stay hotel rooms. Apple’s portfolio consists of 22 different operators that manage hotels in 33 states. Its 30,298 guestrooms are split evenly between the Hilton and Marriott families of brands.

Gathright says her greatest challenge to date has been leading the company through the economic downturns in 2001 and 2008. “We are well positioned for downturns because we have a rooms-focused product, but we still have to be smart about contingency planning and lower occupancies,” she says. The hotels in Apple’s portfolio have limited staffing as well as limited food and beverage outlets.

She takes great pride in being the first woman to serve as president of the Courtyard Franchise Advisory Council, a position she still holds.

The hotel industry is ever changing, and one of the biggest trends today is consolidation. Marriott recently acquired the upscale Starwoods chain, making Marriott the largest hospitality company in the hotel industry. That’s good news for Apple.

“It’s exciting,” Gathright says. “It will create one of the strongest loyalty programs in the industry as well as a stronger platform for us. It will bring in new customers.”

Another trend is that consumers want unique travel experiences. Apple kept that in mind when designing the Courtyard Residence Inn in downtown Richmond by incorporating  a small museum, The Valentine First Freedom Center, at the hotel's location at 14th and Cary streets. The center highlights the principles of freedom of religion outlined in Thomas Jefferson’s Virginia Statute for Religious Freedom that was signed into law in 1786.  The hotel sits on the site of Virginia’s temporary capitol where the statute was enacted. The law was a precursor of the First Amendment to the U.S. Constitution, which guarantees freedom of religion. “It gives it more of a unique, local, authentic flair,” Gathright says. 

Her work schedule keeps her busy but not too busy to spend time with her husband, Jay, and their three sons who range in age from 6 to 15.  With her sons involved in sports, Gathright schedules time away from work so she can sit in the stands like any other mom, “watching a baseball or football game.”   

Favorite childhood memory: Playing tennis with my dad. He helped instill the value of being competitive – setting the bar high and pushing myself to reach goals.

What job she would have in another life:  ESPN sportscaster.

What can’t you live without: Cool shoes, especially colorful pumps. More often than not, you will find me wearing a colorful dress and fun shoes to accentuate my personality.

Pet peeve:  Inefficiency.

Favorite indulgence: A good spa treatment when I am traveling.

Something people don’t know about you: I can be self-critical

Welcome to the agrihood

At Willowsford, residents know where their food comes from. Some of it is grown on a 300-acre farm that’s integrated into the 4,000-acre community in southern Loudoun County.

Willowsford Farm grows more than 100 varieties of vegetables, herbs, fruits and flowers. The farm also supports chickens. Eggs and produce are available for residents to buy through a CSA (community supported agriculture) program and at a community Farm Market.

Mark Trostle, an executive vice president for Willowsford, calls the development an “agrihood.” It flowed naturally, he says, from the large tract of rolling land, its location in a rural part of the county and a desire for low density.  Two thousand acres, including the farm, have been set aside for open space in a conservancy.

“It’s only been done a few places,” notes Trostle, of the agri-community model.

The idea, he says, “was to bring people to a place that would connect them with nature, with where their food came from and with the outdoors again, because so much of suburbia is kind of sterile.”

Willowsford began development in 2010. So far, 700 homes — priced from the mid-$600,000s to $1.5 million — have been built. The community offers amenities such as pools, a clubhouse, a lake, treehouses for the kids and 40 miles of trails.  But it’s the farm focus that sets it apart. There’s a culinary director on site who runs a demonstration kitchen with cooking classes.  Residents and their families also can pick fruits and vegetables from a local garden.

Living down on the farm is an old idea, but this 21st-century version is garnering attention and awards.

Trend tracker

Shenandoah Valley residents have been brewing beer since the Scots-Irish settled in the region in the early 18th century. Three hundred years later, local brewmasters are crafting more than just beer; they’re creating experiences for tourists.

In May, tourism officials launched the Shenandoah Beerwerks Trail, which links craft beer with the valley’s many outdoor recreational activities and attractions.

“It’s a natural pairing,” says Sheryl Wagner, Staunton’s director of tourism who is the trail’s spokeswoman. “We know that craft beer drinkers love the outdoors, and so after a day of hiking, biking and exploring, now they can tap into our local beer culture.”

The Beerwerks Trail is just one example of how the valley is capitalizing on national trends to stimulate the regional economy.

Overall growth in the $106 billion U.S. beer industry has been tepid — with volume in barrels rising only 0.2 percent last year. Craft beer production, however, increased 12.8 percent.   

“We think the Beerwerks Trail provides a new way to showcase one of the fastest-growing attractions in our market to a slightly younger demographic — who also love the great outdoors, music festivals, farmers markers, and exploring vibrant, walkable Main Street communities,” Wagner says.

