News: CJ Exclusives

McGrady: Audit of ABC warehouse waste shows need for major changes

Henderson County GOP lawmaker says N.C. should move to private distribution under state license; Auditor Wood says better state oversight needed under any system

Rep. Chuck McGrady, R-Henderson. (CJ photo by Kari Travis)
Rep. Chuck McGrady, R-Henderson. (CJ photo by Kari Travis)

A prominent Republican lawmaker and proponent of loosening North Carolina’s restrictive alcohol laws says direct government sales and distribution of distilled liquor is antiquated, and lawmakers should fix the broken system.

“Most states use a licensure model that allows the private sector to sell and distribute liquor, said Rep. Chuck McGrady, R-Henderson. “I think we need to consider moving to a more modern licensure model where the state would license liquor sales and distribution just like it already does for wine, beer, and hard cider.”

McGrady’s comments come after the N.C. auditor released a report saying the N.C. Alcoholic Beverage Control commission — the agency in charge of controlling state alcohol production, storage, sales and distribution — has over past years cost the state about $13.5 million.

The audit comes just two weeks after ABC administrator Bob Hamilton left the agency.

The reasons for his leaving are unclear. ABC officials are using personnel statutes as the reason for not commenting about why Hamilton is gone.

Agnes Stevens, deputy director, is acting interim administrator.

McGrady has long pushed lawmakers to make liquor laws friendlier to distillers and consumers alike.

He chairs the House Alcoholic Beverage Control and Appropriations committees and was a strong supporter of Senate Bill 155, which clears the way for N.C. craft distillers to sell five bottles to customers each year, and, contingent on local approval, allows restaurants and retail stores to begin selling alcohol Sunday at 10 a.m., as opposed to noon.

McGrady has sponsored legislation to raise the number of barrels brewers can produce before they’re forced to hire a distributor. House Bill 500, which would have raised the barrel limit to 200,000, was removed from the bill. The state’s powerful wholesale and distributors lobby said the increase would place their own businesses in jeopardy and persuaded lawmakers to eliminate the cap-raising provision.

The audit released Thursday, Aug. 9, in short, found that poor contract administration cost North Carolina taxpayers at least $11.3 million over 13 years. Unused warehouse space potentially cost the state $2.1 million over seven years, and a lack of monitoring left the state underpaid by at least $297,537 over two years.

The ABC erred in its responsibility to follow state policies and state practices, the Office of State Auditor Beth Wood says in the news release. The ABC, the audit concludes, failed to administer the warehouse contract in the best interest of the state.

The General Assembly, said Wood, asked her for an audit the state’s six largest agencies, including Public Safety, where ABC resides.

“My staff said, ‘When we looked at the ABC commission, there’s something not right there,” Wood told Carolina Journal. “They’ve got a contract that’s not been put out for bid since 2004, they can’t answer questions about how the contract’s being administered, this is not tied to a financial statement audit, but it’s info they’ve gleaned about that division of DPS.”

The state ABC, the audit report says, is responsible for overseeing and providing “a uniform system of control over the sale, purchase, transportation, manufacture, consumption, and possession of alcoholic beverages in North Carolina.”

The key word is control.

North Carolina is one of 17 “control” states in the U.S. Those states, simply put, have a monopoly on spirituous liquor.

North Carolina, a local-option state, has 167 local Alcoholic Beverage Control boards operating the 428 retail ABC stores that sell spirituous liquor to individual consumers or businesses.  

Historically, the audit reports says, the commission has contracted with a vendor to warehouse and distribute liquor, which has a much higher proof — more than 20 percent alcohol — than wine and beer.

Maryland-based LB&B, which, its website says, specializes in facilities management, logistics, and training operations, since 2004 has contracted with the state to provide warehouse and distribution services.

“In state fiscal year 2017, the contract cost for warehousing and distributing spirituous liquor was $8.3 million. The total contract cost from July 2004 through June 2017 was $77.7 million.” Auditors found the commission failed to “procure, administer, and monitor the LB&B contract for the warehousing and distribution of spirituous liquor in accordance with state policies and best practices.”

