{"id":5907,"date":"2015-12-03T07:00:02","date_gmt":"2015-12-03T12:00:02","guid":{"rendered":"https:\/\/www.theseventhstate.com\/?p=5907"},"modified":"2015-12-03T00:43:02","modified_gmt":"2015-12-03T05:43:02","slug":"why-the-councils-liquor-reform-wont-work","status":"publish","type":"post","link":"https:\/\/www.theseventhstate.com\/?p=5907","title":{"rendered":"Why the Council\u2019s Liquor Reform Won\u2019t Work"},"content":{"rendered":"

Today, I am pleased to present a guest post from Adam Pagnucco:<\/em><\/p>\n

Rising to the defense of the county\u2019s liquor monopoly, the County Council has put forward a proposal for reform.\u00a0 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.\u00a0 Are they right?<\/p>\n

Let\u2019s examine their recommendation in detail.<\/p>\n

The council\u2019s proposal focuses on \u201cspecial orders,\u201d which are requests by customers for products not in DLC\u2019s regular stock.\u00a0 The DLC\u2019s performance in delivering these products is a huge source of complaints for restaurants and retailers,<\/a> 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. \u00a0The following story is a typical description of DLC\u2019s operations in this area.<\/p>\n

Mike Hill, general manager of Adega Wine Cellars & Caf\u00e9 in Silver Spring, said they have problems getting specialty wines and craft beer.<\/em><\/p>\n

\u201cIf we like a beer or wine and we want to bring that into our store, the turnaround time can be eight days if we\u2019re lucky or two to three months to not at all in some cases,\u201d Hill said.<\/em><\/p>\n

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.
\n<\/em><\/p>\n

\u201cAbout 75 percent of my wall is bare because of items we\u2019re unable to get,\u201d Hill said.<\/em><\/p>\n

The council is right to be concerned about this.\u00a0 Their proposal would allow retailers and restaurants to purchase specialty wines and beer directly from private distributors.\u00a0 That sounds great on the surface, but the devil is in the details.\u00a0 Let\u2019s have a look at the major features of what the council has in mind.<\/p>\n

    \n
  1. DLC remains in control.<\/li>\n<\/ol>\n

    DLC has sole authority to determine what beverages are regular stock or special order, and the council\u2019s proposed legislation<\/a> does nothing to change that.\u00a0 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.\u00a0 Because DLC continues to preside over, control and impose charges on any purchases under the council\u2019s proposal, that guarantees that its many<\/a> inefficiencies<\/a> will continue to plague the entire system.<\/p>\n

      \n
    1. The economics don\u2019t work.<\/li>\n<\/ol>\n

      The council would have private distributors make small deliveries of specialty products while retaining most of the volume for direct delivery by DLC.\u00a0 That\u2019s a problem.\u00a0 Distribution is a capital-intensive industry.\u00a0 Assets like warehouses and trucks are expensive to maintain.\u00a0 To make money, distributors need to move lots of volume through their warehouses and send out lots of full trucks.\u00a0 If they can\u2019t do that, many won\u2019t be able to profit under the council\u2019s proposal and they could simply stay out.\u00a0 Since distributors strike exclusive arrangements with manufacturers, this factor alone could exclude many beverages from the council\u2019s proposed new system, thereby limiting its scope and defeating its purpose.<\/p>\n

      The two largest distributors in Maryland, Reliable Churchill<\/a> and Republic National<\/a>, made this argument in a July 2015 letter to the county council.\u00a0 They wrote:<\/p>\n

      We suggest that some wholesalers, including us, will not be able to deliver special orders for economic reasons.\u00a0 At present, private wholesalers deliver only to the Department of Liquor Control (the \u201cDepartment\u201d) warehouse so they have no regular delivery routes in the County.\u00a0 To fulfill a special order, the private wholesaler would have to make a special trip to the licensee.\u00a0 By their nature, special orders are for small quantities.\u00a0 The profit on such a small transaction would not cover our delivery costs incurred by sending a truck for a special delivery.\u00a0 In other words, there is no financial incentive to make the special delivery and, in fact, a disincentive.<\/em><\/p>\n

      We do not want the [council\u2019s] resolution to raise expectations unnecessarily, so we are writing again.\u00a0 As you know, private wholesalers are not required to fill all orders.\u00a0 Also a winery and distillery can use only one private distributor in Maryland.\u00a0 A distributor can refuse to fill an order if it is not economically feasible.\u00a0 Common sense dictates that a private wholesaler would not fill orders costing them money because they are not in business to lose money.\u00a0 It is almost certain that Republic National and Reliable cannot afford to make a special delivery to a licensee.<\/em><\/p>\n

      \"Wholesalers<\/a> \"Wholesalers<\/a><\/p>\n

        \n
      1. The do-nothing fee.<\/li>\n<\/ol>\n

        The most controversial aspect of the council\u2019s 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.\u00a0 According to the council\u2019s legislation<\/a>, the fee would be \u201cset at a level sufficient to replace the Department of Liquor Control for Montgomery County\u2019s estimated revenue lost by allowing private licensed Maryland wholesalers to sell and distribute beer and light wine products\u2026\u201d\u00a0 So DLC would be made whole.\u00a0 It would be the sole determiner of exactly how high of a fee would be required to make it whole.\u00a0 And since DLC is hugely inefficient in the special order segment \u2013 something even the council admits \u2013 the fee would reflect DLC\u2019s bloated service costs rather than any cost savings obtained by going private.\u00a0 And who would ultimately wind up paying this fee?\u00a0 That\u2019s right, the consumer.<\/p>\n

