Category Archives: Department of Liquor Control

Ike Leggett’s Dump Fire

By Adam Pagnucco.

No one knows exactly when the worst dump fire in Montgomery County history started.  It was first reported to authorities on October 22, 1994.  A 40-foot high pile of trash at the Travilah Road dump had ignited and begun spreading airborne foulness throughout the vicinity.  The Washington City Paper reported, “The slow smolder spewed clouds of acrid smoke—filled with floating ashes and shreds of trash—and a putrid odor that engulfed the North Potomac area for miles around. The noxious fumes temporarily shut down Stone Mill Elementary School and forced residents from their homes; some had to take temporary refuge in motels.”  More than 200 people reported respiratory problems.

Incredibly, the county government did not act immediately to put the fire out.  Rather, it wanted dump owner Billy Mossburg and his family to put it out themselves despite their long history of bad blood with both the county and their neighbors.  The Washington Post reported, “The county doesn’t have the equipment to do the job, and it’s better for the company to spend its money under county supervision than for the county to spend tax money and bill Travilah Recovery later, said Capt. Ray Mulhall, a fire department spokesman.”  The county posted two environmental inspectors and three fire officials to the site to “ensure everything is done right.”

Internally, the administration of outgoing County Executive Neal Potter debated what to do.  Meetings of county officials went on for two hours or more without resolution.  Some in the administration worried about liability.  Others were concerned about who would pay to put out the fire.  Some worried about the difficulty of getting trucks into the dump or whether lights could be installed for night-time fire-fighting.  Just as a course of direction seemed in reach, someone would bring up more questions and the meetings would resume.  And the fire kept burning.

It was Paralysis by Analysis, then and now.

County Executive Ike Leggett has a dump fire, too.  It is otherwise known as the Department of Liquor Control (DLC).  Maligned for many years for its poor service to licensees and consumers, it was the subject of a landmark Washington City Paper story during Leggett’s first year in office.  The DLC is not a threat to public safety as Billy Mossburg’s dump once was.  But it chases away consumers, stunts the county’s restaurant industry and costs the county and state nearly $200 million a year in economic activity.  After a number of scandals including employee theft, employees drinking and driving on the job and use of an inventory system run with sticky notes, the County Council proposed a bill allowing private distributors to fulfill some special orders.  Delegate Bill Frick (D-16) went further, proposing a bill that would have allowed voters to decide whether to continue the liquor monopoly.  After initially supporting the council’s bill, Leggett opposed both of them and promised that he would fix the DLC through a task force.

The result of the task force?  Paralysis by Analysis, of course.  The task force’s eleven members included just two licensees and no consumers.  It had three meetings during which invited speakers extolled the benefits of government liquor monopolies.  It concluded with no task force statement and no proposal.  The administration completely ignored a proposal to recover DLC’s profits and pretended for months that the proposal never existed.  The Executive offered a tweak that no one else supported and later withdrew it, alleging that DLC’s problems were solved.  This is despite the fact that DLC suffered massive supply failures during the Christmas and New Year’s Eve week the prior two years.  On each occasion, Leggett defended the liquor monopoly just prior to its meltdowns.

The pattern here is the same as the reaction of County Executive Neal Potter to the Travilah dump fire.  Be cautious.  Worry about money.  Pretend that things aren’t so bad.  Play for time.  Maybe the problem will go away by itself.  Maybe public interest will move on to something else.

In the end, the Travilah dump fire was undone by an event it could not burn away: an election.  Incoming County Executive Doug Duncan raced from his inauguration directly to the Executive Office Building and demanded that county officials do everything possible to put out the fire.  Eight days later and roughly seven weeks after it was first reported, the fire was out.  The county later sued the dump owner to recover the cost of fighting the fire.

Here is the great lesson of the Travilah dump fire for today’s dump fire at the DLC.  Meetings and task forces won’t put it out.  Neither will consultants, financial analyses, promises, tweaks, defensive blog posts or PR campaigns.  One thing is needed to deal with the liquor monopoly.

Bold action.  From a new County Executive.

A Reply to the County Executive on the Liquor Monopoly

By Adam Pagnucco.

Thanks to County Executive Ike Leggett for responding to my post on how his administration ignored my proposal to make up revenue for the Department of Liquor Control (DLC).  I stand by my piece and reply to several of his points as follows.

1.  Contrary to the Executive’s contention, my proposal was in fact never analyzed during the time of the DLC task force.  His consultant’s report never mentions it despite the agreement of his staff to include it.  Try finding my proposal, my name, a reference to Seventh State or an analysis of my idea for using cable funds to finance DLC’s debt in the report.  They are simply not there.

2.  The Executive alleges that I made a “basic math mistake” by omitting DLC’s debt service from the revenue needing to be replaced.  Not at all.  Anyone reading my proposal can see that I did not omit it.  I simply dealt with it separately from the return DLC sends to the operating fund since the two revenue streams require different fixes.

3.  The Executive is correct that the state has imposed numerous unfunded mandates and fees on the counties in recent years.  I should know.  I helped organize a campaign against the teacher pension shift in 2012 that included county governments, school boards, community groups and elected officials in both parties.  But rather than merely complain about the state, let’s recognize that it has a role to play in dealing with the liquor monopoly and the revenue question since DLC was created in state law.  A visionary Executive with a plan to transition away from the liquor monopoly would be invaluable in securing the state’s cooperation.

