Leasing out Washington's state-run liquor-distribution system to a private operator could net the state $300 million in cold cash, bring in higher profits each year and improve service for consumers and restaurants, according to a proposal from Tom Luce of the Washington Beverage Co.
The pitch by the Tacoma business consultant and former congressional aide is drawing wary interest from lawmakers and Gov. Chris Gregoire, who want to be sure it makes economic sense.
House Ways and Means chairman Ross Hunter, D-Medina, included $300 million from a warehouse lease deal in the operating budget for 2011-13 that passed the House Saturday. Hunter wants to see if the plan can help plug a slice of the $5 billion budget shortfall, and staffers with the Legislature and governor’s budget office are reviewing how a leased warehouse concept might work financially.
We’ve had some offers. At first blush, the offers need work,” Hunter said initially. But the goal is to issue a request for proposals, or RFP, to see what might be feasible, and the state could reject RFPs “if it turns out not to be a good deal for the state,” he said.
Luce brought his proposal to the Washington State Liquor Control Board this year.
“We would take on the risk associated with running the business,” he said Friday. “This makes sense for the state and the private partner if they can grow the (liquor) business beyond what it is today. They’ve got to demonstrate that they are going to be able to do that.”
Improved service – which had been an issue in two liquor-privatization initiatives that failed in fall’s election – is a big part of boosting that business. Luce said his proposal would lead to greater efficiencies because the state and distributor – whomever is selected – would share an interest in raising state profits from the distribution.
He predicted his approach – if state profits can increase by nearly 4 percent a year, or 1 percent more than the liquor agency’s have over the past decade – would give the state about $1.5 billion more revenue over 20 years than it could otherwise expect.
Critics have surfaced, including Republicans such as Rep. Gary Alexander, who isn’t convinced the state comes out ahead and believes the state cannot rely on the $300 million for its budget. But Alexander said he is OK with putting out an RFP to see what private-sector firms might be willing to do – and to see what benefit the state could gain.
Democratic Sen. Tim Sheldon of Potlatch favors a more complete shift of the operations to the private sector. He sponsored a bill, considered unlikely to pass, that would get the state out of the liquor business.
And Bruce Beckett, government affairs director for the Washington Restaurant Association said the proposal fails to open the delivery system to competition. “We’re highly skeptical of this financing model,” he said.
Gregoire is skeptical but interested in the proposal, and state Treasurer Jim McIntire said the concept needs work.
“She’s certainly willing to explore it but has expressed concerns over the loss of revenue down the road,” Gregoire spokeswoman Karina Shagren said.
“What I’ve seen of that so far may not work,” McIntire, a Democrat, cautioned early in the week. “I want to make sure we are not giving up a long stream source of revenue for a short term operating (gain).”
Luce spokesman Sandeep Kaushik said the state would see a $35 million revenue drop in the first year in its collection of revenues from taxes and price mark-ups – but it gets $300 million up front that could be used to keep the Basic Health Plan for low-income workers and other programs running.
Within a few years the state would see its profits “significantly exceed” the $370 million it collected last year – if the system can grow by at least 1 percent a year more than it does today.
Brian Smith, spokesman for the Liquor Control Board, said it does not forecast by price because that is volatile, but the agency has seen an average growth in sales of 2.7 percent a year over the past decade when measured by volume.
Other concerns may arise over the 94 employees at the state’s 220,000 square foot warehouse in Seattle, which has the capacity to receive and ship upward of 22,000 cases of liquor per day. The Washington Public Employees Union represents those workers.
Luce said the employees could remain unionized – perhaps under a sister or affiliate union to WPEA, because they would no longer be public employees.
He expects a bill based on his ideas to be introduced soon in the House and Senate.
Early drafts of the bill say the state Office of Financial Management would solicit proposals or bids for taking over the warehouse for 20 years – with requirements that the bidder or its partner have experience in distribution, whether inside or outside the state.
The RFP would require payment of at least $300 million to the state in cash – up front. The request would assure the winning bidder about $75 million a year minimum to cover operations costs, and the private company would split profits 50-50 with the state that are above what the Liquor Control Board expects.
It also would leave the winning bidders’ investments of millions of dollars in equipment and facilities in state ownership at the end of the lease.
Perhaps more important than any other element, the draft bill says proposals or bids must “demonstrate to the satisfaction of the Office of Financial Management a net positive financial benefit to the state on an average annual basis over the term of the proposed lease or contract.”
In other words, state liquor revenues that exceed roughly 4 percent a year would be split 50-50.
Brad Shannon: 360-753-1688