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McDonnell wants to show Virginia the way out of liquor business

By Anita Kumar
Washington Post Staff Writer
Sunday, July 18, 2010; A01

RICHMOND -- For months, aides to Virginia Gov. Robert F. McDonnell have been meeting behind closed doors with alcohol retailers and wholesalers, public safety officials and faith-based groups to come up with a way to fulfill one of the governor's most notable campaign promises: privatizing the state's liquor stores.

The consequences of what they come up with are potentially enormous and would amount to one of the most noticeable changes in the relationship between Virginians and their government in years, if not decades.

For the drinking-age public, a privatized system could mean many more liquor stores, a much wider variety of libations and lower prices. Like beer and wine, liquor could be sold in grocery stores, big-box stores such as Wal-Mart or anywhere else a licensed dealer chooses to locate.

For the state's ailing transportation network, it would mean a jolt of fresh cash that McDonnell (R) urgently needs as part of his plan to fix roads. Two of McDonnell's other primary sources of new money for transportation -- drilling offshore and tolling interstate highways -- are highly unlikely to generate any money anytime soon.

And for McDonnell, who opposes government-run liquor stores on free-market principles, bringing Democrats and Republicans together on a major issue would show that he can deliver on his promises and be the kind of bipartisan leader he has pledged to be.

Del. David B. Albo (R-Fairfax), who supports privatization, said changing the way Virginia sells alcohol after 76 years would be a huge victory for McDonnell, the General Assembly and Virginia. "It's going to be a big deal if it happens," Albo said. "We've been doing it the same way since Prohibition."

But making it happen will be anything but easy. Alcohol sales bring in about $220 million a year, and many lawmakers -- particularly the Democrats who hold a majority in the state Senate -- are unwilling to support privatization unless it generates much more than that. Many others, including some religious conservatives in McDonnell's party, are fearful that privatizing alcohol sales will lead to a glut of liquor stores and a rise in drunken driving and other alcohol-related problems.

It will also be a tough sell. Although many may support the idea in principle, there is no great push from the public or either party to privatize liquor stores. Two recent governors have raised the idea, only to see it go nowhere. Also, the money generated by alcohol sales goes toward schools, public safety and other core services, and many Virginians are likely to balk at the idea of taking money away from those areas to fund transportation projects.

McDonnell's staff will unveil proposals in the first week of August. His government reform commission is likely to approve one of them Aug. 26, after which McDonnell expects to call legislators back to Richmond for a special session on privatization and other cost-cutting issues.

Staff members are considering four approaches, all of which have serious downsides, according to sources familiar with the process. The options are: selling all of the state's alcohol assets to a single outfit; offering licenses to the 3,000 businesses that sell beer and wine; having firms take over the state's 332 existing stores; and auctioning an undetermined number of licenses to the highest bidder.

Many of those who have attended recent meetings at the governor's office say the plan to auction licenses has received the most support. The proposal would probably come with an increase in the number of stores, perhaps to as many as 800. Companies would be limited in the number of licenses they could buy, and some would be set aside for small, women-owned or minority-owned businesses.

That would mean Virginians could be able to shop for liquor at grocery and convenience stores, as well as big outlets such as Costco.

"For 70 years, we've distributed beer and wine in every 7-Eleven, every Food Lion. But we've controlled the distribution of spirits," McDonnell said recently. "From a free-market standpoint, it doesn't make sense to continue to control only one part of the distribution."

Dollars and sense

After Prohibition ended in the 1930s, 32 states, including Maryland and the District, allowed private companies to sell alcohol. But worries remained about the effect of alcohol sales on the public, and 18 states, including Virginia, decided to take matters into their own hands.

Virginia allowed private companies to sell beer and wine but kept control of distilled spirits. Liquor was sold then, as now, in what are known as ABC stores, run by the Department of Alcoholic Beverage Control.

Virginia is one of several states, including Pennsylvania and North Carolina, that are considering privatizing liquor sales to help balance their battered budgets. Voters in Washington will have a referendum on the issue later this year.

In Virginia, McDonnell's staff members estimate that privatizing the stores could bring in a one-time windfall of $300 million to $800 million, although they would not document how they arrived at those numbers.

They did say a 2002 report written for then-Gov. Mark R. Warner (D), who also considered privatizing the stores, indicated that the state could make $500 million. But a copy of that report -- prepared by a commission chaired by former governor L. Douglas Wilder (D) --does not show specific figures for ABC privatization. It estimates that eliminating about 15 percent of state agencies, including the ABC, could save the state more than $500 million.

Costs of change

Regardless, selling alcohol is a complex business, and a variety of factors could dramatically cut into any profits. For instance, the state may have to pay up to $40 million in severance to 2,600 employees and millions more to get out of contracts, including a $15 million trucking contract, according to sources in the governor's office. The state also rents more than 300 of its stores, and officials would have to find a way out of the leases.

"They ain't got the foggiest idea how much money they'd get," said Senate Majority Leader Richard L. Saslaw (D-Fairfax), who opposes privatization.

Saslaw predicted that the proposal will fail in the Senate because Democrats remain concerned that the state will no longer be able to collect the $220 million in taxes and profits ABC stores contribute annually to the general fund.

Sources said McDonnell will proceed with a proposal only if it includes at least $150 million a year in recurring money -- an amount that could be generated by a new or reconfigured tax on wholesalers or on retailers.

Laura Aldrich, president of the Virginia Retail Merchants Association, which has long supported privatization, said she does not think that the state will make as much money as McDonnell estimates without opening hundreds more liquor stores, a proposition that she thinks would be rejected.

"That's not the Virginia way," she said.

Sen. Mark D. Obenshain (R-Harrisonburg), who in the past two years has unsuccessfully introduced legislation that would allow 800 private liquor stores to operate in the state, said studies show that having more liquor stores does not necessarily translate into more drunken-driving arrests or alcohol-related driving fatalities.

Virginia's 332 stores are far fewer than in most other places. The District, which has less than one-tenth the population of Virginia, has more than 500 liquor stores.

Virginia officials said the relatively small number of stores causes them to lose 15 to 20 percent of alcohol sales to neighboring jurisdictions, including Maryland and the District, where prices are lower and locations more convenient.

Ross Mattis and Ned Wheeler, who own a pair of wine shops in Richmond, said they would be thrilled to get into the liquor business. "I want to be the first in line," Mattis said as he sat next to a rack of wines from Australia and New Zealand in one of his Barrel Thief stores.

Mattis took a break from refilling the glasses of two customers on a recent afternoon to describe the liquor store he would like to buy down the street from one of his shops. He would offer a better selection and better service, he said, and would do some cross promotion with his other business.

"If they wanted to give me that ABC store, there's a lot of things I could do better," he said.

Staff researcher Meg Smith contributed to this report.

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