4.  The Executive is wrong about my proposal to use cable funds to service DLC’s debt in two ways.  First, he claims that I proposed raising the 5% fee the county currently levies on cable bills.  That’s not what I said, and in any case, the fee is already at the maximum level allowed by federal law.  Second, he claims that “Cable fund money cannot legally be used for purposes other than cable-related needs: technology and communication purposes. We cannot take Cable Funds to build roads and schools.”  That is absolutely wrong.  The county’s own cable lawyer advised the County Council in 2012 that the county has discretion over how the 5% fees can be spent, but not on amounts collected over that level or on behalf of municipalities.  Those amounts not subject to county discretion were excluded from my analysis.  In fact, the Executive transfers some money from the cable fund to the general fund right now.  The approved FY17 budget states, “Funds are transferred from the Cable Fund to the General Fund to cover the cost of certain administrative services provided by the County to the Cable Fund ($654,353) and other contributions ($5,163,433).”  That’s right, folks, the Executive’s statement in his reply to us is contradicted by his own budget.

Why is the Executive so resistant to the idea of using cable funds for DLC’s debt service?  Perhaps one reason is because cable fees are the source of millions of dollars for County Cable Montgomery and Montgomery Community Media, two public “news” outlets that provide “coverage” for county elected officials.  Try to locate an unflattering “news” article about county elected officials in any of the “coverage” provided by these outlets.  Good luck finding any because one of them is part of county government and the other is a non-profit that gets more than 80% of its budget from the county.  What’s the better use for this money?  Financing Pravda-style public relations or helping to fix the liquor monopoly?

5.  The Executive notes that Worcester County’s former monopoly on spirits may be coming to an end.  He is probably right about that.  Worcester’s monopoly, while not including wine and beer as Montgomery’s does, did an even poorer job of customer service than MoCo and was busted by the Comptroller for breaking numerous laws in 2010.  After Worcester’s monopoly was opened to competition in 2014, the county lost 42% of its wholesale business after a year (while keeping 96% of its retail volume) and its leaders may decide to exit alcohol sales altogether.  But if they do so, it will be because they have decided they can’t compete with private distributors.

That seems to be the rationale the Executive has for shielding DLC from competition: since (in his view) it can’t compete, competition shouldn’t be allowed.  How is that a good thing for licensees and consumers?  Isn’t there a chance that open competition could cause DLC to improve while making private wholesalers pick up their game?

Also, the Executive says, “In the liquor business it is the suppliers/manufacturers who decide which ONE distributor/wholesaler will sell their products.”  That may be true under most circumstances in Maryland, but COMAR 03.02.01.12 exempts county liquor dispensaries from this arrangement.  In other words, state law allows manufacturers to sell to both county liquor sellers and private distributors.  That is what happens now.  In fact, DLC couldn’t exist without this exemption.  Competition between DLC and the private sector can occur if the state allows it.  The Executive simply opposes it.

The County Executive’s response shows that he is sensitive to criticism on this subject.  If only that were enough to make real progress on the county’s shameful liquor monopoly.

Exclusive: Ike Leggett Responds on the DLC

Today, I am pleased to present a guest blog by Montgomery County Executive Ike Leggett:

REALLY Setting the Record Straight…

Adam Pagnucco’s blog entry, Setting the Record Straight, does anything but set the record straight. Let’s be clear – I did not “throw in the towel” on privatizing the County’s Department of Liquor (DLC). The record clearly shows that I introduced State legislation that would have privatized our DLC while also protecting and maintaining the significant revenue stream of over $30 million a year it contributes to the County budget. Some on our County Council and in the State Delegation felt that, given the progress we’ve seen in DLC since we brought in a new management team with considerable liquor industry experience, and a number of substantive changes we had made to the organization already, we should give them additional time to make even greater improvements.

Philosophically, I am not opposed to privatization, but I also stand by my statement that not one of the critics of the County’s Department of Liquor Control (DLC) put forth a viable privatization proposal that would hold the County budget harmless by replacing the DLC’s profits. The County DLC is a taxpayer asset that produces a net profit of over $30 million a year and to privatize without replacing the revenue would be a disservice to our taxpayers.

After months of soliciting proposals, not one person or organization offered a viable plan to privatize DLC while maintaining the approximately $30 million in profits, including groups that assured us they would. While Mr. Pagnucco claims that his plan would have done so, his route to privatization, simply put, was based on faulty assumptions.

Mr. Pagnucco’s proposal was not ignored. It was carefully reviewed by us in the County and it was also reviewed by a consultant hired to review privatization options It was judged not viable because the underpinnings of the proposal were either unworkable, not legal or just plain wrong. Here’s why:

First, Mr. Pagnucco made a basic math mistake. He estimated that the County receives $20 million in “profit” in FY17, therefore starting with the faulty premise that to make the County whole, only $20 million in DLC profits each year need to be replaced. Unfortunately, he ignores that in FY17, the Department of Liquor Control earmarked $20.7 million for transfer to the General Fund and another $10.9 million to pay debt service on Liquor Bonds – bonds that have paid for road, and school construction in our County.

Therefore, the revenue to be replaced equals $31.6 million, not $20 million.

Mr. Pagnucco’s proposal then makes the argument that there will be a huge economic spinoff from privatizing by increased sales. He relies on a report done by the Comptroller’s Bureau of Revenue Estimates, which was itself built on an amazing number of alternative facts. But, for the sake of argument, say it was a sound analysis. Even Mr. Pagnucco admits that the tax revenue estimates presented in the report actually proves the county’s point that opening the alcohol market really only benefits the State coffers. He himself noted the county would receive less than $1 million of the revenue, while the rest of the estimated $35 million in economic spinoff benefit would go to the state’s general fund.

