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Several states may get out of the liquor business

Washington looking at privatization to close budget gaps

SEATTLE — Thousands of cases of whiskey, vodka and rum zip along three miles of conveyor belts inside a massive distribution center in industrial south Seattle, the sole location for shipping booze to liquor stores across Washington state.

The 250,000-square-foot warehouse is the nexus from which all of the state's liquor is imported, processed and moved out to the 315 state and contract stores, the only place where Washingtonians can buy hard liquor for home consumption.

As states scramble to deal with gaping budget deficits, many are looking for any opportunity to increase revenue, and Washington is one of a handful of states weighing whether privatizing liquor sales is the way to get back into the black.

Some lawmakers here want to sell the distribution center — bringing the state a one-time boost of about $33 million — and let the private sector step in to sell liquor, which some say will reap long-term cost benefits.

"To me this isn't a core function of government," said Sen. Rodney Tom, a Medina Democrat who is a chief budget writer for the Senate. "It's a retail operation. Private companies can do it as good or better."

Tom has introduced a bill that would have Washington get completely out of the liquor business, allowing an unlimited number of people to buy licenses to sell liquor, as is done in California. Other lawmakers have introduced measures taking smaller steps toward privatization, including bills that would auction off franchise agreements for stores like Costco, or which would allow a limited number of smaller contract stores to sell booze.

"When states are struggling around revenue, the idea of privatization often rises," said Steven Schmidt, spokesman for the National Alcohol Beverage Control Association, the group that represents states who are directly involved in the sale of liquor. "This year, we're seeing more efforts to privatize than we have in the recent past."

In Virginia, which is facing a $2 billion shortfall this year, recently-elected Republican Gov. Bob McDonnell ran, in part, on a pledge to privatize liquor stores as a way to raise transportation money. While privatization bills have been introduced by lawmakers in the current session that runs until March, McDonnell is working on putting together a commission on government reform and restructuring that will look at liquor privatization. His staff said that while McDonnell isn't opposed to the current bills, the issue is most likely to come up later this year, possibly in a special session.

"Liquor sales just don't fall under the category of top government functions to be providing to the taxpayers," said McDonnell's policy director, Eric Finkbeiner.

In Mississippi, bills to privatize wholesale wine business have been introduced. In Vermont, a bill has been introduced to disband the Department of Liquor Control and permit second class licensees to sell spirits. And in North Carolina, a state task force is studying various types of government reform including liquor privatization.

The five states are among 18 so-called "control" or "monopoly" states, which exercise broad powers over wholesale liquor distribution. Of those states, only eight — including Washington, Virginia and North Carolina — also are involved in retail alcohol sales, Schmidt said. Thirty-two states are license states, where the private sector handles wholesale distribution. Currently, liquor brings in about $320 million in revenue to Washington each year, but a recent report by Washington state Auditor Brian Sonntag found that the state could increase revenue by as much as $277 million over five years if it changed its current liquor model.

In a year when Washington lawmakers are looking to patch a $2.6 billion deficit, Tom said privatization just makes sense.

A part of the potential savings is the loss of about 800 union jobs, which means that the state would save on long-term pension and health costs for those workers. Tom knows that the union issue is the most controversial aspect of privatization, but he said union jobs are at risk either way.

"I would rather cut jobs at the state liquor store than to cut jobs of teachers," he said. "We have a decision to make."

One privatization bill introduced in the Washington state House by Rep. Gary Alexander, R-Olympia, would change the state model to that of Oregon's, where all liquor stores are private stores that contract with the state. Another bill by Alexander, along with a companion Senate bill by Sen. Tim Sheldon, D-Potlatch, would auction off franchise agreements to the highest bidder, which would open the door for grocery sales.

While the Senate bill received a public hearing, it was ultimately turned into a study bill. And neither House bill received public hearings, and are likely dead, despite the support of at least one prominent Democrat, Rep. Kelli Linville, D-Bellingham.

"We need to reduce the footprint of government," said Linville, who as chairwoman of the House Ways and Means Committee, is tasked with writing the House budget proposal.

But Democratic leaders, including Gov. Chris Gregoire, have come out strongly against privatization, saying it's not a viable budget solution for the immediate fiscal problem the state is facing. Under the auditor's report, the state wouldn't start seeing savings from the change until 2012.

"Our focus is on solving the budget crisis," said Senate Majority Leader Lisa Brown, D-Spokane.

The state Liquor Control Board has managed the wholesale distribution and retail sales of hard liquor through state-owned stores and contracted agencies since 1933. Those stores also compete with private retail stores that sell wine and some malt beverages.

The last time privatization was seriously considered in Washington state was in 2000, when a citizens review committee determined that costs in turning over the system, as well as public health and safety issues, meant that the state should remain a monopoly.

Those same concerns over public health and safety are noted by Rick Garza, deputy director of the state Liquor Control Board.

He said that the state has a nearly perfect no-sale-to-minors compliance rate, and he said he fears that privatizing would significantly worsen that number.

"Why take the risk of allowing for more youth access to alcohol because you think the state shouldn't sell the product?" he asked.

Tom called those arguments "a bunch of baloney."

"Every retailer knows that if I sell to an underage kid and that kid gets in an accident my business is gone," he said. "No business is going to take that risk."