Would private liquor distribution make state money? Lawmakers wonder

The Legislature is considering a plan to award a private company a slice of the state's liquor monopoly in exchange for $300 million upfront to help pay for certain programs. It's one of the few politically viable proposals to help the state raise new money, but it may not be a good long-term deal.

OLYMPIA — It sounds like easy money.

Give a private company a slice of the state's monopoly over the liquor business and, in return, lawmakers receive $300 million upfront to help pay for certain programs, such as subsidized health insurance for the working poor.

Lobbyists are pushing the idea in the Legislature, and lawmakers in both the House and Senate are crunching numbers to see if it would work.

It may be the only politically viable option on the table to raise new money at a time when legislators have to close a $5.1 billion hole in the budget. Lawmakers say they can't increase taxes because a two-thirds vote in both houses would be required under an initiative voters approved in November.

House Democrats included the liquor proposal in their budget, and Senate lawmakers are looking it over, too.

"It could happen. I'd like it to happen, but only if it pencils out," said Senate Ways and Means Chairman Ed Murray, D-Seattle.

That could be a big if.

The proposal under discussion involves the state handing over its liquor-distribution system for 20 years to a private company, along with a big chunk of the revenue it generates. Retail stores and money from taxes would remain under state control.

An analysis done by a company that hopes to run the distribution system indicates the state could gain an additional $1.2 billion over 20 years on top of the $300 million upfront, if the vendor is able to boost liquor revenues significantly.

But those projections also show that, if the vendor is not able to increase revenues beyond the status quo, the state could earn $1.2 billion less than if lawmakers left the current system in place.

The prospect of losing money makes lawmakers queasy.

"If I can't figure out a way to do it so that most of the risk of failing ... is their risk, I'm less interested," said House Ways and Means Chairman Ross Hunter, D-Medina.

Local governments also are concerned they could lose money and want the Legislature to hold them harmless.

The state liquor system currently generates, after expenses, around $370 million annually in revenue from sales, taxes and fees. Most of that goes into the state general fund, and local governments receive a slice as well.

The money made from the distribution system accounts for roughly 20 percent of the overall revenue stream, or about $72 million in fiscal year 2010, according to the state figures.

Business push

Tom Luce, a business consultant and former staffer for U.S. Rep. Norm Dicks, D-Wash., created the Washington Beverage Company to push the liquor-privatization idea this session.

Luce's scenario assumes state liquor revenues would increase 3 percent annually if the state kept the business for itself and did not partner with a company.

If the state privatized the distribution system and the vendor were able to boost revenues to an average 5 percent annually over 20 years, the state would realize a gain of $1.2 billion, on top of the $300 million upfront, according to Luce.

Under that plan, the vendor would receive about 71 percent of the revenue stream from the wholesale operation and the state would get the remainder. Luce noted the money going to the vendor would pay for overhead costs and improvements to the system, as well as repaying the $300 million and generating a profit.

If the private company were able to increase business significantly, the state and vendor would share the increase in profits.

On the other hand, if sales did not increase more than 3 percent annually, the state has the potential to lose about $1.2 billion over the same time period, compared with the money the liquor system would have made if it did not enter into an agreement, according to Luce's analysis.

The loss essentially would be the share of revenue owed to the vendor.

"If you have the status quo, it doesn't pencil out for either the state or the private partner," Luce said. "You've got to assume that someone is going to come in and make significant investments in the business and grow it."

Luce said the analysis was a "worst case" scenario he put together to give lawmakers an idea of how a deal could be structured. He also noted the state would keep any improvements made at the end of the lease.

If the state decides to move ahead, it will go through competitive bidding that his company may or may not win, Luce said. But whatever deal the state ended up with, it likely would be different from what he outlined.

Maine deal

Luce, who has partnered with a firm that structured a similar deal in Maine in 2003, said he's confident a private company could increase liquor revenues in Washington without the state significantly increasing the number of retail stores.

A private company likely would increase the number of distribution centers — currently there's one warehouse in Seattle — to speed up and increase deliveries, he said. It also would improve display and selection in stores and make other improvements.

Maine turned over its distribution system to a private company for 10 years in exchange for $125 million upfront, plus annual payments for the length of the contract.

Peter Mills, a former Republican state representative who helped structure the legislation, said everything worked out for the state in the end.

"It came out all right," he said.

Yet, he cautioned Washington about entering an agreement for longer than 10 years.

"If I were in Washington and was thinking of taking a huge sum of $300 million and not ever seeing the opportunity again for 20 more years, I'd say 'What are you doing to your children?' I don't like any of these long-term sales of state privileges," Mills said.

Cities concerned

The Association of Washington Cities is worried about the potential for cities to lose millions in revenue from the deal.

"Cities and counties have been hit just as hard as the state has been. All of our revenues are down," said Victoria Lincoln, with the association. "This would be added revenue loss."

Local governments want to be left harmless if the state moves ahead, she said.

At least one other liquor proposal has been floated to raise money.

Costco has pushed a measure that would let private retailers sell liquor. The proposal would generate money for the state through licensing fees and business-and-occupation taxes. But that idea doesn't appear to be going anywhere.

It's far from certain that anything will happen this session.

Murray said he's concerned about rushing into something and finding out later the state "let go of a revenue stream that proved to be more profitable than we thought. I don't want to make a quick decision now only to regret it later."