Tag 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.

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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.

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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

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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.

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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?

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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?

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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?

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Why the Council’s Liquor Reform Won’t Work

Today, I am pleased to present a guest post from Adam Pagnucco:

Rising to the defense of the county’s liquor monopoly, the County Council has put forward a proposal for reform.  They claim it will cure most of the problems at the Department of Liquor Control (DLC) while causing none of the budgetary consequences of allowing full private sector competition with the department.  Are they right?

Let’s examine their recommendation in detail.

The council’s proposal focuses on “special orders,” which are requests by customers for products not in DLC’s regular stock.  The DLC’s performance in delivering these products is a huge source of complaints for restaurants and retailers, who claim that DLC regularly shorts orders, misses orders, delivers the wrong products and charges mark-ups that are significantly higher than in the District of Columbia.  The following story is a typical description of DLC’s operations in this area.

Mike Hill, general manager of Adega Wine Cellars & Café in Silver Spring, said they have problems getting specialty wines and craft beer.

“If we like a beer or wine and we want to bring that into our store, the turnaround time can be eight days if we’re lucky or two to three months to not at all in some cases,” Hill said.

He said delivery times vary from 11 a.m. to 7:30 p.m. He explained that sometimes he receives orders that should have gone to other restaurants or stores. Other times his business receives sealed boxes that are labeled as one type of wine, but turn out to be another type when they open it.

“About 75 percent of my wall is bare because of items we’re unable to get,” Hill said.

The council is right to be concerned about this.  Their proposal would allow retailers and restaurants to purchase specialty wines and beer directly from private distributors.  That sounds great on the surface, but the devil is in the details.  Let’s have a look at the major features of what the council has in mind.

  1. DLC remains in control.

DLC has sole authority to determine what beverages are regular stock or special order, and the council’s proposed legislation does nothing to change that.  DLC would also have sole authority to levy and administer a fee on any transactions between private customers and private distributors, an issue explored further below.  Because DLC continues to preside over, control and impose charges on any purchases under the council’s proposal, that guarantees that its many inefficiencies will continue to plague the entire system.

  1. The economics don’t work.

The council would have private distributors make small deliveries of specialty products while retaining most of the volume for direct delivery by DLC.  That’s a problem.  Distribution is a capital-intensive industry.  Assets like warehouses and trucks are expensive to maintain.  To make money, distributors need to move lots of volume through their warehouses and send out lots of full trucks.  If they can’t do that, many won’t be able to profit under the council’s proposal and they could simply stay out.  Since distributors strike exclusive arrangements with manufacturers, this factor alone could exclude many beverages from the council’s proposed new system, thereby limiting its scope and defeating its purpose.

The two largest distributors in Maryland, Reliable Churchill and Republic National, made this argument in a July 2015 letter to the county council.  They wrote:

We suggest that some wholesalers, including us, will not be able to deliver special orders for economic reasons.  At present, private wholesalers deliver only to the Department of Liquor Control (the “Department”) warehouse so they have no regular delivery routes in the County.  To fulfill a special order, the private wholesaler would have to make a special trip to the licensee.  By their nature, special orders are for small quantities.  The profit on such a small transaction would not cover our delivery costs incurred by sending a truck for a special delivery.  In other words, there is no financial incentive to make the special delivery and, in fact, a disincentive.

We do not want the [council’s] resolution to raise expectations unnecessarily, so we are writing again.  As you know, private wholesalers are not required to fill all orders.  Also a winery and distillery can use only one private distributor in Maryland.  A distributor can refuse to fill an order if it is not economically feasible.  Common sense dictates that a private wholesaler would not fill orders costing them money because they are not in business to lose money.  It is almost certain that Republic National and Reliable cannot afford to make a special delivery to a licensee.

Wholesalers Letter to Council 1 Wholesalers Letter to Council 2

  1. The do-nothing fee.

The most controversial aspect of the council’s proposal is that DLC would be able to charge a fee on any special order transactions between private customers and private distributors even though it does nothing to facilitate them.  According to the council’s legislation, the fee would be “set at a level sufficient to replace the Department of Liquor Control for Montgomery County’s estimated revenue lost by allowing private licensed Maryland wholesalers to sell and distribute beer and light wine products…”  So DLC would be made whole.  It would be the sole determiner of exactly how high of a fee would be required to make it whole.  And since DLC is hugely inefficient in the special order segment – something even the council admits – the fee would reflect DLC’s bloated service costs rather than any cost savings obtained by going private.  And who would ultimately wind up paying this fee?  That’s right, the consumer.

Here’s what the state’s two largest distributors wrote about the do-nothing fee (which they characterize as a tax) in the letter shown above.