The ABC, auditors say, “should procure, monitor, and administer contracts in accordance with state laws and regulations and the contract terms and should review and validate the reasons given for all requested contract amendments and price increases prior to authorization.”

Further, the ABC “should obtain the Division of Purchase and Contract’s review and approval when the contract term, including extensions and renewals, will exceed three years.”

Lack of accountability for contractors is highly concerning, Wood told CJ.

LB&B was given pay increases upon demand without documentation or proof, Wood said.

In some cases LB&B misled the state about fuel cost increases, asking the ABC for money they didn’t really need, she said.

“Whatever they asked for, they got. Without any question, without any verification, without any consultation or proof or justification.

“And in some cases what they said was their reasoning was not true. In 2008 they asked for an increase the next year, and said it was due to price increases for their fuel,” Wood said. “When we examined their fuel cost, it actually went down. Same thing in 2016. When we examined it, it had gone down.

“The power of this vendor and this contractor was just amazing to me that they had this much power and the commission didn’t validate or verify anything.”

A 200,000 square-foot warehouse added in 2011 is largely unused, auditors found.

ABC “failed to ensure prudent use of public funds when it authorized the lease of a Clayton warehouse. A large amount of the warehouse space was unused and potentially resulted in $300,000 a year of unnecessary cost over seven years. The Commission did not verify its need for a warehouse of this size, although state policy and best practices required the Commission to perform its responsibilities prudently and economically,” the audit said.

“Adding this warehouse to the Alcoholic Beverage Control Commission Warehouse contract doubled the amount of warehouse space available and has increased the cost of the contract by approximately $2.54 million a year on average.”

North Carolina now has nearly 60 distilleries with products in state ABC stores. North Carolina, though, still lags behind its neighbors in terms of promoting its craft distilleries and taking positive steps toward featuring their products.

Hamilton was recently deposed in a lawsuit filed May 15 by Craft Freedom LLC, The Olde Mecklenburg Brewery LLC, and NoDa Brewing Co. The lawsuit takes aim at the state-imposed distribution cap on craft breweries, along with franchise laws. The lawsuit states the rules are inflicting injury and threaten to impose additional damage to the brewers, who can produce no more than 25,000 barrels of beer each year without contracting with a distributor.

Hamilton began work with the ABC as a contractor in April 2010 and later as deputy administrator in September 2012, according to his LinkedIn profile.

He became administrator in November 2014 and, under his tenure, saw unprecedented growth in the home-grown segment of the industry, particularly for craft distilleries.

In his response to the audit report, ABC chairman A.D. Zander Guy says he was appointed only last year and “the majority, if not all of your review period, was before my tenure as chair.”

Guy says he takes the audit seriously and will implement changes accordingly.

In an email, Stevens said she couldn’t comment on Hamilton’s departure but has “increased its focus on tighter controls so that today a plan is in place and the commission’s audit staff is conducting unannounced random checks of the contractor’s operations.”

“The audit process began over a year ago, so the discussion and tighter controls have been under way for some time,” she said.

Despite the recent spate of problems and scrutiny regarding the N.C. ABC, privatization isn’t the answer, Wood said.

“[I]t really doesn’t matter if it’s a service that is privatized, or if it’s something that North Carolina tries to run itself — and this is not just the ABC and liquor, it’s anything we do,” she told CJ.

“I’m trying to get people to understand that the state of North Carolina does not monitor it. Whether you privatize it with a third party or if you try to run it yourself and contract some of it out, you’re never ever going to get what you expect on either side if you’re not scrutinizing and making sure that what you’re paying for is what you’re actually getting.

“If you go to privatization you’re still going to have to monitor to be sure the state is getting its part of whatever might be coming out of that. The point here is poor oversight. Poor monitoring. Doesn’t matter if it’s done by state agency or if it’s privatized.”