{"id":6987,"date":"2016-08-15T07:00:16","date_gmt":"2016-08-15T11:00:16","guid":{"rendered":"https:\/\/www.theseventhstate.com\/?p=6987"},"modified":"2016-08-14T22:42:14","modified_gmt":"2016-08-15T02:42:14","slug":"how-to-end-the-monopoly-and-recover-the-money","status":"publish","type":"post","link":"https:\/\/www.theseventhstate.com\/?p=6987","title":{"rendered":"How to End the Monopoly and Recover the Money"},"content":{"rendered":"

By Adam Pagnucco.<\/em><\/p>\n

In the latest development in the county\u2019s continuing liquor monopoly saga, the County Executive has established a task force to explore options for scaling back or eliminating the monopoly.\u00a0 One condition applies: the monopoly earns money for the county and the Executive does not want to lose it.\u00a0 Last February, he told Bethesda Magazine<\/a>, \u201cI have no problem with privatization per se, but we need to make sure the county\u2019s residents and taxpayers are protected on the financial issue.\u201d<\/p>\n

That\u2019s a reasonable point of view.\u00a0 Here\u2019s a proposal to End the Monopoly without taking a financial hit.<\/p>\n

First, let\u2019s recall that the goal of last winter\u2019s End the Monopoly campaign was never to abolish the Department of Liquor Control (DLC).\u00a0 Rather, we were seeking to allow private sector competition with the DLC at both the wholesale and retail levels.\u00a0 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.\u00a0 That does not mean that DLC would get wiped out.\u00a0 Indeed, it has one competitive advantage that no private wholesaler has: it is a one-stop shop for all alcoholic beverages.\u00a0 Some licensees are willing to tolerate DLC\u2019s problems in return for the convenience of dealing with one bill and one truck<\/a>.\u00a0 DLC\u2019s 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.\u00a0 If they are correct, private competition will not eliminate DLC, but it could reduce its revenues.<\/p>\n

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.\u00a0 Worcester\u2019s DLC Director testified to the MoCo Delegation<\/a> that within a year, the county had lost 42% of its wholesale business to private competition but had kept 96% of its retail business.\u00a0 Now Worcester County\u2019s monopoly was run far more poorly than MoCo\u2019s DLC as it was found guilty of massive violations of state law back in 2010<\/a>, so MoCo\u2019s DLC could fare much better with competition.\u00a0 But for the sake of argument, let\u2019s use its experience as a starting point.<\/p>\n

Any analysis of what would happen to MoCo\u2019s 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.\u00a0 Potential shortfalls in both those areas must be addressed.<\/p>\n

The General Fund<\/strong><\/p>\n

DLC\u2019s operating profits, projected to be $20.7 million in FY17<\/a>, are paid directly into the county\u2019s general fund.\u00a0 That amount accounts for 0.4% of the county\u2019s $5.3 billion operating budget<\/a>.\u00a0 What would happen to those profits if the private sector were allowed to compete with DLC?\u00a0 According to the county\u2019s Office of Legislative Oversight<\/a>, DLC\u2019s FY14 revenues were split pretty evenly between wholesale ($136 million) and retail ($127 million) operations.\u00a0 If Worcester County\u2019s experience occurred in MoCo, 42% of the wholesale revenue and 4% of the retail revenue would be at risk from competition, so DLC\u2019s total revenue would decline by 24%.\u00a0 If DLC\u2019s operating costs scale with its operating revenues, its net income would fall by $5 million.<\/p>\n

How do we make up that money?<\/p>\n

First, the county could open up more county liquor stores.\u00a0 (Indeed, it is already doing so<\/a>.)\u00a0 In FY13, the county earned $795,000 in annual gross profit per liquor store<\/a>.\u00a0 So if that gross profit figure still holds, seven new liquor stores could cover a $5 million gap.<\/p>\n

Second, new tax revenues will be available in a world of competition.\u00a0 The state\u2019s Bureau of Revenue Estimates released a report<\/a> last year finding that if DLC were completely abolished, $22.8 million in tax revenues would be generated, mostly from customer repatriation.\u00a0 (That is actually larger than DLC\u2019s return to the county\u2019s general fund.)\u00a0 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).\u00a0 The solution is to have the state share its incremental revenue increase with the county for a period of time.\u00a0 After all, if the county is giving up a financial asset, it should share in the returns from that.<\/p>\n

