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President’s Message As we try to remain positive these are the days when it becomes very difficult. It seems all too often, just as soon as we think we have something good going, Lucy pulls the football away and we end up flat on our back. In our case, instead of a football it is the renewal of the Transportation Trust Fund (TTF) and Lucy’s part is played by our Governor. Other than one fringe group there has been no opposition to renewing the soon to be insolvent Trust Fund. Everyone from the business community, the media, our industry and our partners in the building trades all recognized the need for a long term and sustainable funding source for the TTF. This concept has support from the Senate President and Speaker of the Assembly in addition to rank and file members of both houses and both parties. It seemed we had finally reached the goal line and New Jersey would have the first real commitment to infrastructure since the Kean administration, and then it became apparent that the Governor had backed away from the negotiations. Without the Governor ’s support, promoting whatever plan the Legislature and advocates support would be an exercise in futility. Time will only tell what the Governor’s solution will be. While the Governor has shown leadership on many other issues we need him to be the leader he promised New Jersey when it comes to the TTF. Without a reliable and first class infrastructure network, our State will fall further behind in economic activity than it already has and there is no way to tell if we will be able to recover. The ball is in the Governor’s court. UTCA staff and committee members have held numerous meetings to revise specifications for the betterment of the industry. The labor committee is negotiating terms for a more successful and fairer approach to pension reform in order to reduce or eliminate the financial responsibility of contractors for failed pension systems. It is neither fair nor reasonable that contractors should have to pay into the pension system for a second time when they held up their end of the bargain the first go around. The burden should be left with the people responsible for the pensions to make sure that they are funded and distributed properly.

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On a lighter and more optimistic note, the New Jersey Environmental Infrastructure Trust Fund reported at our most recent South Jersey Membership Meeting, that it has close to a billion dollars in projects either on the street or soon to be let. That is good news for our industry, as it is represents a significant increase over what we have seen in the past and the future looks bright. Continuing on with the good news, many UTCA members just returned from our Executive Seminar in Sonoma and San Francisco, California. This seminar proved to be very educational with some great presentations, which you will hear about from Dennis Hart inside this edition. It was great to see some new faces on the trip and we hope that it was a beneficial experience to all those that attended. The weather and tours were absolutely amazing. Keeping with good news we are very happy to acknowledge the two milestones that Sanitary Construction and DW Smith Associates are celebrating. Sanitary Construction is 100 years old and DW Smith Associates has reached 50 years in business. Congratulations to both companies! Keep up the great work. In closing, I ask for your help with our Constructors for Good Government PAC program. Whether your firm is large or small, UTCA’s PAC Clubs have a membership level designed to fit your financial capabilities. Every little bit helps our mutual cause. The UTCA staff have been working tirelessly to have laws passed that benefit the industry and to stop others that would harm our businesses. In government and politics, political contributions are simply part of the business and we need to make sure our industry’s collective voice is heard in Trenton. Please contribute what you can and thank you to those that have already supported the UTCA PAC.

Best regards,

Scott Lattimer Utility and Transportation Contractor, APRIL 2015


APRIL 2015 Volume XL, Number 2

Contents Features

Published Bimonthly During 2015 Office Address: 1670 Route 34 North Farmingdale, NJ 07727 Mailing Address: PO Box 728 Allenwood, NJ 08720 (732) 292-4300 FAX: (732) 292-4310 www.utcanj.org Publisher: Robert A. Briant, Jr.

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Editor: Michael DeVito Editorial Contributors: Anthony Attanasio Mike DeVito Dennis Hart Dan Neville Advertising Manager: Helene Nasdeo Photographer: Michael DeVito Cover Photo: Image Up

Sanitary Construction Completes 100 Years In Construction A Message From U.S. Senator Cory Booker Sonoma/San Francisco Executive Seminar Highway Trust Fund: Groundhog Day Or Not? DW Smith Associates Celebrates 50 Years In Business Affordable Care Act: Understanding The Employer Reporting Requirements

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President’s Message Financial Overview Legislative News Safety Perspective Legal Dig Labor Relations Accounting Corner

Production/Graphics: Lauren Hagan Helene Nasdeo

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Circulation: Helene Nasdeo Printed By: American Plus Printers Affiliations: ARTBA Clean Water Construction Coalition Water Infrastructure Network UTILITY AND TRANSPORTATION CONTRACTOR (ISSN 0192-4843) is published six times a year by the Utility and Transportation Contractors Association of New Jersey, 1670 Highway 34 North, Farmingdale, NJ 07727. Periodical postage paid at Farmingdale, NJ and additional mailing offices. POSTMASTER: Send address changes to UTILITY AND TRANSPORTATION CONTRACTOR, PO Box 728, Allenwood, NJ 08720.

Cover Pictured on the cover from left to right are William Cervino, Michael Cervino Sr., Anthony Cervino, Michael Cervino Jr., Todd Cortese.

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Cover Story

Sanitary Construction Completes 100 Years In Construction Fourth Generation Family Members Now Involved

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hen any business is able to reach the century mark as an entity, that firm most certainly should be lauded, especially when that firm has been able to weather the many ups and downs the construction industry has seen during that time period. Sanitary Construction was incorporated in 1915 by brothers William Cervino, Michael Cervino, Jr. and Anthony Cervino. In the 100 years since incorporation, Sanitary Construction has survived the 1929 market crash, the Great Depression of the 1930’s, World War I, World War II, the Korean & Vietnam Wars and numerous recessions. Today the firm continues to thrive and grow. The idea of a family-owned construction firm actually dated back 30 years prior to its incorporation in 1915. Family patriarch Michael Cervino, Sr. had completed work in 1885 for the Erie Railroad which spring-boarded his foray into the construction industry. His aforementioned three sons would later utilize their father’s experience to establish Sanitary Construction. Early work for the new firm included water, drainage, sewer and road construction projects in Northern New Jersey. An early project for Sanitary which was completed in the 1920’s was for the installation of a sanitary sewer Pictured are Sanitary forces on a project from the 1930’s. 4

system on Union Avenue in Paterson. This $380,000 project was completed with a steam generated trenching machine. The firm successfully completed many more projects throughout the 1920’s.

Pictured is an aerial view of a project in Morristown.

