by Gigi Wood
IOWA – A letter to the editor sent state and local leaders scrambling last week with the hope of saving 700 new jobs.
Thomas Cardella, owner of Thomas L. Cardella & Associates, a call center company with more than 800 employees in the state, said he will take most of his next 700 hires to Texas.
In a letter sent out Dec. 3, he stated: “Thomas L. Cardella & Associates was recently notified by the state of Iowa that our unemployment taxes will be going up by $900,000 (from a rate of 1.5 percent to 8 percent) in 2011. This has caused TLC&A to reevaluate our three year plan, and to not add 700 new jobs (500 in Cedar Rapids, 100 in Grinnell, and 100 in Cedar Falls) in the state of Iowa but to instead move those new jobs to Texas. These 700 jobs would have represented over $18 million in payroll and would have helped to revitalize the flooded downtown Cedar Rapids area, as well as brought additional revenue to the other communities.”
State and local response
He sent the letter to Gov. Chet Culver’s office, to incoming Gov. Terry Branstad and every major newspaper in the state, Mr. Cardella said. Come Monday, Dec. 6, it was the scuttlebutt of government, economic development and business circles across Iowa.
Mr. Cardella said that day he was waiting for a response from local leaders. On Tuesday, he traveled to Des Moines to meet with Iowa Workforce Development officials. He spoke with Cedar Rapids Mayor Ron Corbett, Priority One officials and the Cedar Rapids chamber of commerce about ways to keep the jobs in the state. Incoming Iowa Department of Economic Development Director Debi Durham was making calls Tuesday and Wednesday to find a solution to the exodus.
“It’s funny you called because I had spoken to Priority One earlier today and I’m actually pulling over and calling Tom and finding out if there’s anything that can be done,” she said Tuesday.
Ms. Durham has led the Siouxland Chamber of Commerce since 1995 and is often credited with Sioux City’s business revitalization in the past 15 years.
“We’re certainly going to try and see if he will let the new administration have the opportunity to work on the issue before he makes a final decision. But how that’s going to be received I don’t know,” she said.
She did not return a follow-up call by press time. Bret Mills, the outgoing IDED director, also did not return a phone message seeking comment by press time.
On Wednesday, Mr. Cardella shared his story to an audience of 180 at the Corridor Business Journal’s How I Built It event, for which he was one of five panelists, who discussed how successful entrepreneurs start businesses. At the event, Mr. Cardella said he had also planned a new call center for Newton, but he was almost certain he would move his planned job growth to Texas.
“Somebody has to put their foot down (on tax increases and the state’s ability to work with businesses),” he said. “I hope it doesn’t come to making a massive expansion in Texas.”
He also announced a pilot program he will be working on with Iowa Workforce Development. A company’s unemployment tax rate in Iowa is based, in part, on the number of unemployment claims by former employees. Mr. Cardella said the state does not verify those claims, so his company has an inflated tax rate. He will report the people who abuse the system and the state will check up on those filings.
After the event, he said he had cordial meetings with state leaders about the potential Texas move.
“It’s up to the state right now,” he said.
This is not the first time Mr. Cardella has said he would move new jobs out of state. In 2007, he said he would cancel plans for the creation of 240 jobs in Cedar Rapids if the city didn’t offer business incentives. He has since said that the city was trying to keep his company from locating in town by change the zoning on a building his business wanted to occupy. That call center is operational and is consistently adding employees.
In response to a story about the hiring outlook for the Corridor, he told the Corridor Business Journal in October he was hiring 60 additional temporary positions in Coralville to handle a holiday catalog retailer account. Those jobs will remain for the duration of the contract, he said.
He added that he would be opening a call center in El Paso to support the Spanish-speaking needs of its clients. He said at the time he expected his company to grow 64 percent over the next six months and El Paso would be a small part of that growth.
He said he planned to handle that growth by expanding the company’s Iowa call centers, which are in Cedar Rapids, Coralville, Keokuk and Marshalltown. He also expected to open new call centers, which he has since announced would be in Grinnell and possibly Newton.
Last week, Mr. Cardella said he decided to open the El Paso office after receiving the letter about the tax increase in November. He said he received an additional letter during the first days of December, which outlined the actual increase.
