Should Taxpayers Finance ESOPS?

An Employee Stock Ownership Plan, or "ESOP," makes it possible for employees to become part owners of the company they work for. The theory behind them argues, with considerable validity, that when employees become owners, productivity improves and labor-management relations get better. More than 250 Michigan firms, including McLouth Steel and John Henry Company, are operating under ESOPs.

The question that needs debated, however, is whether it is the business of state government to subsidize this particular form of business organization (or, for that matter, any form). Michigan taxpayers are doing just that, to the tune of $1 million. The fact is that many ESOPs neither get nor need such state support, and most get some if not all of their financing internally or from private lending sources.

With all the long-overdue scrutiny the state budget is receiving now, it seems hardly a day goes by that another program isn't unearthed that caters to yet another politically-defined special interest cause. This is but one more example.

How did the State of Michigan become involved in subsidizing ESOPs in the first place? Initially, government involvement was a well-meaning but misguided response to Michigan's decline as an industrial power in the mid-to-late 1970s. The Employee-Owned Corporations Act was enacted by the legislature in 1979 to promote employee ownership as a "job-saving" alternative to plant closings or relocation.

During the 1980s, however, ESOPs became more politicized and, ultimately, a means to build new political constituencies. A Michigan Center for Employee Ownership and Gainsharing was established under the auspices of the Governor's Office for Job Training, and slick, taxpayer-financed literature was distributed to promote the program in the labor and business communities.

Additional legislation was passed in 1985 and 1986 extending employee ownership services at the state level to existing, healthy businesses. State-subsidized ESOPs were given bonding authority, and provided access to $1 million in taxpayer funds through the Michigan Strategic Fund. Program advocates trumpet the plans as "Working Together, Working Better."

There are several questions worth considering when evaluating the state's ESOP program. First, have ESOPs arrested Michigan's decline as an industrial power? Evidence to support the claim that they have is difficult, if not impossible, to find. This author is unaware of any study which makes such a case.

Second, have state monies been invested wisely through the program? According to public records, many loans made to ESOPs are either in arrears or near default. For example, a $200,000 loan to Cheboygan Tap & Tool Co. provided financing for employees to purchase the assets of Detroit Tool Industries in Cheboygan. The company is currently in Chapter 11 in U.S. Bankruptcy Court.

Third, is it fair for the state to subsidize some private businesses, through the ESOP program, and not others? Where is the justice in providing taxpayer-financed, low-interest loans to politically-connected firms, when other businesses must vie in the open marketplace without government assistance, many of them in direct competition with their subsidized counterparts? Such a system breeds corruption, with political ties taking precedence over economic considerations.

Finally, why is the state encouraging ESOPs between labor unions and private corporations, but not among public employees in Lansing?

State government is in drastic need of downsizing after eight years of out-of-control growth during which the most departments grew at a rate greater than both personal income and inflation. Why not cut state government down to size and address the current budget deficit by empowering public employees through ESOPs? The Accident Fund, the state's workers' compensation insurer, could be privatized in this fashion, as one example.

ESOP-style privatization in Great Britain under former Prime Minister Margaret Thatcher resulted in the transfer of tens of thousands of employees from the public to private payrolls. Public employees were given an incentive to compete, taxpayers saved money, the British government raised funds through the sale of assets, and ordinary citizens acquired shareholder stakes in new businesses that had once been a drain on their pocketbooks.

ESOP-style privatization cannot solve all of Michigan's financial problems, but it would mark a welcome turn from existing policy. Instead of wasting $1 million in taxpayer subsidies to the private sector, Lansing should move to save tens of millions of dollars through privatization via ESOPs within its own domain.