By 1948, one of the three brothers, Anthony Cervino, took over the family business along with his wife Margaret Palladino Cervino. Construction projects were completed in Bergen and Passaic counties during that time. Margaret Cervino was involved with numerous aspects of the business including estimating, payroll and accounts payable/receivable, and at the same time was busy raising her four sons who would form the next generation of the firm. Ironically, Margaret Cervino was also born in 1915 – the same year that the firm was incorporated. For the next two decades, Sanitary Construction completed numerous projects in both the public and private sectors of construction. The firm had gained a reputation as a top-notch utility contractor that could complete difficult work on time and within budget. Utility and Transportation Contractor, APRIL 2015


that bears her name. The Margaret Cervino Memorial Scholarship is awarded on an annual basis at the New Jersey Institute of Technology to a female student who majors in engineering or construction technology. Certainly a worthy tribute to Margaret’s legacy as a female business owner in a traditionally male-dominated profession. Since 1974, her four sons: Michael, William, Anthony and Augustus, have been involved with the company on a full-time basis. William currently serves as President of Sanitary Construction, Michael, Sr. is Vice President, Anthony is the Secretary/Treasurer and Augustus is a field operator/foreman. A fourth generation is also involved with the firm. Michael Cervino, Jr. is the Assistant Treasurer and also involved with estimating and project management, while Todd Cortese, Michael’s Sr.’s Son in law, serves as Operations Manager and handles the company’s financial aspects with Michael, Sr.

A school project is completed in Morris County.

However, in 1969 a major event rocked the Cervino family when Anthony Cervino passed away. The newly-widowed Margaret Cervino, with four sons under the age of 18, took the reins of the company and opened many eyes with her successful operation of the firm. After she was able to convince Sanitary’s bonding company and bank that she could handle the challenge of the business, Margaret Cervino competitively bid jobs and supervised quality work, all while raising four sons. By the 1980’s Sanitary Construction completed major sewer projects in Wyckoff and Mt. Olive, as well as pump stations at Picatinny Arsenal and various bridge rehabilitation projects. The work at Picatinny included installations of water mains and spill containment areas. Another project completed during this time included land clearing and construction of a flood corridor on Mashipacong Island in Sussex County. Construction was performed between two sections of the Delaware River which serves as a sanctuary for Indiana Bats and American Bald Eagles. The project was completed in areas of very sensitive wetlands. Margaret Cervino died in 2000, but her successful stewardship of the firm was an inspiration and excellent example for women who aspire to work in the construction industry. Her accomplishments were recognized in 2003 by the Utility & Transportation Contractors Association of New Jersey which established a new scholarship

The firm is at work on a site work contract in Parsippany. Utility and Transportation Contractor, APRIL 2015

Walls and pond are constructed in Highland Park.

In recent years the company has transitioned its focus to large scale site development projects for residential and commercial clients. This turn-key construction includes demolition, earthwork, utility installations, paving, striping and landscaping. From 20062009, the contractor completed a site package for the expansion of Morristown Memorial Hospital. This work required the installation of foundations, construction of a new parking deck, paving, as well as the widening and signalization of Route 124. At the same time, Sanitary performed a similar type contract at Preakness Health Care Center. Another recent project was the installation of an eight inch ductile iron fire suppression line which was placed under an active runway

An underground detention system is under construction in Paramus. 5


and taxiway at Teterboro Airport. This construction also involved the completion of a mechanical building and the installation of hydrants. On a project at Newark Airport, Sanitary completed a glycol recovery system as a subcontractor for Tilcon. This type of system is utilized to de-ice airplanes that are situated over a catch basin which collects and processes the glycol for recycling. The firm has also completed site preparation for a wastewater treatment plant and a pump station at the Prices Pit Landfill in Pleasantville which required a 40 foot deep cofferdam and deep well dewatering. Additionally, SCC forces recently completed a total sewer collection system replacement in West Orange at a location that once housed Thomas Edison’s laboratory, and constructed a new culvert on Route 206 for Tilcon. The Route 206 project also involved the installation of approximately 3000 linear feet of eight inch force main as well as demolition of an existing bridge. Some of the company’s current projects include two site work subcontracts with Joseph A. Natoli Construction Corp. These projects are for the construction of Paul Miller Auto Group’s new Porsche dealership and the Bergen County Special Services Facility located in Paramus. Sanitary is also completing the first phase of work for Mill Creek Residential Trust’s 268 unit luxury apartment building in Morristown and recently broke ground on the first phase of a major commercial redevelopment project located on Passaic Avenue in Kearny.

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The Pleasantville pump station is completed for the US Army Corp of Engineers.

Throughout the years, Sanitary Construction Company has persevered and continues to thrive in a challenging and ever evolving construction industry. By adhering to the corporate values which the company was founded on over 100 years ago and cultivated throughout the twentieth Century by the Cervino family, the next generation of the firm is sure to remain a respected player in NJ’s construction industry for many years to come.

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A Message From United States Senator Cory Booker Recently, I was fortunate to be named the top-ranking Democrat on the US Senate’s Subcommittee on Surface Transportation – a position that will enable me to work across party lines to improve infrastructure in New Jersey and across the country. And there isn’t a single New Jerseyan who doesn’t count on some kind of federally funded infrastructure. Currently, America is faced with a long list of transportation projects that can’t get done because local officials don’t have access to adequate funding. New Jersey’s businesses, residents, and commuters are counting on us to find solutions that sustain and improve our nation’s highways, railways, and waterways — networks that are critical to economic growth, job creation, and national security. New Jersey alone has more than 38,000 miles of public roads, and nearly 1,000 miles of rail freight lines, connecting every corner of the state to consumers and networks throughout the region. Sixtysix percent of New Jersey’s major roads are in poor or mediocre condition. This costs New Jerseyans over $3 billion a year in extra vehicle repairs and operating costs. Across the United States, 65,000 bridges are classified as structurally deficient and 65 percent of America’s major roads are rated in less than good condition. Americans spend 5.5 billion extra hours of travel time from traffic congestion annually, costing families $120 billion in fuel and lost time, and our businesses $27 billion in extra freight. According to a report by Facing our Future, a group of former New Jersey government executives, New Jersey needs at minimum $21.3 billion to invest in short-term transportation infrastructure needs through 2018. It is this urgent and collective need that keeps me committed to finding sustainable, long-term solutions to our nation’s infrastructure funding crisis. Most recently, I introduced bipartisan legislation that would give local officials more control

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over the transportation planning process in their states and communities. The “Innovation in Surface Transportation Act,” introduced by Senators Wicker, Casey and me, will create new opportunities for economic growth by empowering cities to compete for a larger share of federal funds. Local jurisdictions, metropolitan planning organizations, transit providers, and others would be in charge of developing projects for consideration. Instead of people in Washington making the decisions, a panel of local stakeholders would decide which projects to approve based on how the project could improve the transportation system, promote innovation, and spur economic development. In order to advance New Jersey’s economic development, it is vital that we adopt policies that invest in our transportation infrastructure. This legislation will increase our economic competitiveness and fund necessary transportation projects to promote the safety, stability and economic strength of our state and nation. These issues are of tremendous importance to growing our state’s economy and creating job opportunities for New Jerseyans and I’m excited to get to work.

Senator Booker was elected to a full term in the United States Senate in 2013. Prior to that Cory won a special election to fill the term of the late Senator Frank Lautenberg- and became New Jersey’s first African-American senator. Under his leadership as mayor, New Jersey’s largest city, Newark, entered its biggest period of economic growth since the 1960s – the first new downtown hotels were constructed in 40 years, the first new office towers in 20. During Cory’s tenure, overall crime declined and the quality of life for residents improved with more affordable housing, new green spaces and parks, increased educational opportunities and more efficient city services.