So he suggested that we pass a State law to compel the State to share its new revenue with us. The consultant, and everyone familiar with how Annapolis works, rightly pointed out that first, it requires the state to be a willing partner, and second and more importantly, there exists a legitimate concern about revenue sharing with the State. What the State giveth, the State taketh away. Just in the 1990s alone, the following County revenue sources were reduced or eliminated by the State:

  1. Liquor tax revenue sharing: eliminated; loss of $4.4 million to counties
  2. Beer tax revenue sharing: eliminated; loss of $4.2 million to counties
  3. Tobacco tax revenue sharing: eliminated; loss of $12.7 million to counties
  4. Property tax grant: eliminated; loss of $82.5 million to counties
  5. Teacher social security: eliminated; loss of $145 million
  6. Financial institution franchise tax sharing: eliminated; loss of $17 million to counties
  7. Transportation taxes revenue sharing (not highway user): eliminated; loss of $19.6 million to counties
  8. Abandoned property revenues: eliminated, loss of $5 million to counties
  9. Corporate filing fee revenues: eliminated; loss of $1.6 million to counties
  10. Security interest filing fee revenues: eliminated; loss of $1 million to counties

Mr. Pagnucco claims that the County can replace the bond money by raising our cable franchise fee and siphoning off dollars from the Cable Fund. With this statement he negates his own argument that his proposal would be “cost neutral” since it would in fact require raising fees.

But what he more importantly failed to realize is that Cable fund money cannot legally be used for purposes other than cable-related needs: technology and communication purposes. We cannot take Cable Funds to build roads and schools. Plus, utilizing this revenue would just create a budget hole elsewhere.

Another faulty assumption in Mr. Pagnucco’s proposal is using Worchester County as an example of how privatization in Montgomery County would work smoothly. He claims that after privatizing its liquor business, Worchester experienced reduced revenues but that the loss was negligible and that such a loss would equate to a mere $5 million per year for Montgomery. However, in reality, the unhappy ending to the Worchester story of privatization is that Worchester County is now going out of the liquor business forever and will generate exactly zero revenue for its budget in the future.

The final faulty assumption in Mr. Pagnucco’s proposal is his assumption that the county could just open up more liquor stores, which he notes would create additional profits.  See paragraph above: Worchester’s unhappy ending is testament that it just won’t happen.

Finally, Mr. Pagnucco says he was not proposing getting rid of the DLC – he just wanted to provide competition (i.e.; “end the monopoly”) by allowing our licensees to decide from whom to purchase products. But that’s not how it works. In the liquor business it is the suppliers/manufacturers who decide which ONE distributor/wholesaler will sell their products. The so-called monopoly doesn’t end, it simply transfers from the County to the private sector. Why turn over this asset that belongs to our county residents to the private sector for nothing?

We should be looking forward, not back. The DLC is, as they say, under new management. It has a new director, and is on course to continue making positive changes to improve operations and customer service.

Ike Leggett
County Executive

Setting the Record Straight

By Adam Pagnucco.

County Executive Ike Leggett has thrown in the towel on efforts to reform the county’s Department of Liquor Control (DLC).  We will have something to say about that soon.  But first, let’s address a claim the Executive has made in Bethesda Magazine: namely, that “the department’s critics have failed to put forth a proposal that included replacing the DLC’s profits.”

That is flat-out untrue.

On August 15, 2016, while the Executive’s DLC task force was meeting, your author posted a proposal on Seventh State for replacing DLC’s profits.  Our concept was to replace every dime of DLC’s net income with a combination of revenue sharing with the state, opening a few new liquor stores and financing the county’s liquor bonds with cable funds.  No new taxes or fees would be required.  In the email below, your author asked Bonnie Kirkland, the Executive Branch staffer running the task force, to have the proposal studied by the administration’s consultant.  Ms. Kirkland agreed to do that.  But the consultant’s report never examined our proposal and does not reference it at all.  And now the Executive claims that our proposal never existed.

Let’s give the Executive the benefit of the doubt.  No Executive is aware of every interaction his staff has with the public.  But it’s absolutely untrue that we had no proposal to replace DLC’s profits.  We did and we shared it with his staff.  It was simply ignored by his administration.

Below is the email exchange your author had with Ms. Kirkland as proof.  Let no one – not the Executive, not his staff, not anyone at the County Council and not anyone else – continue to claim that we presented no ideas for replacing DLC’s profits.

*****

From: Kirkland, Bonnie <Bonnie.Kirkland@montgomerycountymd.gov>

Sent: Thursday, September 1, 2016 3:47 PM

To: Pagnucco, Adam

Subject: Re: Proposal on liquor monopoly revenue

Adam – The proposal, along with the others, is under analysis by the consultant. They will present a preliminary report/analysis at the next meeting, September 15.

Bonnie

Sent from my iPhone

On Sep 1, 2016, at 2:28 PM, A P <acp1629@hotmail.com> wrote:

Hi Bonnie – have you had time to consider my request?  I believe it responds to the Executive’s view that he is prepared to depart from DLC’s monopoly status so long as the revenue gap is closed.  Adam

From: Bonnie.Kirkland@montgomerycountymd.gov

To: Acp1629@hotmail.com

Subject: RE: Proposal on liquor monopoly revenue

Date: Wed, 17 Aug 2016 17:13:08 +0000

Adam – Yes, I did receive your email. I am currently out of the office and will respond as soon as possible.

