Good spirits

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If you walk through the doors of the ABC store on West Main Street with fantasies of mojitos and margaritas watering your mouth, you’ll find your buzz is soon killed. The store has more in common with the sterile confines of a dentist’s office than a tropical paradise.

Sure, there are random glimmers of personality: hand-held American flags taped to shelves, orange and red streamers dropped from the ceiling and plastic Christmas garlands hugging the walls. But it does little to excite the palate and compel a splurge purchase. It’s a hardware store for spirits, and that certainly doesn’t set the stage for maximizing profits.

The store’s bland ambience is a 76-year-old remnant of Prohibition. In owning liquor sales, Virginia now has 332 ABC stores, seven of which are in the Charlottesville-Albemarle area.

Candidate Bob McDonnell vowed in his gubernatorial campaign to lead the charge to take Virginia out of the liquor-selling business and hand over sales to the private sector. In doing so, he said he could generate a onetime $500 million windfall through private retail licenses and wholesaler fees. He promised to allocate those monies toward underfunded transportation projects.

As governor, McDonnell has remained committed to the privatization plan, in words and deeds. He has organized a Commission on Government Reform & Restructuring, which by September 15 will present to the General Assembly a detailed privatization proposal. Also, behind the scenes, the governor’s policy team has been meeting with police, faith-based groups and alcohol industry reps in an attempt to clarify misconceptions and allay concerns.

McDonnell is also investing his own time and energy in the issue, much more than previous governors who have considered privatization. He has embarked on an eight-city, late-summer town-hall meeting tour to convince state residents that now is the time to privatize. 

“Assure me that you’re not going to rob the General Fund, and I’d consider privatization,” says State Senator Creigh Deeds.

The ideological premise behind McDonnell’s case is compelling: Selling liquor is not a core function of government. Even Democratic Senator Creigh Deeds, who ran against McDonnell last fall, acknowledged as much in an interview with C-VILLE.

But upon further probing, it emerges as an issue more complex than any “Reduce Government” bumper sticker. Over the last 10 years, ABC’s oversight of liquor has generated, on average, $220 million in excise taxes and profits that are deposited into the General Fund, a flexible pool of state money that can be used at the discretion of the governor and the General Assembly. If privatization is approved by state lawmakers, then that guaranteed annual stream of revenue would disappear.

“Assure me that you’re not going to rob the General Fund, and I’d consider it,” Deeds says. “But there’s no way this thing produces half-a-billion dollars up front for transportation. That number was pulled from the air last year during the campaign.”

Deeds’ financial reservations are shared by state Democrats and Republicans alike, though McDonnell and his team are confident that the effects of privatization will more than recoup the $220 million in annual intake.

In addition, privatization is facing opposition from the Virginia Assembly of Independent Baptists, a lobbying presence in Richmond concerned about how social ills might fester if liquor sales are put into the hands of the private sector.

How McDonnell and his team take the financial complexities and social concerns, wrap them in a lawmaker-friendly box and tie around it a politically palatable bow will determine whether privatization succeeds and a campaign promise is fulfilled.

However, under a challenging budgetary climate for states, the governor and his team face the tall order of assuring Virginians that taking away a proven revenue source will make The Old Dominion money in the long run.

Not a full exit

 

The governor’s reform commission is debating four privatization plans: offering liquor licenses to all 3,000 state businesses that already sell beer and wine—the most laissez-faire of the four; selling liquor assets to one private entity, which would sign a lease controlling the operation for a set number of years; having many private companies act as agents of the state, which would get a cut of liquor profits; and auctioning 500 to 1,000 retail licenses to the highest bidders.

In opposing privatization, lawmakers like Delegate Rob Bell look to the $220 million or so in annual ABC revenue. Half of that comes from ABC store profits, including Virginia’s 69 percent mark-up and the 20 percent excise tax on liquor, which is among the nation’s highest.

The auction plan has emerged as the clear frontrunner, which is curious given that it includes a layer of governmental regulation and intervention—not McDonnell rallying cries. In addition to limiting how many stores sell liquor, the state would set minimum bid prices for three kinds of licenses, depending on the store’s size. That way, a mom-and-pop liquor depot would not be bidding alongside Walmart.

Eric Finkbeiner, a senior policy advisor for McDonnell who is spearheading the privatization effort, told C-VILLE that the auction plan reflects the governor’s commitment to privatize “in a very Virginia conservative way.” He defined that as ensuring both tasteful marketing and a sensitivity to underage access.

“We don’t want to see a jump from 332 to 3,000 [liquor stores],” Finkbeiner said. “We don’t want to have a liquor store on every street corner. We don’t want the gawdy neon signs or the floating blimps of various bourbon and vodka products flying over roadways.”

By capping the number of stores, the state might be leaving money on the table, and it risks ruffling the band of laissez-faire lovers known as The Tea Party, whose anti-big-government sentiment McDonnell appears to be channeling with his privatization push.

