Montgomery County Taxpayers League

The Voice of Taxpayers of Montgomery County, Maryland

Liquor control

Notes from the meeting of Oct. 17, 2018 – Dept. of Liquor Control

Meeting of October 17, 2018

Topic: “The Department of Liquor Control”

Speaker: Robert Dorfman, Director, Montgomery County Department of Liquor Control

The Montgomery County Taxpayers League (MCTL) met with the Director of the Department of Liquor Control (DLC), Robert Dorfman and his staff on Oct. 17, 2018.  He provided an overview of the DLS’s position on privatization and a video produced at no expense to the taxpayers that introduced DLS’s operations.  He also provided a written summary of DLC highlights, and noted a number of key staffing changes in marketing, warehouse operations and retail that he believes are already making a difference in DLS’s performance.  His verbal and written responses to MCTL member questions follows:

1. Montgomery County Sales – He and staff indicated that the county was dead last in the state for liquor and beer per capita sales last year partly because our high incomes and demographics are associated with lower consumption.  An MCTL comparison of state published sales for FY 2017 show that two comparable jurisdictions in population and incomes (Baltimore County and Anne Arundel County) had double our distilled spirit sales per capita.  Mr. Dorfman said the DLC is improving the marketing and attractiveness of its retail locations, but acknowledges it has fewer retail locations down-county than in the rapidly growing up-county.  Surveys of customers in DLC stores indicate a high level of satisfaction, but this does not include residents who buy liquor elsewhere.  Further, while DLC notes its prices are competitive, MCTL notes that other factors are equally important in drawing more customers to DLC retail sites.  These include service, convenience, and product selection. 

2. Restaurant Business Service – Service has improved for delivery and special orders according to Mr. Dorfman.  He said that restaurants account for only 4% of DLC sales, and questioned if older complaints by restaurants are still valid.  MCTL  asked if perceived conflicts of interest between DLS’s enforcement and sales activities could contribute to restaurant issues, or have a chilling effect on the level of complaints.  Mr. Dorfman and other DLC representatives present didn’t think so and noted that DLS’s enforcement program is a model followed by other counties in the state.

3. Truck Fleet and Warehouse Investments – Mr. Dorfman could not quantify productivity improvements or savings attributable to these recent investments.  He indicated that no staffing reductions occurred as a result of these investments.  22 new trucks have replaced older trucks that had been in service for 20 years which have reduced maintenance, temporary lease truck, and service interruption costs.  Warehouse improvements have included new methods and procedures and a new automated “Invoice Picking” system to improve inventory controls and flows.

4. Inventory Losses and Financial Performance Drivers – Mr. Dorfman said that last year losses were $363,762.  That was .18% of total inventory compared to an industry average of .25%.  Better controls over special orders with “flow racks” were noted as one reason. Four years ago MCTL compared DLS’s financial performance to nearby control states of Virginia and Pennsylvania.  These indicators have not changed, probably due to economies of scale available to higher volume state level operations.  An updated comparison of costs of goods sold as a percentage of sales is still 73%, much higher than Virginia or Pennsylvania (57% and 69%),  Net book value of depreciable assets ($45M) also shows DLC is high in comparison to Virginia ($52M) and Pennsylvania ($97) relative to their much higher sales volumes.  Slower write-offs of impaired assets, and slower depreciation schedules may also account for this and would boost reported profits.  County auditors did not express an opinion on DLS’s financial controls for their FY 2017 financial statements). 

5. General Fund Transfers – Transfers dropped last year to $18M from an average annual target of $30M to pay for the investments noted above.  Mr. Dorfman indicated that he believes DLC will make its forecast this year for transfers. DLC also collects state sales tax, but doesn’t collect any local sales tax.  MCTL has determined that working capital requirements of the business are a factor that limits investments, as do county capital project allocations.  DLS’s audited financial statements are included with the County’s audited financial reports (see link below, pgs. 36-39). 

6. Excessive Alcohol Abuse by Teens – DLC investigated source of illegally purchased alcohol by a teenager who died last summer following a party in Bethesda, and found DLC stores were not the source.  Enforcement and licensing programs are designed to quickly react to and resolve retailing problems.

7. Privatization Arguments – Mr. Dorfman cited the state of Washington as an example where retail outlets ballooned from 300 to 1,600 overnight creating enforcement and control issues.  He notes that under the 3-tier systems in our state, distributors and retailers really don’t control prices as much as they do for other products, and that distributors don’t compete for business. He believes DLC has made important changes to be more responsive to its customers and doesn’t feel that private distributors or retailers would do any better.