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Financial Overview

START-UP SEASON: HOW BANKS CAN REV CONTRACTORS’ ENGINES By: William J. Ruckert, Provident Bank Finally!! Spring has sprung and start-up season has arrived. That’s the good news. The bad news is that contractors like you may have to find a way to finance their operations for the next 120 days as work is done, expenses are incurred, bills are generated, and payments are pending. For yet another year, the primary issue for all contractors is seasonal cash flow, that persistent thorn in the side. Your winter repairs/ maintenance expenses have been paid, accounts receivable are low, operating expenses are growing, inventory is sorely needed—and your cash balances are being depleted. The cash flow problem is only heightened this year by terrible weather conditions—polar vortex, anyone?—that have delayed and will continue to delay start-up. Luckily for you, bankers are dedicated to ensuring that contractors are adequately financed for the upcoming season. And this time of year is critical. While your accountants are working feverishly to complete year-end financials, your bank anxiously awaits the statement. Bankers and surety agents depend on that information to make decisions about your financing eligibility; similarly, the public and private sector job owners rely on the decisions of banks and surety agents when considering your bids. Here’s the challenge: How do you make banks comfortable lending to you given the weakening balance sheet and seasonal losses? More importantly, what solutions can your bank offer you? Naturally, a working capital line of credit is the obvious choice. But there are ideal alternatives designed specifically for the seasonal start-up phase, including a seasonal override to an existing line of credit, short-term time note, and/or moratorium on term debt payments. Seasonal overrides to lines of credit are commonplace in banking and by no means unique to the construction industry. For example, retailers typically employ them as they incur the costs prior to the holiday season and await billings/payments. Sound familiar? The Utility and Transportation Contractor, APRIL 2015

override amount and time frame should mimic your cash flow cycle. Typically, the cycle picks up after 6 months or less but varies based on the unique need. Specific short-term borrowings, also known as a time note, are generally job-specific to ensure repayment. Interest is paid monthly with full principal payment due at maturity, which benefits cash flow as the job ramps up and payments are collected. These loans can extend for up to one year, but be careful; you do not want the timing of that lump sum principal payment to exacerbate your cash flow crunch at this time next year. A brief moratorium on term loan payments can also provide cash flow relief. Repayment of the debt is not extended beyond typical terms, but deferring spring payments helps you manage your cash position. This loan structure should be negotiated ahead of time because requesting a moratorium after the loan closes can unsettle the bank. Whichever solution is right for you is based on the unique borrowing needs of your company and can be affected by several factors, including the prior year’s results, an unexpected rush of winter business (e.g. snow plowing), back-log, and the mobilization costs associated with starting a new job. No two borrowing needs are alike. Regardless of your company’s unique financial condition, your banker should be intimately aware of your situation prior to receiving year-end financial statements so all parties are prepared to meet your company’s needs. All of your cash flow issues can be overcome by open and active dialogue. The lines of communication should flow between company management, your accountant, surety agent and banker. If you can’t have this kind of frank conversation with your bank, then perhaps you should seek a new financial institution. Provident Bank can be there for you: for start-up season and all seasons. To learn more about start-up season financing options, please contact the author. 21


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Legislative News

FEDERAL & STATE UPDATE By: Anthony Attanasio, Executive Director UTCA enjoyed several legislative successes this winter but our biggest initiative still remains unresolved. There continues to be a tremendous amount of work ahead of us but here is a recap of some of the issues the Association has been working on legislatively. As we all know the single most critical issue our industry faces is the renewal of the broken Transportation Trust Fund. The need to renew the fund is undeniable, however there has been no major action from the Christie administration to address this issue. The Governor chose not to mention the TTF in either his state of the state speech or annual budget address. Further, the Governor proceeded to go on to his monthly radio show and say “there is no crisis” and that he believes the TTF is “pretty well funded”. As those of us in the industry know both of these statements are not completely accurate. At a legislative hearing in March, UTCA Executive Director Anthony Attanasio testified that “this is not only a crisis but is in fact actually a catastrophe”. The trust fund will have an annual debt service starting in FY16 of close to $1.2 billion while it only takes in a little over $900 million in cash leaving a $300 million shortfall. That revenue is only enough to pay down debt on old projects, therefore the State currently has no money for future projects beyond the next fiscal year. Worse than that is the fact that New Jersey’s bridges were recently ranked 6th worst in the nation and our roads are also in unacceptable condition. The administration has cobbled together funding for one more year using more borrowed money and one shot funding sources that will force the NJDOT to make decisions that could harm our industry for several years. Senate President Sweeney, Assembly Speaker Prieto along with Assembly Transportation Chairman John Wisniewski have tried to keep the TTF as the main focus in Trenton but the Governor’s silence on this issue is deafening. In February, 24

UTCA CEO Bob Briant, Jr. was invited to meet with the Senate President and Speaker as part of an exclusive group of industry leaders to work on a permanent solution to the TTF crisis. In addition, Anthony Attanasio appeared on NJTV’s “On the Record with Michael Aron” in March alongside Assemblyman Wisniewski to continue to pound the drum. Anthony will also be moderating and participating on several panels focused on the TTF at the TransAction conference in Atlantic City this month. UTCA will continue to work with the ForwardNJ coalition to lobby for a long term, robust and sustainable funding source for the TTF. In Washington D.C., there appears to be bipartisan support to renew the federal highway trust fund. Leading members from the Senate and House, both Republican and Democrat, continue to highlight the need for a long term and adequately funded trust fund. Congressman Frank LoBiondo (R-2), Congressman Bill Pascrell (D-9) and Congressman Tom MacArthur (R-3) are representing New Jersey well on the issue. Congressman MacArthur has even co-sponsored a bill called the Partnership to Build America Act of 2015 (H.R. 413). This measure establishes the American Infrastructure Fund (AIF) to provide bond guarantees and make loans to state and local governments, non-profit infrastructure providers, private parties, and public-private partnerships for state or local government sponsored transportation, energy, water, communications, or educational facility infrastructure. This requires proceeds from the sale of the bonds to be deposited into the AIF. The bill would also amend the Internal Revenue Code to allow U.S. corporations to exclude from gross income qualified cash dividend amounts received during a taxable year from a foreign-controlled corporation equal to the face value of qualified infrastructure bonds the corporation has Utility and Transportation Contractor, APRIL 2015


