- Report Published -
|Establishing an Employee Stock Ownership (ESOP) Information and Resource Service Within the Executive Branch of Government|
|Secretary of Administration; Secretary of Finance; Department of Planning and Budget; Commonwealth Competition Council|
|Appropriation Act - Item 53 B. (Regular Session, 1998)|
|This Report is the culmination of a series of events that was initiated with the 1997 General Assembly. The 1997 General Assembly approved Senate Joint Resolution No. 284 requesting the Secretary of Administration, in cooperation with the Commonwealth Competition Council, to study methods to privatize appropriate state government functions through the development and promotion of employee stock ownership plans, commonly known as ESOPs. These plans enable employees to obtain a substantial ownership stake in the company where they work.|
The Secretary of Administration and the Commonwealth Competition Council issued their report, Senate Document No. 12 (1998), on December 15, 1997 to the Governor and the 1998 General Assembly. The report contained two primary recommendations:
• Conduct pre-assessment analyses on selected state functions that may be candidates for an ESOP privatization. This recommendation was fulfilled with a report to the Commonwealth Competition Council on September 14,1998. The report, "Employee Stock Ownership Plan (ESOP) Pre-Assessments" identified three major state functions that are potential successful ESOP implementation opportunities.
• Consideration should be given by the Governor and the General Assembly to enact legislation for funding to support and assist current ESOP companies and to promote the creation of new ESOP companies in both the private and public sectors. This ownership transition service function should be assigned to an appropriate state agency. The mission of this service and state agency should be to promote employee participation and stock ownership by providing information, education, and technical services to employee groups and business owners and to generate awareness of the concept with the general public.
This second recommendation was supported by the Governor and the 1998 General Assembly in the form of "Item 53.B" in the Appropriation Act requesting the Secretary of Administration, in conjunction with the Commonwealth Competition Council, the Department of Planning and Budget, and the Secretary of Finance to study the necessary resources, staffing, and other requirements, including the need for appropriate legislation, to establish an employee stock ownership (ESOP) information and resource service within the Executive Department, and to report the findings and recommendations to the Governor and the 1999 General Assembly. This report fulfills the requirements of "Item 53.B" of the Appropriation Act.
The support for ESOPs also took another form during the 1998 General Assembly session. Senate Joint Resolution No. 103 was unanimously approved by the General Assembly expressing its support for ESOPs as an effective and viable privatization method to provide state and local government services and functions to the citizens of the Commonwealth.
ESOPs and ESOP-owned companies are a powerful and vital force in both the national and state economies. The National Center for Employee Ownership reports that since 1975, the number of ESOP-owned companies has grown from 2,000 to over 11,000 and the number of employees in ESOP companies is approaching 11 million.
Recent studies by the National Center for Employee Ownership reveal that when ownership and participative management are combined, substantial gains result. A comprehensive study in Ohio reported that ESOP companies did exceptionally well in generating jobs.
The ESOP movement enjoys strong Congressional support. The Employee Retirement Income Security Act (ERISA) of 1974, as amended, is the enabling legislation which gave ESOPs their specific statutory framework. Since 1974, federal legislation has provided ESOPs with additional tax and incentive benefits.
Sixteen states have enacted legislation or implemented programs to foster the ESOP movement in their respective states. Most of these programs are administered by the state's Department of Economic Development.
The 1998-2000 Executive Budget of the Commonwealth of Virginia states that:
"The Department of Business Assistance was created by the 1996 General Assembly. The department is responsible for existing industry development, workforce services, small business development, and financial services. These functions were previously carried out by the Department of Economic Development. The department leads the effort to enhance the relationship between the state and existing Virginia businesses by providing a single point of contact for state services. A business call program serves as the core information-gathering mechanism to discover how the state can serve its existing business community. The department works closely with the entire Virginia business community to resolve problems and issues related to state government, provide access to state programs and services, and to generally improve the overall business climate in the state."
The Commonwealth enjoys a national reputation for business and economic development, business retention, and a favorable business environment. Assisting current ESOP companies and promoting the creation of new ESOP companies in the private sector should be an important element in the advancement of the state's economic development goals, particularly when economic dislocation is apparent and worker assistance is needed. By providing practical information and assistance to help organizations implement equity-based programs, this service will enhance the economic and social development in the Commonwealth by facilitating business succession and expanding ownership opportunities for the workforce.
This report identifies federal funding available from the "Economic Dislocation and Worker Adjustment Assistance Act" (Public Law 100-4 18, Title VI, Subtitle D) which amended Title III of the Job Training Partnership Act. The federal law states that "In a situation involving an impending permanent closure or substantial layoff a state may provide funds, where other public or private sources are not expeditiously available, for a preliminary assessment of the advisability of conducting a comprehensive study exploring the feasibility of having a company or group, including the workers, purchase the plant and continue it in operation." The Virginia Employment Commission has a "Dislocated Worker Unit" which receives federal funds from the Act. These federal funds are utilized by other states to assist companies in conducting ESOP pre-feasibility studies. Due to the structure and legislation currently in place, this report does not contain any recommendation for the need to enact any additional legislation.
The major function of the Department of Business Assistance is to lead the effort to enhance the relationship between the state and existing Virginia businesses by providing a single point of contact for state services. It is recommended that the Department of Business Assistance be assigned the responsibility to implement an employee stock ownership plan (ESOP) information and resource service.
The mission of this service should be to promote employee participation and stock ownership by providing information, education, and technical services to employee groups and business owners and to generate awareness of the concept with a broader general public. The mission should also include assistance in obtaining professional assistance for pre- feasibility studies in situations involving an impending closure or substantial layoff for a preliminary assessment of the advisability of conducting a comprehensive study exploring the feasibility of having a company or group purchase the entity.
It is recommended that a two year pilot program be initiated by the Department of Business Assistance with an additional appropriation of $75,000 for each year to support the hire of a new ESOP Coordinator to initiate a public awareness program. The Department of Business Assistance should coordinate with the Virginia Employment Commission to determine if federal funding from the "Economic Dislocation and Worker Adjustment Assistance Act" may be available to conduct ESOP pre-feasibility studies.