III. A Survey of Employee Ownership Legislation at the State Level in the 1990s

Introduction

The number of employees involved in some form of employee ownership, as illustrated in Section I, has been on the rise over the last two decades. This has been due in part to increased state involvement. This seems to be particularly true of states with proactive employee ownership programs such as Michigan, New York, Ohio, Oregon, and Washington. A variety of different types of legislation concerning employee ownership have been passed over the last 25 years at the state level. The purpose of the following section is twofold. First, there will be an examination of the trends associated with the passage of employee ownership legislation. Second, there will be an overview of the state legislation concerning employee ownership.

Trends in Employee Ownership Legislation

An examination of legislation passed at the state-level to promote, encourage, and facilitate employee ownership over this time period revealed several distinct, yet overlapping, trends. The first trend was one of enthusiasm with regard to employee ownership. There appeared, at the time, to be a coordinated effort to pass such legislation, as well as a subsequent "bandwagon effect," evident by a desire of some states not to be left out. This trend began in the late 1970s and peaked in the mid-1980s. The second trend began in the mid-1980s and was characterized by retrenchment by state government. State employee ownership legislation, in a number of states, sunset and were not renewed because the established programs were often not utilized. In several states programs were established but resources were not allocated to implement these programs. The third and final trend was characterized by sporadic passage of employee ownership legislation in the United States during the 1990s. The passage of such legislation appears linked to isolated events rather than any coordinated efforts to pass such legislation.

Trend One

Between 1974 and 1986, 12 states passed state policies promoting employee ownership. Figure 1 illustrates the first trend of enthusiasm marked by the number of state policies passed concerning employee ownership in the 1980s, especially between 1980 and 1985. During this time 10 states passed state policies regarding employee ownership. During the 1980s, Pennsylvania also promoted employee ownership but without specific legislation to do so. Between 1986 and 1994, only 2 states passed state policies promoting employee ownership. The last state policy promoting employee ownership was passed in 1989. During this same period a number of state policies have lapsed, or been repealed. States in the Northeast represent the greatest proportion of states with state policies concerning employee ownership. In the time period before 1980 only 2 states passed state policies. In 1995 and 1998, Virginia and North Carolina, respectively, passed state policies promoting employee ownership. This legislation will be discussed more below in trend three.

Employee ownership legislation, particularly states establishing employee ownership programs, was primarily passed in states with Democratic leadership (Ohio, New York, Michigan, Massachusetts). The primary objectives of employee ownership legislation, during this time appears, geared toward the broadening of ownership and avoidance of plant shutdown. Regarding broadening of ownership, this objective is obvious given the phrasing of a number of policy declarations passed during the early 1980s. Delaware and Maryland are examples of broad state policy declarations. Delaware and Maryland provide an example of this objective. Delaware’s policy declaration for example, states that it is the policy of the state to encourage the broadened ownership of capital through the use of ESOPs. Maryland’s policy declaration states that it is the policy of the state "to encourage the broadened ownership of capital and that ESOPs were an important means of reaching that goal." Cooperative legislation also fits with in this goal of broadening the ownership of capital.

Figure 1

State Policy Declarations passed concerning Employee Ownership

Regarding the avoidance of plant closure, New York’s policy provides an example of this objective. New York’s policy states that "the general welfare is directly dependent on the economy and plant closures are a problem. The purpose of this act is to encourage employees of these plants to continue them as employee-owned enterprises thereby retaining jobs." Michigan’s policy also displays evidence of this objective. It states that "there exists in this state [Michigan] the continuing need for programs to alleviate and prevent conditions of unemployment, and the legislature finds that it is accordingly necessary to assist and retain local industrial and commercial enterprises, including employee-owned corporations, to strengthen and revitalize the economy of this state and its municipalities.

The federal government also had this as a policy objective with the passage of the Economic Dislocation and Worker Adjustment Act (EDWAA) and the Worker Adjustment and Retraining Notification Act (WARN). This legislation provided states that choose to implement the program with resources for preliminary feasibility studies.