Tourists initially may come to the region to try out its breweries, she says, “But they’ll also explore our region, eat in our local restaurants and stay overnight. It’s a win-win for everyone.”

The Beerwerks Trail features a dozen breweries in the central and southern valley: Brothers Craft Brewing, Pale Fire Brewing Co., Three Notch’d Brewing Co. and Wolfe Street Brewing Co. in Harrisonburg; Redbeard Brewing Co., Shenandoah Valley Brewing Co. and Queen City Brewing in Staunton; Devils Backbone Outpost Brewery & Tap Room in Rockbridge County; Stable Craft Brewing in Augusta County; Blue Lab Brewing Co. in Lexington; and Basic City Beer Co. and Seven Arrows Brewing in Waynesboro.

“For a rural area like the valley, it’s a real boost, and especially for the smaller townships,” says Heidi Crandall, co-owner of Devils Backbone, which also has a production facility in Nelson County.  “Any time you have one industry in a cluster like that, it brings in more people, and that helps everyone.”

(Devils Backbone announced in April it is being acquired by St. Louis-based Anheuser-Busch. )

The sixth craft-brewing trail in Virginia, Shenandoah Beerwerks received a $50,000 grant from the Virginia Tourism Corp.’s marketing leverage program to support print, digital and social media marketing for the trail during the next fiscal year. Signs will be installed at each brewery, and promotional information will be available at visitor and welcome centers across the commonwealth.

“We are very excited about this grant, because we can greatly expand how we promote our region,” Wagner says. “We see this as a strategic tourism investment that builds off the booming craft-beer industry.”

Following Virginia Craft Beer Month in August, Shenandoah Beerwerks rolled out a “Farm-To-Cask” event over three weekends in September. Each participating brewery crafted a new cask beer for the occasion, using produce from local farms, including honey, apples, Asian pears, blackberries, peppers, pumpkins and ginger. A new brewery, Great Valley Farm Brewery in Rockbridge County, also opened this fall.

The region’s hospitality industry is jumping on the craft beer bandwagon, too. For example, in addition to its other travel packages, Stonewall Jackson Hotel and Conference Center in downtown Staunton is offering guests tickets that are good for their choice of local craft beers and souvenir glasses.

“For us, it’s an opportunity to expand our reach into other avenues,” says Damon Strickland, the historic hotel’s general manager. “It’s agritourism — grain to glass. There are a lot of folks who enjoy learning about the industry from start to finish. And we truly enjoy supporting anything that is local and part of the valley.”

Bath County stave mill
Meanwhile, a Scottish company is tapping the region’s timber industry to produce another type of adult beverage, bourbon.

Speyside Bourbon Cooperage chose Bath County for a new stave mill. It will supply American white oak staves used to make bourbon barrels. The company is investing $5 million to create a production facility in an industrial park in Millboro, creating 30 jobs.

The Distilled Spirits Council of the United States reports that sales rose 4.1 percent to nearly $72 billion in 2015. Sales of U.S. whiskeys increased even faster, up 7.8 percent. The surge in demand for bourbon has led to a shortage of barrels, according to the Wall Street Journal.

Darren Whitmer, Speyside’s general manager, says the search for a stave mill location started more than a year ago. “Our goal all along was to locate the plant in the Shenandoah Valley region due to the availability of white oak and the fact that the timber industry is strong there,” he says.

Speyside currently operates two plants in Scotland and one in Kentucky. The company is a part of a larger cask-making operation based in France. Speyside Bourbon Cooperage in Jackson, Ohio, was the company’s first plant dedicated solely to producing bourbon barrels.

The project is the first economic development project announcement for Bath since 2003. The company has agreed to get 80 percent of its timber from Virginia landowners.

“It’s a huge win for them,” says Carrie Chenery, executive director of the Shenandoah Valley Partnership, a regional economic development group. “Bath was able to provide the natural resources and the workforce that Speyside was looking for.”

Community solar project
While developing its beverage industry, the valley also is responding to the growing interest in solar energy. Virginia’s first community solar project is being built at the BARC Electric Cooperative facility in Rockbridge County.

Instead of installing solar panels on their rooftops, customers of the community solar project will have access to solar power generated at a single facility. BARC is building and maintaining the system for its member-owners, who live in Rockbridge, Bath, Highland, Augusta and Alleghany counties.

The cooperative also built an educational center at the facility to teach students and visitors about solar energy production. The classroom features a touch-screen display of real-time data from the solar array.

At the announcement in August, Gov. Terry McAuliffe called the community solar project “an excellent model for stabilizing and reducing energy costs, while delivering clean solar power to large segments of households on the grid.”

