Thursday, February 3, 2011

Where McDonnell's ABC plan went wrong

Governor Bob McDonnell' s much-discussed, often-changed, plan to privatize the state's ABC stores and get the Commonwealth out of the liquor business is likely dead for the year.

Del. Chris Jones (R-Suffolk), chairman of the House General Laws Committee has said he'll use his chairman's discretion not to bring the bill up in committee. The Senate had previously said it wouldn't take up the bill until it passed the House.

That's really too bad. The state should get out of the liquor business. I was writing about it before McDonnell brought it up as an issue in the 2009 gubernatorial campaign.

But the governor and his staff made just about every mistake they could in rolling out a plan.

The first mistake, made back during the campaign, was linking privatization with funding the state's highway needs. There's no logical nexus between alcohol sales and road funding.

The amount of money that the plan would raise, even under the governor's most optimistic scenario, is fairly trivial compared to the state's unmet highway needs. It also created opposition to the plan among people who weren't necessarily against ABC privatization, but wanted to see the state pursue a more rational course -- such as a gas tax increase -- to fund highway improvements.

Given that a gas tax increase wasn't in the works, McDonnell is better served by his latest transportation plan, which is to borrow $3 to $4 billion. That's more than has been accomplished for transportation under the last six governors.

The second, and perhaps most critical mistake, the governor made was to let the people most likely to buy the stores essentially write his plan. The plan was crafted by a senior McDonnell aide in conjunction with lobbyists representing beer and wine wholesalers, convenience stores and large retailers like Walmart.

That was critical because it led to choices that made McDonnell's plan less saleable politically and less beneficial to the taxpayers.

First was price. While the interests that wanted into the liquor business set a nice price for themselves, they set one that wasn't necessarily in the best interests of the taxpayer.

Essentially, they set the price for Virginia's entire liquor business, which generates about $650 million in gross sales, at $550 million.

From a business point of view, and certainly from the point of view of the state's taxpayers, who own that asset, this made no sense. Soon after it was announced, two GOP businessmen on the Peninsula, both supporters of McDonnell for governor, called me and complained that he was "selling off all the state's assets just to keep from raising taxes."

Both said the real fair prices for the state's alcohol business was several times what McDonnell was asking.

While the price of the retail outlets was probably low, the price of the state's wholesaling business was definitely low.

Here's how low. Maine, which has a fraction of Virginia's population, leased its wholesale operation to a private company for 10 years for $144 million. The McDonnell plan would have sold Virginia's wholesale business forever for a little over $150 million.

The word lease brings us to another problem created by allowing people who wanted to get into the liquor business to draft the plan. They not only wanted to pay as little as possible for the right to sell liquor, they only wanted to pay it once. All the licenses foreseen in the McDonnell plan were permanent.

That of course created one of the biggest criticism of the plan, that the state would, for a one-time cash bonanza, lose the ongoing stream of revenue provided by the ABC stores.

That could have been easily avoided. The state could have auctioned off ten-year licenses. And it could have allowed license holders to pay on a yearly basis, maintaining a stream of annual revenue, as well as making it easier for "Mom and Pop" operations to compete for the business. At the end of ten years, the licenses would have gone back up for auction.

That wouldn't have been as good for the license holders, but it would have been better for the taxpayers.

The mistake that probably doomed the proposal was that it overreached politically. Here's where McDonnell could have used the help of some elected officials who understood Virginia's political culture, instead of business lobbyists.

Changing from state-controlled liquor stores to private package stores would have been a huge change for Virginia, a state that is notably change-averse. That's the kind of big change that typically takes the state four or five tries to make. Just think of the lottery. But, because their eyes were on dollar signs and not voters, lobbyists pushed for more.

It wasn't enough to make the stores private; they had to triple the number of stores that currently exist. And private package stores, like other states have, wasn’t good enough, we had to offer licenses to sell hard liquor in 7-Elevens and Walmarts and grocery stores.

Anyone with the slightest grasp of Virginia's political culture had to know that was going too far. It created opposition among religious groups and undermined McDonnell's support with General Assembly Republicans.

McDonnell should have known this. That's his base. It's where he comes from. He spent years in the General Assembly as an ally of the same religious right groups who were turned off by this proposal.

In embracing the business-crafted plan, McDonnell created inevitable political opposition from his friends. His plan ultimately died because they aren't enough votes in the Republican-dominated House to pass it. That could have been avoided.

It was too much too soon. In Virginia, if we embrace change at all, we favor gradual change.

The proposal should have held the number of stores initially to the same number ABC operates now. That would have made each license more valuable anyway, because it would have insured licensees faced limited competition. And it would have muted political opposition from people worried about "a liquor store on every corner." (That, by the way, is a red herring. Once they are no longer state entities but private businesses, the location of liquor stores would be controlled by local zoning decisions. They'd mostly end up in high-traffic business zones, like shopping centers. About where most of them are now.)

Then, in five years or ten years, once Virginians knew that private liquor stores didn't mean the end of the world, you could gradually begin increasing the number of stores, thus increasing the state's yearly take from the licensing fees.

If the governor is serious about getting the state out of the liquor business, he needs to go about it differently next year. There are Republicans and Democrats who agree with him on the principle. He should convene a panel of those -- and some folks who disagree to find out what they can accept, although they might not like it -- to craft a plan that is the most beneficial to the state financially and most acceptable to the public.

Virginia changes. But it changes slowly. It usually takes more than one try to make a change this big.

Cross-posted to All Politics Is Local.

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