purchased. We are encouraged that Congressman MacArthur is working across the aisle on innovative new ways to fund infrastructure projects in America. On the legislative front, UTCA was successful in seeing several of the bills the association supported and/or amended become law and legislation we aggressively opposed vetoed by the Governor. We are happy to report that the Permit Extension Act-A3815, has been signed into law. This bill pushes back the expiration date of current permit approvals to December 31, 2015. In addition, the Governor signed The Water Infrastructure Protection Act-A3628 into law. This bill authorizes municipalities and municipal, county, and regional utilities authorities to lease or sell their water or wastewater assets to a private entity, without a referendum, if an emergent condition exists. UTCA was able to secure several crucial amendments to the bill that will benefit the industry. UTCA also worked closely with a coalition of business, utility companies and labor organizations to aid the passage of this bill including a last minute push to secure the 21st “yes” vote for the legislation in the Senate. We were also pleased that the Governor vetoed S1811, also known as the Buy America bill. This proposal would have required government contractors to use goods made in the United States; and it required businesses that receive government contracts or government assistance to disclose job exportation information. This legislation, while well intentioned, would have slowed public projects and added dramatically to the contractor’s compliance costs. Additionally, these requirements would create more red tape, would stall project decisions and could jeopardize relations with New Jersey’s international trade partners. Finally, the bill could potentially conflict with federal “Buy America” provisions which could jeopardize federal funding on transportation projects. UTCA coordinated with the State Chamber of Commerce, the NJ Business & Industry Association and the New Jersey Department of Transportation in opposing this legislation. The UTCA continues to be the industry leader in both Trenton and Washington D.C. and will continue to tirelessly advocate on your behalf.

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Continued from Page 45 While these attacks on the irrefutable public and economic benefits that come from improved transportation infrastructure are disappointing, these individuals and entities would not be stepping up their efforts to kill a HTF fix if they too did not see progress occurring. The first step toward ending the eight-year cycle of dysfunction that has plagued federal surface transportation investment and disrupted the activities of the state that rely on these funds for, on average, 52 percent of their highway and bridge capital improvements was always going to be the launch of a national debate. It has been clear over the last two months that this overdue discussion has begun. It is now up to Congress and President Obama to find a way to fill the HTF’s $15 billion per year shortfall between available resources and current levels of highway and transit investment. The positive developments over the last two months have certainly laid the foundation for such a solution, but we still have a long way to go. It is the responsibility of the transportation construction industry and all transportation stakeholders to build on these steps and continue pushing Congress to act in a meaningful way to permanently fix the HTF. As already noted, there are vocal and committed groups working aggressively to defeat us in this effort and you can bet Congress is hearing from them. With the authorization of the highway and transit programs expiring May 31 and the trust fund needing additional resources by July, one way or another Congress will act in the next few months. This means we have the attention of lawmakers and they are facing a deadline, two things that always create an opportunity on Capitol Hill. For those of you who have not seen or do not remember the movie, Bill Murray’s character in “Groundhog Day” broke out of his time trap by beating the odds to achieve something meaningful. In a similar spirit, it’s time to break out of the time trap and for Congress and the President to achieve something meaningful and permanent with the HTF.

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Sonoma/San Francisco Executive Seminar Attendees Enjoy Great Weather & Beautiful Locations

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he 2015 Executive Seminar proved to be one that the participants will talk about for years to come. Throughout a week of perfect weather, 100 UTCA members and their families enjoyed touring the tranquil vineyards of Sonoma, California and the beauty and excitement of San Francisco. Thanks to the research and planning conducted by UTCA Board Member and George Harms Construction President and COO Tom Hardell, the group enjoyed wine tastings and tours of the Ledson and Artesa Wineries; the Rodney Strong Winery with a stopover for lunch in the town of Healdsburg; and a tasting and tour of the Benziger Winery featuring a fantastic group dinner in their wine storage caves. The Lodge at Sonoma Renaissance Resort & Spa became the perfect spot for the members of the group to gather in the evening. UTCA President Scott Lattimer noted that the ability to meet

informally with other industry members is invaluable. “Of course the wineries and the tours are fantastic but the most enjoyable part of the trip is to meet such a varied group of industry members and build new relationships and discuss issues that impact all of us. Meeting in the evening in the hotel lounge and spending time on the buses and going out to dinner help to build relationships and the overall strength of the Association. On this trip we had members from the highway and utility contracting community; equipment

George Pallas and Shawn Farrell discuss contract issues during an interactive presentation.

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and material suppliers; metal fabricators and highway electrical contractors; law firms, insurance, bonding and information system companies; and engineering firms. I would encourage everyone in the Association to attend these events and they won’t be disappointed.” Newly appointed UTCA General Counsel Paul Fader Utility and Transportation Contractor, APRIL 2015


A Benziger Winery employee discusses their biodynamic farming techniques to produce ultra-organic wines.

of Florio Perrucci Steinhardt & Fader, LLC echoed this sentiment, “Initially I and other members of our firm thought it was a good idea to attend just to introduce ourselves to the membership but I can say that in a short week we learned a great deal about the issues affecting the association and have built new friendships.” The Executive Seminars feature work sessions addressing various topics of interest to the industry. George Pallas and Shawn Farrell of Cohen Seglias Pallas Greenhall & Furman continued their tradition of providing the group with valuable legal presentations. George and Shawn’s interactive presentations and knowledge are always well-received. This year’s presentation was entitled “How to Get

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Paid For Extra Work” and copies are available at the Association office. Upon leaving Sonoma the group stopped at the picturesque town of Sausalito to enjoy fantastic restaurants and strolling the waterfront streets. San Francisco afforded the group the options of touring Alcatraz, the waterfront and riding the famous cable cars. Some of the group took advantage of the opportunity to play a round of golf at the Spanish Bay course within Pebble Beach while others enjoyed the day in Carmel-By-The-Sea, California. The seminar presentations in San Francisco were given by UTCA member Kevin Ellman of Wealth Preservation Solutions and Riccardo Castracani of DEAL/RDE USA. The Association is always grateful when Kevin can advise the group on emerging financial management issues. His program this year concerned investing and executive retention planning. Riccardo Castracani gave a detailed presentation on the challenges his firm faced in producing the pre-cast work for the construction of the newly completed San Francisco-Oakland Bay Bridge. The construction techniques used in building this massive segmented bridge were as impressive as the bridge itself. During the farewell reception UTCA CEO Bob Briant Jr. thanked all of the sponsors of the seminar as well as the UTCA Executive Seminar Committee and Committee Chairman Gerard Burdi and the UTCA staff for arranging a fantastic program. He also announced that the committee has selected the Casa de Campo Resort in the Dominican Republic for the 2016 seminar and Paris/Barcelona for 2017. For additional information on the seminars or copies of the presentations please contact the association office.

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Photo Caption: Gennaro Liguori receives his Hall Of Fame Award from Joe Walsh in 2012.