We also suggest that the local tax you intend to impose on special orders is counter-productive.  It makes a bad economic situation worse.  First, increasing the cost of products will encourage people to shop outside the County, thereby creating a hit for County business.  The County should lower prices to keep business in the county.  Already, tens of millions of dollars are spent outside the county on alcoholic beverages due to the comparatively higher costs.  Second, the tax makes delivery of a special order even more costly, discouraging wholesalers from delivering special orders.  Wholesalers cannot charge more in Montgomery County to recoup a local charge.  Third, state law precludes local taxation of alcoholic beverages, thereby suggesting that the local charge is illegal and cannot be implemented.  Fourth, we expect significant opposition to this proposal of a local charge based on its statewide implications.  Last, in some ways, the County should pay wholesalers to deliver special orders because they are solving a County problem at their expense.  We know that will never happen.

What if the do-nothing fee is removed?  Well, there’s a catch: the county issues bonds backed by liquor profits.  The council and the County Executive use this as a basis for opposing full private competition but it’s also relevant to the council’s proposal.  The County Executive believes that the do-nothing fee is required to protect those bonds in the case that any liquor distribution is done privately.  In the memo below, the Executive writes to the Council President:

I have been advised by the County’s Bond Counsel that edits were required to earlier drafts of the [liquor control] legislation to avoid a downgrade to the over $100 million in outstanding Department of Liquor Control (DLC) Revenue bonds as well as prevent litigation from existing bondholders due to a material deterioration in the security of the bonds.  According to Bond Counsel, at the time the bonds were sold bondholders had the security of a near monopoly created by State law.  If this legislation is approved that near monopoly will no longer exist under State law; so the security of the bonds will have changed.  Prior drafts of the legislation did not limit the reduction in DLC revenues pledged for the payment of the bonds and did not mandate the imposition of the surcharge [on private transactions].

The best option for reducing the possibility of a downgrade or a bondholder action is to require that the surcharge collected from the wholesalers is equal to lost revenues.  Therefore we have inserted provisions making the surcharge mandatory and “set at a level sufficient to replace… the estimated revenue lost.”  This provision should remain even after the bonds have been paid to protect County services supported by the DLC earnings transfer.

Leggett DLC 1 Leggett DLC 2

And so if the council’s recommendation is adopted with a do-nothing fee, it will – surprise! – do nothing because distributors won’t participate.  And if it is adopted without one, it would cause many of the same budgetary issues as an End the Monopoly approach with few of the offsetting benefits.

  1. A Get Out of Jail Free Card for DLC.

Remember the board game Monopoly?  One of its most famous playing cards allows a player to Get Out of Jail Free.  That’s exactly what the council’s proposal does for DLC.

Get out of jail free-1

The proposals by Comptroller Peter Franchot and Delegate Bill Frick would expose DLC to full private sector competition – the only force that will compel DLC to improve.  But the council’s system would keep DLC in the driver’s seat.  DLC would decide which beverages to sell, which ones to delegate to the private sector and exactly how much money it will charge to be “compensated.”  It will remain free to run its warehouse with sticky notes and to suffer shortages of as many as 154 cases a day.  Its broken ordering system will now include extra accounting and paperwork to administer the do-nothing fee.  And if anyone speaks up in the future in favor of real change, the DLC’s bureaucracy will say, “Wait a minute.  A new procedure has just been put in place.  We need time to implement it.  And once we do, we promise things will improve.”  And a year will pass.  And five years.  And then a decade.  And businesses will continue to struggle while consumers simply flee to the District of Columbia, which they do now.

The council’s proposal is designed to force citizens – consumers and businesses alike – to subjugate their interests to the liquor monopoly.  Good government demands the opposite: the county should serve the interests of the citizens.  And there’s only one way to do that.

End the Monopoly.

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MoCo Doesn’t Need Its Liquor Money

Today, I am pleased to present a guest post by Adam Pagnucco:

Even though MoCo consumers are fleeing the county’s archaic liquor monopoly, county officials are going all out to save it. Their arguments boil down to essentially one point: we need the money, and terrible things will happen unless we get it. The County Executive’s spokesman has said that a reduction in liquor monopoly money “means a reduction of county services or an increase in taxes.” And Council Member Hans Riemer has said that a loss of liquor money would mean “jeopardizing our ability to hire teachers or police officers.”

Are they right? Let’s look at the data.

First, let’s consider the nature of the county’s budget. It is not a static, zero-sum thing. Rather, it is a dynamic and growing thing that increases almost every year. The county deliberately sets property tax rates to increase collections at the rate of inflation (its charter limit) regularly. Income and energy tax collections rise with private-sector growth. State aid, mostly going towards public schools, has been rising. All of these factors have contributed to a steadily growing county budget.

