The 2023-24 Budget

Department of Alcoholic Beverage Control

In this post, we assess and make recommendations on the Governor’s budget proposal to (1) provide additional resources to the Department of Alcoholic Beverage Control (ABC) to support its licensing, enforcement, education, and grant programs and (2) transfer to the ABC Fund $48.5 million General Fund over three years that was previously appropriated to the department for a fee waiver program.

Background

ABC Is Primarily Funded Through Licensing Fee Revenues Deposited in the ABC Fund. Currently, ABC has about 95,000 licensees across the state, including businesses such as winegrowers, liquor stores, and restaurants. ABC is supported primarily by its special fund, the ABC Fund, which receives revenue almost entirely from fees charged to these licensees. Licensing fees generally fall into two categories: (1) annual renewal fees (the most significant source of revenue) and (2) application fees for new licenses, license transfers, daily licenses for events, caterer’s permits, and other miscellaneous fees.

Pandemic Impacted Licensees Resulting in Revenue Decline and Expenditure Reduction. The COVID-19 pandemic negatively impacted many ABC licensees and resulted in a decrease in licensing revenue. For example, as a result of public health orders restricting large gatherings, there were fewer events requiring daily licenses, such as festivals. Prior to the start of the pandemic, ABC projected that its licensing fee revenues would be $83.7 million in 2019-20. However, actual revenues collected in 2019-20 were $77.5 million, or about 7.4 percent lower than expected. In response to the reduced revenues, ABC took several steps to reduce expenditures, including reducing hiring and various program expenditures. For example, in 2021-22, ABC reduced the Alcohol Policing Partnership grant program from $3 million to $1.5 million. This program provides grants to local law enforcement agencies to address the crime and public nuisance associated with problem alcoholic beverage outlets.

State Temporarily Waived Fees and Backfilled ABC Fund to Provide Licensees Relief. In order to provide licensees relief, the state temporarily waived license fees through February 2023 for restaurants, bars, and other specified ABC licensees impacted by health and safety restrictions imposed in response to the pandemic. Licensees had to self-certify that they met the eligibility requirements for the waiver, which include that the licensee had an eligible license type that was active from March 1, 2020 to December 21, 2020, and that the licensed premises’ primary operation was disrupted by health and safety restrictions imposed in response to the pandemic. The state also backfilled the resulting loss in revenue to the ABC Fund. Specifically, the 2020-21 budget package made available up to $93 million from the General Fund through 2022-23 to backfill the ABC Fund. The budget package authorized the Department of Finance to transfer funds, as needed, to backfill the ABC Fund for revenue lost as a result of license renewal fee waivers that occurred from March 2021 through February 2023.

The $93 million appropriation was provided based on the assumption that all eligible licensees would apply for the renewal waiver; however, a substantial number did not. Specifically, ABC estimates that $48.5 million will remain unspent from the appropriation, which will revert to the General Fund at the end of the 2022-23 budget year under current law. The department surveyed a sample of licensees to ask why they did not apply for the waiver and they reported various reasons, including not being aware of the waiver, not wanting to take the extra step to self-certify that they were eligible, or that they did not need the relief because their businesses were doing well.

ABC Increased License Fees in 2023 and Plans Further Fee Increases in 2024. Under current law, ABC has the authority to administratively increase fees up to the growth in the Consumer Price Index (CPI) each year. Specifically, each year, ABC may increase its license fees by the annual growth in the CPI occurring 17 months prior to the effective date of the increase. Most recently, on January 1, 2023, ABC increased its licensing fees by 4.7 percent, reflective of annual CPI growth that occurred between August 2020 and August 2021. Because ABC has already used its authority in the current year, the department will not be able to adjust the fee further until next year, which ABC recently notified the Legislature of its intent to do. Specifically, ABC will increase its licensing fees by 7.5 percent, effective on January 1, 2024, which is reflective of the CPI growth between August 2021 and August 2022.

Governor’s Proposal

Increases Funding for New Positions to Support ABC Programs. The Governor’s budget proposes 16 new permanent positions in 2023-24—increasing to 19 positions in 2024-25—to support ABC’s licensing, enforcement, and education program. The proposed budget includes $2.8 million from the ABC Fund in 2023-24—increasing to $3.2 million annually in 2024-25—to support these positions. The proposed positions in 2023-24 include:

• An Office of Equity with an Equity Officer to evaluate ABC laws, policies, and practices to identify and address any instances in which ABC’s programs are creating disparate outcomes.

• A Deputy Director of Public Affairs to support external and internal communication, media and press relations, social media, the ABC website, public outreach, and education.

• A Senior Personnel Specialist to alleviate workload from existing staff and create capacity in ABC’s Human Resources Branch.

• An Accountant Trainee to address increased workload from manager and server online registrations and new online payment options.

• Twelve information technology (IT) and information security personnel in 2023-24 (increasing to 15 beginning in 2024-25). The IT personnel would provide IT support in areas where ABC has yet to modernize or has needs as a result of recent changes, including the introduction of telework, the modernization of public-facing services, and the proposed Office of Equity, among others. The information security personnel would address a variety of information security issues from ABC’s introduction and expansion of its public-facing services and automation tools due to teleworking, among other things.