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Safety Perspective

THE CAVE-IN PROBLEM By: David Kliwinski, CSP Trench Collapse Kills 2 A father and son trenching a water line were killed when a dirt wall collapsed and buried them. Both men were pronounced dead at the scene of a housing subdivision under construction. According to police, the accident was reported at 1p.m., and it was nearly 3p.m. before the body of the second victim was finally recovered. The accident occurred in a housing subdivision where road work and one house where under construction. Interviews and evidence disclosed that the ground was thick with mud the day of the incident from recent rains resulting in unstable soil conditions. Police said the workers dug a trench six to eight feet deep for the pipe. The walls were not braced! Firefighters were first on the scene, and the Deputy Fire Chief said one man was completely buried. The partially buried man was pulled out but could not be revived. The local public works department employees assisted firefighters in directing the shovel operator in removing dirt and widening the pit for the rescue attempt of the second victim. Police investigated the accident for criminal negligence while the U.S. Occupational Safety and Health Administration (OSHA) investigated the fatalities for violations of compliance with regulatory standards. The frequency and regularity of these types of fatal occurrences during excavation work has been a concerning and on-going industry challenge for many years. Management commitment, risk planning, effectively executing proper means of employee protection, training, regulatory compliance and budgeting money to perform this activity safely are the primary contributing factors and root causes. Cave-In Dangers The greatest danger associated with trenching and excavation work is the potential of cave-in or earth slides. Cave-ins are a primary source of fatalities in the construction industry killing hundreds of 40

employees annually. Eliminating cave-ins should be the ultimate goal of every contractor, and this goal can only be supported if supervision and workers are aware of the risk associated with their work, and have knowledge of the tremendous force created during a cave-in. For example, a cubic yard of soil weighs approximately 2700 pounds (in dry conditions). And, the average cave-in typically results in the collapse of 3 to 4 cubic yards of soil weighing 8000 to 10000 pounds. Since the average person is unable to breathe when their chest is covered with 150 pounds of soil, survival under these conditions is unlikely. Factors Contributing to Cave-Ins Trenching cave-ins occur because the strength of the soil in the trench wall is not sufficient to withstand the pressure exerted by the surrounding earth. Several factors affect the soil’s strength to ultimately cause a cave-in. The 4 most significant factors contributing to cave-ins include: 1) weight 2) water accumulation, 3) vibration and 4) soil composition. Excessive weight caused by surcharge loads such as spoil (excavated soil), construction equipment and materials, and the removal of soil beneath structures in the vicinity are responsible for excessive loads on trench walls creating cave-ins. Water accumulation is one of the greatest dangers because the presence of too much can substantially weaken the soil. Too little water can cause a stable appearing soil to become brittle and crumble causing a cave-in. Vibrations caused by nearby road traffic and construction equipment, along with blasting and pile-driving activities weaken the soil creating cave-in potential. Finally, soil composition is a crucial factor because it involves various types of soil possessing different strengths. Hard compact soils (cemented sand and gravel) exhibit characteristics similar to rock and are much stronger than sandy or loose soils. A “Competent Utility and Transportation Contractor, APRIL 2015


Person” (knowledgeable and experienced in trenching activities) should be responsible for evaluating existing soil conditions and recommending the appropriate measures to ensure trench stability during construction work. This individual is responsible for inspecting the trench daily for unsafe conditions (changing conditions), and ensuring that support systems are provided and maintain their engineering quality and performance. The most common cause of cave-in accidents are : 1) inadequate or lack of protective shoring systems, (usually in an attempt to cut costs or save time) 2) inability to accurately assess soil conditions 3) failure to consider changing weather conditions 4) failure to properly locate heavy loads away from trenches/excavations 5) poor planning and 6) improper or inadequate training. Danger Signs Related to Cave-Ins To ensure safe trenching operations contractors should take action to mitigate the following existing dangers: · Spoil, material or equipment closer than 2 feet from the trench edge · Experience level of the Competent Person, supervision and employees · Bulges on side walls of the trench · Accumulation of loose rocks or material fallen from the trench walls · Cracks in the soil near the surface of an excavation · Water in the bottom of a trench and rainfall activity · Subsidence (a shrinking or vertical movement of the soil) · Layered soils · Previously excavated soils · Intersecting trenches · Narrow right of way limiting workers freedom of movement

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· Increased seepage of subsurface water · Drying of exposed trenches Any one or a combination of these danger signs should prompt immediate corrective actions. Many accidents can be attributed to improper installation and removal of shoring, and the anxious nature of employees to enter a collapsing trench to prematurely attempt rescue. Proactive measures that address the risk and associated hazards is necessary to drive the safe execution of excavation and trenching activities. Conclusion Cave-ins continue to be a prevalent problem in the construction industry requiring the immediate attention of both management and employees, and industry constituents. The limited resources of government agents (e.g. OSHA compliance officers) often preclude the inspections required. These agencies are usually understaffed, distrusted and usually only contacted after a tragedy has occurred. Ultimately, compliance should not be the driving factor for providing employees the safe work environment they are legally required to be provided. The contractor has the primary responsibility for Safety including for the humanitarian, financial and legal reasons associated with the work being performed. Each contractor should be of the mindset to create a culture of caring for the safekeeping of all employees performing work so it becomes a value that permeates the entire organization, and that drives the safe performance of work. A company’s ultimate goal should be to ensure the protection of their greatest asset, and to return each employee home safely to their loved ones.

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Featured Article

Firm Provides Support Services To Contractors

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HIGHWAY TRUST FUND: GROUNDHOG DAY OR NOT? By: Dave Bauer ARTBA Senior Vice President Of Government Relations

In the early 1990s movie “Groundhog Day”, Bill Murray plays a character that keeps reliving the same day. No matter what Murray’s character does during that day, the next morning he wakes to the same song from his alarm clock and the day proceeds just as the others. This bit of pop culture has become a too frequent metaphor for the past eight years of Highway Trust Fund (HTF) dysfunction where each cycle begins with a projection of when the fund will be unable fulfill its obligations and ends with Congress approving last minute legislation to temporarily preserve highway and public transportation investment. Then the clock starts ticking on the next crisis. As we count down to the sixth HTF revenue shortfall in eight years, a number of developments have already ensured that we are not reliving the same trust fund cycle. Certainly, the U.S. Department of Transportation’s projection that—without additional revenues—it will need to start slowing down reimbursements to the states in July due to trust fund liquidity constraints and insolvency looming in September very much bring to mind the premise of Groundhog Day. The difference between this situation and the previous five trust fund shortfalls, however, is the vast recognition by members of Congress of the need for action and the priority the congressional leadership has placed on passing a surface transportation bill. The day after the 2014 elections, both House Speaker John Boehner (R-Ohio) and incoming Senate Majority Leader Mitch McConnell (R-Ky.) cited infrastructure as one of the few areas where the new Republican Congress could find common ground with President Obama. Since the 114th session of Congress convened in January, passing a surface transportation reauthorization bill has been consistently listed as one of the “must do” items by members of both chambers and parties. Perhaps one of the brightest spots in terms of distinguishing the 2015 HTF crisis from those in 2008, 2009, 2010, 2012, and 2014, is that this time around all parties are actively seeking a solution. Most members of Congress now clearly understand they cannot deliver a long-term surface transportation bill until the find a longterm solution. Senate Finance Committee Chairman Orrin Hatch (RUtah), Environment & Public Works Committee Chairman Jim Inhofe (R-Okla.), Commerce Committee Chairman John Thune (R-S.D.), and Foreign Relations Committee Chairman Bob Corker (R-Tenn.) have all publicly said they are evaluating all options—including a federal motor fuels tax increase—to generate additional HTF revenues. In the House, Representatives Reid Ribble (R-Wis.), Dan Lipinski (D-Ill.), Tom Reed (R-N.Y.), and Bill Pascrell (D-N.J.) generated a letter from 285 House members—including a majority of both party— urging the House GOP and Democratic leadership to make developing a long-term HTF plan a priority. While the Obama Administration has long advocated for increased federal surface transportation investment, the President’s FY 2016 budget for the first time includes a specific plan to generate the Utility and Transportation Contractor, APRIL 2015

