The privatization of ABC and jettisoning a profit center

During campaign season, voters frequently hear the statement, "government ought to be run like a business." How many businesses do you know would be willing to eliminate a profit center that realizes some $118 million per year in net revenue and another $120 million in taxes for a price that is speculative and which may come with some undesired consequences? Well, that is exactly what the Commonwealth is considering doing if it embraces Governor McDonnell's proposal to privatize the ABC stores.

While the precise proposal has not yet been outlined, the general principle is for Virginia, one of only 18 states that now run liquor operations, to sell or license the ABC retail operations to the private sector in exchange for cash up front. Estimates of the revenue from the sale range from $150 million to $500 million. That one-time influx of money would be dedicated to transportation, a critical need in the Commonwealth.

While I agree with many others that the liquor business is not a core service of government, we should recognize that the Commonwealth's ownership of liquor operations has brought needed revenue into the General Fund, some of which goes directly to mental health, retardation, and substance abuse funding by statute.

The Virginia ABC presently operates 332 stores and employs 2680 people. In Fiscal Year 2009, it deposited $248 million in profits, excise and sales tax into the General Fund, the Commonwealth's primary funding source for public safety, education, and healthcare. It is not at all clear what will happen to this revenue stream in any privatization. Without raising the excise tax on liquor sales, it is very possible that the amount of money that the General Fund presently receives will be much less after privatization. Some argue that the only way to replace the lost monies is by increasing the number of stores and/or concentrating liquor sales into big box outlets like Costco and Walmart. In the end, then, any privatization proposal, independent of the ideological assertion that the private sector is the better outlet for this business, must be considered by comparing the risk of losing consistent General Fund revenue after the ABC sale against the benefit of receiving an undetermined amount of money for the sale of the operation that would go into transportation.

If the Commonwealth decides to privatize, one option to consider is the sale of some or all of the operation to ABC employees through an Employee Stock Ownership Plan (ESOP). ESOPs have worked well in the United State and enable employees to acquire ownership and build assets. The Commonwealth Competition Council studied this concept in 1998 and found it worthy of consideration. Over 13 million U.S. Employees participate is ESOPs, and Virginia is home to a number of large companies which include employees in the ownership of the firms, including several with workforces in excess of 1000. Using an ESOP would accomplish the goal of moving ABC from public to private ownership, while keeping ABC workers employed, raising productivity in the stores, and providing even higher levels of customer service. I remain open to considering whatever proposal advances, exploring the details that may make the difference as to whether or not it is a good idea, and welcome any comments that citizens may offer to assist me in my deliberations.

We just finished our series of "Coffee and Conversation," and they were very useful in helping me understand your views on a wide variety of issues. I can do a better job when I hear from you, so let me know what you think: send me an email, call my office, or find me on facebook or twitter. And please encourage others to join this list.

Sincerely,

David

Sustainability Fact of the Day:

Do you know the weight of the Great Sphinx? 200 tons. Do you know how much paper UPS saved by printing directly on their boxes? 6 times that. A classic case of how sustainability and profitability dovetail. (August 8, 2010)