Comments of NC Association of ABC Boards Presented to Joint Study Committee on Alcoholic Beverage Control

March 24, 2010

Good afternoon. I am Jon Can. I practice law in Raleigh and am a lobbyist for the NC Association of ABC Boards, among others. Thank you for allowing me this opportunity to speak with you today.

Your Committee charge contains a wide-variety of issues that you may address, some of which are new issues. My comments today are with respect to positions that have been established by the Association.

Salaries

Much of the media attention on ABC boards has related to salaries and meals. The reports seem to indicate that the salaries in New Hanover County are the noun across the State. This is not the case. We have analyzed the salary information submitted to the ABC Commission, and offer the following observations.

The salary for the New Hanover County ABC Board's manager is not an accurate representation of other boards' managers across the State. The average salary for all ABC Boards' managers is $47,149; the average of the lowest 10 salaries is $15,148 and of the highest 10 salaries is $119,982. Because the ABC system is comprised of boards with varying number of stores, we calculated the average salary for the manager, by the number of stores, as follows: one store - $36,829; two to five stores - $49,017; six to ten stores - $83,356; and eleven or more stores - $121,894.

We supported the ABC Commission's recent directive to local ABC Boards to provide information on the ABC board's compensation and benefits to top employees. This data provides useful tools for ABC boards and for appointing authorities - the Cities, Towns and Counties that have ABC boards - to have in assessing and setting compensation and benefits. In past years, ABC boards have willingly provided the ABC Commission with information and data as requested. For at least the past 13 years, the Commission has annually requested, and ABC Boards have provided, information on Boards' managers' salaries.

We support regulatory changes to: (1) require ABC boards to adopt compensation ranges for all positions; (2) require ABC boards to include decisions about employee compensation and benefits in their meeting minutes; (3) require that ABC boards submit all meeting minutes to their appointing authority; and (4) require ABC boards to submit a copy of their annual audit to their appointing authority.

We request that the ABC Commission annually obtain compensation and benefit information for top employees of ABC boards, and compile and distribute this data to ABC Boards and to their respective appointing authorities. This data should include both the approved compensation range for the position and the actual salary of the top

employees. We request that the ABC Commission require ABC Boards to certify to the ABC Commission, when Boards provide this infoimation to the Commission, that the Board has provided the same information to the Board's appointing authority.

Meals

The Mecklenburg County holiday dinner has garnered a lot of attention. I am not aware of similar meals of this nature with other ABC boards, and do not believe that there has been any. Pursuant to a 1996 ruling from the Commission, which permitted unsolicited business meals as an accepted practice, industry representatives have on occasion provided unsolicited business meals to some ABC board members and managers. This practice has not been widespread and has not been of the type or nature as the meal that was recently reported by the media. We support the ABC Commission's January 13, 2010 memorandum which prohibits industry members from providing meals to ABC board members and employees, and the Association urges its members to adopt a policy to decline such meals if offered. G.S. 18B-1116 already prohibits the alcohol industry from giving anything of value to any alcoholic beverage retailer or his employee and the Commission's rules prohibit distiller representatives from giving liquor or anything of value to store personnel and prohibit store personnel from accepting gifts from such representatives (4 NCAC 2T. 0910). Even so, we stand ready to work with you and legislators to improve upon the current law regulating these areas.

Ethics

We support regulatory changes that would require ABC Boards to adopt an ethics policy consistent with the policy required to be adopted by their appointing authority pursuant to recent law (Session Law 2009-403). This new law requires local governments to adopt ethics policies by January 1, 2011. At least 87 ABC boards already have an ethics policy and at least 81 Boards have a policy prohibiting gifts, as reported to the ABC Commission recently. The Commission has recently submitted an Ethics Resolution to the ABC boards. Currently, about half of the boards have adopted this suggested ethics policy and many more have this on their agenda for upcoming meetings. Ethics can be a very broad subject. There are already statutes and rules regarding gifts and meals. If there are gaps in the ethics standards applicable to ABC boards I think you will find that we will be supportive of filling those gaps.

PED Report

At the last meeting of this Committee, you heard from Carol Shaw with the Program Evaluation Division and the PED's Report on the ABC System. The PED Report makes several recommendations and the Association has taken a position on those recommendations.

1. Mission Statement. PED recommends that the General Assembly should clearly define the mission of local boards in Chapter 18B of the General Statutes. The Association supports a statutory mission statement.