Figure 2

States which no longer have Policy Declaration or Program

Several states, during the 1980s, funded employee ownership programs. These states included Michigan (1988), New York (1987), Ohio (1988), Oregon (1989), and Pennsylvania (1990). Some state programs, for example Massachusetts and Washington, were established within existing departments. There were also several states that had services provided within existing programs (or departments), including states such as California, Montana, Delaware, Maryland, and Maine. Several states also intended to fund state employee ownership programs, such as Hawaii, Illinois (twice) and New Jersey. At present, there are 4 states with employee ownership programs still in operation: Maine, Massachusetts, New York, and Ohio. It is important to note that these programs operate in varying degrees. Furthermore, several states still offer, in a very limited capacity, employee ownership related services (Michigan and Washington).

Trend Two

The second trend of retrenchment becomes obvious in Figure 2. This figure illustrates the number of states whose policies included provisions on state programs that were either not implemented or have been drastically cut in recent years. It also displays the states that no longer have state policies concerning employee ownership on the books. In three states, state policies have either been repealed or the legislation has sunset. Eight states had state policies with provisions for employee ownership programs to be established separately or as part of existing departments. Five of these states have no state employee ownership program in operation and/or do very little to encourage employee ownership. Two states, Michigan and Washington have limited programs still in operation. Funding for several state programs began to diminish during this time and a number of state programs, such as in Massachusetts, were defunded entirely. There is also evidence that, in the late 1980s, funding for the establishment of employee ownership programs in New Jersey and Hawaii were not authorized by their respective state legislatures.

In California, services were to be provided by the Department of Commerce (now the Department of Trade and Commerce). However, there was virtually no demand for these services given the lack of a business culture conducive to [accepting of] employee ownership. There was no knowledge of requests made concerning employee ownership at either the Department of Trade and Commerce or the Department of Economic Development.

In Hawaii, although a state policy was passed in 1985, the state legislature did not authorize the funds necessary for the operation of the state program. Illinois’ original employee ownership legislation was repealed in 1992, but new legislation established a task force to "study the scope and effectiveness of current and past efforts by and within the state of Illinois to encourage and assist with ownership succession and recommend any changes." The task force recommended a state-sponsored program but no action has yet taken place.

Montana’s program was never really implemented. It was to operate within existing state departments. Several resource guides were acquired and one company received assistance but, for the most part, people interested in employee ownership were, and still are, referred to experts in the private sector. According to an employee at the Department of Commerce, Montana’s state policy and accompanying legislation was expected to be repealed, and was, by the state legislature in 1999.

Both Oregon and Washington had operating state programs into the 1990s, but programs were discontinued due to budget cuts.

Oregon’s program, run by the Community Economic Stabilization Corporation (CESCO), closed in June 1995. The Oregon Economic Development Department (OEDD) had subcontracted CESCO and was cut after the OEDD received a 33% budget-cut in 1995 from the Republican-run state legislature. While in operation, CESCO had put on seminars regarding employee ownership and had provided other information dissemination functions. CESCO’s relation with the state had made it difficult for CESCO to justify its existence. This was due to the types of firms referred to CESCO as possibilities for employee ownership. Most of the companies were either from the timber industry (a diminishing industry) or were not viable businesses. The goals of promoting employee ownership and job retention also had to compete with Oregon’s attempt to attract more industry to the state, primarily from the high technology sector. CESCO also had difficulty promoting succession planning to retiring owners due to the complexity of ESOP law and the limited number of resources available to deal with this complexity. In other words, CESCO had very few success stories. According to the former executive director, most of the employee-owned businesses in Oregon could have done just as well without the benefit or help of a state program.

The Washington program closed in June 1997. This was due to a budget formula cap that was passed several years ago that led to the eventual budget cuts at the Department of Community, Trade, and Economic Development. While in operation, there was an average of 60 requests annually for information and assistance. There have been sporadic employee ownership deals that have been performed ad hoc (without an employee ownership program in place).