Bonnie

From: A P [mailto:acp1629@hotmail.com]

Sent: Wednesday, August 17, 2016 1:02 PM

To: Kirkland, Bonnie <Bonnie.Kirkland@montgomerycountymd.gov>

Subject: FW: Proposal on liquor monopoly revenue

Hi Bonnie – did you receive this email?  And if so, can you confirm that this proposal will be analyzed along with the others in the course of the DLC task force’s deliberations?

Thank you,

Adam Pagnucco

From: acp1629@hotmail.com

To: mcvim@aol.com; dwayne.kratt@diageo.com; mdharting@venable.com; molly@allsetrestaurant.com; rneece@esopadvisors.com; mmendelevitz@esopadvisors.com; mbalcombe@ggchamber.org; ggodwin@mcccmd.com; gitaliano@bccchamber.org; jredicker@gsscc.org; chris.gillis@montgomerycountymd.gov; joel.polichene@rndc-usa.com; bob.mutschler@rndc-usa.com; tbeirne@wineinstitute.org; jen@pwrjmaryland.com; sidney.katz@montgomerycountymd.gov; lisa.mandel-trupp@montgomerycountymd.gov; neal.insley@nabca.org; steve.schmidt@nabca.org; hgaragiola@alexander-cleaver.com; robert.douglas@dlapiper.com; sfoster739@comcast.net; mthompson@marylandrestaurants.com; jason@capstrategies.net; ashlie.bagwell@mdlobbyist.com; mcarter@vsadc.com; proddy@rwlls.com; lobbyannapolis@verizon.net; amy.samman@montgomerycountymd.gov; fariba.kassiri@montgomerycountymd.gov; bonnie.kirkland@montgomerycountymd.gov; ginanne100@aol.com

Subject: Proposal on liquor monopoly revenue

Date: Mon, 15 Aug 2016 12:00:24 -0400

Hi Bonnie:

I am requesting that this proposal on how to deal with liquor monopoly revenue be considered by the administration as part of its DLC deliberations.

http://www.theseventhstate.com/?p=6987

Thank you,

Adam Pagnucco

Meet the New Liquor Monopoly

By Adam Pagnucco.  

Meet the New Liquor Monopoly.  It’s the same as the Old Liquor Monopoly, except with less accountability.

OK, now that the applause is dying down, let’s look at the details.  The New Liquor Monopoly proposed by County Executive Ike Leggett would be a quasi-governmental authority rather than a county department.  It would have the same warehouse, the same equipment, the same trucks, the same ordering and billing systems, the same employees, the same front-line and middle management, the same union and – of course! – the same state-sanctioned monopoly status.  This is “change” that only a monopoly would love!

But wait.  There is one significant difference.  Under the current system, the Executive Director of the Department of Liquor Control (DLC) is a department director who serves at the pleasure of the County Executive.  Should the Executive become displeased with his or her performance, that person could be dismissed.  The County Council has a role (at least hypothetically) in holding DLC accountable through its power to approve DLC’s operating and capital budgets as well as any debt secured by liquor profits.

Those sources of accountability disappear in the New Monopoly.  The proposed authority would be governed by a Board, which would be nominated by the Executive and approved by the County Council, and that Board would hire a CEO.  The CEO would not report to the Executive.  The council would no longer have approval authority over the New Monopoly’s operating or capital budgets.  The New Monopoly would also have unfettered authority to issue debt.  Here’s a question, folks – what do you think will happen to liquor prices if the New Monopoly screws up and takes on too much debt?  Pish posh – it’s not like the existing Monopoly has ever screwed up, yeah?

We know you can barely contain your excitement.  Here is the County Executive’s statement so you can absorb all the dirty details!

exec-statement-1

exec-statement-2exec-statement-3At first glance, the New Monopoly is little different from the Old Monopoly.  From top to bottom, it is the same entity in terms of capital, labor and processes.  But this new beast could be much more dangerous than the old one.  It is neither accountable to its customers nor to elected officials.  In fact, it is accountable to no one at all.

Folks, it’s time for brutal honesty: our county government has failed us.  The liquor monopoly’s problems have been apparent since the first year of the current County Executive’s first term.  For nine long years, the county did nothing as the monopoly continued to get worse, culminating in the epic 2015 New Year’s Eve disaster.  Thousands of consumers and licensees signed a petition to End the Monopoly and residents even voted for term limits in part due to fury over DLC.  And what do we get?  A proposal for Endless, Unaccountable Monopoly.

We, the residents and business owners of this county, have not been heard.  Our demands for freedom have been subjugated to the crushing burden of alcohol totalitarianism.  There is only one thing left to do.

Vote for candidates who will End the Monopoly in the next election.

MoCo Solicits for Liquor Monopoly Propaganda Video

By Adam Pagnucco.

The Montgomery County Government has issued a solicitation seeking bids on a propaganda video defending the county’s liquor monopoly.  The solicitation comes after the County Executive’s task force on the issue concluded its meetings with (so far) no apparent resolution.

The informal solicitation, captured in a screenshot from the county’s website below, invites companies in the county’s Local Small Business Reserve Program to bid on an opportunity to create a video about the Department of Liquor Control (DLC).  The solicitation describes the project scope as, “The creation of an impactful, high quality, television ready, 2-3-minute video. To include videographer, audio services, design and editing of a short film or commercial on the benefits of a control jurisdiction, and dispelling myths. The short will be directed at educating the general public. We hope to have the project completed by December 30, 2016. A high quality public service announcement in a format that can be shared and posted on a website for public access.”

video-solicitation

This is not the first time the county has used public resources to spread political propaganda supporting the liquor monopoly.  Last January, the county distributed flyers defending DLC at county liquor stores while the county’s state legislators were debating its fate.  The flyer distribution ended shortly after it was exposed by Fox 5.