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2. Performance Standards. PED recommends that the General Assembly should direct the ABC Commission to develop performance standards for local boards. We support the development of performance standards ONLY IF those standards are promulgated by the ABC Commission through its rule-making authority.

3. Merger. PED recommends that the General Assembly should authorize the ABC Commission to require local board mergers (including new boards) as needed to improve the effectiveness and efficiency of the ABC system and to use performance standards when determining whether to require merger of boards. We support authorization for the ABC Commission to require mergers of certain boards (but not all boards), as a last resort, based on performance standards that are promulgated through the rule-making process.

I say "certain boards but not all boards" because the legislation introduced as a result of the PED Report (SB 839/HB 768) provides for mandatory mergers of all ABC boards in a county, regardless of performance or other factors, and authorizes the ABC Commission to merge two or more counties into a regional ABC board. Mandated merger with the end result of "one board per county" and exempting systems that are already merged would affect about 90 boards in about 27 counties. We do not support this type of mandated merger or geographic merger and note that this type of merger is not recommended by the PED Report.

In recommending mandated mergers of certain ABC boards that do not meet performance standards, the PED Report assumes that forced mergers will result in increased efficiencies, profits and distributions. Any increased efficiencies due to a merger will inure to the financial benefit of local government and the local community, and not the State. Some local governments will question the State's interest in requiring them to merge their ABC boards and will prefer to remain independent, and to ensure that a store will be able to serve their community, even if some additional profits could be gained from a merger.

In recommending forced mergers of ABC boards, the PED Report also assumes that there are too many ABC boards. However, NC has a low number of retail spirits outlets by comparison to other states. NC has about 410 ABC stores and over 6,000 outlets licensed to sell beer off-premises. In 2005, South Carolina, a license or open state, had more than twice the number of retail outlets for the sale of spirits with less than one-half of NC's population. The number of outlets in North Carolina is consistent with those in Virginia, where all spirits are sold at retail through state-owned ABC stores. In 2008, Virginia had 332 stores serving a population of 7.7 million.

Current law allows ABC boards to voluntarily merge, even across county lines. The Association has historically supported the voluntary merger of ABC boards, and prompted the General Assembly to authorize boards to jointly operate ABC stores, which it did in 2001. We encourage ABC boards to consider voluntary merger and joint operation of stores, where appropriate. However, it is not appropriate for all boards and all situations. Local governments that want to voluntarily merge ABC boards can do so.

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Local governments have not, and are not, asking the General Assembly to mandate merger of all ABC boards.

4. Increased Threshold for Elections. PED recommends increasing the registered voter threshold for a city ABC store election from 500 to 5,000 voters. We support this recommendation, and also the PED recommendation to allow the towns in NC's dry counties in western North Carolina to qualify at the current threshold (because no town in these counties has a population of 5,000 registered voters). The Association would not oppose "grandfathering" cities with between 500 and 5,000 registered voters if those new boards were merged or jointly operated with another board.

5. Technical Assistance Fund. PED recommends that the General Assembly authorize the ABC Commission to levy a bailment surcharge up to $0.10 per case to create a non-reverting revolving no interest loan fund to pay for technical and financial assistance for local boards. The Association supports and requests the ABC Commission to provide technical assistances to ABC boards (particularly to assist them in voluntarily merging or jointly operating stores), but does not support a levy or the establishment of this fund.

6. Mixed Beverage Election. PED recommends the elimination of the requirement that a city must operate an ABC store or hold an ABC store election in order to hold a mixed-beverage election. The PED Report noted that several towns had placed ABC store authorization and mixed beverage authorization on a referendum with no intention of establishing the ABC store, so that the mixed beverage authorization could be voted upon. We support this recommendation.

7. Agency Stores. PED recommends that the General Assembly should authorize the ABC Commission to require local boards to contract with an agency store (privately owned and operated retail outlet) to sell liquor when performance standards indicate efficient operation of an ABC store by a board is not possible. Stated another way, this means that over the objection of an ABC board, its appointing authority and the local community, the Commission could require the board to enter into a contract with a grocery store, pharmacy, convenience store or other private party to sell liquor at retail in that jurisdiction. We oppose agency stores. Significantly, the Alcohol Beverage Council of North Carolina strongly opposes agency stores. The Alcohol Beverage Council of North Carolina is comprised of companies that, acting as brokers, market spirits in this state and that represent the interest of liquor distillers in North Carolina.