Pennsylvania established a program in 1991 (legislation passed in 1990) and it was in operation till 1995. In 1997, there was a bill drafted similar to the Ohio state program, but there is little political support, or commitment for such a program.

Trend Three

The third trend, beginning in the 1990s, is characterized by sporadic passage of employee ownership legislation due more to state conditions, rather than any type of concerted effort to pass such legislation. Legislation passed in 1990s include updates of previous legislation in California and Massachusetts, ESOP exemption from securities regulations in Nebraska in 1990, cooperative legislation in Texas (1991) and Delaware (1996), eligibility for use of job training funds to include employee-owned companies in Iowa (1992), and loan guarantees in Maine (1997). People in states that once had state employee ownership legislation have also expressed interest in employee ownership: Delaware and New Hampshire.

A major development during this time, and possibly the beginnings of a new trend, is the investigation of employee ownership as an instrument to privatize various government functions. This policy objective appears to have replaced the earlier policy objectives of broadening of ownership and avoidance of plant shutdown. The Virginia Competition Act of 1995 was the first policy declaration with such a policy objective. The Commonwealth Competition Council, for the state legislature formally investigated the viability of employee ownership as a method of privatizing government function in Virginia, in 1997. North Carolina passed a similar piece of legislation in 1998.

Concluding Remarks

The first trend appears to be the result of earlier federal legislation as well as being one of several strategies to compensate for declining industries, and subsequent job loss, primarily within heavy industry, in the Northeast. This logic also applies to the Northwest, especially Oregon, which experienced huge job loss due to a declining timber industry during the 1980s. It also appears to have been an attempt to broaden the ownership of capital.

Certain problems that would manifest themselves during the second trend can find their origins in the first trend. Ivancic and Logue, concerning employee ownership in some states, discovered that "They don’t care if it’s a good idea. A state passes a law and then all the others copy it," as was observed by a state employee from New Jersey. States that did not consider what had worked and what had failed concerning employee ownership were unable to avoid such bandwagon policymaking. One study found that there were three elements that were consistently among statutes successfully implemented. First, the successful laws were clearly written and required specific action. Second, an early effort was made to increase the knowledge of the personnel charged with implementing the statute. Finally, the agencies in question had a structure and composition that facilitated activity.

It is evident that the phrasing of a law is not as nearly as important as the subsequent implementation efforts. The primary reason for "failure" of employee ownership programs has been a lack of sufficient resources, if any resources at all, to implement the program and a lack of demand for such services. Insufficient implementation is not the only factor that has hampered the objectives of employee ownership legislation and programs. Other factors have also impacted efforts to promote, encourage, and facilitate employee ownership. The trend of fiscal conservatism to reduce government expenditures, at the federal, state, and local level, has had a profound impact on employee ownership programs and other efforts to promote employee ownership. This current trend to reduce government expenditures has for the most part been carried out by Republican-led state legislatures/governors but Democrats have also been quite active in cutting costs.

A lack of awareness by business, potential employee owner groups, as well as government agencies in some states manifested itself in a lack of demand for such services. The actual demand for such services may actually have been in decline prompting policy makers to discontinue funding employee ownership programs. In some states, like California, the business culture has not been conducive to employee ownership. It is also evident that the business owners, in some states, like Oregon, have been very suspicious of employee ownership due, in great part, to the complexity of the process of implementing employee ownership.

Virginia’s investigation of employee ownership as a means to privatize government services and functions could be the beginning of a new trend concerning employee ownership. If subsequent action is to succeed in Virginia, those in charge of implementation must be wary of past efforts. Although the vast majority of employee buyouts occur in the private sector much can still be learned and applied to similar projects in the public sector. Virginia is, in essence, a laboratory, and other states will certainly pay close attention to Virginia’s success or failure with regard to this legislation. If successful, Virginia may become a model for privatization of government services and functions via employee ownership. North Carolina was be the first state to follow Virginia’s lead and depending on the success of Virginia and North Carolina other states might also pass similar legislation.

Date: 2015-01-11; view: 953