Questions sent to Edward Cooper (Vice President, Total Wine and More) and George Griffin (Director, Department of Liquor Control, Montgomery County) in advance of the meeting of June 12, 2014, and their responses
Topic: “Should Montgomery County be in the Liquor Business?”
1. There are many reasons for and against privatizing the liquor business in Montgomery County. Loss of a major revenue stream is most often cited as the main reason. What is the net revenue gained through county control of liquor and how much revenue would privatization bring in?
Mr Griffin said that having the county run the liquor business is good for public health and safety. The Department of Liquor Control (DLC) in 2012 had a profit of $34 million after expenses, equal to 2 cents of the county property tax rate. Twenty-four million went to the county’s general fund while the remaining ten million went to debt service where it could operate much more freely than currently.
Bonds issued by the DLC carry a triple-A rating. To increase revenue there should be more DLC stores and the DLC should operate as and enterprise agency.
Mr. Cooper said there are several possibilities. Washington state just privatized its government-run liquor business and now has the highest liquor tax in the nation.
He said that customers are always looking for a wider selection and lower prices, not always available in County-run stores. For an example he pointed to the Total Wine store in Laurel, MD, which has 25% of its revenue coming from Montgomery County residents. Their store in Tysons Corner, Virginia, gets 23% of its revenue from Montgomery County residents. Another way the lost revenue deriving from privatization could be made up is through the county’s piggyback tax.
2. There is a perception that the preservation of 350 union jobs is a major obstacle to privatizing distribution and sales? If privatized, how many of these jobs would be moved to the private sector and would they belong to the same union?
Mr. Cooper said that privatization would increase the number of jobs in the county. In Washington state before privatization there were157 stores and 1200 employees. After the operation was privatized all 1200 employees lost their jobs. However, the state’s two largest alcohol distributors hired more than 1200 soon after. Additionally, the pay and benefits for the employees with their new employer increased. Also, with privatization retail prices would vary based on competition.
Mr. Griffin said there are already distributors in Maryland so there might not be much additional hiring.
Gino Renne, President of UFCW Local 400, spoke up by saying that there is no way that private industry could match the pay and benefits DLC workers currently receive.
3. Is the public control of liquor an asset or a detriment to the restaurant business? Would privatizing liquor sales help or hurt the restaurant business?
Mr. Griffin acknowledged that there is room for improvement. The recent Task Force on the Nighttime Economy recommended that DLC be modernized. DLC has the transparency and consistency of pricing. Also, instead of delivery trucks from many distributors a restaurant only needs to deal with one truck. The retail stores are used as adjuncts to the warehouse, so the restaurant can always pick up what is needed at the local retail outlet and still pay the same price as at the warehouse. DLC pricing is competitive with a markup of 15-25%.
House Delegate Charles Barkley asked Mr. Griffin about complaints that he hears from restaurant owners about the DLC.
Mr. Griffin acknowledged that there are uncertainties about when orders are to be delivered but said they are creating a new system for regularly ordering which should reduce the uncertainty. DLC does meet with restaurant associations.
Mr. Cooper said the problem with a government monopoly is that employees don’t have an incentive to obey the law. If a private owner breaks the law, he can lose his license, but that kind of punitive action cannot occur with the DLC.
He agreed that prices are good but could be better. He cited some company research which compared prices for 25 wines and liquors in selected areas where Total has stores. For wine the price is always cheaper in private stores. For liquors the price was lower in 16 of the private stores.
4. How do you explain the fact that Montgomery County is dead last in the state for liquor and beer per capital sales? Is the current method of distribution and retailing sending residents to neighboring jurisdictions for their purchases? How would privatizing the liquor business improve these numbers?
Mr. Cooper said that the county is losing sales to other jurisdictions, attributing that fact to lower prices and wider selection.
Mr. Griffin said that part of the decline is due to demographics and our county’s location. We border the District of Columbia, which makes it easy for those who work in DC to buy in the city. Also, studies have shown that people drink less as they get older, and Montgomery County has an aging population. And the County is not a tourist destination while DC is, nor do we have a residential university. National studies show that 25% of the population never drinks, another 25% drink occasionally while the other 50% drink regularly. DLC has contracted with a private firm to analyze their operation and to make recommendations.
5. The state of Washington recently privatized the liquor business. What are the lessons learned from this switch to privatization?
Mr. Griffin said that Washington has the highest liquor prices in the country because the state legislature increased liquor taxes, an effort supported by Costco but which Costco is now trying to change. With the 2012 change the number of retail liquor stores increased from 328 to 1415, and average hours of operation doubled from 70 hours per week to 140. There were some negative effects because this was not a law passed by the state legislature but rather a voter initiative.
In Virginia the move to privatization was supposed to be revenue neutral. When new revenues fell short, taxes were raised but the increased revenue still has not caught up to the previous level.
Mr. Cooper said that Washington state is now getting more revenue than ever. With privatization most of the state liquor employees were rehired by the private businesses which were created. And in the warehouse operations employment increased from 250 to 1400.
6. Some would argue that underage drinking is not a major problem in Montgomery County due to county/state control of sale of liquor. Is this true? How would privatizing the liquor business impact underage drinking?
Mr. Griffin said that studies by the Centers for Disease Control have shown that underage drinking is lower in areas where the government sells liquor. Studies also show there is also a lower vehicle accident rate. He also said that when one DLC store encounters a fake ID, that information is immediately communicated to all other DLC stores so the the perpetrator is totally blocked from buying in the county.
Both agreed that part of the problem is parents who buy alcohol for their underage children but there are no studies which show how widespread that problem is.
7. How do you avoid the appearance of a conflict of interest when the Department of Liquor Control is both the regulator and distributor of liquor? Would privatizing the liquor business solve this problem?
Mr. Griffin said that 17 states control liquor the way the county does. DLC also has a lot of interaction already with the private sector as the DLC is a buyer and seller at local stores and purchases local services such as advertising.
8. How often is there an outside independent audit of the Liquor Department? Has there ever been a management audit of the department? How much overtime is paid in the Liquor Department?
Mr. Griffin said that DLC is audited annually by the state and by the county finance office, and a management audit was just completed. The county’s Inspector General received $100,000from the County Council to analyze all DLC transactions for the last five years.
As for overtime DLC paid $625,000in 2012 with that number now at over $1 million. Much of the increase was caused by the moving of the warehouse contents to a new location.
The meeting was adjourned at 9:15 pm.