New Report Examines Five Options for Changing MoCo Liquor Control Structure

Alternatives from County Council agency range from incremental reform to privatization

By Louis Peck

Councilmember Hans Riemer Courtesy Photo (Montgomery County)

A new report by an arm of the County Council outlines five options for changing Montgomery County’s unusual public liquor control system – with the alternatives ranging from incrementally reforming the current structure to moving toward full privatization.

The 117-page report – put together over a six-month period by the council’s Office of Legislative Oversight (OLO) and formally released this morning – takes a close look at the operations and finances of the county’s Department of Liquor Control (DLC). Perhaps most significantly, it includes detailed estimates of the budgetary impact on county government of doing away with or making major changes to the status quo, while also examining ways to replace that revenue.

The local liquor control system – which dates back to the end of Prohibition in 1933, and is the only such system in the country at the county level – long has been the subject of complaints from restaurateurs and retail store owners, as well as consumers. There also have been contentions in recent years that it has stymied the county’s night life and the attendant ability to attract younger residents. But efforts to alter the system have traditionally faced a major fiscal and political roadblock: how to make up for the $25 million to $30 million that annual profits from DLC operations have yielded to the county’s coffers.

While saying that “based on our review, OLO finds that changes and/or improvements to the current structure are warranted,” the report does not recommend a specific alternative. It leaves that task to the council’s ad hoc Committee on Liquor Control, which on Feb. 27 is scheduled to hold the first of several sessions to discuss the findings of the report. “I think we’re going to need into the summer to really hammer out and get some consensus around some reform ideas,” Councilmember Hans Riemer, who chairs the ad hoc panel created in December, said in an interview.

Initial reaction to the OLO report was mixed – with Riemer the most upbeat among the three members of the ad hoc committee, which also includes current Council President George Leventhal and Councilmember Marc Elrich. “I was pleasantly surprised, because it’s more do-able than I thought,” Riemer said of possible changes to the current structure outlined in the report.

“I think the study shows that the service provided by our Department of Liquor Control is a hindrance to the kind of businesses that we want to thrive in this county,” Riemer told his colleagues today as the report was formally released.

However, the OLO study elicited a decidedly cool response from the Office of the County Executive. “The report recommends options to privatize the sale of liquor in Montgomery County. However, in our opinion, local liquor control has served Montgomery County well,” Chief Administrative Officer Timothy Firestine said at the outset of a four-page memorandum that takes issue with a number of the report’s findings. The memo, which generally reiterates views expressed in recent years by the leadership of the DLC, expressed a strong preference for pursuing the report’s so-called Option 5, to “increase efficiency within current system.”

In between reform within the current system and full deregulation, the report’s authors – OLO senior legislative analysts Craig Howard and Leslie Rubin – also presented three intermediate options: privatizing the wholesale distribution of beer, wine and liquor while maintaining government ownership of the 25 retail outlets around the county; privatizing wholesale distribution of beer and wine while maintaining public control of liquor distribution and the retail outlets; or privatizing wholesale distribution of so-called special order beer and wine products. The latter alternative could address criticisms from many of the county’s restaurant owners, who have complained repeatedly about lack of availability of products – particularly wines — that have to be specially ordered because they are not stocked in the DLC warehouse, and the delays in obtaining these special orders.

While differing on whether broader changes to the county’s current liquor control structure are needed, both Riemer and Elrich agreed that privatizing special orders is worth looking into further. “We need to deal with some of the special order issues that we know are issues for the restaurants,” Elrich said in an interview. “And we’ve got to figure out what’s the best way to deal with low-volume sales for lots and lots of different products, because [the DLC] can’t stock all 29,000 products” – a reference to the number of beer, wine and liquor labels on the DLC order list.

A formal survey of those holding licenses to sell alcoholic beverages in the county, conducted as part of the OLO’s report, found significant unhappiness not only with product availability, but also with overall DLC operations. “In general, licensees are dissatisfied with DLC’s operations, processes and performance as the wholesaler of alcoholic beverages in Montgomery County,” the report says. (The response from the county executive’s office’s criticized this finding as “questionable,” noting that it was based on survey responses from only about 100 of more than 1,000 licensees in the county.)

One potential upside to simply privatizing the wholesaling of special orders is that it would require the county to make up only about $4 million to $6 million in annual revenue, while displacing only about 15 of the more than 400 current DLC employees, according to the OLO report. Resistance from UFCW Local 1994 MCGEO, the union representing most of the DLC workforce, also has been a long-time barrier to privatization.

By comparison, full-scale privatization of the DLC enterprise, while yielding $66 million to $76 million in one-time gains from the sale of DLC assets, would also compel the county to find somewhere between $32 million to $43 million to make up for lost annual revenue.

In fiscal year 2014, the DLC provided a total of $26.4 million to the county government – with $20.9 million going directly to the county’s general fund, and another $5.5 million dedicated to pay off debt service, the OLO found. In addition to that, the county – in the event of privatization – would have to assume bond payments now paid by the DLC, yielding the $32 million to $43 million estimate.

Said Riemer: “I think all options are on the table, and all options are realistic in different ways. I think it’s not out of the question that this could turn into a net fiscal positive for the county.” He said that implementing any of the four privatization options would likely require imposing a distribution fee on private distributors; the OLO report estimates that imposing a 1-cent fee on each ounce of alcohol delivered to the county would yield nearly $17 million annually; a 1.5 cent fee would bring in more than $25 million.

While the report concedes that such a fee “may provide an incentive for distributors to raise the wholesale price of products for Montgomery County businesses,” it adds, “State law, however, requires distributors to charge all customers the same price for products, which would prevent distributors from increasing prices only in Montgomery County.”

Riemer, who until recent months had advocated working within the current public control structure to achieve changes, said he has now swung behind some kind of move to privatization. “My thinking has evolved – you can’t serve a county of this size and diversity with one distributor,” he said, alluding to the DLC. “It doesn’t work. It’s like one restaurant chain providing all the restaurants in the county.” He said he has been looking a system like Virginia’s – in which the state controls the wholesale distribution and retail sale of hard liquor, leaving the distribution and sale of beer and wine in private hands.

But Elrich, while saying that some changes are needed, added: “I basically don’t think we should privatize the system, and I don’t think anything [in the OLO report] convinced me otherwise….The revenues are a big thing, and [the DLC] is a big, successful department that brings in a lot of money for the county.” He said the option was of privatizing special order distribution of beer and wine was worth examining because “it doesn’t get to the core of the business” while, at the same time, addressing complaints from the restaurant sector.

He added: “For me, part of it is a public health issue. We do the right amount of alcohol promotion, which, in my mind, is not too much. If you have lots and lots of vendors in a private market, you’re going to get stores that I don’t want in Montgomery County.”

Leventhal, the third member of the ad hoc Committee on Liquor Control, praised the OLO report as a “very thorough job,” but declined to state a preference among the options offered in the study. “I’m going to delve into this topic in great depth in the coming year,” he said. “A big issue, of course, is cost: The current liquor system generates a lot of revenue for county government. But we’re all very concerned that our current system may not be responsive, and may not provide adequate customer service and may not provide adequate selection and choice.”