The cost of the video will not be known until a bid is accepted, although the solicitation’s fine print states that it cannot exceed $25,000.  The cost of distribution could be much more, especially if the county runs the video as an ad on private television channels.

All of this comes after the county’s state legislators, who have purview over DLC since it is established in state law, asked the County Executive last year to consider various models of liberalizing the liquor monopoly.  The Executive agreed and convened a task force to study various options, but the task force’s three meetings ended without a visible result.

With this solicitation, the county appears to be digging in to defend the monopoly despite its massive failures and the protests of thousands of residents against it.  The liquor monopoly is one of several reasons why MoCo residents voted for term limits and yet the county is staying the course.

Will they ever learn?

The Magic of Freedom from the Liquor Monopoly

By Adam Pagnucco.

Montgomery County is witnessing an historic craft beer renaissance.  New small breweries are popping up all over the county offering an incredible array of IPAs, Belgian tripels, pilsners, ESBs, saisons, stouts and even rum rye.  Politicians and customers alike are celebrating, even if they might be a wee bit late to work on the following day.  But this renaissance has been caused by one factor that few so far are talking about.

These breweries are exempt from having to sell their products through the county’s Department of Liquor Control.

brookeville-beer-farm-1

Montgomery County Executive Ike Leggett and members of the County Council at a ribbon cutting for Brookeville Beer Farm.  Photo courtesy of Delegate David Moon.

Until recently, there were three small breweries in MoCo: Growlers in Gaithersburg, Rock Bottom in Bethesda and Gordon Biersch in Rockville.  The latter two are part of chains.  While each establishment could sell to individual customers, they had to go through the Department of Liquor Control (DLC) to sell to restaurants and retailers.  For the most part, it wasn’t worth the bother.

That changed in 2014 when a group of craft brewers wanted to open Denizens Brewing Company in Downtown Silver Spring.  The condition they imposed was that the DLC must not be allowed to carry their beer.  Denizens co-owner Julie Verratti told the Sentinel, “There’s no freaking way in hell I would ever trust my product to the Department of Liquor Control.”  According to the article:

Veratti said the main reason she does not trust the DLC to deal with her product is because she believes the warehouse employees would not properly handle it.

“It’s not their product so they don’t give a sh**,” Veratti said. “They don’t care if it sits out and I doubt half the people in the warehouse have knowledge of how to handle beer.”

Paul Rinehart, founder of Baying Hound Aleworks, whose brewery had to go through the DLC prior to the change in law, called using the DLC as a distributor “not fantastic.”

Rinehart said when using the DLC his brewery “ran into issues where our product would get lost” and would often hear from clients that their product orders had been either delivered incorrectly or not delivered at all.

Despite the DLC upgrading their inventory system to Oracle, which rolled out on Feb. 1 and has its own problems, Rinehart said he has no plans to use the DLC to distribute again.

“I’m just afraid of my product getting lost again,” Rinehart said.

The result of Verratti’s advocacy was a 2014 state bill that allowed micro-breweries to bypass the DLC and sell craft beer directly to restaurants and retailers as well as on-site customers.  This was the key reform that enabled Denizens to grow in MoCo.  Once again, from the Sentinel:

Had it not been for the change in law that gave breweries the ability to deliver their product directly to their customers, Julie Veratti, co-owner and director of business outreach for Denizens, said her brewery would not have distributed inside the county at all and instead would have just distributed the product to Washington, D.C. Denizens opened for business after the change of law came into effect.

And so MoCo micro-breweries are now free of DLC entirely.  Disasters like DLC’s week-long meltdown in last year’s holiday season do not affect them at all.

The result of all this is a BOOM in craft brewing.  Since the DLC exemption was passed, Denizens (Silver Spring), 7 Locks (Rockville), Waredaca (Laytonsville) and Brookeville Beer Farm (Brookeville) have opened.  A fifth brewery attempted to open in Rockville but encountered permitting and zoning issues with the city government and moved to Baltimore.  The chart below shows all active licenses and permits pertaining to MoCo microbreweries.  Fifteen of eighteen originated in 2014 or later.

moco-brewery-licenses

The lesson to be learned here is that removal of the county’s liquor monopoly leads to economic growth and job creation.  Those are important considerations for a county that has seen its private sector jobs base shrink between 2001 and 2014 and has just raised property taxes by 9 percent.  The state’s Bureau of Revenue Estimates has found that the county could create more than 1,300 jobs and nearly $200 million in annual economic activity by tossing its liquor monopoly into the dustbin of Prohibition.

Will the county embrace economic prosperity and job creation?  Or will politicians continue to defend the monopoly while cutting ribbons for breweries who are exempted from it?

How to End the Monopoly and Recover the Money

By Adam Pagnucco.

In the latest development in the county’s continuing liquor monopoly saga, the County Executive has established a task force to explore options for scaling back or eliminating the monopoly.  One condition applies: the monopoly earns money for the county and the Executive does not want to lose it.  Last February, he told Bethesda Magazine, “I have no problem with privatization per se, but we need to make sure the county’s residents and taxpayers are protected on the financial issue.”

That’s a reasonable point of view.  Here’s a proposal to End the Monopoly without taking a financial hit.

