Gov. Glenn Youngkin proposes to fill the $110 million revenue hole in the next two-year budget for the Virginia Alcoholic Beverage Control Authority.
But legislators and leaders of the state’s alcoholic beverage industry still want ABC to be independent of the executive branch to avoid the perceived “political influence” that they say led to the projected shortfall.
Four influential business groups — the Distilled Spirits Council of the United States, the Virginia Beer Wholesalers Association, the Virginia Distillers Association and the Virginia Wineries Association — are asking legislators to reject Youngkin’s proposed budget amendments, which would reverse the General Assembly’s effort to make ABC independent of the governor’s control.
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The projected $110 million shortfall, resulting from an inflated revenue requirement by the Youngkin administration at a time of declining alcohol sales, “reinforced our concern that ABC needs independence from political influence,” the organizations said in a letter to legislators.
The organizations also reminded legislators why the General Assembly — then under Republican control — voted in 2015 to make ABC an independent authority after more than 80 years as a state executive branch agency.
The legislation, sponsored by Sen. Ryan McDougle, R-Hanover, now the Senate minority leader, and then-Del. David Albo, R-Fairfax, ultimately changed under influence from then-Gov. Terry McAuliffe, a Democrat, to keep ABC under the executive branch in the budget and give the governor the power to hire its CEO.
“The goal at the time was to minimize political influence over this important revenue generating venture, so that it could operate in a more efficient and businesslike manner,” the organizations said.
Youngkin spokesman Christian Martinez confirmed that the governor’s proposed amendments incorporate “the preliminary downward revisions” for ABC profits, which he noted had been “excluded” from the assembly budget.
“The administration continues to work with the ABC governing board and management to maximize the revenues generated for the Commonwealth in the midst of a macro-economic softening in the beverages and spirits industry that impacts Virginia ABC and states across the nation,” Martinez said.
“The ABC board remains committed to undergoing a more robust operating forecast for (the next fiscal year) and beyond. This diligence and review will refine ABC’s long-term operating strategy, and inform a return to historic levels of profitability, consistent with the legislative mission of the institution.”
ABC evolves
ABC became an authority in 2018, when then-Gov. Ralph Northam appointed Travis Hill, who had led the agency as chief administrative officer, as its first CEO. Hill persuaded the General Assembly to let the new authority invest a portion of the profits it generates for the state budget in long-deferred improvements to crucial information technology systems, including those for sales at the 400 stores that ABC operates across Virginia.
Youngkin reappointed Hill as CEO in 2022, but last year began shaking up the organization by naming former Del. Tim Hugo, R-Fairfax, as chairman of the authority board of directors.
Hugo called in Chief Transformation Officer Eric Moeller to take a hard look at ABC’s operating expenses and the declining portion of revenues that the authority was sending to the state treasury for the budget. ABC generated more than $220 million in profit from liquor sales in the fiscal year that ended June 30, or about $20 million more than required in the state budget, but Moeller found that its profit margin had fallen as operating expenses had risen.
Under Moeller’s urging, the board ultimately adopted a revised budget in August that assumed a 5% annual growth in revenues and cut $21.3 million in operating expenses, boosting expected ABC profits by the same amount. Youngkin included the same 5% annual growth rate in the revenue projections he gave to the Governor’s Advisory Council on Revenue Estimates last fall for the state’s five-year revenue forecast.
Hill, 45, resigned in early November to look for new professional opportunities, which he found earlier this year as an executive at a large Richmond law firm, Hunton Andrews Kurth.
Misgivings about projections
Officials in the alcohol industry expressed misgivings last summer about the projected growth in revenue, as alcohol sales began declining significantly across the country, beginning in July. With inflation an issue, consumers were buying less expensive brands of liquor in smaller bottles in a national trend that quickly affected sales in Virginia ABC stores.
The authority cut an additional $10.9 million in operating expenses to close a growing revenue gap, but still fell $4.9 million short in profits it had promised for the budget in the current fiscal year. The larger problem was the profit shortfall in the two-year budget, despite about $1.5 billion in annual sales.
Initially, ABC estimated the projected shortfall at $82 million, but the hole became deeper in March, when the board learned that the authority expected to fall $44 million short in the fiscal year that begins on July 1 and $66 million the following year.
The board reviewed the revised forecast at two successive meetings but did not adopt it, prompting two prominent legislators to urge the board to take action at its next meeting on Wednesday. That is the same day that the assembly reconvenes to consider Youngkin’s record 153 vetoes and proposed amendments to 116 bills — including 242 proposed changes to the budget bills alone.
“We find this omission to be alarming and problematic,” said Sen. Barbara Favola, D-Arlington, and Del. Paul Krizek, D-Fairfax, in a letter to Hugo on April 1.
“The Authority’s expected revenue and profit shortfalls are unprecedented and these shortfalls should be acknowledged,” said Favola and Krizek, who chair the Senate committee and House subcommittees that oversee ABC.
In his proposed amendments to the budget adopted by the assembly, Youngkin reduced the forecast for ABC profits by $110 million over two years, which legislators and industry officials welcomed.
“It worked,” Krizek said of the letter that he and Favola sent to ABC.
But Youngkin also proposed four amendments that would reverse the assembly’s budget language that would make ABC independent of the executive branch.
McDougle, one of the sponsors of the legislation in 2015 to create the authority, said the assembly’s original intention was for ABC “to be more independent” as an authority, but McAuliffe “was not in favor of that.”
The result was legislation that made ABC independent under the state’s procurement and employment laws but kept the authority under the Secretary of Public Safety and Homeland Security in the budget and gave the governor the power to appoint its CEO.
McDougle said he is still considering the governor’s amendments, but he added, “I think you’re seeing some conversations among legislative branch individuals who want it to be independent.”