However, Carole Thorpe, chairwoman of the Jefferson Area Tea Party, suggests that the cap is a compromise aimed at social conservatives who are concerned about the social cost of additional liquor stores.

Thorpe did not disparage the plan’s free enterprise impurities.

“Few things aren’t regulated to some degree, otherwise you’d have anarchy,” she told C-VILLE.

Speaking generally on privatization, Thorpe added: “It’s refreshing to see an effort that is eliminating an unnecessary function of government to fund a necessary function of government, which would be in this case to fix our infrastructure.”

A Pandora’s box of social ills?

 

If the number of liquor stores in Virginia doubles or triples, it might stand to reason that Virginians would buy and consume more spirits. Such proliferation could increase alcohol abuse and could also lead to increased time and energy that local police spend on alcohol-related cases.

“The societal cost of alcohol abuse concerns me,” Deeds said.

The Virginia Assembly of Independent Baptists, a group of about 500 Baptist churches, share his concerns and has helped kill liquor privatization legislation in the past.

Jack Knapp, the executive director of the assembly, says that on “95 percent to 99 percent of the issues,” he and McDonnell “agree completely, but this is one area where we disagree.” 

Biblical principles promote personal responsibility, Knapp said, and that tenet aligns with the political and economic notions of smaller government and free enterprise. However, alcohol is a different animal, he said, and the ills it can create should compel government to intervene and practice its duty “to protect us from both internal and external outlaws.”

“If ABC stores are sold,” Knapp said, “then we move away from an agency whose primary concern is control to a free-enterprise system whose primary concern is making a profit, and that’s exactly what they should be concerned with. That’s what private enterprise is all about. But we all know the problems that alcohol causes: drunk driving, child abuse, spousal abuse, loss of work time, diseases that come from consumption. Why would we promote a product like that? Why would we encourage more sales of it?”

On the question of whether privatizing liquor sales would lead to more drunkenness in Virginia, McDonnell cites data that shows it does not meaningfully increase drunk-driving deaths or binge-drinking rates.

To assuage Knapp’s concerns, as well as those who share his beliefs in the General Assembly, McDonnell & Co. say that the health and safety and policing aspects of the state’s Department of Alcohol Beverage Control (ABC) would remain at full strength if privatization passes. The administration would also empower localities to institute stricter alcohol-related sanctions, if that’s what a community agrees on.

McDonnell and his team have data to back up their claim that privatizing liquor sales does not increase alcohol consumption, nor meaningfully increase drunk-driving deaths or binge-drinking rates.

“In terms of the likelihood of harmful effects from alcohol, it really has nothing to do with privatization,” Finkbeiner said.

Among the findings McDonnell & Co. cite is a recent study from the Virginia Institute for Public Policy. The think tank found that in the 18 states that still control liquor distribution, an average of 33.8 people per 100,000 died each year from alcohol-related causes for the years 2001 to 2005. Meanwhile, in the other privatized states, that figure was 34.6.

Finkbeiner also claims that in northern Virginia, the state is losing 15 percent to 20 percent of liquor sales to D.C. and Maryland due to convenience. With more liquor outlets opening as a result of privatization, Virginia would win back those customers—and the taxes they would pay – without increasing consumption, he said.

“In our scenario, Virginians are still consuming the same amount of alcohol, but they’re purchasing those spirits in Virginia stores,” Finkbeiner said.

Knapp is among those who aren’t buying the argument.

“Figures don’t lie, but liars figure,” he said. “If you look hard enough, you can find a study to support whatever position you want to take, and I think that’s exactly what has happened here. I believe that reality will show that.”

Finkbeiner contends that even with the social concerns, many of the General Assembly’s social conservatives with whom the administration has spoken are troubled by government bloat. In their minds, the act of reducing government will prevail over their anti-alcohol beliefs when they cast votes on the issue, he said.

“That’s the feedback we’ve gotten so far,” Finkbeiner said.

The artisanal liquor bump?

 

Social consequences aside, for some small businessmen who currently sell beer and wine, adding high-end, artisanal liquor to their shelves is an attractive, and potentially profit-boosting, idea.

“It’s a gigantic untapped market for Virginia,” said Will Richey, who owns Revolutionary Soup and is a founding member of The Wine Guild of Charlottesville, a buying club.

“Virginia is a tourism state,” Richey said. “We really bank on our wineries and our history. And if you look at the wine shops and breweries that have opened up all over the state and the interest out there for wine and artisan beer, to have such a controlled ABC system I think is ridiculous.”

Religious opponents to privatization say that if ABC stores are sold, “then we move away from an agency whose primary concern is control to a free-enterprise system whose primary concern is making a profit, and that’s exactly what they should be concerned with.”

To boot, Richey’s gut feeling is that the introduction to the Virginia market of more varied high-end liquors would increase alcohol profits without increasing consumption.

