Governor reveals ABC plan as legislature prepares to start

Gov. Bob McDonnell is pursuing a new liquor privatization plan that he hopes will be easier to swallow.

McDonnell proposes that the state retain control of the wholesale operation and privatize the retail portion to reap a $200 million to $400 million windfall for transportation, under a plan to be crafted into legislation for the General Assembly session that starts today.

Annual revenue to the state's general fund from liquor sales — budgeted at $324 million in the fiscal year that began July 1 — would increase by about $13 million, mostly through savings from not operating stores, according to estimates calculated by the PFM Group. The administration hired the national financial-management advisory firm to explore ways to privatize the state's liquor monopoly.

The big question is whether this revised plan — details of which were first reported by the Richmond Times-Dispatch — will go over any better with legislators than its predecessors.

Lawmakers have objected to previous versions of McDonnell's privatization plan on various grounds, with some simply wanting to leave what they consider a well-functioning system alone. The first plan the administration floated met roadblocks in both political parties, partly because it would not have produced as much money for state coffers as the current system.

"The first plan was bad and this is half of the first plan, so maybe the good news is it's just half-bad," said House Minority Leader Ward L. Armstrong, D-Henry.

He said it's "a total nonstarter in the General Assembly, and I'm not just talking about on the Democrat side of the aisle."

But Sen. John Watkins, R-Powhatan, said the latest plan covers revenue expectations and reduces a government function.

"We don't belong in a retail vending operation," he said. "Bottom line just comes down: it's the right thing to do."

Under this latest plan, 1,000 licenses would be auctioned off to retailers in tiers, based on size, to sell liquor in new or existing store. The state would decrease its mark-up on distilled spirits at the wholesale level to 50 percent, down from 69 percent — but it would allow the stores to set their own sales price.

That retail mark-up would likely differ based on the size of the store. Using an assumed retail mark-up of 15 percent, PFM estimates the price per gallon for consumers would remain within $1 of the current rate.

The upfront windfall from auctioning off licenses could bring in $300 million — give or take $100 million either way — according to PFM estimates. If the up-front payments fell short of $200 million, the administration would walk away from privatization.

All 334 state-run ABC stores would close, and employees would be eligible for severance under the Workforce Transition Act.

Licenses for new outlets would be restricted to one per approximately 8,000 residents with a maximum of 600 for high-volume outlets such as Costco and grocery stores, 150 for specialty wine and beer stores, 150 for small/medium size stores such as convenience stores and 100 for smaller stores with at most 50 employees statewide.

Preference would be given to current wine and beer licensees, and owners that fall into the tier of smallest stores would be allowed to pay for their winning bid over four years.

If they don't pay, they would lose their license.

By virtue of tying the licenses to population, Northern Virginia could see a more than three-fold increase in the number of stores, from 115 to 385. Central Virginia would see an increase of 103 outlets, to 191, while the Northern Neck area would gain four outlets, to total 22.

Restaurants would be permitted to buy liquor from the private retailers and could negotiate price and delivery options not available through the current ABC stores.

As part of the retail privatization, 22 more ABC agents would hit the streets, paid for through annual license fees of $1.5 million.

McDonnell made ABC privatization one of his campaign issues, tying it to a smaller-government philosophy and the need for transportation dollars.

Instead of dropping the idea after his initial efforts stalled, he went back to the drawing board.

He hired the PFM Group for $76,900. By proposing a plan that it says would bring in money upfront for the state's underfunded road maintenance and construction budgets, and increased annual revenues, the administration hopes this latest crack at privatization will be more politically palatable.

"This is just one of dozens of policy proposals we are advancing this session. Our agenda is focused on encouraging private sector job creation and reforming state government," said McDonnell spokesman J. Tucker Martin.

That said, Martin described the latest proposal as a "win-win-win-win" because it "eliminates a government monopoly, creates additional revenue for the state through cost avoidance, cuts the markup tax and puts new funding into transportation."

The report estimates an increase in gross sales of 5 percent under the license approach.

It cautions, however, that the process for implementing any new system will be "labor-intensive, time consuming, and most likely, frustrating to all parties."

omeola@timesdispatch.com

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