Report: Governor's ABC plan projections too high

RICHMOND

Gov. Bob McDonnell's proposal to privatize liquor sales could yield less money for the state than expected due to overly optimistic assumptions, a new analysis by the General Assembly's auditing unit finds.

The report by the Joint Legislative Audit and Review Commission indicates the McDonnell administration may have overestimated how much could be raised through the sale of wholesale and retail licenses and the liquidation of real estate held by the state Department of Alcoholic Beverage Control.

While the JLARC review raises questions about the financial model on which the privatization plan is based, it could end up as an academic exercise. Already facing significant opposition, the governor recently hired an outside consultant to evaluate ways to end Virginia's liquor monopoly, so his plan may change before he takes it to the General Assembly in January.

Tucker Martin, a spokesman for McDonnell, said that while the JLARC review "is based on one plan, the administration is considering multiple privatization models and proposals."

During his 2009 campaign, McDonnell called for ending Virginia's role in liquor sales. He designated it a key review item for his government reform commission, and his administration developed the plan this year. Plans to take up privatization at a special session of the General Assembly were shelved when it became apparent that support for the concept remained soft, particularly among Senate Democratic leaders who vowed to defeat it.

The current proposal calls for the auction of 1,000 retail licenses and the sale of wholesale licenses and various state liquor assets. Together, those sales are expected to generate a one-time windfall of about $450 million for the state. That money would be deposited into an account to help fund road projects.

In its most recent form, the plan leaves the state about $47 million short of the annual proceeds generated under the current system.

The JLARC report says the administration's revenue assumptions may be too low in some cases.

However, the report devotes more attention to factors that could keep the state from meeting its revenue projections, including a failure to sell all retail licenses, the purchase of licenses for less than anticipated, and the effects of financing costs on smaller retailers' license bids.

Wholesale license sales could fall far short of the $161 million McDonnell expects them to generate, the report says, pegging the figure at closer to $76 million.

Other factors that could alter the economics of the plan are the accuracy of the administration's markup calculations and the impact of wholesale and retail price markups on the market.

The report concludes that price increases could harm sales and that the plan "may overstate" the growth in liquor sales Virginia could experience under a privatized system if consumers buy here instead of in Maryland or Washington.

State Sen. Edward Houck, D-Spotsylvania, requested the report.

Democrats have argued that the plan will deprive the state of millions it receives under the current system and will lead to an explosion of stores beyond the 332 Virginia now operates. The release of the JLARC study seemed to stoke that criticism.

"This study confirms what we already knew - the governor's plan to privatize ABC won't generate the revenue we need to fix our crumbling transportation system," House Minority Leader Ward Armstrong, D-Henry, said in a statement. "After nearly a year of trying to salvage this bad idea, it's time for Bob McDonnell to stop wasting time and taxpayer money and put together a real strategy to grow our economy, improve education and bring our infrastructure into the 21st Century."

Julian Walker, (804) 697-1564, julian.walker@pilotonline.com