The PED recommendation would apparently limit agency stores to jurisdictions where it deems that the efficient operation of an ABC board is not possible, and notes that other states have agency stores in rural areas that cannot support a stand-alone retail liquor store. However, agency stores will lead to efforts to allow spirits to be sold in all jurisdictions by private sellers, not just rural areas. Currently, there are about 6,000 outlets licensed to sell beer off-premises in NC. Local voters did not vote to allow spirits to be sold in private retail establishments, only through ABC boards; local referenda to

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establish ABC boards (and other alcohol referenda) are hotly contested. This "control" over the sale of spirits was an important factor in these referenda.

8. Privatization. The Association opposes privatization. The PED was directed to address the issue of privatization. While the PED Report examined North Carolina's control system in comparison to other control states and in comparison to certain other license or open states, the PED did not recommend privatization. There are numerous findings in the PED Report which support its reasoned decision not to recommend privatization. Three of these key findings are that:

(a) First, among the other 18 control states, North Carolina ranks 12th lowest in the number of retail outlets, 4th highest in revenue per gallon, and 3rd lowest in adult per capita consumption.

(b) Second, in comparison to the 12 license or "open" states who are similar to North Carolina in that they limit sales of spirits to package stores (that are privately owned), North Carolina has the fewest retail outlets (except for Delaware, a much smaller state), receives the most public revenues/gallon, and has the lowest per capita consumption.

(c) Third, control states may not convert from a control system to a license system because a reduction in revenues is likely, in that control states received an average of $25.36 per wine gallon' in state and local revenues in 2006 from spirits while license states received an average of only $11.65 per wine gallon.

North Carolina ranks 3 rd among the 50 states and the District of Columbia in revenue per capita from the sale of spirits and 48 th in per capita consumption. This information comes from DISCUS, the national association of liquor distillers, which published this infolination in 2009 for the year 2007.

The PED Report focuses on profits. The PED Report noted 43 ABC boards had profits of less than 5% (FYE 07) --- I note that only 23 of these boards have mixed beverage sales to bars and restaurants and that mixed beverage sales have to be authorized by voting citizens in the jurisdiction. However, sales from these boards constituted only 5.53% of the total sales for the ABC system. The PED Report explains that population shifts have affected profitability, with the population shifting over the past few decades away from rural areas to urban areas, surrounding counties and tourist areas.

The PED Report also noted that some ABC boards did not make a distribution of profits (FYE 07). Sales from those 28 ABC boards constitute only 4.43% of the total sales for the ABC system. Further, these 28 boards still collected $7.7 million in state sales and excise taxes, $300,000 in other taxes, and contributed $150,000 to law enforcement and alcohol education, and paid $170,000 to operate the ABC Commission and its warehouse. Nine of these 28 boards had profit percentages greater than 5%.

A wine gallon is a measurement volume that is equivalent to a standard U.S. bulk or liquid gallon

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These boards may be retaining distributions for capital purchases and improvements or for payment of debt beyond loan requirements, with the knowledge and agreement of their appointing authority.

Local governments benefit from profitable ABC stores, not the State. As you heard from Carol Shaw with the PED at the last meeting, State revenues are based on dollar volume of spirits sold. State alcohol taxes are paid to the State for every sale, which is another advantage of the control system, regardless of whether of the store is profitable or not. Local governments should be able to balance profits with providing its citizens with a convenient location to purchase liquor.

Profits and revenues are just one aspect of the sale of spirits. Societal costs and the public's health and safety are also very important factors. The North Carolina Institute of Medicine, in its 2008 Task Force on Substance Abuse Services Report to the General Assembly, noted that the consequences of underage drinking cost the State $1.2 billion in 2005.

The bottom line is that alcohol will never come close to "paying its way" in our society; its negative effects far exceed any possible measure of revenue generated. But our current ABC System is meeting its core mission of "control, service and revenue" better than could any form of privatized liquor sales and is accomplishing important public health and revenue objectives.

Submitted by Jon Carr, lobbyist, NC Association of ABC Boards, on March 24, 2010. Jon Carr, Jordan Price Wall Gray Jones & Carlton, 919-828-2501; jcarr@jordanprice. corn

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