Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Department of Alcoholic Beverage Control (2100)

The Department of Alcoholic Beverage Control (ABC), established by constitutional amendment in 1954, administers the Alcoholic Beverage Control Act. Under the act, the ABC has the exclusive authority, in accordance with laws enacted by the Legislature, to license and regulate the manufacture, sale, purchase, possession, and transportation of alcoholic beverages in California, and to collect licensing fees. The ABC also has the authority to deny, suspend, and revoke licenses.

The Governor's budget proposes $35.4 million for support of the ABC in 2001-02 from the ABC Fund ($34.6 million) and reimbursements ($869,000). Included in this amount is $1.5 million for local assistance—the same as the current year. In total, the proposed budget is less than a 1 percent increase.

The ABC Fund Condition

We recommend the Legislature enact legislation allowing the Department of Alcoholic Beverage Control to increase license fees to sustain current enforcement levels and avoid budgetary shortfalls.

The ABC Fund receives revenues from 61 different types of manufacturer, importer, retail, and wholesale liquor licenses. The ABC currently monitors over 72,000 licensees. Estimated net revenues to the fund in 2001-02 are $32.2 million.

In the Analysis of the 1999-00 Budget Bill we noted that—based on projected expenditures—the fund would not cover ABC's budget by 2001-02. Since that time, however, unexpected reductions in the state employer retirement costs resulted in substantial savings in ABC's operating budget. Had the reduction in retirement expenditures not occurred, the fund would not have been sufficient to support ABC's current level of activities in the budget year.

Based on current-year and proposed budget-year expenditures and revenues, the ABC fund will end the budget year with approximately $2.6 million in reserve. This represents approximately one month's operating expenses for ABC. This is substantially less than the $8 million that would be needed to maintain what is usually considered to be a prudent special fund reserve of three months' operating costs. Moreover, if retirement expenses increase in the budget year, the fund will be depleted during the 2002-03 budget year. In the event retirement costs remain stable, there will be insufficient funds to support the current level of activity in 2003-04. Consequently, in order to sustain the current level of enforcement by the department license fees will have to be increased.

History of ABC License Fees. The license fee revenue deposited in the ABC Fund is the total of a base license fee established in 1955 and four subsequent increases:

• In 1978—a 10 percent surcharge to account for inflation.
• In 1983—a 6 percent surcharge to pay for administrative hearings.
• Also in 1983—a 3 percent surcharge to fund the Alcoholic Appeals Board. These funds go directly to the board and are not available to the ABC.
• In 1991—a $5 assessment against most licensees was added to fund designated driver education programs under the California Highway Patrol. These funds are used exclusively by the highway patrol.

Of the four license increases above, only the 1978 surcharge funded department enforcement activities. Periodically, however, regulatory agencies must evaluate their fee schedule and adjust fees upward (for example, to account for inflationary pressures) or downward (for example, when workload declines). In ABC's case, operating costs have increased because of inflation and increased enforcement activities, yet the license fees have not kept pace with these costs. Figure 1 illustrates the extent to which inflation since 1978 has reduced the purchasing power of the fees.

As discussed above, these fees have not been adjusted for inflation since 1978. To illustrate the impact of that on the department, we estimate that if license fees were adjusted solely to reflect inflation since 1978, the fund would have about $55 million in additional revenue for the proposed budget year.

Ideally, the ABC fee structure should generate sufficient operating revenue to fund needed ABC operations and establish a reasonable reserve. In addition, because ABC fees are set in statute, the fees should be structured with sufficient flexibility to periodically allow adjustments to match the enforcement activities and associated budget changes approved by the Legislature.

Given the department's tight budgetary situation, we recommend that the Legislature amend the Alcoholic Beverage Control Act to permit ABC to increase fees. We would suggest giving ABC the ability to raise fees up to 20 percent over several years. We further recommend that any fee increase be conditioned on the need to increase fees only to meet the budget expenditure level approved by the Legislature and necessary to maintain a prudent operating reserve.