Alliance Proposes Opt Out Measure For LCB’s Future

SNOW HILL – The story of Worcester County’s embattled Liquor Control Board (LCB) continued Tuesday when a group of licensees proposed amending county rules to allow “opting out” of the current monopoly on wholesale liquor distribution.

Representing the Worcester Alliance for Fair Markets (WAFM), attorney Joe Moore addressed the County Commissioners on behalf of the collection of 90 or so licensees behind the proposed reform. “This is not a new issue,” began Moore.

The call for change to the LCB’s monopoly on liquor distribution has, by many accounts, existed for years. In recent months, that call has intensified due to the controversy that attached itself to the LCB when it was revealed that the board had violated several trade laws, including selling the same product for different prices on the same day and selling products to retailers “below the cost” of what the LCB paid the wholesaler.

In response to the controversy, State Senator Jim Mathias said he was willing to “submit legislation to abolish [the LCB] if a plan is created to replace the money.”

In an effort to be “mindful of Senator Mathias’ comments,” WAFM proposed granting liquor license holders in Worcester the option of paying a $2,000 annual “opt out” fee, which would allow them to purchase liquor and spirits from other sources besides the LCB.

“We want to allow a free market in Worcester County,” Moore told the assembly.

The $2,000 fee was not just a rough guess made by the alliance. In the proposal submitted to the commission, the last decade of both the LCB’s retail and wholesale profits were averaged. The resulting 10-year retail average came to $366,039 per year. Because the WAFM application wouldn’t affect retail operations, however, that data was not pertinent. What the commissioners were asked to focus on specifically was the profits from the wholesale portion of the LCB’s operation.

From 2001 to 2010, wholesale profits averaged out to $274,842, with the highest profit of $479,325 in 2001 and an actual loss of revenue of $421,483 in 2010. WAFM divided that 10-year average by the 183 alcohol liquor license holders in the county and came up with $1,510 per licensee. However, Moore pointed out that his clients would drop 2010’s near half a million dollar loss from the formula, coming up with a new average of $352,211 a year, which equated to $2,000 a licensee.

It was WAFM’s opinion that it would be completely fair to allow licensees to pay that $2,000 annual fee for the right to buy from other distributors besides the LCB, which they claimed has an average markup of approximately 24 percent.

Moore played Devil’s Advocate for a moment and admitted that some smaller distributors would lose money by paying the flat fee. But, he pointed out the opt out fee was in no way mandatory and that licensees could chose to forgo that option and continue buying directly from the LCB.

However, LCB spokesmen, attorney John Phoebus, disagreed with the equality of the plan, stating that it only “sounds good” on paper, and would not be successful in practice.

“It would only be good if close to 100 percent of licensees supported it,” he said in an interview.

While Phoebus was refused the opportunity to address the commission immediately after Moore’s proposal, he confirmed that the commissioners invited the LCB to respond, which they will do so by letter.

Phoebus admitted the opt out fee would benefit a portion of licensees, but not the majority.

Commissioner Louise Gulyas asked Moore if he could make any predictions about how licensees would react if the WAFM proposal came to fruition.

“How many licensees do you think will opt out?” she wondered.

Moore was hesitant to make a guess and stated that it would be hard to tell until those licensees were actually given the choice.

The LCB, on the other hand, made some calculations. According to Phoebus, only licensees that spent upwards of $20,000 a year on liquor would see any savings by paying the opt out fee instead of continuing to buy from the board.

When looking at a list of purchasers, Phoebus stated that only about one-third of licensees spent more than that amount on liquor. He admitted that there were several people right around the $20,000 mark, but doubted that clients would swap LCB membership for the opt out fee if they didn’t see a financial gain.

According to Moore, the plan was fair to everyone involved. He made it clear that it was not the WAFM’s intention to eliminate the LCB entirely, just to break its monopoly and to give licensees a choice when it came to whom they could buy spirits from.

Instead of disassembling the board and leaving its employees out of work, Moore claimed the new proposal would allow the LCB to “continue serving in what we believe was their [intended] function,” as retail operators and wholesale distributors to those who wished to use them.

Phoebus countered by stating that the loss of the top third of the LCB’s wholesale business would compromise the entire system. Without the revenue from the biggest operators, the LCB wouldn’t be able to continue to provide wholesale services to anyone, which Phoebus remarked would cost a lot of locals their jobs, as the wholesale branch of the board currently has 18 employees and swells to 33 employees during the summer.

“The worst thing is what life would look like for the rest of the licensees,” said Phoebus, remarking that if the top 33 percent or so of clients left, the wholesale operation would collapse, leaving a majority of license holders out on a limb.

While it could be argued that this would simply confine the LCB to running its retail branch and would allow those smaller clients to find other wholesalers, Phoebus claimed that the LCB made the wholesale process much simpler for small retailers, delivering products directly to their door and pre-stocking the most popular items in anticipation of a rush.

He explained that if the wholesale division buckled, there would be no more deliveries, a service he believes many minor establishments rely on, as they can’t afford to spend their time directly shopping at wholesale locations, the majority of which Phoebus guessed would likely be in Baltimore or further.

“It’s just a question of economics,” he said.

The fact that the opt out fee was a flat $2,000 instead of scaled according to business size also caught Phoebus’ attention. By his math, the largest buyers of wholesale liquor would have to pay a fee in excess of $80,000 to equalize how much profit they’d be denying the LCB by leaving.

While WAFM didn’t speculate on how the LCB’s wholesale division would fare, Moore did point out that only four of Maryland’s 23 counties even have an LCB or LCB equivalent. Additionally, Moore cited the fact that an alcohol license holder in Worcester County “already pays the highest license fee in the state,” with a Class “B” restaurant license costing $3,125 annually and a Class “D” nightclub license costing $4,250 annually. Tacking on the $2,000 opt out fee, club owners would be paying over $6,000 a year just to distribute alcohol.

“We’re not whining about this…it is what it is,” said Moore, adding that he just wanted to point out how much license holders in Worcester already go through and that leaving them no choice but to buy from a monopoly with 24-percent average markups wasn’t fair.

“It’s the role of the County Commissioners…to ensure a fair, level playing field in Worcester County,” said Moore.

Commission President Bud Church addressed those in attendance, stating that the commissioners would need some time to digest the information. When later asked if he could provide any estimate for when the commission would be ready to vote to either support or deny the proposal, Church promised in the near future.

“We know time is of the essence…I can’t give you a time specific but it won’t take long,” he said.

Mathias, whose offer to submit legislation limiting or eliminating the LCB. prompted the WAFM to bring the proposal to the commissioners, was not on hand for the meeting. However, he is aware of the proposal’s existence.

“It sounds to me to be a reasonable approach, a sensible approach,” he said from Annapolis Wednesday. “If I get the green light from the county, I’ll be ready to submit a bill on their behalf.”

But Mathias does consider the commissioners’ approval vital to whether he’ll step up to the plate. If they do decide to support the proposal, he believes it has a good chance of becoming law.

“My job is not just to put a bill in, but to put it in and get it passed,” he said. “If the county says this is a bill they can live with, I’m optimistic about the chances of getting it passed.”