A formula could be constructed that ties incremental increases in state revenue from alcohol sales in MoCo to DLC\u2019s reduced income.\u00a0 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.\u00a0 The formula should cap returned receipts to the county at the amount that the state gains so that the state doesn\u2019t lose money.\u00a0 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.<\/p>\n

The math is clear: it\u2019s 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.<\/p>\n

The Bonds<\/strong><\/p>\n

The county has issued three tranches of revenue bonds guaranteed by liquor profits, the last of which matures in FY33.\u00a0 The outstanding balance on the bonds is $114 million as of June 30, 2014<\/a> and DLC is projected to pay $10.9 million in debt service<\/a> on them in the current fiscal year.\u00a0 If the liquor profits available to pay for these bonds were to disappear, another source of revenue must be found to replace them.<\/p>\n

Such a revenue source can be easily found in the county\u2019s budget: county cable franchise fees.\u00a0 Federal law allows local jurisdictions to charge cable companies in return for using public right-of-way.\u00a0 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.\u00a0 Because cable bills rise every year, the county gets more money out of this as time passes.\u00a0 Also, because this money is unencumbered by DLC\u2019s employee and capital expenses, it is not subject to cost changes like DLC\u2019s profits are.\u00a0 Cable franchise fees are actually a more stable revenue source to guarantee bonds than are liquor profits.<\/p>\n

According to the county\u2019s cable budget, the county is projected to collect $17.7 million in cable franchise fees in FY17<\/a>.\u00a0 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.\u00a0 The county has obtained legal advice<\/a> holding that the county can do virtually whatever it wants with the 5% cable franchise fees.<\/p>\n

How\u00a0is the cable money currently spent?\u00a0 Most of it is given out to the PEG (public\/education\/ government) TV channels.\u00a0 The two largest are the county\u2019s in-house news channel, County Cable Montgomery, and the non-profit Montgomery Community Media, which is also financed by private sector contributions.\u00a0 The problem is that no one knows how many people actually watch this programming.\u00a0 The huge majority of their YouTube<\/a> clips<\/a> get a few dozen views each at best.\u00a0 Is this truly worth millions of dollars of public money?<\/p>\n

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.\u00a0 Liquor profits would be the first source of debt service payment, with any shortfall covered by cable fees as a supplement.\u00a0 Even if liquor profits entirely disappear, the $13.9 million in annual cable fees \u2013 an amount that has been growing steadily for years \u2013 could cover the $11 million in annual debt service by themselves.\u00a0 And over the long term, this arrangement would be temporary as the bonds will eventually be paid off.<\/p>\n

There you have it.\u00a0 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.\u00a0 No new taxes or fees are necessary.\u00a0 And the county would see the creation of new jobs, more income, more economic activity and greater competitiveness with its neighbors<\/a> as a result.<\/p>\n

It\u2019s a huge opportunity.\u00a0 Will Montgomery County go for it?<\/p>\n","protected":false},"excerpt":{"rendered":"

By Adam Pagnucco. In the latest development in the county\u2019s continuing liquor monopoly saga, the County Executive has established a task force to explore options for scaling back or eliminating the monopoly.\u00a0 One condition applies: the monopoly earns money for the county and the Executive does not want to lose it.\u00a0 Last February, he told … Continue reading How to End the Monopoly and Recover the Money<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_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":""},"categories":[151,1449],"tags":[1545,1439],"class_list":["post-6987","post","type-post","status-publish","format-standard","hentry","category-adam-pagnucco","category-department-of-liquor-control","tag-adam-pagnucco","tag-department-of-liquor-control"],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4mKJE-1OH","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/6987","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\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6987"}],"version-history":[{"count":9,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/6987\/revisions"}],"predecessor-version":[{"id":6996,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=\/wp\/v2\/posts\/6987\/revisions\/6996"}],"wp:attachment":[{"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6987"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6987"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.theseventhstate.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6987"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}