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Under the influence

By Karen Helland and Hans Zeiger
Corporate executives aren't the only ones who benefit from lax accounting standards. Russell Lee LaFountaine, hired by the Washington State Liquor Control Board to deliver liquor along the I-5 corridor for the past five years, found them handy, as well.

Nobody at the Liquor Board noticed when LaFountaine double-billed for deliveries. Nobody verified the weight of the deliveries he made. Sometimes he billed for deliveries that didn't exist. His friend at the liquor agency, Gerianne Silva, would hand him checks in the parking lot.

By February of this year, LaFountaine had overcharged the agency almost $840,000. By the time State Auditor Brian Sonntag caught the fraud, LaFountaine had vanished. The Liquor Board claimed it had changed its accounting practices and the responsible parties were gone - although it wasn't quite clear how LaFountaine was hired originally.

On Oct. 10, federal marshals captured LaFountaine in California. He will be extradited to face theft charges in the largest fraud case ever investigated by the state auditor.

It may be the largest fraud case ever and the most egregious example of problems at the Liquor Control Board, but it's only one episode of mismanagement in a saga spanning many decades.

Until scrutinized by the state auditor, Liquor Board accounting practices didn't require store managers to reconcile revenues, leaving the board ill-equipped to determine what happens to money collected in sales - $421 million in 2001. According to the state auditor, these accounting weaknesses allowed employees to misappropriate more than $35,000.

Accounting isn't the only problem. In 1999, the Liquor Board finished a whiz-bang automated warehouse for $32 million ($5.5 million over budget - they quietly raised taxes twice to cover costs). But they couldn't move in because internal squabbles delayed purchasing the computerized control system.

For more than two years the warehouse sat empty. Meanwhile, wholesale distribution of liquor operated out of temporary, inefficient rented space, costing $2.2 million. Another million was spent in extra labor and moving costs.

Problems at the Liquor Control Board have plagued Washington's governors for nearly 40 years. Back in 1965, Gov. Dan Evans considered privatizing liquor sales in response to scandals uncovered by a legislative council. In the '80s, Gov. John Spellman examined privatizing as well, but he backed off over fear of losing revenue.

As criticism continued, Gov. Booth Gardner managed to get the terms of Liquor Control Board members reduced, but preserved state control. In the 1990s, Gov. Mike Lowry developed legislation to privatize liquor sales; that died in committee.

Two years ago, continued allegations of corruption and abuse of authority prompted Gov. Gary Locke to appoint a task force examining the board.

But the majority of the task force recommended no major changes, considering privatization too much trouble, especially since there was "no public outcry."

Maybe the public should now consider whether outcry is in order by taking a long, hard look at why our state is even in the liquor business. The answer is historical: a 70-year-old hangover from Prohibition. Washington was one of 18 states that responded to the repeal of Prohibition by controlling liquor distribution and sale. Most states simply regulate a private marketplace.

Washington's involvement in the liquor business involves an inherent contradiction. On the Liquor Board's Web site, you can choose between reading fact sheets that caution you against alcohol and searching a convenient database for price and location of your favorite brew. The state is both the regulator, trying to restrict alcohol consumption, and the distributor, enjoying the profits of a liquor monopoly. Trying to do both jobs has kept it from doing either job effectively.

On the distribution end, Economics 101 instructs us that monopolies are bad for the consumer. They result in high prices and inefficiency. And Washington's liquor system demonstrates this relative indifference to the desires of the consumer. It seems unlikely that a private, competitive marketplace in liquor would keep the same number of liquor stores for two decades, or close stores on Sundays and holidays.

Those concerned about the effects of alcohol on society argue that privatizing liquor sales would increase the availability of liquor too much. They point to higher rates of consumption and alcohol-related deaths in states that don't directly control liquor sales than in those that do.

But that disparity conceals a wide range of data: many noncontrol states, such as Hawaii, Nebraska, and Massachusetts, have much lower rates of alcohol-related deaths than Washington. Other factors, such as types of regulation and local culture, are likely to be more influential than whether the state sells the booze.

Distributing alcohol through a bureaucracy hardly seems the best way to prevent alcohol abuse. There's no guarantee that bureaucratic inefficiencies will restrict alcohol consumption where problems occur. Indeed, combining the regulatory function with distribution creates a temptation to focus regulations on squelching the competition rather than alcoholism.

An independent public agency could better target regulations to address problem drinking. Meanwhile, a private, competitive marketplace would allow those who use alcohol in moderation to enjoy better service and pricing.

Another concern over privatization is state revenue. Both liquor taxes and profits go into state and local coffers. However, the state's profits from liquor sales fluctuate, while the much larger amount of revenue collected in liquor taxes has grown steadily.

With the liquor business privatized, the state could collect business and occupation and property taxes from liquor stores as well as liquor taxes.

If Washington auctioned off its retail liquor businesses, it would receive millions in immediate revenue that could be used to help in the current budget crunch. Tax rates on liquor could be increased if needed to make up lost revenue from profits. But when Alberta, Canada, privatized its liquor sales, it had to lower taxes four times to keep revenues constant.

The intractable problems with the Liquor Control Board should be no surprise. When the regulator is also the seller, the situation is ready-made for corruption. If the state didn't sell us liquor, it would sound less hypocritical when it tells us to be careful. It's time to get the state out of the booze business.

Karen Helland and Hans Zeiger are research analysts for the Evergreen Freedom Foundation in Olympia.

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org