resources necessary to pay for his highway, transit, and passenger rail spending proposal. The Administration’s plan to allocate $238 billion generated over six years by requiring U.S.based multinational companies to “repatriate”— or declare as U.S. revenue— profits earned overseas has generated mixed responses on Capitol Hill, but no one disputes that this mechanism would generate real revenue. The complications with this proposal is primarily based on the need for a broad re-write of the U.S. tax code—a major lift in any environment—to make the repatriation construct work. Furthermore, many on the congressional tax committees and in the business community want revenue generated from corporate tax reform to be used to lower corporate tax rates. Regardless of the prospects of using repatriation revenues to support transportation investment, the fact that the President and his team has forwarded a HTF solution is further evidence of the different environment in 2015 than in years past. It should also be noted that forces outside of Capitol Hill have highlighted the nation’s infrastructure challenges and the need for congressional action. The CBS news program “60 Minutes” ran a lengthy segment in late November about the deterioration in the nation’s highways, bridges and other infrastructure facilities. Since January, editorials in the “Washington Post,” “USA Today,” “New York Times” and other major publications have endorsed a gas tax increase to generate the resources needed to begin improving the country’s roads, bridges and public transportation facilities. According to Sir Isaac Newton’s Third Law of Motion, for every action there is an equal and opposite reaction, While Newton focused on physics, his insight also applies to politics. The longtime opponents of federal highway and transit investment have definitely noticed the momentum towards a solution for the HTF over the last two months and have accelerated their activities to derail this progress. Professional conservative groups, such as Heritage Action and The Club for Growth, were part of a letter signed by 50 self-titled taxpayer advocates and free market organizations that wrote to Congress in February opposing a gas tax increase and brandishing unsupported claims of wasteful federal highway spending. The “Wall Street Journal” also recently wrote a lengthy editorial calling for abolishing the federal gas tax and forcing states to handle highway and bridge needs on their own. The Journal is also allowing other conservative pundits to run op-eds decrying a gas tax increase and further criticizing the value of federal highway investment. Continued on Page 25 45


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Featured Article

DW SMITH ASSOCIATES CELEBRATES 50 YEARS IN BUSINESS Continuing A Proud Tradition

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here are few privately owned professional consulting firms that were established in New Jersey in the 1960’s which are still in business. Many firms that got their start in those years are now publicly owned or no longer active today. DW Smith Associates is a firm that is celebrating 50 years in business and has remained privately owned over the years. DW Smith Associates, LLC has experienced unique success and development since it was first established in July 1965 by Donald W. Smith. The commitment to innovative, environmentally-sensitive and cost effective designs established in 1965 has remained the core philosophy of the firm today.

throughout Central New Jersey. The decades of the 80’s and 90’s found the firm continuing to prosper in the private sector, while expanding its services in the public sector throughout New Jersey. Some of the firm’s new efforts included municipal work, parks and the development of some unique recreational communities that required the firm to meet several environmental challenges.

Pictured left to right are the firm’s owners; Thomas Murphy, Timothy Lurie and Jennifer Nevins.

Pictured together are company founder Donald W. Smith and current President Jennifer Nevins.

In the early years, the firm provided various professional services throughout Ocean County, including work on various sites for Leisure Technology Corporation and K. Hovnanian Enterprises. The firm continued to play a major role in providing consulting services for the development of a multitude of adult communities 48

Approximately 15 years ago, Jennifer Nevins became an owner at DW Smith Associates, LLC. She joined the firm in 1988 and currently serves as President of the company. Ms. Nevins has contributed to the success of the firm over the past 27 years and currently oversees the firm’s business operations with a focus on quality assurance and control, strategic planning and project management, specializing in Community Association and Utility services. She has received a number of recognitions for her hard work and dedication as a woman Utility and Transportation Contractor, APRIL 2015


Working for Caruso Excavating, DW Smith provided construction layout services for the Asbury Park Waterfront Redevelopment project.

business owner, including being named Enterprising Woman of the Year by Enterprising Women Magazine and as one of the Top 25 Women in Business by NJ Monthly. Joining Ms. Nevins in leadership roles are firm Principals Timothy Lurie, PE, PP, CME and Thomas Murphy, PLS. Mr. Lurie has served with the company since 1996, specializing in Civil Engineering, Municipal Engineering and Planning with extensive experience in Land Development, Landfill Design, ADA Analysis, Environmental Permitting and CAFRA Design. He has been highly involved in the restoration of Monmouth and Ocean counties following Superstorm Sandy and continues to support efforts to repair and rebuild the Jersey Shore. Mr. Murphy joined the company in 1997, specializing in Construction Surveys, GPS Surveys, NJDOT Highway Surveys, Right-of Way, Bathymetric and Route Surveys with extensive experience in Land Title Records Research, Survey Mapping and CADD Calculations. He has also been instrumental in expanding the firm’s survey department focus on infrastructure and utility projects. Together the partners have assembled a talented workforce to ensure project success for the firm’s clients. Today, DW Smith Associates is a certified WBE/SBE/DBE Professional Consulting firm that provides Construction Management, Engineering, Planning, Surveying, Landscape Architecture, Environmental Permitting, and Community Association services. The firm offers comprehensive expertise and quality services for projects of varying sizes and complexity. As DW Smith Associates has progressed, the firm has seen tremendous growth in recent years and has been able to significantly expand its talent base. In addition, longtime Associates Kevin Murphy, Syed Husain and John Harper continue to offer their

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extensive professional experience, along with recent addition Lynn Voorhees, Director of the Community Association division. The company had also benefited from the experience of its founder, Donald W. Smith, for 49 years until his passing in late 2014. The most recent 15 years have been especially active for DW Smith Associates under the new management team. Activities have continued in both the private and public sectors throughout New Jersey as well as in New York and Pennsylvania. Some of these projects include planned community development, waterfront development, affordable housing, recreational facilities, professional sports complexes, roadway and right-of-way work, utility and natural gas transmission lines, airport development and dam and bridge work. Some current and recently completed projects include the Lakewood Blue Claws Stadium, Hoffman’s Marina in Brielle, Four Seasons at South Knolls Adult Community in Jackson Township, Hickory Farms Community in Berkeley Township and Manahasset Creek Park in Long Branch, a project for which the company received a Distinguished Engineering Award from NJ Alliance for Action in 2013.