First, let’s recall that the goal of last winter’s End the Monopoly campaign was never to abolish the Department of Liquor Control (DLC).  Rather, we were seeking to allow private sector competition with the DLC at both the wholesale and retail levels.  Licensees would be able to buy from the county, private wholesalers or both and consumers would be able to buy all beverages, including spirits, from county stores, private stores or both.  That does not mean that DLC would get wiped out.  Indeed, it has one competitive advantage that no private wholesaler has: it is a one-stop shop for all alcoholic beverages.  Some licensees are willing to tolerate DLC’s problems in return for the convenience of dealing with one bill and one truck.  DLC’s Acting Director claims that their performance is improving and the county employee union President told the latest meeting of the task force that he has spoken to dozens of retailers who wish to stay with DLC.  If they are correct, private competition will not eliminate DLC, but it could reduce its revenues.

The closest relevant example to what would happen if DLC were exposed to competition is Worcester County, Maryland, which opened up its spirits monopoly in 2014.  Worcester’s DLC Director testified to the MoCo Delegation that within a year, the county had lost 42% of its wholesale business to private competition but had kept 96% of its retail business.  Now Worcester County’s monopoly was run far more poorly than MoCo’s DLC as it was found guilty of massive violations of state law back in 2010, so MoCo’s DLC could fare much better with competition.  But for the sake of argument, let’s use its experience as a starting point.

Any analysis of what would happen to MoCo’s DLC under competition must recognize that the liquor monopoly makes two payments to the county: a direct return to its general fund and debt service paid on bonds guaranteed by liquor profits.  Potential shortfalls in both those areas must be addressed.

The General Fund

DLC’s operating profits, projected to be $20.7 million in FY17, are paid directly into the county’s general fund.  That amount accounts for 0.4% of the county’s $5.3 billion operating budget.  What would happen to those profits if the private sector were allowed to compete with DLC?  According to the county’s Office of Legislative Oversight, DLC’s FY14 revenues were split pretty evenly between wholesale ($136 million) and retail ($127 million) operations.  If Worcester County’s experience occurred in MoCo, 42% of the wholesale revenue and 4% of the retail revenue would be at risk from competition, so DLC’s total revenue would decline by 24%.  If DLC’s operating costs scale with its operating revenues, its net income would fall by $5 million.

How do we make up that money?

First, the county could open up more county liquor stores.  (Indeed, it is already doing so.)  In FY13, the county earned $795,000 in annual gross profit per liquor store.  So if that gross profit figure still holds, seven new liquor stores could cover a $5 million gap.

Second, new tax revenues will be available in a world of competition.  The state’s Bureau of Revenue Estimates released a report last year finding that if DLC were completely abolished, $22.8 million in tax revenues would be generated, mostly from customer repatriation.  (That is actually larger than DLC’s return to the county’s general fund.)  The problem is that only $1.8 million would accrue to the county in local income taxes, while the rest would go to the state (primarily through sales taxes).  The solution is to have the state share its incremental revenue increase with the county for a period of time.  After all, if the county is giving up a financial asset, it should share in the returns from that.

A formula could be constructed that ties incremental increases in state revenue from alcohol sales in MoCo to DLC’s reduced income.  For example, in Year X, if DLC earns $5 million less than its baseline and the state earns $6 million more than its baseline, up to $5 million could be returned to the county.  The formula should cap returned receipts to the county at the amount that the state gains so that the state doesn’t lose money.  And it could be temporary and transitional since at some point MoCo would be expected to behave like nearly all other counties in the nation and pay its bills with no liquor monopoly.

The math is clear: it’s entirely possible for the county to suffer no net losses at no cost to the state with incremental revenue sharing and a few more liquor stores.

The Bonds

The county has issued three tranches of revenue bonds guaranteed by liquor profits, the last of which matures in FY33.  The outstanding balance on the bonds is $114 million as of June 30, 2014 and DLC is projected to pay $10.9 million in debt service on them in the current fiscal year.  If the liquor profits available to pay for these bonds were to disappear, another source of revenue must be found to replace them.

Such a revenue source can be easily found in the county’s budget: county cable franchise fees.  Federal law allows local jurisdictions to charge cable companies in return for using public right-of-way.  The maximum amount allowed by federal law – 5% of cable bills – is contained in the franchise agreements the county negotiates with Verizon, Comcast and RCN.  Because cable bills rise every year, the county gets more money out of this as time passes.  Also, because this money is unencumbered by DLC’s employee and capital expenses, it is not subject to cost changes like DLC’s profits are.  Cable franchise fees are actually a more stable revenue source to guarantee bonds than are liquor profits.

According to the county’s cable budget, the county is projected to collect $17.7 million in cable franchise fees in FY17.  Of this amount, $3.8 million is passed on to the Cities of Rockville and Takoma Park and the Maryland Municipal League in compensation for use of municipal rights of way, leaving $13.9 million available.  The county has obtained legal advice holding that the county can do virtually whatever it wants with the 5% cable franchise fees.

How is the cable money currently spent?  Most of it is given out to the PEG (public/education/ government) TV channels.  The two largest are the county’s in-house news channel, County Cable Montgomery, and the non-profit Montgomery Community Media, which is also financed by private sector contributions.  The problem is that no one knows how many people actually watch this programming.  The huge majority of their YouTube clips get a few dozen views each at best.  Is this truly worth millions of dollars of public money?

The county could easily retire its current liquor bonds and replace them with new bonds that are guaranteed by both liquor profits and cable franchise fees.  Liquor profits would be the first source of debt service payment, with any shortfall covered by cable fees as a supplement.  Even if liquor profits entirely disappear, the $13.9 million in annual cable fees – an amount that has been growing steadily for years – could cover the $11 million in annual debt service by themselves.  And over the long term, this arrangement would be temporary as the bonds will eventually be paid off.

