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Posted at 1:29 PM ET, 11/23/2010

McDonnell overestimates money from ABC privatization proposal, legislative review says

By Anita Kumar and Rosalind S. Helderman

Gov. Bob McDonnell's initial proposal to privatize the state's 76-year-old liquor monopoly may have overstated how much money Virginia could make from selling the system, according to a new report by the General Assembly's investigative arm released Tuesday afternoon.

The report, which can be seen online, found that in several instances, McDonnell's team was too rosy in its estimates, but in others it simply made mathematical errors. A few times, the report indicates, McDonnell's staff may have underestimated possible revenue from his proposal.

The Joint Legislative Audit and Review Commission found that McDonnell made numerous assumptions in calculating his plan, which calls for almost three times as many retail stores in the state, and changing any one of them could raise or lower revenue.

McDonnell unveiled a plan to privatize the system Sept. 8, estimating that Virginia would receive a one-time windfall of at least $458 million for transportation. But after considerable opposition from legislators from both the Democratic-led Senate and GOP-controlled House of Delegates, McDonnell is working to revamp that proposal.

The auditors also concluded that McDonnell's proposal would have caused the prices of distilled spirits to rise from 11 to 26 percent -- a price hike that could cause a drop in sales not accounted for in McDonnell's projections. (Unmentioned in the report is the possibility of a backlash from consumers if prices rose that significantly.)

Senators had requested that JLARC perform an analysis of the impact of McDonnell's initial proposal -- including the plan's revenue projections for upfront cash from the sale of retail and wholesale licenses, its predictions of ongoing revenue from a new taxing structure for a private system, and its suggested use of money from the sale of the system for transportation -- before the General Assembly debated the issue. The auditors could update it to include a new proposal.

JLARC indicates that the state could receive less than half of the $160 million McDonnell expects to receive from selling wholesale licenses. It also concluded that McDonnell may have overstated how much more alcohol would be sold in a newly privatized system as a result of Virginians who now buy booze in the District and Maryland choosing to buy closer to home instead.

McDonnell has hired a national financial management company at a cost of $75,000 to look into a retail-only option in time for lawmakers to debate it when they return to Richmond for their legislative session in January.

His original proposal was to auction 1,000 licenses to the highest bidders, which would allow Virginians to buy liquor for the first time at private liquor stores, grocery and convenience stores, and big-box stores such as Wal-Mart and Costco. Licenses would be sold to the highest bidders: 600 big-box stores, such as grocery stores and Wal-Mart; 250 convenience stores and drug stores; and 150 package stores.

By Anita Kumar and Rosalind S. Helderman  | November 23, 2010; 1:29 PM ET
Categories:  Anita Kumar, House of Delegates, Liquor privatization, Rosalind Helderman, State Senate  
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