“We had notification back in November that our rates were going up substantially and didn’t have any idea until last Thursday how much,” he said last week. “The city of Cedar Rapids, after Go Daddy turned them down, approached us to come downtown. So we worked with the city for quite some time to try and make that happen. But when we found out that our unemployment taxes were going to go up substantially, we couldn’t cost-justify any jobs in Iowa.”
The company will instead create at least 200 of those jobs at the El Paso center, which will open March 1, he said last week.
“A $900,000 increase would make us unprofitable next year,” he said. “I can’t pass this cost on to my customers like the government is insisting we can. Eventually, what I might have to do is look offshore and open some call center space offshore. Taxation forces us to find places where we can stay in business.”
He plans to not draw a salary to help with the increased expense. The investors’ interest rate will be cut by a third and the company has asked its bank to reduce its interest rate. Corporate management pay will be decreased, and wages and benefits will be frozen to deal with the increase.
“The $19 million in new payroll that we would have brought to the state of Iowa would have actually had a yearly impact on the communities of $60 million,” he said. “Iowa State University did a study for us and they determined that payroll dollars that come in the state from outside the state, and that’s where ours comes from, go through a community about three times. So this will be an overall economic impact to the three communities of about $180 million over three years.”
Kerry Koonce, a spokeswoman for Iowa Workforce Development, said the unemployment tax rate is different for each business.
The rate is increasing for businesses because state law mandates the fund stay solvent and prevents the Employer Unemployment Insurance Trust Fund, which is used to pay state-level unemployment benefits, from going bankrupt. The unemployment benefit extensions that have taken place during the recession are paid by the federal government, not the state, Ms. Koonce said.
“There was a change this year, but most businesses saw no more than a 1.5 percent increase unless their activity was substantially higher for layoffs and things like that,” she said.
Ms. Koonce said the unemployment tax rate is not based on a company’s number of employees. She said the rate is reviewed annually and once the fund becomes solvent again, it will shift back to a lower rate.
She said she could not discuss personal accounts, but insisted that Cardella & Associates does not have a 1.5 percent rate.
“I can guarantee you he didn’t have 1.5 (percent) before,” she said. “A call center never would, they have too many layoffs.”
Mr. Cardella refuted her claim.
“That’s not true,” he said. “She sounds a little clueless to me.”
There are six unemployment tax tables that are laid out in Iowa Code and within each of those tables, there are multiple rungs of tax rates for employers.
“It’s very complicated, but basically it takes projections from the highest level your unemployment has been in the last two years, benefits paid out, et cetera, and projects where the trust fund needs to be,” Ms. Koonce said. “It takes into account the number of businesses, wages reported in the past year. If (the state) believes the trust fund will get below $150 million, it’s going to move the tables and it’s going to make the rate go up.”
The new rate will go into effect in January and will be due when businesses pay first quarter taxes in April.
“The table moved because of the recession,” she said. “When the tables move, an employer’s rate will likely go up. However, how much it goes up varies with how they move within the table, as well. One of the things that heavily affects your placement within the table is what you had in charges, as in benefits paid out to somebody against your company, if you have lots layoffs. Or, if you had, like many companies during the recession, many employees who worked for four weeks off, four weeks on, that adds up.”
The tax rate is based on a company’s five-year average of those activities.
“If we’ve paid out more than what you’ve put in, you could move as a business within that table,” Ms. Koonce said. “It’s very common for call centers to have lots of ups and downs.
Mr. Cardella said his rate is not going up because of layoffs.
“That’s not true, either,” he said. “What’s happening is the fund is close to insolvent. (The state) is taking larger companies and pushing them up the classification schedule to make more money.”
In Iowa, employers pay unemployment taxes on the first $24,500 of salary. If an employee’s salary is $50,000, an employer pays the tax rate as if the pay was $27,000.
Other states have different rates, Ms. Koonce said.
Cardella & Associates was named this year’s Corridor Business Journal Fastest Growing Company for 919 percent growth from 2005 to 2007. The designation was determined by Honkamp Krueger & Co., which reviews tax statements by companies that apply for the ranking.