There you have it.  Through a combination of a few more stores, incremental revenue sharing with the state and restructuring of the liquor bonds, the county could free itself from its liquor monopoly with no significant financial consequences.  No new taxes or fees are necessary.  And the county would see the creation of new jobs, more income, more economic activity and greater competitiveness with its neighbors as a result.

It’s a huge opportunity.  Will Montgomery County go for it?

MoCo’s Giant Tax Hike, Part Six

By Adam Pagnucco.

Montgomery County’s giant tax hike will have consequences.  Here are a few of them.

1.  Term limits are more likely to pass.

There are several reasons why Robin Ficker’s newest term limits amendment will probably pass if he gathers enough signatures to place it on the ballot, but the tax hike is one of the biggest.  The last time the council broke the charter limit in 2008, voters responded by passing Ficker’s charter amendment to make tax hikes harder.  With a new tax hike in place, voters may be tempted to respond with term limits.

Ficker has taken notice.  He regularly runs Facebook ads linking term limits, the tax hike and the council’s 2013 salary increase like the one below.  Commenters respond predictably.

Ficker vs Elrich

Ficker may have a new ally in his quest to evict the council: MCGEO President Gino Renne.  After the council voted to abrogate his union’s collective bargaining agreement, Renne told the Post, “I’m tired of these clowns,” and said his union might support term limits.  An alliance between Gino Renne and Robin Ficker would be one of the strangest events in the history of MoCo politics.  Whoever can produce a picture of these two smiling and shaking hands will be awarded a gift certificate from Gino’s beloved Department of Liquor Control.

2. Outsider candidates could be encouraged to run for county office.

If term limits pass, two things will happen.  First, the County Executive’s seat and five seats on the County Council will be open in 2018.  Second, the tax increase will be blamed for the success of term limits.  Both factors could lead to the entry of outsider candidates with a message like this: “We need new leadership.  We need to do things differently.”  Translation: we need to run the government without giant tax hikes.

Some of these outsiders may use the county’s new public financing system to run.  But the strong performance of David Trone, who started with zero name recognition and won many parts of CD8, will encourage self-funders.  This being Montgomery County, there are a LOT of potential self-funders, including those who have previously run for office.  Candidates in public financing can raise as many individual contributions of up to $150 each as they are able to collect, but the system caps public match amounts at $750,000 for Executive candidates, $250,000 for at-large council candidates and $125,000 for district council candidates.  A wealthy self-funder could easily overwhelm candidates who are subject to these caps and make a mockery of public financing.

3.  More charter amendments on taxes are possible.

Ficker’s 2008 property tax charter amendment, which instituted the requirement that all nine Council Members must vote to override the charter limit on property taxes, was a mild version of his previous ballot questions on the subject.  His 2004 Question A, which would have abolished the override provision entirely, failed by a 59-41 percent margin.  Now that the 2008 amendment has been proven ineffective, Ficker could be encouraged to bring back his more draconian version soon.  In the wake of this new tax hike, would voters support it?

Passage of a hard tax cap would have very grave consequences for the ability of county government to deal with downturns.  In 2010, the County Council responded to the Great Recession by passing a tough budget combining cuts, furloughs, an energy tax increase and layoffs of 90 employees.  When the next recession comes, if the county has no taxation flexibility, it might have to pass a budget laying off hundreds of people and gutting entire departments.  If the levying of giant tax hikes in non-emergencies causes the voters to abolish the possibility of levying them in true emergencies in the future, it would be a serious calamity.

4.  Governor Larry Hogan is a big winner.

One of Governor Hogan’s favorite political tactics is to play the Big Three Democratic jurisdictions against the rest of the state, with the City of Baltimore being his prime target.  But he can also point to Prince George’s County, where the County Executive (and a potential election opponent) proposed a 15% property tax hike, and also to Montgomery County, where the council passed a 9% increase.  His message to the voters will be a simple one.

“Look, folks.  This is what you get when you allow liberal Democrats to have one-party rule: giant tax hikes.  That’s why you need people like me in office to stop them.”

How many MoCo Democrats will ask themselves this question: “What is easier for me to live with? Larry Hogan or nine percent tax hikes?” What do you think their answer will be?

Hogan received 37% of the vote in Montgomery County in 2014.  He had a 55% approval rating in MoCo according to a Washington Post poll last October.  A Gonzales poll taken in March found that registered voters in the Washington suburbs (defined as MoCo, Prince George’s and Charles) gave Hogan a 62.6% job approval rating, with 35% strongly approving.  If Hogan can use the tax issue to run in the low 40s, or even as high as 45% in MoCo, he will be very difficult to beat for reelection.

Reelecting himself is not Hogan’s only priority.  He would also like to elect enough Republicans to the General Assembly to uphold his vetoes.  That task is easier in the House of Delegates, where Democrats hold 91 seats, six more than the 85 votes required to override vetoes.  If the GOP can pick up seven seats, as they did in 2014, they can uphold the Governor’s vetoes on party line votes.  That would cause serious change in how Annapolis operates.  Could big tax hikes in Democratic jurisdictions like Montgomery help the GOP get there?

