Report of the

DABC REVIEW COMMITTEE

Appointed by theMinority Leadershipof the Utah Legislature

DABC Review Committee MembersPeter S. Cooke, Co-ChairJeff Hatch, Co-ChairStephen Schubach, Co-ChairBrett BirtKris BodeenDavid ColeDave DeSeelhorstPeter EricksonScott EvansTamara Gibo

DABC Review Committee ConsultantMatthew WeinsteinReleased January 27, 2012

Report of theDABC Review Committee

Introduction

With the growing public outcry over waste, fraud, and abuse in Utah’s system of alcoholic beverage control, the DABC Review Committee was appointed in late 2011 by the Democraticlegislative leadership to bring a business perspective to bear on the issues facing the Utah StateLegislature.Over the past several weeks, the DABC Review Committee has heard comments from a broadspectrum of interested parties, including hundreds of customers, businesses, citizens concernedwith the social consequences of improper use of alcohol, government officials, and DABC present and former employees. Our dialogue touched many consumer and provider complaintswith regulations, but policy considerations centered around three overarching topics:1. How can the business of alcohol distribution be run better and provide the State withgreater net income?2. Do current liquor laws, rules and regulations properly align with the DABC mission and purpose of discouraging excessive drinking and preventing underage drinking and drivingunder the influence of alcohol?3. Can our laws and regulations promote greater engagement of business providers insupporting the DABC mission and purpose, while at the same time providing accessible,customer-friendly service to visitors and local residents alike?

DABC Generally and in the National Context

The 21

Amendment to the US Constitution ended Prohibition and turned most regulation of alcohol over to the states, which deal with this responsibility either through a “licensing” systemor a “control” regime. Thirty-two states are “license” states that do not participate in the sale of alcohol beverages but regulate alcohol by issuing licenses to private businesses to sell alcohol.The other 18 states are “control” states, like Utah, where the state acts as

the sole wholesaler of alcoholic beverages, as well as the retailer in various ways in half of these states (one of the 18,Washington State, is set to transition from “control” to “license” in 2012).In Utah, the Department of Alcoholic Beverage Control (DABC) purchases for and oversees amixed public-private system consisting of:

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44 state stores

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104 privately owned package agency stores of five different types

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over 2,500 clubs, bars, restaurants, and other licensed establishments that sell alcohol for on-premises consumption

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oversight of distribution of beer that is up to 4% alcohol by volume (3.2% by weight) togrocers and convenience stores.By statute, one state store is permitted for every 48,000 citizens, which would appear to allow atotal of 58 state stores. In its FY2011 annual report, the DABC reported gross revenues and feesof $298 million and the following net state and local revenues from alcohol sales:

DABC Review Committee ReportJanuary 27, 2012Page 2 of 9

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Summary of DABC Problems Brought to Light in 2011

In recent years and dating back as far as 1995, state and legislative audits have revealedcorruption and mismanagement at the Department of Alcoholic Beverage Control. An October 2011 legislative audit documents decades of improprieties that violated state laws andregulations and cost the taxpayers hundreds of thousands of dollars, including:a.

Corruptioni.

Nepotism – a mother supervising her own daughter ii.

DABC paying a premium to purchase from Flexpak, a company owned by theDABC director’s own soniii.

Splitting of invoices to keep them under the $1,000 threshold that triggerscompetitive biddingiv.

“The DABC has been rigging bids and falsifying financial data for years in order to bypass procurement requirements. The DABC’s routine practice has been to make purchases and then document higher bids after a purchase has already been made inorder to pass financial audits conducted by the state.” (page 3 of October 2011audit)v.

Post-retirement re-employment pattern revealed in December 2006 legislative auditvi.

Special perks for senior management and Commission members:1.

Custom furniture for the DABC director 2.

Expensive iMacs and iPads for senior staff 3.

Use of $20,000 Jeep Liberty as an executive vehicle4.

Fancy gifts (an iPad and two netbooks) to three Commissioners b.

Poor financial controls allowing money to go missingi.

$300,000 loss at a package agency in Eden, Utah that was never reported to theAttorney General or the Commission revealed in May 2011 legislative auditii.

“On January 24, 2011, $37,122 in liquor was picked up from the DABC and never paid for in violation of DABC Commission rule.” (page 20 of October 2011 audit)iii.

Failure to obtain documentation for invoicesc.

Failure to report and false reporting to the Commissiond.

Poor judgment in closing profitable stores rather than finding savings elsewhere in DABCadministrative and warehouse operations, as is now being done by the new DABC director.

Total Funds to State and Local Governments from Liquor Sales

Funds FY 2011 FY 2010

School Lunch Transfer 29,555,158 27,921,283Sales Tax 15,752,918 14,688,985Net Profit 62,313,707 58,359,774