Tag Archives: DLC

No Free Drinks for Me: The DLC Bites Back

Yesterday, the Director of the Montgomery County Department of Liquor Control wrote me regarding about my recent post on the DLC. It’s unusual for a civil servant to dive into public political debates involving his department, especially during an election, so I thought I would print his email and my response.

David,

As I finished reading your blog ON “THOSE GOOD UNION JOBS” AT THE DEPARTMENT OF LIQUOR CONTROL, I was inclined to finally respond to your ongoing one-sided, dated, often inaccurate portrayal of the DLC, and particularly your lack of knowledge of the Federal and State alcohol regulations.

Simply put, you need to get out more.

Even our most vocal critics have acknowledged the significant improvements that we’ve made. You should come and see for yourself.

We can disagree with this or that policy but the demeaning and disparaging comments that you made about our several hundred hard working and dedicated DLC employees really crossed the line. I am proud of the work they do. You should be ashamed of yourself.

Regards,
Bob

Here is my reply:

Bob,

I did not disparage the work. I also did not attack the job done by the employees as a group. However, I think it is well within my rights to describe the service experience as variable despite the stores having seemingly more staff than equivalent private competitors inside and and outside the County. It’s also utterly reasonable to think that the DLC should exist to serve county residents, not that we exist to provide employment at the DLC. I just saw your latest sales figures and I see little sign of any change in the sales pattern that would indicate residents perceive a change. Certainly, I have heard little in the community or from restaurant operators.

More broadly, I’m entitled to my opinion, and one voice countering the weight of the DLC and county government agitprop hardly seems close to balance. In any case, I get vocal pushback on many posts, but heard less criticism than I thought I’d get on that one.

I call them as I see them and I see no shame in that.

If you have good news to share instead of shaking your finger at me, please let me know. I’m always glad to learn more.

David

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On “Those Good Union Jobs” at the Department of Liquor Control

MCGEO has done quite a number on county residents. When discussing the hot issue of privatization of Montgomery County’s liquor monopoly, politicians automatically express concern about the potential loss of those “good union jobs.”

People would be a lot less sympathetic to the idea of protecting liquor store or distributor employees. Why on earth should we maintain an antiquated, inefficient monopoly to protect their jobs but not spend money to protect the grocery store cashier or bank teller threatened by automation?

What makes all the angst about losing “good union jobs” even more galling is that private liquor distributors are unionized by the Teamsters – a little fact that never seems to get mentioned in all the handwringing.

Privatization doesn’t threaten union jobs. It threatens union jobs that pay dues to MCGEO. So MCGEO President Gino Renne, who was paid $196,700 by his local union and an additional $20,000 by his international union last year, is naturally quite concerned. As Gino likes to say, “Just keeping it real.”

Sadly, no one seems concerned about all these Teamsters Union jobs lost due to the monopoly depriving them of a livelihood. Not to mention the restaurant jobs lost because of extra costs that make it harder to turn a profit and frustration with the Department of Liquor Control that stops businesses from opening or expanding in Montgomery.

The other unasked question is why does the DLC perform so poorly if these jobs are so great? Service at DLC stores is variable at best and most employees are unfamiliar with their product. Beyond the stories about the DLC failing to deliver product at key moments, such as right before New Year’s, I’ve also heard about the DLC dumping shipments in the middle of the bar during happy hour.

It’s almost as if Ernestine left the phone company once Ma Bell was broken up and sought refuge at the DLC. “We’re the DLC, we don’t have to care.”

It’s not as if the DLC is understaffed. Somehow, Montgomery County-based Total Wine manages to keep in stock and much better organized a far greater range of product. They do it with fewer employees who yet also seem to know about the product that they’re selling and are more likely in my experience to provide good customer service. Other stores do the same.

Similarly, I’d like to know the share of DLC workers who live in Montgomery County. While some might argue that this is irrelevant, why must Montgomery County citizens keep in place a costly system to subsidize workers who don’t even live here? Even this question has totally lost the plot as government should not be a make-work program but should provide services to residents.

Councilmembers defend the DLC because it brings in money to the county. It would be a miracle if a monopoly on booze in the DC area did not. The sad truth is that it brings in far less than it might. The amount of beer and spirits sold per capita in Montgomery is lower than almost all other jurisdictions in Maryland as well as the Virginia suburbs. Does anyone seriously believe that we drink phenomenally less than people in Fairfax? Greater efficiency would also increase profit. Couldn’t we just tax alcohol and try to grow the economic pie instead of clinging desperately on to a stagnant unloved system?

None of this means that we shouldn’t pay county employees decent wages or we should just chuck the DLC workers out of a job. But nor should taxpayers be obligated to maintain a system that doesn’t work and myopically hurts the economy in perpetuity.

It’s time to call the question and end this outdated monopoly.

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Clash on the Issues, Part III: Blame It on the Alcohol

This is the third in a series about the issue positions of candidates in District 1 based on the debate hosted by Friends of White Flint. Today’s topic: what do the candidates think about the Montgomery County Department of Liquor Control’s alcohol monopoly?

Time to Get Off the Sauce: Candidates for Privatization

Bringing levity to the debate on several occasions, Pete Fosselman started by bluntly stating “I like my liquor” to laughter from the crowd. He proposes letting the county retain control of hard liquor but privatizing the sale of beer and wine, arguing that the change would boost in Montgomery restaurants. As an industry that makes most of their money on alcohol sales, they watch this aspect of the business carefully.