5.  It will be harder to get more aid from Annapolis.

In 2007, former Baltimore State Senator Barbara Hoffman commented to the Gazette on Montgomery County’s ultra-wealthy reputation in Annapolis.  “They have to overcome the view that they’re rich and trouble-free. … That’s not true anymore.”  She was right then, and she is even more right now.  The county has massive needs for transportation projects and both operating and construction funds for the public schools.  But when the county levies giant tax hikes on itself to pay for these needs, is it letting the state off the hook?  State legislators from other cash-strapped jurisdictions that lack wealthy tax bases like Bethesda, Chevy Chase and Potomac are perfectly happy to let MoCo tax itself while they ask the state to tax MoCo even more to pay for their needs.  (Remember the 2012 state income tax hike, of which MoCo residents paid 41% of the new revenue?)  As a result, the next time the Lords of Annapolis are asked to help Montgomery County, they could very well reply, “Tax yourselves to pay for it. You always do.”

6.  A major argument in favor of the liquor monopoly has been proven hollow.

County officials predicted that if the liquor monopoly was lost, annual property taxes would have to rise by an average $100 per household.  Instead, the monopoly was preserved and the council passed a property tax hike that will cost an average $326 per household.  The tax hike was in the works since at least January 2015, long before small businesses and consumers launched their campaign to End the Monopoly.  And the $25 million in new spending added by the council to this year’s budget actually exceeds the $20.7 million that the liquor monopoly is projected to return to the general fund.  This proves once and for all that liquor monopoly revenues do not prevent tax hikes!

7.  There will be pressure in the future for another tax hike.

As we discussed in Part Three of this series, the U.S. Supreme Court’s Wynne decision, which requires counties to refund taxes paid on out-of-state income, was one reason for the current property tax hike.  Senator Rich Madaleno’s state legislation extended the time that counties had to pay for refunds from Fiscal Year 2019 to 2024.  Below is a table showing the fiscal impact on all Maryland counties combined, of which Montgomery accounts for roughly half.  While the legislation enables counties to spend less in FY 2017-2018, it requires them to spend more in FY 2020-2024.  MoCo will have to spend around $20 million a year in most of the out years.

Madaleno Wynne Bill Fiscal Impact

Given its $5 billion-plus annual budget, Montgomery could easily afford the out-year payments by slightly slowing the growth rate in its annual spending.  But instead, the council added $25 million in new spending on top of the Executive’s FY 2017 budget, and unless it is cut, that spending will continue in future budgets.  The cumulative impact of that new spending plus future Wynne refund payments will start to be felt in three years.  At that point, the council could very well face a choice between trimming back their added spending or raising taxes.  What do you think they will do?

8.  Economic development will now be harder.

Despite the wealth in some of its communities, Montgomery County struggles with the perception that it is not business-friendly.  While its unemployment rate is low by national standards, its real per capita income fell steeply during the recession, much of its office space is obsolete and it lacks Northern Virginia’s two major airports and its new Metro line.  The chart below shows the county’s private sector employment from 2001 through 2014.  Despite recent sluggish growth, the county had fewer private sector jobs in 2014 than it did in 2001.

MoCo Private Employment 2001-2014

And while the county lost private sector jobs, the Washington region as a whole grew by 9.5% over this period.

Washington Private Employment 2001-2014

There may be a variety of factors explaining MoCo’s weak economic performance, but consider this: in the last 15 fiscal years, the county has seen six major tax increases.  The county broke its charter limit on property taxes in FY 2003, 2004, 2005, 2009 and 2017 and it doubled the energy tax in FY 2011.  (Most of the latter increase is still on the books.)

Good government is an exercise in balancing needs.  Education, transportation, public safety and public services are valuable and require resources, at times necessitating tax increases.  But all of that is impossible without a vigorous private sector that creates jobs and incomes and pays the government’s bills.  Those priorities must be balanced, and when they are, progressive policies can be afforded.  But if they are not, economic growth will fail, government services will be harder to sustain, taxes will fall increasingly on a shrinking base and a downward spiral could begin.

In the wake of its long-term stagnant economy and its Giant Tax Hike, how close is Montgomery County to that tipping point?

County Council Hopping Mad Over DLC Price Hike on Special Order Wines

Montgomery County Councimembers Tom Hucker and George Leventhal have objected vehemently to the Department of Liquor Control’s 10% price hike on special order wines.  Both have been staunch defenders of the County’s liquor monopoly and amazed that the DLC is taking exactly the opposite approach advocated by the County earlier this year.

Here is George Leventhal’s email to DLC Acting Director Fariba Kassiri:

Dear Fariba,

Last year, the County Council unanimously recommended that special order beer and wine sales should be handled by the private sector. County Executive Leggett initially agreed to this recommendation, but then changed his mind and our state legislative delegation deferred to his wishes, so no change occurred to beer and wine sales in Montgomery County. Now, according to your message below, the county has decided that because special order beer and wine sales cost DLC substantially more to process, DLC will impose a substantial price hike on licensees for these products. This decision was made without informing the County Council ahead of time and without the benefit of any advice from a Task Force on Liquor Sales, which Mr. Leggett promised to appoint but has yet to appoint.
Once again, DLC is acting in a manner that is adverse to the interests of the county’s restaurants and retail sector. I am disappointed in this decision and even more disappointed by the failure of the executive branch to take this issue seriously. The County Council’s Ad Hoc Committee on Liquor Control delved into the issue and came up with a compromise last year that would have preserved significant revenue to the county while freeing restaurants and retailers from the most onerous challenges of working with the county-controlled system. I am done apologizing for the failure of the executive branch to handle liquor sales responsively and efficiently. The responsibility for this failure rests squarely with Mr. Leggett.
With great concern,
George Leventhal
Montgomery County Councilmember

Councilmember Tom Hucker issued a press release and also posted this on his Facebook page:

huckerliquor