Home Virginia Politics ABC bombshell: Could McDonnell privatize without General Assembly approval?

ABC bombshell: Could McDonnell privatize without General Assembly approval?

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By Paul Goldman

Based on current law, Section 4.1 of the Virginia Code entitled the Alcoholic Beverage Control Act, Governor McDonnell could begin the privatization of the state’s ABC store system without seeking any legislative changes from the General Assembly. As a technical matter, he would need his appointed ABC commissioners to agree since they have the statutory authority. But assuming a majority of the 3 Commissioners were supportive of McDonnell’s initial steps, a careful reading of the ABC law suggest the convention wisdom in state political and legal circles – that any effort at privatization first has to be approved by the General Assembly – may not be correct.

What follows is not a suggestion or a prediction relative to what the Governor might do, especially since he knows the General Assembly can change the law with veto-proof majorities should it be sufficiently opposed to his actions. Truth is, as I have been saying for months, Governor McDonnell’s lengthy focus on ABC privatization has actually opened the door to a unique opportunity for Republicans and Democrats to take a very important and necessary to step toward finding the transportation solution Virginia increasingly needs.

It is an opportunity not likely to present itself again, so to miss it would be a very costly mistake for the state, in my view. It will take leadership to get an agreement, and it will not wholly please either side. But it would be very good for Virginia, and that should be operative marker.

So if it were me, I would seize the moment to forge the kind of win-win-win agreement discussed in this space for several weeks.

But today, let’s discuss a new wrinkle: What could McDonnell do on a unilateral basis to begin his goal of privatizing the ABC system?

First, as to the wholesale operation:                

ABC law appears to leave a huge privatization loophole relative to the state’s current wholesale operation.  The law commands the Virginia Supreme Court to broadly construe the regulatory powers of ABC Commission, such regulatory power itself already a wide grant of authority from the General Assembly. While Section 4.1-119 discusses directly the retail operation of ABC stores, there is no equivalent code section relative to how the Commission can conduct the wholesale operation. Accordingly, the ABC Commission could decide to hire a private entity, such as is now the case in the State of Maine, to run the state’s wholesale hard liquor business.

But you say: How can this be if we are a control state? Answer: As a legal matter, the state would still control the wholesale operation, it is only “outsourcing” the management. Hopefully, they wouldn’t let Northrop Grumman get the contract, but would instead actually find someone who could perform as promised.

Second, as to the retail operation:

Current ABC law says hard liquor can only be sold in a government store and those doing the selling have to be “employees” of the Department of Alcoholic Beverage Control. However, ABC Commissioners have the power to hire such agents, consultants and professionals as they deem necessary to help carry out the mission of the Department. Accordingly, given the law’s command that the court’s cut the ABC commissioners a lot of discretionary slack when “not inconsistent” with the purpose of the statutory scheme, it seems to me the ABC Commissioners could, on a trial basis, hire private enterprise to manage the operations of certain ABC stores. This “agency” store concept is in use in several states today and very successful.

As I read Virginia law, the ABC commissioners, upon a finding that such a test of the “agency store” concept in Virginia would enhance their ability to carry out the health, safety and police functions required of them, would have the authority to do a trial program involving a limited number of existing stores, or all the stores in a limited area of the state, or through the creation of a limited number of new “agency stores” all located in Northern Virginia for example.

But you say: How can they get around the Code Section 4.1-119 (D) which says only “employees” of the ABC Department can sell hooch? Answer: Technically, the private store management would not do the actually selling to any customer, the store clerks would maintain their ABC “employee” status for the test, perhaps under a new category, their work product “managed” by the private sector.

Recently, it was revealed that the Governor had retained a group from Philly, previously used by former Governor Warner, to look at ABC options including the “agency store” concept as the basis for changing the law.

Contrary to conventional wisdom, a revenue-neutral plan is achievable using this kind of model, as will become clear in a few weeks. It is not McDonnell’s first choice, probably not his fifth one either. But as the Chinese say, even the longest journey has to begin with the first step.

  • robsmithiii

    “D. Alcoholic beverages at government stores shall be sold by employees of the Board, who shall carry out the provisions of this title and Board regulations governing the operation of government stores and the sale of alcoholic beverages, except that the Board may appoint the holder of a distiller’s license or its officers and employees as agents of the Board for the sale of spirits, manufactured by or for, or blended by such licensee on the licensed premises, at government stores established by the Board on the distiller’s licensed premises, provided:

    1. At least 51 percent of the agricultural products used by such licensee to manufacture the spirits are grown on the licensee’s farm or land in Virginia leased by the licensee and no more than 25 percent of the agricultural products are grown or produced outside the Commonwealth. However, upon petition by the Department of Agriculture and Consumer Services, the Board may permit the use of a lesser percentage of products grown on the licensee’s farm if unusually severe weather or disease conditions cause a significant reduction in the availability of agricultural products grown on the farm to manufacture the spirits during a given license year;

    2. Such licensee is a duly organized nonprofit association holding title to real property, together with improvements thereon that are significant in American history, under a charter from the Commonwealth to preserve such property, and which association accepts no federal, state, or local funds; or

    3. Such licensee operates a museum whose licensed premises is located on the grounds of a local historic building or site.

    Such agents shall sell the spirits in accordance with the provisions of this title, Board regulations, and the terms of the agency agreement between the Board and the licensed distiller.

    For the purposes of this subsection, “blended” means the receipt by a licensed distiller of deliveries and shipments of alcoholic beverages, other than wine and beer, in accordance with subdivision 6 § 4.1-201 to be (i) additionally aged by the receiving distillery in order to increase the quality and flavor of such alcoholic beverages and (ii) bottled by the receiving distillery.”

    The operating clause that I think creates the ambiguity is this:

    except that the Board may appoint the holder of a distiller’s license or its officers and employees as agents of the Board for the sale of spirits, manufactured by or for, or blended by such licensee on the licensed premises, at government stores established by the Board on the distiller’s licensed premises, provided

    This is the only given example of discerning the description of a Board employee.  Board employees, by extension, would be employees of the Commonwealth, except in instances where they are licensed distillers.  Products, by law, must only be sold in government stores or on the premises of a licensed distiller.

    I think the interpretation leaves a little doubt…but I still think it’s safe to say that the language necessitates a revision by the General Assembly in order to change over to a privatized system.

  • gene magruder

    Understand completely the concept but one question- How can a private store management team have the authority tofire a state employee.I do not think that would be possible since the employee would ultimately be responsible to their employer which would be the Commonwealth of Virginia.