The firm provides construction stakeout survey services in preparation for a development in Howell.

DW Smith Associates is currently providing land surveying services to Ocean County as part of the Route 526 roadway improvement project. The firm is also providing route, construction and as-built survey services for natural gas pipeline infrastructure in New Jersey, New York and Pennsylvania. Current efforts also include providing construction stakeout survey services to The EPH Group for a planned 251 single family home development in Howell. In addition, construction layout services were recently completed for Caruso Excavating as part of the Asbury Park Waterfront Redevelopment project and for Earle Asphalt Company as part of the New Jersey Turnpike Authority’s Garden State Parkway Interchange 88 Improvement project. What we have witnessed at DW Smith Associates in recent years is a resurgence of top flight, professional consulting services through the management and leadership team of the company. This explains the numerous accolades bestowed upon the firm, including its recent recognition as one of the Top 100 Diversity Owned Businesses in NJ and one of the Fastest Growing Privately Held Companies in America. The DW Smith team is excited to be celebrating the company’s 50 year anniversary and continuing the proud traditions of the firm. 49


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Legal Dig

CALCULATING YOUR AGGREGATE WITH A NEW TWIST By: Paul T. Fader, Association Legal Counsel Recently, in Dobco Inc. v. Brockwell & Carrington Contractors, Inc., (hereinafter “Dobco II”) a New Jersey trial court considered a case of first impression regarding whether a low bid on another contract, which has not yet been the subject of a contract award, must be disclosed at the time of bidding a contract subject to a DPMC “aggregate rating” limitation. The DPMC aggregate rating establishes a dollar cap on the volume of work that a contractor may become obligated to perform. The contractor’s available bidding capacity is calculated by deducting the value of its uncompleted work, as certified in its Form DPMC 701, from its gross aggregate rating. Evidence of completed work consists of an ownerapproved invoice or “other similar documentation”. N.J.A.C. 17:192.13(c). In a prior Dobco case, i.e., Brockwell & Carrington Inc. v. Kearny Board of Education 420 N.J. Super. 273 (App. Div. 2011) (hereinafter “Dobco I”), the court held that an aggregate rating bidding requirement extended to both the bidder and the bidder’s bid-listed subcontractors. In Seacoast Builders Corp. v. Jackson Twp., Board of Educ. 363 N.J. Super. 373 (App. Div. 2003), the court ruled the contractor must have the needed bidding capacity both at bid time and at the time of contract award. In the instant case, Dobco II, Dobco challenged the responsiveness of two low bidders, who had bid-listed the same electrical subcontractor (Sal Electric), arguing that Sal Electric’s subcontract exceeded its bidding capacity because it was also the electrical subcontractor of a low bidder (Torcon) on another unrelated contract, which, if ultimately awarded, would diminish Sal Electric’s bidding capacity to the degree that the instant subcontract exceeded its capacity. The low bidder and Sal Electric argued that Sal Electric’s anticipated Torcon subcontract did not have to be disclosed at bid time because the Torcon contract had not then been awarded. Theoretically, such contract might never Utility and Transportation Contractor, APRIL 2015

be awarded due to a successful bid protest or a possible rejection of all bids, or the award may be delayed to the point that, when actually awarded, it would not, due to an intervening diminution of its work backlog, be a non-issue. The trial court upheld Dobco’s bid challenge and Dobco, the third low bidder, was awarded the contract. The court reasoned that Sal Electric’s expected Torcon subcontract ought to have been disclosed in its Form DPMC 701 certification and that its nondisclosure precluded any post-bid evidence that its aggregate rating would not be exceeded. In support of its decision the court observed that non-disclosure would create havoc because public owners would not be able to expeditiously determine bid capacity. Further, in light of the Seacoast Builders case, Sal Electric had to have the needed bidding capacity at time of bid and at the time of contract award. The court concluded that if the Torcon contract was awarded then the subcontractor’s bidding capacity under the instant subcontract, would be exceeded. The court also touched on, but did not decide, the issue of how to determine completed work for purpose of a DPMC-aggregaterating analysis. The trial court, noted that, because a contractor might submit an inflated or unsent invoice in order to increase its bidding capacity, some indicia of owner approval of its invoice should be required. The takeaway from Dobco II is that bidders on contracts governed by the DPMC rating ought to: (1) disclose in their DPMC 701 any low bid it has previously submitted, but as to which there has been no contract award; and (2) ensure that no bid-listed subcontractor has any such pending low bids that it has failed to disclose in its DPMC 701 submitted with the bidder’s bid package. The information contained herein is for informational purposes only as a service to the public, and is not legal advice or a substitute for legal counsel, nor does it constitute advertising or a solicitation.

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AFFORDABLE CARE ACT: Understanding The Employer Reporting Requirements

By: Nancy Damato, Partner, RDA Benefit Services The Employer Reporting provisions under the ACA (Patient Protection and Affordable Care Act/Obamacare) requires employers, insurers and carriers, and other reporting entities to complete specific forms and report this information to the IRS, in order to enforce the individual responsibility and employer shared responsibility (“Pay or Play” provision), as well as reconcile subsidies. WHO HAS TO COMPLY WITH THIS REPORTING REQUIREMENT? These reporting requirements under Sections 6055 and 6056 apply to all Applicable Large Employers (ALEs), which is any employer with 50 or more full-time equivalents. It is also important to note that ALEs must report even if they are insured in the small group market, are an uninsured group, or even self-insured. Self-insured small employers (with fewer than 50 employees) must also comply with the reporting requirements of Section 6055. WHAT INFORMATION MUST BE REPORTED ON THESE FORMS? Information to be tracked on a monthly basis for every month in 2015 and reported to the IRS includes: · Which months an employee and their dependents were covered under your group’s health plan · The cost of the employee’s share of the lowest monthly self-only insurance coverage Utility and Transportation Contractor, APRIL 2015

Keep in mind that the information needed for this reporting may come from several different sources, such as payroll, HRIS, and time and attendance records. So, it is very important to start collecting this data on a regular basis now. WHEN DOES THIS REPORTING NEED TO BE DONE? Employers must provide statements to each full-time employee on or before January 31, 2016. Forms need to be filed with the IRS on or before February 28, 2016. (If filing electronically, then by March 31, 2016.) You should also be aware that there will be penalties for failure to file the forms with the IRS or provide statements to employees. Don’t delay! Make preparations now to collect all the data needed for this important ACA requirement. To answer detailed questions, please visit: http://www.irs.gov/AffordableCare-Act/Employers/Questions-and-Answers-on-EmployerShared-Responsibility-Provisions-Under-the-AffordableCare-Act. For more information, please feel free to contact Nancy Damato, RDA Benefit Services, LLC at 609-693-0772 or ndamato@rdabenefits.com. The information in this article is intended as an overview and is for informational purposes only.

