Youngkin Administration Criticizes Falling ABC Profits

Four years after Virginia transitioned its Department of Alcoholic Beverage Control into an authority in an effort to make the state agency run more like a business, Gov. Glenn Youngkin’s administration says ABC isn’t generating the additional funding for Virginia as originally intended.

Administration officials told ABC’s Board of Directors last week that the authority’s profits and contributions to state coffers have declined in recent years while operating costs have increased $135 million since 2017.

Virginia Chief Transformation Officer Eric Moeller said ABC’s contributions have declined from a peak of $229 million in 2021 to $227 million in 2022 and $221 million in 2023 even as revenue generated by the authority increased by nearly $100 million over the same time period.

“All that growth has not resulted in bottom-line cash to the economy,” said Moeller at the July 20 Board of Directors meeting.

While ABC officials say they don’t dispute the administration’s findings, they argue the authority’s financial transfers to Virginia’s general and other funds continue to “exceed the expectations” of General Assembly budget projections. Additionally, they say the rising costs can be attributed to investments in authority operations and employees that are intended to yield long-term benefits.

“We understood that doing these investments would come at a cost for reduced profit growth,” said ABC CEO Travis Hill during the meeting. “It was certainly understood that it was going to help us in the long term.”

‘Investments should have a return’

Key to the administration’s criticism of ABC last week was what it described as several years of declining profitability and rising costs to the Commonwealth.

According to the administration, ABC’s annual profitability has been steadily declining ever since peaking in 2019. At the same time, annual operating costs increased by $123 million, and revenues grew from $903 million to over $1.2 billion.

Virginia Deputy Chief Transformation Officer Tony Lee told the Board of Directors ABC should be able to currently achieve greater profitability because “the company has grown, stores have grown, and the inflation on alcohol prices has exceeded the inflation at the operating cost level.”

While Moeller acknowledged that ABC has undergone significant change in recent years, he said the authority needs to justify how money is being spent.

“Investments should have a return,” he said, adding, “I don’t know that we’ve always had a rigorous process for ensuring they’ve been evaluating the priority before, during, and after the investments that we really got a return on all the things that we’ve done.”

“Whatever we’ve done – whether they were right or wrong – it’s water under the bridge, and the money’s been spent,” he continued.

While ABC had previously proposed a budget of nearly $340 million for the next fiscal year, the Youngkin administration put forward a proposal for $21 million less, a suggestion that received particular pushback from Board of Directors member Mark Rubin and was ultimately rejected by the board on a 3-2 vote.

“I saw today there’s $5.2 billion of additional money in Virginia,” Rubin said to Moeller at the July 20 meeting. Losing $21 million in the authority’s budget “may make us less productive and take us off of the path we’re on in terms of the future,” he continued.

Moeller replied, “With all due respect, it’s not your money. It belongs to the people of Virginia, and there are a lot of things to do with it at this time.”

“I haven’t heard anybody in the state say what we need to do is put more money into the alcoholic beverage commission,” he added.

Striking a balance

ABC officials agreed with the administration that the authority’s goal is to generate increased amounts of profit for Virginia but emphasized investments were and are still needed for long-term success.

Hill told the Board of Directors that ABC required major investments after transitioning to an authority to address issues like technical debt, outdated information technology systems, and an inefficient distribution center.

The CEO said the authority’s investment “has succeeded” in terms of decreasing employee turnover, increasing transfers to the commonwealth, and ensuring ABC remains a competitive employer.

ABC Chief Administrative Officer David Alfano told the Mercury that employee salaries and benefits are one of the biggest contributors to ABC’s expenses and increase every year.

Despite these rising costs, Alfano said ABC has transferred $40 million more to Virginia than General Assembly projections called for since 2021 – contrary to data presented by Moeller during the board meeting showing a decline in transfers.

Administration officials told the Mercury their figures appear smaller than what’s listed on ABC’s annual reports because they didn’t take into account the “noise” of non-operating activity – like the sale of the authority’s old Hermitage Road warehouse in Richmond – in order to provide a more accurate picture of operating profitability.

Hill told the Board of Directors ABC needs to “strike a balance between achieving even greater profitability” while “making sure we keep pace with business investments” so that the authority doesn’t find itself in a similar situation with the administration next year.

Board Chair Tim Hugo said concerns will continue to be raised about ABC if its profitability does not stop declining.

“If you explode your costs and explode your cost structure and your profitability goes down, people are going to ask the question why,’” Hugo said. “And they’re not going to stop and they’re going to start looking under every rock you’ve got.”