The MCTL favors privatization because liquor distribution and retail is not an inherently local government function.  We are the only county in the state that does this, and the last county in the nation to continue this practice.  MCTL believes that competition would improve service, selection, convenience and sales volumes, with two or more private distributors competing within the county for the business of hundreds of more conveniently located retailers.  MCTL is concerned about growing legacy and investment costs of the DLC operation and DLS’s inability to achieve sales volumes that would stabilize its business.   MCTL projections last done in 2014 showed annual county revenues for possible new distributor franchise fee agreements and sales forecasts could be $60M, higher than currently transferred to the general fund.  Also, a one-time revenue boost of $50M would be realized from winding down DLC operations, selling assets, after providing for a generous severance payment to employees.  This does not include additional local sales or property tax increases. 

Financial Statement Link, see pgs 36-39, first column 

https://www.montgomerycountymd.gov/finance/resources/files/data/financial/cafr/FY2017_CAFR.PDF

Questions prospective voters could ask candidates for county and state office.

Many voters have asked us to come up with thoughtful questions that they could ask of candidates for local and state offices.  Too often we hear the same promises of greater support for schools, better transportation and lower taxes.  But very little is said about how a candidate intends to achieve these goals.  Our questions below are designed for voters to ask candidates directly so they can get a specific answer as to how the candidates intend to fulfill their promises.

 

County Level:

1.  Now that debt service accounts for 10% percent of the county budget and is for all intents and purposes at its ceiling, how would you address school construction needs?

2.  The Department of Liquor Control is run by the county government and handles the purchase, warehousing and sale of liquor bringing in $28 million in revenue in a $5.5 billion county budget.  Do you believe that the county government should employ 442 county staff and cover their salaries and benefits or does this function belong in the private sector?

3.  The County Executive’s budget proposal for FY 2019 gives the school system $2.59 billion of which $19 million is over and above the mandated Maintenance of Effort level.

–  Do you believe that the school system, while it describes how it will spend the increase, should also show how the increase will produce results?  How would we know that such results have been achieved?

  • 45% of the MCPS budget is overhead (non-instruction), Should MCPS cut overhead costs before it gets an increase in county funding? By how much?
  • Public school budgets are created by non-elected public employees without formal input from the taxpaying public.  What would you do to make the taxpayers feel more confident that the schools are spending their tax dollars wisely? Is it time for an Inspector General for MCPS that would look not only at waste, fraud and abuse but also at program performance?

4.  According to Maryland’s State Department of Assessments and Taxation, there were just 19 new filing for new businesses in Montgomery County in FY16. In the year before there were 57 new business filings in the county. What specifically would you do, at the county level, to encourage business growth in Montgomery County?

5. In addition to reduced income tax forecasts, recordation/transfer and energy taxes are forecast to be lower than expected over the next 5 years.  What are some of the programs or services where you would reduce spending to balance the budget?

6.  County employees will get a 2% cost-of-living increase along with a 3.5% “step” increase in FY 2019.  Do you believe this comports with wages in the private sector in Montgomery County?

7. It has been said that collective bargaining gives unions an unfair advantage in arbitration, leading to pay raises way above market and the highest paid employees in the region.  Would you support changing the arbitration rules? Also would you support more transparency in collective bargaining negotiations so that the public is aware of the “going in” positions of labor and management and is allowed to express their opinions at a public hearing before the agreement is finalized?

8. County income taxes have varied significantly from forecast for the last 2 years.  Property taxes are less volatile, but stagnant, and subject to Charter limits.  Would you support increasing property taxes on home improvements by treating them as “new construction” and thus gaining more for the county in property taxes – without Charter limit restrictions? In other words, do you support the inequity of property owners of unimproved properties supporting those who have made major improvements to theirs?

9.  WSSC, the largest monopoly in the state of Maryland, has prepared a six-year fiscal plan that requires 6% rate increases to maintain the debt service it has accrued to meet its net revenues.  WSSC also has ad valorem taxing authority to raise county property taxes. What oversight would you propose to make WSSC an efficient and effective monopoly to avoid these annual rate increases or even an increase in property taxes? 

10. What specific experience do you bring to the office to which you wish to be elected which demonstrates your development or implementation of a program in the public sector.

State Level

1.  The Maryland State Retirement and Pension System has $20 billion in unfunded liabilities.  The last time the State fully funded the system was in 2000.  Further, the State pays $500 million a year to financial management firms to manage pension investments at no higher a return than low-cost index funds.  Should we continue to pay out $500 million a year to these firms?

2.  For every $1 that Montgomery County taxpayers send to Annapolis, we get 20 cents in return in direct aid.  Howard County, a wealthier county than ours gets 24 cents on every dollar.  How would you get us, at least, to Howard County levels?

3.  Our delegates to Annapolis inform us, every year, that they have passed a “balanced” budget.  True, in one sense.  However it excludes long-term liabilities which in pensions alone exceed 10s of billions.  How would you provide transparency in budgeting?