“The people who drink for volume are already getting what they want; there’s nothing holding them back,” Richey said. “What most of the wine and beer retailers go for around here is higher quality and smaller quantity, to some extent. It’s more interesting to me to sell half-a-case of a $50 bottle of Burgundy than to sell two cases of Australian Yellowtail. Grocery stores can do that. With privatization, I think we’d see higher sales on higher-dollar alcohol that people more naturally drink in moderation.”

With liquor sales in private hands, Richey noted, distilled spirit marketing could also become more personalized and creative.

“I’m not criticizing ABC employees, but right now there’s no incentive for them to up-sell or give you the history behind a bourbon producer,” he said.

Another question is whether in Charlottesville and Albemarle there’s demand for more than the seven liquor stores currently run by the Department of Alcoholic Beverage Control.

The answer is “yes,” according to John Woodriff, co-owner of Beer Run.

“I think we could support more liquor stores,” Woodriff said. “If more people were selling liquor, we’d have much more diversity.”

ABC figures show that Charlottesvillians do indeed enjoy their spirits. In 2009, the city’s four ABC stores sold 164,025 gallons of liquor—that’s  4.67 gallons per person, which amounts to $12.1 million in gross sales.

Albemarle’s sales were not nearly as high. The county’s three ABC stores sold 75,286 gallons of liquor, or 1.02 gallons per person, which totaled $5.1 million in gross sales. 

Not all local adult beverage connoisseurs are enthusiastic about the possibility of selling liquor, however.

Robert Harllee, owner of the Market Street Wineshops, objects on philosophical and aesthetic grounds. If privatization passes, liquor will not appear on his shelves. Harllee calls wine “a living thing” and liquor “a dead thing.”

“Every time they make it, it’s exactly the same,” he says. “It’s an industrial process. The only thing living that’s done is putting them in barrels to age them.”

What about ABC employees?

 

Another tentacle to privatization is the fate of more than 2,000 ABC store employees, about 30 percent of whom work full-time. With privatization, ABC clerks and store managers would face job uncertainty.

The state is not allowing ABC workers to speak freely to reporters about privatization, but Del. Bob Brink, D-Arlington and member of McDonnell’s reform commission, offered his opinion.

“I think we have a moral and legal obligation to make sure any employee who might be displaced is treated fairly,” Brink told C-VILLE.

Compounding the issue is the fact that full-time ABC workers are in the state retirement system, and the average age of an ABC employee in fiscal 2009 was 47. If these employees opt to cash in on retirement benefits, expenses would be added to the state’s ledger.

For his part, McDonnell policy advisor Finkbeiner downplayed the impact that privatization would have on ABC employees.

“We’ve talked to wholesalers and retailers out there on the private side,” he said, “and they’re very interested in hiring current ABC employees, because you would have a built-in pool of folks with experience and expertise who know the industry.”

All about the Benjamins

 

Local lawmakers Deeds, Del. David Toscano, D-Charlottesville, and Del. Rob Bell, R-Albemarle, have acknowledged that their top privatization reservations revolve around finances. 

“We don’t want the gawdy neon signs or the floating blimps of various bourbon and vodka products flying over roadways,” says McDonnell policy advisor Eric Finkbeiner.

“The risk is that we’ll be in a worse situation, from a revenue standpoint, than we are right now,” Toscano said.

Bell noted: “You don’t want to make short-term decisions that have long-term consequences.”

And if one dives deeper into the minutiae, it’s easy to understand their uneasiness.

In looking at the $220 million or so in annual ABC revenue that lawmakers are reluctant to part with, half is generated from ABC store profits, including the 69 percent mark-up that Virginia currently applies to each bottle of liquor. The other half originates from a 20 percent excise tax on liquor, one of the highest in the country. Simply put, the government has created for itself one heck of a cash cow.

To match the ABC intake, a leading idea within McDonnell & Co. is to shift the tax structure post-privatization so that the excise tax is replaced with a per-gallon fee that private wholesalers would pay the state. Proceeds from that fee would offset the loss of the $220 million, they say.

To understand the details of the issue, one needs a finance degree, a law background or a very adept teacher. The McDonnell administration has gathered all three types so that fiscal nuances are accounted for and presented to lawmakers and the public in a convincing, digestible way. Administration helpers include Goldman Sachs and other financial houses, as well as the ABC Privatization Coalition, which is made up of the law firm Eckert Seamans and the public-affairs firm Capital Results.

Brink, the Arlington Democrat who sits on the governor’s reform commission, has seen a similar movie before. He worked on Capitol Hill during Hillary Clinton’s push for health care reform in 1993.

The effort failed largely because the plan was “dropped on Congress without [the administration] having prepared them for it,” Brink said.

One can be sure that McDonnell’s team is well aware of how a communication breakdown can doom legislation, as in HillaryCare’s case.

Even so, Brink, who is more engaged with privatization than the average state lawmaker because of his role on McDonnell’s reform commission, feels the governor “has a lot of work to do before it’s ready for prime time.”

And prime time doesn’t mean the fall TV season, but rather a special legislative session in Richmond that the governor will likely organize in October or November. That session could lead to a decision on privatization.

 

 

 

 

 

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