Update on Utah's Privatization Process
As we previously reported, Utah is considering privatizing at least some aspects of its liquor control. On Wednesday, August 25, John Freeman, the Deputy Director of Operations for The Utah Department of Alcoholic Beverage Control (“DABC”) appeared before the Privatization Board to answer questions.
Mr. Freeman presented four reasons to maintain the status quo. First, he contended that privatization would decrease the state’s net revenue from alcohol sales. As previously reported, Utah garnered $59 million in profit and $41 million in tax receipts from liquor sales in 2009. Mr. Freeman cited the findings of the Alcohol Research Group, a California-based division of the Public Health Institute, which indicate that control states like Utah generate three times the revenue of non-control states. Members of the Board appeared reluctant to accept these findings, focusing instead on the state’s hard costs to run the liquor stores. As the Salt Lake Tribune reported, Randy Simmons, the Board’s chair, indicated that the primary question for him was whether the money spent to run the liquor stores (estimated at $21 million) could be put to better use. The Board did not discuss how the state would compensate for the millions of dollars in lost revenue, which appear to be far greater than the estimated savings.
Second, Mr. Freeman contended that private retailers would not have the same buying power the state has, and therefore, could not offer the same selection of products. Mr. Freeman specifically cited the state’s ability to stock stores with niche wines, indicating that more than 4,000 wines were available in the state. The Board questioned, however, whether the state is responsive to customer preferences. While there was some confusion among Board members as to whether privatization for both wholesale and retail aspects of alcohol sales were options, it appears that only the retail side is currently under discussion. Thus, the question of choice in products is likely moot as the state would still control selection and would maintain its current buying power.
Third, Mr. Freeman argued that consumers would pay more under privatization. As it stands, Utah marks products up by a statutorily-mandated 86%. Private retailers would need to add sufficient amounts to the price to cover their costs and be profitable. The discussion indicated that wages are one area that would likely cost private retailers more. Currently, the state legislature sets wages for store employees, which average barely above minimum wage.
Finally, Mr. Freeman argued that DABC’s primary responsibility was to ensure public safety and that any form of privatization would create more alcohol-related problems in the state. The Alcohol Research Group study supported these claims, showing that consumption rates in non-control states are higher than in control states, due in part to more outlets and longer hours. The Board questioned the study’s findings regarding alcohol-related problems in Utah, with Randy Simmons stating that he had read conflicting studies. The Board did not address whether the state would continue to mandate the number of outlets and their hours under privatization.
Because of time constraints, the session abruptly ended with both sides promising to forward on their sources and to continue the conversation regarding privatization. We will keep you updated as these issues develop.
Possible Privatization of Utah Liquor Stores
The sixteen-member Utah Privatization Policy Board was created by the legislature to determine what services currently provided by the state can be privatized. State liquor stores are one of many state functions that the Board is examining.
Utah is one of 18 states, and two Maryland counties, that currently use a state run retail system, commonly called control states. The other 32 states issue licenses to private companies to sell liquor. Four control states (Washington, Virginia, North Carolina and Utah) are currently considering privatization. See Susan Johnson’s blog for a terrific discussion of the Washington initiative process. Utah also controls the wholesale market for liquor, which is not under discussion for privatization.
The debate thus far has centered on the economics of privatization and the level of state control exercised over liquor sales. There seems to be consensus that privatization will occur only if shown to be both profitable and to allow for sufficient state control.