4. According to the State Department of Assessments and Taxation there were just nineteen new business filings in Montgomery County in FY16.  In the year before, there were 57 new business filings in the county.  What specifically would you do, at the state level, to encourage more business growth in the county?

5. Would you support Maryland Public Service Commission oversight of the WSSC, the largest monopoly in Maryland? Would you support privatizing the WSSC?

6. Do you favor the modernization of the state’s laws governing breweries? Breweries—most of which are small businesses—are limited to 2,000 barrels of beer they can sell to visitors in their tasting rooms. They can sell an additional 1000 barrels but only by adhering to a “buy back” provision requiring that they sell the extra beer to a distributor and then buy back their very own beer. This puts our breweries at a competitive disadvantage regarding surrounding states and hinders job growth and the concomitant increased tax revenue.

“How to End the Monopoly and Recover the Money”

From Seventh State an article by Adam Pagnucco.about ending Montgomery County’s monopoly on liquor:

The County’s Department of Liquor Control “monopoly earns money for the county and the [County] Executive does not want to lose 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.”

As always we invite your comments.

 

 

“George Griffin Out as Director of Department of Liquor Control”

From Bethesda Beat of January 29, 2016:

“George Griffin is no longer the director of Montgomery County’s Department of Liquor Control (DLC)….Patrick Lacefield, a spokesman for the county, confirmed Griffin was leaving the department.  “It’s time for a change,” Lacefield said. “There’s going to be a national search to replace him.”

“When asked if Griffin’s departure had to do with the problems at the department that have been detailed during County Council committee meetings and news reports over the past year, Lacefield said, “It is what it is.”

Questions sent to speakers in advance of meeting Nov. 19, 2014

Speakers:  Phil Andrews, Council Member and Sidney Katz, Council Member-Elect, both from District 3, Montgomery County
Questions sent to the speakers in advance of the meeting:

1.  What impact will the election of a Republican governor have on Montgomery County?  His campaign emphasized reduced spending and taxation.  Will Montgomery County follow suit?  Are we prepared to handle statewide cuts?

2. What is your position on Maintenance of Effort spending?  Should it be tied to improved school outcomes?  Is there any likelihood that the Maintenance of Effort law might be amended?

3.  There is abundant statistical evidence that “good” teachers have pupils who learn more than the average year by year throughout their careers, whereas ‘poor” teachers have students who learn less than average every year.  Recent studies have shown that students fortunate enough to have had good teachers earn more than their peers 20 or 30 years later.  Given all this statistical evidence, why does Montgomery County not move towards paying “good” teachers (measured by comparative value-added scores which correct for student quality) more than “poor” teachers?  We understand that the County Council has little influence over the actions of the School Board (except through the power of the purse); how would you be able to make this happen?

4. Health and Human Services – What is your position on extending Kennedy cluster family social services (free health care, food, rent and utility assistance) to the Watkins Mill family cluster before doing a study to determine if these services have indeed improved Kennedy cluster academic performance?

5.  Transportation – What is your position on spending in anticipation of the Purple Line?  For, example, Art Holmes told us in a meeting a year ago that $80M had been spent on elevators to connect riders with the Bethesda Metro stop that will serve only 450 riders a day.

6.  How do you reconcile the fact that county taxpayers who do not live in municipalities are subsidizing those who live in municipalities specifically through the 17% income tax rebate?  Could this funding be creating pockets of wealth, particularly in the smaller municipalities, to the detriment of the needs of non-municipal residents?

7.  What is your position on Montgomery County getting out of the liquor business?  A recent report by WRC TV (channel 4) of DLC truck driver beer thefts for private resale raises questions about DLC’s internal controls.  Can this county operation ever be sufficiently incentivized to install strong controls?  Why did the County’s Internal Audit Department’s review of inventory controls (July 2014) miss this control weakness?  Does this strengthen the case for privatization?

8.  Given the steadily increasing number of advertisements regarding Montgomery County services related to entertainment, how do you view the county’s role in the provision of entertainment services.  How much does the county spend on such services and could those funds be used elsewhere?

Questions sent to Messrs. Cooper and Griffin in advance of meeting of June 12, 2014

Questions sent to both speakers in advance of the meeting of June 12, 2014:

Topic: “Should Montgomery County be in the Liquor Business”?

Speakers: Edward Cooper, Vice President, Total Wine and More

George Griffin, Director, Department of Liquor Control, Montgomery County

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?

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?

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?

4.    How do you explain the fact that Montgomery County is dead last in the state for liquor and beer per capita 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?

5.    The state of Washington recently privatized the liquor business.  What are the lessons learned from this switch to privatization?

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?

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?

8.    How often is there an outside independent audit of the Department of Liquor Control?  Has there ever been a management audit of the department?   How much overtime is paid in the Department of Liquor Control