Health-care projects
Health-care projects also have taken shape in the region, a sign of the industry’s influence on the valley’s economy and quality of life.

Earlier this year, Merck, a New Jersey-based global pharmaceutical company, announced a $168 million expansion of its manufacturing facility in Rockingham County near Elkton.

The investment includes upgrading the plant’s infrastructure and adding new manufacturing facilities and equipment. Merck began operations in Elkton in 1941.

McAuliffe approved a $1.3 million performance-based grant from the Virginia Investment Partnership program, an incentive available to existing Virginia companies. Funding and services to support the company’s employee retraining activities will be provided through the Virginia Jobs Investment Program.

Meanwhile, Valley Health opened a $28.5 million regional cancer treatment facility at Winchester Medical Center in August.

The 52,000-square-foot facility houses chemotherapy and radiation treatment areas, physician practices for surgeons, medical and radiation oncologists as well as consultation, nutrition counseling, integrative care and a clinical research office. The building also includes a 70-seat meeting room.

“Cancer care has long been a vital service for us and for the communities we serve throughout our region,” says Grady W. “Skip” Philips III, the president of Winchester Medical Center.

“This center enables our patients to conveniently access the entire spectrum of cancer services under one roof and have a more seamless, coordinated treatment experience,” he says. “It will be a wonderful place for our multidisciplinary team to work and our patients and families to be supported throughout treatment and recovery.”

Winchester-area plans
Winchester and Frederick County, in fact, have been buzzing with economic development activity in recent months.

Home Depot opened its third distribution center in Frederick County in the fall. The company now occupies 250,000 square feet in the Stonewall Industrial Park. Home Depot will use the space as an overflow facility, complementing its other domestic distribution center at 480 Park Center Drive. The home improvement retailer also operates an international distribution center in southern Frederick County.

The FBI is moving forward with the development of a Central Records Complex in Frederick County. The U.S. General Services Administration purchased a 59-acre site on Millwood Pike in June for $4.75 million.

The complex previously was being considered for the White Hall section of the county, near the West Virginia line, but the project has endured numerous funding and logistical hurdles since its initial announcement in 2004.

The estimated $109 million complex will streamline the FBI’s records management system. The 256,000-square-foot facility is expected to employ as many as 450 people.

Winchester Regional Airport is set to expand as a result of $1.5 million in funding from the Federal Aviation Administration. The airport is looking to construct 11 hangars on undeveloped land north of the runway and east of the Public Safety Building on Coverstone Drive to accommodate future airport development and growth.

Workforce partnership
The valley’s economic development depends upon it having a skilled workforce. This year marks the 20th anniversary of a partnership between Staunton-based Cadence Inc. with Blue Ridge Community College.

Cadence, a contract manufacturer serving health-care and life-science markets, established an endowment at the college for its Technical Studies/Manufacturing Engineering program. Many of Cadence’s employees are graduates or current students of the mechatronics program.

“Not only has Blue Ridge been a great source for new employees, but as our company has grown, many of our current employees utilize Blue Ridge to continue their education and improve their skills in order to grow with the company,” says Ken Cleveland, Cadence’s chief financial officer.

Amy Kiger, executive director of BRCC’s Educational Foundation, says it’s important to have partners in the community like Cadence who recognize the value that a community college provides.

Cadence also collaborates with the Community Foundation of the Central Blue Ridge to support “Student Focus. Community Impact. The Campaign for Blue Ridge Community College.”

The partnership helps fund various technologies and curriculum materials: BRCC’s Career Coach program that places educational and career advisers in 12 local high schools; and the Workforce and Economic Development program to promote awareness to the school’s various degree and certification offerings.

Collaborations such as the one between Cadence and BRCC will help ensure that the valley will continue to attract skilled workers as well as tourists.

UnitedHealthcare gives $25,000 grant to VCU program

.UnitedHealthcare has given a $25,000 grant to the Virginia Commonwealth University School of Nursing to help reduce hunger and social isolation among seniors.

The money will support the school’s community-based, care-coordination initiative, the Richmond Health and Wellness Program.

The grant will fund free weekly student-catered meals at three senior apartment communities. Funding from the grant will also support educational efforts used to increase the variety and nutritional value of seniors’ diets.

Along with the weekly meals, the grant will also help VCU students identify seniors who may be eligible to enroll in a Meals on Wheels program or to participate in FeedMore’s Commodities Supplemental Food Program.

The Richmond Health and Wellness Program will also provide referrals to day programs and other resources from the local Area Agency on Aging.

According to America’s Health Rankings, Virginia ranks 21st in the nation for senior hunger.