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McDonnell starts over on ABC privatization proposal, according to new consultant contract

By Anita Kumar
Anita Kumar

A newly released contract with the PFM Group shows Virginia Gov. Bob McDonnell (R) is back to square one as he tries to revamp his ABC privatization proposal to make it more palatable to legislators.

The national financial management company has been hired to consider ways to privatize the state's 332 retail stores (similar to the way Iowa and West Virginia did) or partially privatize the state's retail stores (similar to the way Ohio did).

The company estimates its cost to be $76,900.

The McDonnell administration released the contract in response to a Freedom of Information Act request.

Under proposals to privatize or partially privatize retail stores, the state would remain the wholesaler of distilled spirits and continue to apply markup and excise tax at the wholesale level. Current applicable state and local taxes on gross receipts and income apply, according to the contract.

PFM also leaves the door open to to privatize some or all of the wholesale operation or
change the proposals once the General Assembly's investigatory arm releases its report on McDonnell's proposal later this year.

Read the proposals and the pitch from the company to the state.

As we reported earlier, Iowa and West Virginia, the only two states that have fully privatized their retail stores in the last two decades, each made less than $20 million upfront when they privatized. Officials in those states said the change helped them become more efficient and saved overhead costs, but never produced the anticipated windfall.

In 1986, Iowa closed 207 state liquor stores and opened 256 private stores. The state now has about 800 private stores selling liquor. The first year the state saved $3.7 million dollars and took in an additional $9 million -- primarily from selling its liquor inventory -- though it had expected $17 million. West Virginia privatized retail liquor stores in 1991 allowing liquor stores to bid on licenses a decade at a time. Operating costs went down as did the amount sent to the state after expenses.

Ohio saved $25 million in 1991 by allowing companies to run its 453 stores. The state sets the price and store owners receive a commission.

Other states have partially privatized stores. See a full list of 18 control states and what systems they use now, including Iowa, West Virginia and Ohio.

The PFM Group began work last week. PFM has done work for the state before and currently has a contract with the Virginia Port Authority.

Some legislators and lobbyists say they have been talking to the governor's office about whether the state should give up only the retail stores while maintaining its monopoly on liquor wholesaling and distribution.

McDonnell unveiled a plan in September calling for the complete privatization of all aspects of the state system, which would produce a one-time windfall of at least $458 million for transportation. But he faces considerable opposition in both the Democratic-led Senate and GOP-controlled House of Delegates in part because the plan would bring in $47 million less each year to the state.

He abandoned plans to hold a special legislative session on the proposal this month after failing to garner enough votes, but will pursue it when lawmakers return to Richmond for their regular session in January. The 46-day legislative session begins Jan. 12.

McDonnell has two months to modify his proposal. House Speaker Bill Howell (R-Stafford) had recommended that McDonnell form a working group of legislators, wholesalers, distillers, retailers and others to hash out a compromise.

McDonnell spokesman Tucker Martin declined to say whether a working group existed or whether it had met.

By Anita Kumar  | November 10, 2010; 12:00 PM ET
Categories:  Anita Kumar, Liquor privatization, Robert F. McDonnell  
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Comments

Our liquor stores aren't run by religious Ayatollahs. They're even open Sunday afternoons where it's profitable. We don't need liquor sales every place they sell lottery tickets.

Think of the premise. More liquor outlets mean more liquor sales, even while our ABC stores are open 7 days a week. They're just trying to capture impulse purchases.

Everyone who wants to tax french fries will also tell you encouraging liquor sales is detrimental to the state's public health and therefore financial health. Alcohol isn't as deadly as tobacco, but it is more costly than fried foods.

The Fundamentalists don't want it and the Nanny state advocates won't endorse it either, which leaves a coalition of gas station operators and urban housing project dwellers. Spend even more on the study, just don't have them deliver a workable solution.

If the Obama people had delivered the recovery even they were expecting then it might have worked.

Posted by: blasmaic | November 10, 2010 6:02 PM | Report abuse

Take the contract with PFM Group as a sure sign that McDonnell has plans for higher office (can someone say, Vice-President?).

His earlier plan came up nearly $50 million short in revenues to the state. So it's a non-starter. Dead. But McDonnell promised in his campaign that he could find a "windfall" of dollars for transportation by privatizing state liquor stores. That is highly unlikely, and runs against the experiences of other states that have tried the same thing.

My guess is that the state legislature's "investigatory arm" (JLARC) will render a report very critical of the McDonnell plan, finding it rests of shaky assumptions and cost estimates.

So, McDonnell uses taxpayer funds to gin up a report that – probably tailored to some specific assumptions – helps to make his case for privatization.

But why privatize? There's the ideological myopia. But there's also the political play McDonnell can use to try and propel himself into serious consideration for higher office.

Like McDonnell's raid on the state pension fund, used to artificially create the appearance of a budget "surplus," he is borrowing money and kicking the costs down the road to future citizens and elected leaders.

Posted by: mcrockett1 | November 11, 2010 6:29 AM | Report abuse

Take the contract with PFM Group as a sure sign that McDonnell has plans for higher office (can someone say, Vice-President?).

His earlier plan came up nearly $50 million short in revenues to the state. So it's a non-starter. Dead. But McDonnell promised in his campaign that he could find a "windfall" of dollars for transportation by privatizing state liquor stores. That is highly unlikely, and runs against the experiences of other states that have tried the same thing.

My guess is that the state legislature's "investigatory arm" (JLARC) will render a report very critical of the McDonnell plan, finding it rests of shaky assumptions and cost estimates.

So, McDonnell uses taxpayer funds to gin up a report that – probably tailored to some specific assumptions – helps to make his case for privatization.

But why privatize? There's the ideological myopia. But there's also the political play McDonnell can use to try and propel himself into serious consideration for higher office.

Like McDonnell's raid on the state pension fund, used to artificially create the appearance of a budget "surplus," he is borrowing money and kicking the costs down the road to future citizens and elected leaders.

Posted by: mcrockett1 | November 11, 2010 6:31 AM | Report abuse

Could this be a draft of the PFM proposal and not the final? There are 6 really sloppy typos/spelling errors on page 11.

It says they will look into risks to the state. That should include rising costs of law enforcement and treatment, etc. with overconsumption/abuse. There are numerous peer reviewed evidence-based studies that show that harm increases with greater outlet density. Regulation of the prices and the sales tactics are also critical. The United Kingdom has a bad situation of rampant abuse. Pubs are losing business as groceries peddle ultra-low priced booze.

The most important criteria is public health and safety. Liquor is a potent, addictive substance not always respected. The ABC store system works well for the state.

Posted by: anonymousid | November 11, 2010 1:24 PM | Report abuse

It could have worked if the Obama people had delivered the economic recovery that even they were expecting, but heck that's so far in the past already.

Posted by: blasmaic | November 11, 2010 3:58 PM | Report abuse

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