From an economic perspective, state liquor stores are one of the few profitable government agencies in Utah. Estimates indicate that state liquor stores sold $269 million dollars worth of product in 2009, yielding $59 million in profit and $41 million in tax receipts, with $27 million going to the school lunch program. Information gathered by the Board so far indicates that privatization could result in $21 million dollars in annual savings from lowered payroll, operational and liability costs. The potential cost savings are more than offset by last year’s profit levels, however, which exceeded the potential annual savings by $38 million. It is not clear that tax receipts would remain consistent either. Both Montana and Maine, two states that recently privatized, have reported a drop in sales (and thus tax receipts) due to increased prices. It is not clear whether a privatization of Utah liquor stores would be likely to result in increased prices. Although privatization could lead to a decrease in revenues for the state from profits and tax receipts, privatization would bring in new streams of revenue, such as real estate taxes on liquor store properties, which are currently exempt. The state would also realize one-time gains from selling the current liquor store businesses and property. The Privatization Policy Board will need to consider whether these revenue streams would be sufficient to replace any lost revenues associated with lost profits and tax receipts.
With regard to control, the primary question is how to balance free-market principles with moral regulations. Many supporters of privatization equate state-run liquor stores to socialism. Opponents question whether a loosening of state control would result in increases in impaired driving and alcohol consumption, particularly by minors. One Board member, Senator Howard Stephenson, Republican from Draper, has indicated that liquor stores lend themselves to privatization, but that all of the current controls should remain in place. It is unclear whether business would be able to operate profitably if the state maintains current restrictions on advertising, locations, hours and days of operation. Further, as long as the state keeps its monopoly on wholesale liquor distribution, the state would maintain control over the brands offered and any volume discounts negotiated, which could limit the ability of retailers to compete based on selection and price. It is unclear what effect, if any, consumers would experience other than new names on the liquor stores.
Stoel Rives will be monitoring the privatization debate in Utah. We will post an update after the next Board meeting, expected to be held in late September.
Variations of Organic Labeling
Figuring out what information must be on your wine label can be tedious. Adding terms like "organic" or "sustainably-grown" can be even more challenging. Extra steps are required for adding organic certifications or claims to a wine label, although the regulation of such claims under the TTB COLA process has been made more clear with the Memorandum of Understanding between the TTB and the USDA concerning organic labeling and adverting. The MOU clarifies and delineates the enforcement responsibilities of each agency with respect to labeling and advertising of alcohol beverages produced under the Organic Foods Production Act of 1990 (OFPA).
The USDA has authority over domestic and imported agricultural products to be sold, labeled, or represented, as organically produced. Under OFPA, the USDA has established the National Organic Program (NOP). Agricultural products that are sold or labeled as organically produced must be produced and handled in accordance with NOP. Any use of the term "organic" on a wine label or in adverting of wine must comply with the USDA's NOP regulations. Now, with the adoption of the MOU, it is clear that TTB has the regulatory authority to determine whether proposed labels are consistent with NOP.
The Advertising Labeling and Formulation Division (ALFD) of the TTB has guidance for organic labeling applicants. The guidelines provide a step-by-step process of what is required to obtain label approval, including the need for proof of USDA-accredited certifying agent (ACA) preview, a certification statement, a sulfite statement, an ingredient statement, the USDA seal, and so on. The guidelines also contain an organic label quick reference sheet that explains the requirements for the various organic claims, like "100 percent organic," "organic," or "made with organic (specify ingredient)." Additional TTB guidelines on variations of "organic" labeling are available at www.ttb.gov/pdf/wine.pdf.
For fun, I looked at four different bottles of wine that made some claims for "green production." The first was a NSA Organic, USDA certified wine from the Columbia Valley. The bottle was blazed with the "organic" nature of the wine, from the foil marked with "NSA Organic" to the "certified organic vineyard" on the "back" label. The USDA Organic stamp was also featured. Comparatively, an Oregon pinot from Eola-Amity Hills was simply marked with a small "made with organic grapes" statement and certified organic by Oregon Tilth. Then there was another wine from Columbia Valley that, while not having any "organic" claim, was described as a "wine of sustainable and environmentally friendly farming." Finally, the fourth was an Austrian wine certified "Demeter," a biodynamics certification. However, notably many wines that are known to value biodynamic or sustainable farming practices do not make such claims on their labels. Recognizably, this allows for more flexibility and avoids the extra steps of having to prove organic label claims.