        Here\u2019s what the state\u2019s two largest distributors wrote about the do-nothing fee (which they characterize as a tax) in the letter shown above.<\/p>\n

        We also suggest that the local tax you intend to impose on special orders is counter-productive.\u00a0 It makes a bad economic situation worse.\u00a0 First, increasing the cost of products will encourage people to shop outside the County, thereby creating a hit for County business.\u00a0 The County should lower prices to keep business in the county.\u00a0 Already, tens of millions of dollars are spent outside the county on alcoholic beverages due to the comparatively higher costs.\u00a0 Second, the tax makes delivery of a special order even more costly, discouraging wholesalers from delivering special orders.\u00a0 Wholesalers cannot charge more in Montgomery County to recoup a local charge.\u00a0 Third, state law precludes local taxation of alcoholic beverages, thereby suggesting that the local charge is illegal and cannot be implemented.\u00a0 Fourth, we expect significant opposition to this proposal of a local charge based on its statewide implications.\u00a0 Last, in some ways, the County should pay wholesalers to deliver special orders because they are solving a County problem at their expense.\u00a0 We know that will never happen.<\/em><\/p>\n

        What if the do-nothing fee is removed?\u00a0 Well, there\u2019s a catch: the county issues bonds backed by liquor profits.\u00a0 The council and the County Executive use this as a basis for opposing full private competition but it\u2019s also relevant to the council\u2019s proposal.\u00a0 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.\u00a0 In the memo below, the Executive writes to the Council President:<\/p>\n

        I have been advised by the County\u2019s 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.\u00a0 According to Bond Counsel, at the time the bonds were sold bondholders had the security of a near monopoly created by State law.\u00a0 If this legislation is approved that near monopoly will no longer exist under State law; so the security of the bonds will have changed.\u00a0 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].<\/em><\/p>\n

        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.\u00a0 Therefore we have inserted provisions making the surcharge mandatory and \u201cset at a level sufficient to replace\u2026 the estimated revenue lost.\u201d\u00a0 This provision should remain even after the bonds have been paid to protect County services supported by the DLC earnings transfer.<\/em><\/p>\n

        \"Leggett<\/a> \"Leggett<\/a><\/p>\n

        And so if the council\u2019s recommendation is adopted with a do-nothing fee, it will \u2013 surprise! \u2013 do nothing because distributors won\u2019t participate.\u00a0 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.<\/p>\n

          \n
        1. A Get Out of Jail Free Card for DLC.<\/li>\n<\/ol>\n

          Remember the board game Monopoly?\u00a0 One of its most famous playing cards allows a player to Get Out of Jail Free.\u00a0 That\u2019s exactly what the council\u2019s proposal does for DLC.<\/p>\n

          \"Get<\/a><\/p>\n

          The proposals by Comptroller Peter Franchot and Delegate Bill Frick would expose DLC to full private sector competition \u2013 the only force that will compel DLC to improve.\u00a0 But the council\u2019s system would keep DLC in the driver\u2019s seat.\u00a0 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 \u201ccompensated.\u201d\u00a0 It will remain free to run its warehouse with sticky notes and to suffer shortages of as many as 154 cases a day<\/a>.\u00a0 Its broken ordering system<\/a> will now include extra accounting and paperwork to administer the do-nothing fee.\u00a0 And if anyone speaks up in the future in favor of real change, the DLC\u2019s bureaucracy will say, \u201cWait a minute.\u00a0 A new procedure has just been put in place.\u00a0 We need time to implement it.\u00a0 And once we do, we promise things will improve.\u201d\u00a0 And a year will pass.\u00a0 And five years.\u00a0 And then a decade.\u00a0 And businesses will continue to struggle while consumers simply flee to the District of Columbia, which they do now<\/a>.<\/p>\n

          The council\u2019s proposal is designed to force citizens \u2013 consumers and businesses alike \u2013 to subjugate their interests to the liquor monopoly.\u00a0 Good government demands the opposite: the county should serve the interests of the citizens.\u00a0 And there\u2019s only one way to do that.<\/p>\n

          End the Monopoly.<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

          Today, I am pleased to present a guest post from Adam Pagnucco: Rising to the defense of the county\u2019s liquor monopoly, the County Council has put forward a proposal for reform.\u00a0 They claim it will cure most of the problems at the Department of Liquor Control (DLC) while causing none of the budgetary consequences of … Continue reading Why the Council\u2019s Liquor Reform Won\u2019t Work<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[119],"tags":[1545,1439,1720,1742,1740,1741],"class_list":["post-5907","post","type-post","status-publish","format-standard","hentry","category-alcohol","tag-adam-pagnucco","tag-department-of-liquor-control","tag-dlc","tag-end-the-monopoly","tag-reliable-churchill","tag-republic-national"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4mKJE-1xh","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/5907","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5907"}],"version-history":[{"count":3,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/5907\/revisions"}],"predecessor-version":[{"id":5915,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/5907\/revisions\/5915"}],"wp:attachment":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5907"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5907"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5907"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}