Andrew Friedson spoke passionately in favor of privatization. Fighting back against those concerned about the loss of revenue generated by the monopoly, Friedson stated “I believe government should be judged on how well it serves people, not how well it makes money.” Moreover, he argued that the monopoly costs Montgomery revenue, as it is hard to explain why alcohol sales are 41% lower here than elsewhere in the region unless you think Montgomery has “a secret temperance movement.”

Meredith Wellington agreed with Friedson, saying thoughtfully that the monopoly is a symptom of the county’s problematic approach. Arguing that government can’t do everything, Wellington said that we want entrepreneurial people in the county and need to work with them to help us market the county to businesses.

Though concerned about losing the union jobs, Reggie Oldak also thinks the county should not be in the liquor business, pointing out that $30 million is not much in a $5.5 billion budget. She shouldn’t worry so much. Private liquor distributors are also unionized. Why should the county should favor jobs with one union over another?

They Tried to Make Me Go to Rehab, I Said No, No, No: Candidates against Privatization

Bill Cook believes that privatizing the liquor industry would be a huge loss for the county because we’d lose $30 million and those “great paying union jobs.” Taking perhaps an unusual tack, he then proceeded to attack of his own potential constituents, Total Wine Co-Owner David Trone, who lives and has located the headquarters of his business in District 1.

Stating that there is “nothing wrong” with the county selling liquor and endorsed by UFCW 1994 MCGEO, Ana Sol Gutiérrez favors modernization, not privatization. She says that “significant steps have been taken” in terms of improvements. I wonder if she also thinks Metro escalators rarely break down. Gutiérrez likes that we can take on new debt by bonding the revenue stream. In other words, the county is fiscally hooked on alcohol.

Jim McGee opposes privatization but favors modernization. Unfortunately, that has been promised for years but is much like waiting for Godot. They say that it’s coming. But when is it coming? At the same time, McGee thinks it is too hard for microbreweries to distribute their product.

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Luedtke Proposes Alcohol Sales Reform

There are two major components to frustration with Montgomery County’s alcohol laws: (1) the distribution monopoly by the Department of Liquor Control (DLC), and (2) the limitations on where consumers can buy alcohol. Del. Eric Luedtke’s (D-14) bills would address the latter (see press release below).

In a nutshell, one bill would allow supermarkets to get around the current limits that make it impossible for them to sell all types of alcohol at multiple locations by allowing them to open stores within their stores operated by the DLC.

I suspect supermarkets will be chary of giving up sales space when they cannot control the sales experience and have to negotiate over which products are sold. My bet is that they would much prefer to be able to sell just beer and wine within their own stores. Hopefully, the bill can be amended towards that end.

However, MCGEO, the DLC union, will likely resist any effort to move away from the absolute DLC control model. Though supermarket employees are unionized, it is a different union, and MCGEO won’t want to lose the opportunity to expand its muscle–and ability to protect the hated distribution monopoly.

The second bill loosens certain restrictions on DLC stores and Sunday alcohol sales. My bet is that non-DLC stores that sell beer and wine will fight allowing DLC stores to sell soft drinks and cold beer and wine. They’ll be outraged that they still have to deal with DLC’s distribution monopoly yet see the DLC encroaching on a valuable share of their business.

Bottom Line: If some major kinks can be worked out, especially the need for a DLC-operated store within a store, consumers will regard this as a major step forward. But the bills do nothing to address the hated distribution monopoly that jacks up prices and drives restaurant business out of the county.

Here is Del. Luedtke’s press release:

Delegate Eric Luedtke Seeks to Make Montgomery Alcohol Laws More Consumer Friendly

Bills include provisions that will eliminate outdated blue laws, expand choices for retail alcohol consumers

Montgomery County, MD, October 30, 2017Delegate Eric Luedtke (D-Burtonsville) announced plans today to introduce two bills aimed at making Montgomery County alcohol laws more consumer friendly. One of the bills, MC 16-18, will allow for separate beer, wine, and liquor dispensaries to be located inside grocery stores. This store-within-a-store model has been used successfully in other states. Under this model, large grocery stores will be eligible to have a separate store located within them selling alcohol, similar to coffee shops or bank branches located in many grocery stores now.

The second bill, MC 4-18, titled “The Montgomery County Alcohol Modernization Act of 2018,” will overhaul a number of outdated laws that limit consumer options and place unnecessary limits on businesses. Among its many provisions, this bill will allow county liquor stores to sell cold beer and wine, soft drinks, and growlers. The bill also eliminates some of the last remaining blue laws in Montgomery County, such as laws that prevent some alcohol licensees from serving alcohol as early on Sundays as they do on other days of the week.

Delegate Luedtke stated about this effort, “Our debates about alcohol laws in Montgomery County have too often ignored consumers. The most common complaint I hear from residents about our alcohol laws is a lack of beer and wine in grocery stores. It’s time we focused more on consumer needs and fixed some of these outdated laws.”

Both pieces of legislation will be filed as local bills, and there will be public hearings held on them before the Montgomery County Delegation in December.

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Delegate Eric Luedtke represents District 14 in Montgomery County, which includes Brookeville, Burtonsville, Damascus, Olney and parts of Silver Spring. Delegate Luedtke is chair of the Education Subcommittee on the House Ways and Means Committee.

 

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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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