New Proposal Emerges to Create a Public-Private Partnership to Reform DLC

New Proposal Emerges to Create a Public-Private Partnership to Reform DLC

A state delegate made the proposal at a meeting of the working group established to evaluate alternatives to the Department of Liquor Control

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Members of the working group listen to a proposal by Jason Underwood, a lobbyist for Sazerac, at the meeting Wednesday in Rockville

Andrew Metcalf

A new proposal has emerged to reform the county’s Department of Liquor Control (DLC).

State Del. Ben Kramer (D-District 19) proposed Wednesday that the DLC's management be replaced by a public-private partnership that would put the warehouse, distributing and marketing operations in the hands of an experienced business.

Kramer made the proposal at the second meeting of the county’s working group evaluating the structure of the DLC. Kramer is not a member of the working group, but was identified by the group’s chair as a “private management contractor.”

Kramer called for the county to partner with a private enterprise that will take over the management role and develop a marketing and retail expansion plan for the department. He also backed measures to make sure the sale of alcohol is controlled and “socially responsible.”

The proposal would protect the union employees who work for the department while also bringing the creativity and innovation of a private business to the DLC, he said. The county would retain ownership of DLC assets, control over policy decisions, enforcement of liquor laws, labor relations and collective bargaining, according to the delegate's proposal.

Kramer pitched the idea during a meeting of the 11-member working group tasked by County Executive Ike Leggett to provide recommendations to change the structure of the department that controls the wholesale distribution of almost all alcohol, as well as the retail sale of all liquor. The only other entities allowed to distribute in the county are small breweries. The county nets about $30 million in annual profit from the department—a revenue source county leaders have fought to maintain as the department's operations have been criticized during the past two years.

Kramer said the private partner could be compensated through either a percentage of revenue, a bonus system, a management fee or a combination of those funding sources.

“The county may find a David Trone who may want to bid on this,” Kramer said.

Trone, a Potomac resident and recent Congressional candidate, is the co-founder and former CEO of Bethesda-based Total Wine & More, the country’s largest privately held spirits retailer.

Also at the meeting, Jason Underwood, a lobbyist for the alcohol producer Sazerac, which makes Fireball and several types of bourbons, encouraged the county to keep its wholesale alcohol distribution wing, calling it a “goose that lays the golden egg.”

“Never get rid of it,” Underwood said. He cited information from a study done by Ronald Zullo, a University of Michigan economist, that found jurisdictions that control wholesale distribution of alcohol receive about 82.4 percent higher alcohol-related revenue than jurisdictions that don’t. If a jurisdiction controls retail operations as well, Zullo found revenue is 90 percent higher.

Underwood also said Zullo’s study determined crime rates for aggravated assaults, fraud, domestic abuse and vandalism were lower in control jurisdictions.

When asked by an audience member who funded the study, Underwood said he believed the University of Michigan funded it.

However, acknowledgements for the 2013 study note the report was supported by a grant from the National Beverage Control Association—the national group that represents control states and jurisdictions.

Underwood also suggested the working group adopt a model similar to Maine, which contracts the wholesale distribution and storage of all spirits to a private company and then collects a commission. The state signed a 10-year contract in 2014 with Pine State Trading Co. to handle warehousing and distribution of liquor in the state. After the first year the state netted $46 million in profits, according to the Portland Press Herald.

Kramer said after Underwood’s presentation that the Maine model could be looked at to help set up the public-private partnership he’s proposing.

“You make me look like a genius,” Kramer said to Underwood. “Your example with Maine is exactly what I want to start having as part of this conversation.”

Underwood pointed out, however, that Maine lost millions in potential profit as a result of its original 2004 contract with Maine Beverage—the first business it partnered with. The state received about $190 million from Main Beverage during that 10-year partnership, but a Deloitte & Touche study later determined the fair-market value of the contract was worth $378 million, according to the Press Herald. Maine Gov. Paul LePage sought a different partner after the deal ended, eventually landing Pine State Trading Co.

Another recommendation briefly discussed at the meeting Wednesday was to remove the county from distributing beer and wine, while keeping the liquor operations, and charge an excise tax to private distributors based on how much beer or wine they deliver. Arash Tafakor, the owner of Downtown Crown Wine and Beer in Gaithersburg, made the proposal and said in an email distributed at the meeting it would enable  the DLC to generate revenue via the tax as well as maintain its liquor distribution and retail store network.

Bonnie Kirkland, the chair of the group and an assistant chief administrative officer for the county, said the county intends to hire the consulting firm Public Financial Management (PFM) to evaluate the proposals made Wednesday and at a meeting in July, based on their revenue, legal, labor and bond implications.

Other working group members said it seems unlikely the working group will have a consensus recommendation in time for the 2017 General Assembly, which would need to pass legislation if the county requests significant changes to alcohol laws. The General Assembly will begin its session in January, but many local bills are submitted and reviewed in the fall, well before the session begins.

“It’s a tall order to get something lined up for this legislative session, but that’s the goal,” said council member Hans Riemer, a member of the working group, who led an effort by the County Council to privatize part of the department last year. “We’ll see how this fares.”

Riemer said he’s pleased the group is talking about different models for the department.

The working group is scheduled to hold its next two-hour meeting September 15. Kirkland said she hopes recommendations will be whittled down to a manageable number by that point.

“The plan is to give the county executive the fruits of our labor and that of PFM’s and he will make a decision based on that work,” Kirkland said.

Leggett appointed the working group group after efforts to reform the DLC by the County Council and State Del. Bill Frick (D-District 16) did not pass in the state legislature earlier this year. 

Licensees such as local restaurants and privately-owned beer and wine stores have complained that the department has poor customer service, a record of inaccurate deliveries and limited selection. Several licenses have been actively lobbying the County Council to alter the structure of the department to allow private alcohol distributors to enter the market.

Jane Redicker, the president of the Silver Spring Chamber of Commerce, said after the meeting she felt the voices of licensees weren’t being heard as part of the working group.

“My concerns are that this group is not getting input from the people who are supposed to benefit from the discussions and the reason this task force was put together, and that’s our restaurants, private beer and wine stores and consumers,” Redicker said.

However, one licensee, Monir Aridi, the owner of Seneca Meadows Beer and Wine in Germantown, said recent changes in the DLC’s warehouse and customer service department have changed how he views the department. He said more improvement is needed, but he said he liked being able to order from one distributor, rather than dozens of different companies that could enter the market if it was privatized. He encouraged other licensees and the public to give the DLC more time to improve its operations.

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