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Labor Relations

NEW JERSEY’S “BAN THE BOX” LAW TAKES EFFECT: WHAT EVERY CONTRACTOR SHOULD KNOW By: Jill Tobia, Esq., Tobia & Sorger On March 1, 2015, the “Opportunity to Compete Act”, which was signed by New Jersey Governor Chris Christie this past August, took effect. This Act, which is often referred to as the “Ban the Box” law, prohibits a covered employer from asking a job applicant about his or her criminal background during the initial hiring process, including on a job application form as well as in an interview. However, the Act still permits employers to conduct background checks and to use the information contained therein as part of an employer’s ultimate hiring decision after the initial application process. Since criminal background checks have become an almost standard part of the hiring process, the Act impacts the majority of employers in New Jersey. Furthermore, while certain positions are exempt, the majority of job positions maintained by UTCA Contractors fall under the Act. Therefore, as this law is now in effect, and there are fines and penalties imposed for violations, UTCA Contractors should familiarize themselves with the requirements of the “Ban the Box” law and adjust their hiring processes accordingly. Overview of New Jersey’s “Ban the Box” Law: The New Jersey “Ban the Box” Law prohibits a covered employer from inquiring about a job applicant’s criminal history during the initial hiring phase of the application process. This means that a covered employer may not have a question relating to criminal history on a job application form nor may the employer ask the applicant about his or her criminal background during an interview. However, an employer still may conduct a criminal background check prior to extending an offer of Utility and Transportation Contractor, APRIL 2015

employment to an applicant and may also use the information revealed in such a background check to deny employment to an individual. The Act applies to all employers doing business in New Jersey who employ fifteen (15) or more employees during a twenty (20) calendar week period. The Act does contain an exemption for job positions, such as law enforcement and judiciary, which by law may not be held by persons with criminal records. Similarly, an employer may be exempt if its business activities would be compromised by law or regulation if it employed persons with criminal backgrounds. The Act will be enforced administratively with civil penalties of $1,000 for a first violation, $5,000 for a second violation, and $10,000 for any subsequent violations. Advice for UTCA Contractors: Given that the law just went into effect on March 1, 2015, there are many unknowns surrounding both practice and enforcement. The fact that there is a line drawn between the initial hiring phase, during which inquiries regarding criminal history are prohibited, and the final employment decision, where criminal background information can be considered, creates a lot of uncertainty regarding the use of said information. Accordingly, all UTCA Contractors should review their hiring procedures and develop an application process that balances, consistent with the Act, an applicant’s right to have access to a position regardless of his or her criminal history and an employer’s right to consider an applicant’s criminal history before making a final employment decision. 63


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Accounting Corner

CAPTIVE INSURANCE: A VIABLE STRATEGY TO REDUCE COSTS By: Michael Mazur; Mazur, Krieghbaum & Higgins CPA’s The high cost of insurance is an issue for most companies. New Jersey business owners rank health insurance as their number one cost concern according to the New Jersey Business and Industry Association 2015 Business Outlook Survey. Other concerns include the cost of workers compensation insurance, wages and labor, taxes and frivolous lawsuits – all of which contribute to increased insurance premiums. Nationwide, executives in the construction industry echo the concerns of New Jersey business owners. The Wells Fargo 2015 Construction Industry Forecast revealed that contractors are also concerned about the cost of wages and labor, equipment, healthcare benefits, insurance and taxes. A strategy used by 90 percent of the Fortune 500 companies to help control the cost of insurance is to form a captive insurance company (captive). This is an insurer wholly owned by a parent company which provides insurance to its parent and related companies. Captives are generally used to augment existing commercial policies and provide insurance for risks not covered by traditional insurance. Captives can cover everything from general and umbrella liability to workers compensation, regulatory changes and legal defense. Some companies are beginning to use captives to fund employee benefit programs like life and disability insurance, retirement and healthcare benefits. Other types of insurance captives offer include: employment practice liability, contractor liability, director/officer/ employee liability, contractual liability, property damage and business interruption, fiduciary liability, equipment, and protection against pollution, mold and other environmental claims. 66

Generally, any type of definable and measureable risk can be covered by a captive as long as the state or country in which it is domiciled (i.e. incorporated, licensed, managed and operated) allow the line of business to be underwritten. Contractors can custom tailor insurance policies to cover their specific needs. Captives can also be used to decrease the cost of commercial policies. Contractors can elect to reduce premiums by increasing deductibles and then have the deductible paid through the captive. In the past, captives only made sense for companies with at least $100,000 in insurance premiums and more than $10 million in revenue. Today, it is possible for smaller contractors to form their own captive due to declining capital requirements and operating costs. Ideal candidates are businesses with: $500,000 or more in profits, multiple entities, risk currently uninsured or underinsured, and interest in protecting its assets while possibly minimizing its tax obligation. A properly structured captive offers both added insurance coverage and numerous tax planning opportunities, including but not limited to: * * * *

Tax deductions on insurance premiums paid to the captive Lower income taxes Possible tax saving on shareholder dividends Further opportunities for estate and gift planning

Smaller captives may qualify to be exempt from federal income tax on operating income. Under U.S. Internal Revenue Code section 831(b), a captive with a gross premium income of $1.2 million or less that makes an election under that section is not taxed on premium Utility and Transportation Contractor, APRIL 2015


income but is taxed on investment income. In other words, when set up in line with IRS guidelines, a captive can receive up to $1.2 million in premiums tax free from its parent company. The parent or affiliate company can then take a deduction for the amounts paid to the captive as a legitimate business expense. The captive can make a profit if claims are less than the premium paid by the company. A portion of the profits can then be reinvested to avoid ordinary income taxation. Or, the funds could be disbursed to the company’s shareholders as a qualified dividend which would be taxed at a lower rate. Even so, there is always the risk that claims against the company could be higher resulting in a loss. Therefore, it is important to consider what risks to insure under the captive instead of a commercial policy. Many contractors join a group captive where a number of businesses come together to form their own insurance company or an association captive which is established by a trade group for the benefit of its members. Participating in a group or association captive allows its members to share, in some degree, the collective risks, as well as the benefits such as potential investment earnings and profits from premiums paid in excess of claims. Since group members make a commitment to minimize risks, participation also serves as a risk management tool. As with any business strategy a contractor should consult with legal counsel, as well as accounting, insurance and other professionals before establishing a captive. Contractors need to be fully aware of compliance and funding requirements, as well as IRS regulations. It is important to carefully consider all of the costs, risks and benefits to ensure that a captive is right for your company. About The Author: Michael A. Mazur, CPA, CFF, PSA specializes in working with contractors. Contact Mike at (732) 341-3893 or MMazur@M-KCPA.com to answer your questions on captives.

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