The chart below shows a comparison of total county revenues, net income from the county’s Department of Liquor Control (DLC), and the rate of inflation in the Washington-Baltimore metro area from Fiscal Year 2004 through Fiscal Year 2016.

MoCo Revenue vs Inflation

A few things stand out. First, total revenues grew in ten of these twelve years, with small declines occurring in 2010 and 2015. (Data for the latter year is still an estimate). Second, total revenue has been growing at an average rate (4.2% a year) that is almost double the rate of local price inflation (2.4%). Third, net income from the liquor monopoly is a tiny fraction of the county’s budget and has been largely stagnant. In 2004, liquor money was 0.74% of the county’s budget; in 2016, it is projected to be 0.47%. Part of this is because the county has begun issuing bonds against liquor profits and thus must pay debt service. But another part is that the monopoly is poorly managed. Over this period, the county saw an average annual revenue gain of $25 million from liquor and $140 million from other sources.

That means county revenues would still go up even without liquor monopoly money. There would be no need for cuts.

Comptroller Peter Franchot has proposed allowing the private sector to compete with the county’s Department of Liquor Control (DLC). What would happen to county revenues if that were to occur? That depends on how retailers, restaurants and consumers react. Let’s consider what would happen if DLC were well-managed, price competitive and truly focused on customers. Under this scenario, it might lose just 25% of its net income. Here’s how county revenues would have performed since 2004 if that were the case.

DLC loses 25 percent

In the real world, the county’s total revenues grew by an average 4.2% a year. If DLC had lost 25% of its net income, the county’s total revenues would have grown by an average 4.1%. There would be almost no difference to the county’s bottom line.

Now let’s suppose that DLC loses 50% of its net income. Here’s how that scenario would have played out.

DLC loses 50 percent

The county’s average annual total revenue growth changes from 4.2% to 3.9%. Again, not much difference.

Finally, let’s look at what would have happened had DLC net income disappeared entirely.

DLC loses 100 percent

The county’s annual total revenue growth changes from 4.2% to 3.7%. The latter number is still 55% greater than the average rate of price inflation in the Washington-Baltimore area (2.4%). Furthermore, let’s keep in mind that this scenario would only occur if DLC were so awful that all of its customers fled. If that’s the case, why should DLC be protected by a monopoly at all? And the data above completely omits any extra revenue the county would earn from a revitalized private sector free of the monopoly that it calls “an Evil Empire.” Extra money from property taxes and income taxes could close some of this gap.

This discussion is not exclusively hypothetical. In July, the County Council passed a mid-year savings plan that trimmed $54 million from the budget it had passed only two months before. That amount is more than twice as much as the county earns from its liquor monopoly. Public education and public safety were not jeopardized. That’s because the overall budget provided for a $209 million increase from the prior year’s estimated revenue. County government continues to grow and no apocalypse has occurred.

Finally, consider this. There are more than three thousand counties in the United States. Very few of them have MoCo’s resources. All of them except us have figured out how to pay for their priorities and balance their budgets without needing a liquor monopoly. Are MoCo’s elected officials the only county leaders in the entire United States who can’t figure out how to live without one? I think not; I have seen them deal with much more serious budget problems effectively.

The county government doesn’t need its liquor money. So let’s End the Monopoly.

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MoCo Consumers Flee from the Department of Liquor Control

Today, I am pleased to present a guest post from Adam Pagnucco:

Last week, Montgomery County Council Member Hans Riemer wrote a guest blog on the reasons why county residents opposed the county’s alcohol system in a recent poll by Comptroller Peter Franchot. Council Member Riemer wrote:

While the poll does show the general dissatisfaction with the alcohol regime our residents endure, it unfortunately does not specify which parts of the regime are the culprit, state or local. In my many conversations with residents, I find that the primary complaint relates to the state of Maryland’s unfortunate ban on the sale of beer and wine in grocery stores.

This is important because if the council’s plan is enacted, the county liquor stores survive and actually increase in number in order to increase consumer options and pay for reform. We need them. Considering that, I would ask how important is it to residents to replace county liquor stores with private ones? While I am sure that there is some support for that, it is not clear to me that it is a very high priority for the community. I don’t hear a lot of complaints that we have county stores. Mostly just that there aren’t enough of them. What about you?

In fact, there is overwhelming evidence that MoCo consumers are fleeing the county’s alcohol monopoly and it has nothing to do with the availability of alcohol in grocery stores. Consider the following.

