ABC balks at adopting revised revenue forecast in face of shortfall

Interim CEO Tom Kirby did not ask the authority board of directors to adopt the revised forecast for the second time this month, noting that Gov. Glenn Youngkin and the General Assembly had not asked for further updates since the scope of the projected shortfall became public on March 19. The board publicly reviewed the revised forecast then at the governor’s request.

“It’s the same numbers,” Kirby said.

Instead, the ABC board is waiting on further options for cutting expenses, even though the authority cut almost $11 million to trim an estimated profit shortfall for the current fiscal year from $15.8 million to $4.9 million. It also is waiting on Youngkin and the assembly to agree on a final state budget from July 1, 2024 through June 30, 2026, including a proposal by the assembly to give state employees raises of 3% each year, which ABC would have to use about $10 million in future profits to pay for its staff.

The board, which now includes three members appointed by the governor, talked at length on Wednesday about controlling expenses that Chairman Tim Hugo, a former Republican delegate from Fairfax County, said had grown under the previous governor and leadership at ABC.

There was no mention of the 5% annual growth in revenues that the Youngkin administration pushed the board to adopt last August in its current budget and included in the five-year state revenue forecast that he provided the Governor’s Advisory Council on Revenue Estimates. Instead, revenues had grown by 1.5% through February, as consumers buy less expensive brands of liquor in smaller bottles, which follows a national trend that emerged last year.

“Obviously, it’s setting up ABC for failure with unrealistic goals,” said Del. Paul Krizek, D-Fairfax, chairman of the House Appropriations subcommittee on public safety and transportation. He also is chairman of the House General Laws subcommittee overseeing ABC.

Hugo, whom Youngkin appointed as chairman 13 months ago, called in then-Chief Transformation Officer Eric Moeller to examine ABC’s finances to determine why the margin of profit — the portion of sales revenues transferred to the state general fund budget — had declined.

Moeller, who left the administration early last month, pushed for $21.3 million cuts in ABC operating costs — primarily staff and consulting services — to increase the profit transferred to the state by the same amount. He also pushed the 5% annual increase in revenues to generate those profits.

In remarks to the board on Wednesday, Hugo commended the administration for sending people to ABC to examine its rising expenses and declining profit margins.

“I’m not sure people were watching the store,” he said, citing higher expenses for the salaries of an increasing number of executives and directors and contracts for outside consultants.

Kirby, who succeeded former CEO Travis Hill in November, talked about the authority’s efforts to tighten controls on all expenses, including consulting contracts and purchases for displaying merchandise at ABC’s 401 retail stores across the state.

“We’re seeing the effects of discipline,” he said.

Hugo responded, “Overdue discipline?”

Greg Holland, a Richmond lawyer and board member, reminded the board of discussions that he and previous directors had more than two and a half years ago, during the COVID-19 pandemic, about the challenge of keeping staff.

“The reason we are where we are is we had to increase what we paid our people,” he said.

Holland also noted that ABC had to pay an additional $500,000 in January — more than two months after Hill resigned as CEO — because of a mistaken allocation of work hours by the authority for its retail stores.

“Talk about responsibility! People have to accept responsibility for that,” he said.

The squeeze on operating expenses also is having its effect on the ongoing modernization of the authority’s information technology systems, which Hill began with the General Assembly’s consent when ABC was still a state agency. It became a semi-independent authority in 2018 under legislation signed into law three years earlier.

“For years, ABC ran on end-of-life software and operating systems, for things as critical as (point of sales) and financials,” Chief Information Officer Paul Williams said in an IT update to the board. “The mountain of technical debt that has been addressed in the past five years has been a financial drain and a source of stress for the organization. We cannot repeat those mistakes.”

However, ABC now is postponing some of its IT modernization projects because of the effort to cut costs, Williams said in response to questions by the board.

“It’s okay,” he said, “but it’s challenging.”