The above funding also includes a $50,000 request for a marketing budget in the Office of Public Affairs for translation services and social media to support ABC’s outreach and education.

Transfers Unspent General Fund From Renewal Fee Waiver Program to Support New Expenditures and Ensure ABC Fund Solvency. In order to support the proposed increase in positions and expenditures (as described above) and ensure the ABC Fund remains solvent, the Governor proposes to transfer the unspent balance of $48.5 million General Fund—which was previously appropriated for renewal fee waivers—over three years to the ABC Fund. Under the proposal, $20.5 million would be transferred in 2023-24, $16 million in 2024-25, and $12 million in 2025-26.

In addition, ABC has indicated that if the above transfer is approved, it would also bring the Alcohol Policing Partnership grant program funding back to its authorized funding level of $3 million.

Assessment

Proposed Positions Have Merit, but Do Not Fill Critical Need and Exacerbate Potential ABC Fund Insolvency. The additional positions proposed by the Governor would support various activities that generally appear worthwhile to implement. However, the ABC Fund is currently structurally imbalanced—that is, the expenditures out of the fund exceed the revenues deposited into the fund. The Governor’s proposed increase in expenditures would likely result in the ABC Fund being insolvent in 2023-24, as shown in Figure 1. As such, increasing expenditures from the ABC Fund should be reserved for positions and activities that seek to fill a critical, immediate need at this time to maintain existing service and program levels. We find that the proposed positions do not meet this criteria.

Proposed General Fund Transfer Would Address Potential Insolvency, but Comes at Expense of Other General Fund Priorities. As previously discussed, in order to address the potential insolvency of the ABC Fund and support the proposed positions, the Governor proposes to transfer the unspent General Fund balance—which would otherwise revert to the General Fund at the end of 2022-23—to the ABC Fund. Effectively, the proposal represents a new $48.5 million General Fund expenditure. Importantly, the state currently is experiencing a budget problem, where General Fund revenues already are insufficient to fund existing commitments. In this context, every dollar of new spending comes at the expense of a commitment the Legislature deemed a priority and approved funding for, as it requires finding a commensurate level of solution somewhere within the budget.

Not Approving Proposed Positions and Transfer Might Still Result in ABC Fund Needing Some Assistance, but Remains Uncertain. Even if the Legislature does not approve additional positions, it is possible the fund will barely remain solvent over the next year. Specifically, assuming (1) existing service levels remain unchanged, including the reduced funding level of $1.5 million for the Alcohol Policing Partnership grant program; (2) licensing fee revenues continue to increase after the pandemic with CPI growth as planned by ABC; and (3) other expenses—in particular employee compensation—do not increase significantly, the ABC fund balance would be $2.3 million in 2023-24, which would represent 2.3 percent of the ABC Fund’s projected annual expenditures. However, beginning in 2024-25, the fund could emerge from its structural imbalance as revenues would exceed expenditures under this scenario.

Whether the fund is able to remain solvent and/or emerge from its structural imbalance depends heavily on the (1) outcomes from collective bargaining agreements that the department will not know until the end of 2022-23 or the beginning of 2023-24 and (2) future revenue growth. If there are notable increases in employee compensation or if licensing fee revenues are lower than projected, the ABC Fund could become insolvent in 2023-24 and/or be unable to emerge from structural imbalance. In these scenarios, ABC might need funding to maintain its existing program and service levels; however, at this point in time, it is difficult to predict the level of funding needed, in part, because of the delay in knowing the actual employee compensation increases. However, rather than a General Fund transfer, the Legislature could consider authorizing a loan if revenues are lower than projected or costs to maintain existing service and program levels exceed estimated amounts.

Recommendations

Reject Proposed Positions. We recommend that the Legislature reject the proposed positions because they do not fill an immediate or critical need to maintain existing service or program levels. Doing so would keep expenditures from the ABC Fund lower as revenues recover and annual increases to licensing fees can potentially bring the fund into balance. To the extent the ABC Fund stabilizes in the future, as is currently projected, the department could submit a proposal for the additional positions to the Legislature at that time.

Reject Proposed General Fund Transfer. We recommend that the Legislature reject the proposed General Fund transfer, given our above recommendation to reject the proposed positions. Moreover, given the state’s budget problem, the proposed transfer would come at the expense of previously identified General Fund priorities.

Adopt Provisional Language Authorizing Loan to Keep Fund Solvent if Need Arises. As we discussed, under a certain set of assumptions, the ABC Fund remains solvent in 2023-24. However, if employee compensation increases are higher or if revenues are lower than projected, the ABC Fund could become insolvent. In recognition of this possibility, we recommend that the Legislature adopt provisional language that would allow the Department of Finance—with 30-day notification to the Joint Legislative Budget Committee—to authorize a loan up to a certain amount to keep the ABC Fund solvent if revenues are lower than projected or costs to maintain existing service and program levels exceed estimated amounts. The Legislature could direct ABC to report at budget hearings on its estimates for a loan size that would be sufficient to maintain its existing service levels in 2023-24 and cover any uncertainty in revenue or employee compensation increases. In the event that the ABC Fund continues to face insolvency in 2024-25, the administration can return to the Legislature with a proposal to address it that can be considered through the budget process next year.