  1. Sales of alcohol are low in MoCo.

Data from Gallup and the U.S. Department of Health and Human Services link alcohol consumption to income and education. In other words, as income and education levels rise, alcohol consumption tends to rise too. Since MoCo is one of Maryland’s highest-income and best-educated jurisdictions, the county should be one of its leaders in alcohol consumption. However, that is not reflected in per capita sales data collected by the Comptroller’s office. In terms of per capita sales deliveries to retail licensees inside each county, MoCo ranks 13th of 24 jurisdictions in wine, tied for 23rd in spirits and dead last (by far) in beer. Among the counties out-ranking MoCo in per capita wine sales are Calvert, Carroll, Cecil, Garrett, Harford and Kent, all mostly rural jurisdictions with far less disposable income than MoCo. Does anyone believe that MoCo residents drink less wine than people in Western Maryland? Grocery stores cannot explain this discrepancy because the huge majority of counties in Maryland have restrictions on grocery store sales of alcohol. As Comptroller Peter Franchot has said, MoCo residents simply cross the border to buy liquor.

  1. MoCo residents flee the county to go to Total Wine.

Total Wine, which is headquartered in MoCo and owned by MoCo residents, is one of the nation’s largest alcohol retailers and is famous for its big stores, huge selection and low prices. The company refuses to open a store in MoCo because the county’s alcohol monopoly “doesn’t favor the free market.” But Total Wine has plenty of MoCo residents among its customers. The company estimates that over 20% of its McLean store sales and nearly 25% of its Laurel store sales are accounted for by MoCo customers. David Lublin’s price comparison explains why: Total Wine blows away county liquor stores on both price and selection. Other jurisdictions gain at our expense.

  1. The Department of Liquor Control’s own consultant found major problems in its operations.

A consultant hired by the Department of Liquor Control (DLC) found a host of problems in county liquor stores. Here are three from the consultant’s 2014 report.

Lack of administrative flexibility – Unlike most County functions, DLC operates in a wholesale/retail sales environment. In many instances, it lacks the flexibility and ability to respond quickly, which is necessary for it to best serve its customers and do so profitably. This lack of control over key decisions also manifests itself in other identified weaknesses.

Staffing – The DLC often lacks the ability to apply normal staffing techniques found in private retail. For example, there are generally two peak seasons for liquor retail operations: the Winter Holiday season and Summer Fourth of July season. Most DLC stores would, for comparison purposes, be similar to an independent liquor retail store (as opposed to a ‘Big Box’ chain store or grocery store). In these establishments, it would be likely that rather than adding permanent full-time staff to handle these peak seasons, the business would hire temporary staff. However, because of County collective bargaining agreements, they generally do not have this flexibility, which either leads to staffing shortages (which can negatively impact sales) or a working environment for existing staff that hampers morale and productivity.

Older stores/locations/rental contracts – In several instances, stores are in obvious need of basic repairs or refurbishment – including scarred floors and counters, old racks, lighting and entrances. Given that the DLC leases all of its locations, in many instances it has little leverage to demand improvements prior to the end of the lease.

Lack of flexibility, staff shortages and sub-standard stores. Is this what MoCo consumers deserve?

  1. D.C. liquor stores camp out at our border.

The graphic below shows seven liquor stores in D.C. within four blocks of the MoCo border. If MoCo consumers were happy with the county’s alcohol system, why would this be happening?

DC liquor stores

  1. The only county liquor store with true competition is losing money and will close.

Most county liquor stores are insulated from competition because they are the only suppliers of spirits in their vicinity. The one exception is the store in Friendship Heights, which is adjacent to the D.C. border. Since the surrounding area is affluent and wealthy people often buy up-scale beverages, one would expect this store to be a strong money maker. But the store lost $278,431 in 2013 – the only county liquor store that lost money – and will soon close. It’s not a coincidence that D.C.’s Paul’s Wine and Spirits is just three blocks away. The county’s decision to close this store is an admission that its stores can’t compete with the private sector. And if that’s the case, why should they be protected by a state-ordered monopoly?

MoCo’s alcohol monopoly and its accompanying fleet of county liquor stores are unacceptable to county consumers and that was clear long before this blog released the Comptroller’s poll results on the subject. So what is the county doing about that? Why, it’s opening more county liquor stores. That’s like promising Kirk Cousins more playing time with every interception he throws.

Look folks. Our system’s premise is that MoCo residents are children, inferior to our fellows in the rest of the region, and that we must be controlled by the heavy hand of government for our own good. Well, guess what? We’re not children and we know what we want: the same freedom of choice that everyone else in the region has. We don’t want excuses. We don’t want tweaks. We don’t want vague promises of improvement.

We want to End the Monopoly.

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