April 7, 2004 Board Room Alcoholic Beverages Division
Members Present in the Chambers:	Shirley Daggett Mary Hunter Scott Doll Dick Stoffer Gayle Collins
Guests Present:	Sheila Douglas, Iowa Wholesale Beer Distributors Jerry Fleagle, Iowa Grocery Industry Association Doni DeNucci, Iowa Hospitality Association Lyle Stutzman, Johnson Brothers Jim Clayton, University of Iowa
Staff Present:	Lynn Walding Jim Kuhlman Judy Seib Gary Marker Nicole Gehl Linda Cox Lyndsay Perrin
Counsel Present:	Karen Doland

Call to Order

Introductions

Minutes of Previous Meeting

Legislative Update

Nicole Gehl reported on legislation of specific interest to the division.

	SSB 3169	The appropriations bill is primarily status quo with the same budget recommendation submitted by the Governor.
	SF 2220	The warehouse privatization bill is not expected to go anywhere this session.
	HF 2499	House leadership decided not to let the keg registration bill on the floor and the bill is dead for this session. The bill was introduced as a means to identify and restrict access and would have preempted any local ordinances. The Division worked with the grocery association and health groups to insure the bill was workable from an administrative standpoint. The original bill draft involved wholesalers affixing tags. Missouri and Nebraska are two of 19 states that have keg registration laws. Missouri's system puts tags on the kegs and Nebraska's system places a sticker on the keg. Miller Brewing complained the sticker system leaves a residue that is hard to remove when the keg is returned. Sheila Douglas commented Miller's opposition and privacy issues contributed to the bill's demise.
	HF 2494	Governor Vilsack signed HF 2494 on March 18th. The bill states that the suspension of a liquor license for sales-to-minors offenses only applies to the physical location where the violations occurred. In addition, the bill changes the word "conviction" to "violation" to avoid confusion. Prior to the committee meeting, members of the Stepping Up Project were concerned there would be an extra chance tacked on to the end; however, according to Jim Clayton the organization is okay with the legislation as passed. There was concern that a licensee who lost his license at one address would be able to open a new business at another location. Assistant Attorney General John Lundquist has advised that the division would resist on the grounds of "good moral character". Typically, on a third violation, the licensee surrenders the license rather than jeopardize the whole chain according to Lynn Walding.
	HSB 81	The division took no position on the bill to increase the penalties for possession of alcoholic beverages by a person under the legal age. The bill did not pass the funnel.
	HF 2253	This bill to increase the penalty for underage possession of alcohol did not pass the funnel. As they were with tobacco two years ago, legislators were hesitant to make underage possession a criminal offense. Mr. Walding stated that the current penalty is a simple misdemeanor and there are thousands of citations being issued in Iowa City. The schools also partner with the division in identifying kids and getting them cited for both alcohol and tobacco offenses.
	HF 511	A hold over from last session, this bill relates to the training and certification of designated security personnel working at commercial establishments with a liquor control license or wine or beer permit. The bill passed the House and was introduced into the Senate State Government Committee.
	HF 494	A Ways and Means Bill, HF 494 is exempt from the funnel. The bill exempts from sales and use taxes, the sales to tangible personal property to be used primarily in the cultivation or culture of grapes for wine making according to Nichole Gehl.
	SF 2050 & HF 2107	Both are Ways and Means bills and both double the barrel tax on beer. Neither bill has moved. Both will probably encounter strong resistance from the beer wholesalers.
	HF 2505	This bill adds specific language for extending credit for alcoholic beverages, wine or beer to convention centers, civic center or events centers under specific circumstances. The bill passed the House and is assigned to the Senate Judiciary Committee according to Ms. Gehl. The bill was introduced by Representative Rants who assured the beer wholesalers that the language in the bill will remain narrowly defined.
	SSB 3031	SSB 3031 did not make the funnel. The bill initiated by the Petroleum Marketers redefined "gross misconduct" to include sales of alcohol or tobacco to a minor, thus allowing an employer to deny unemployment benefits.
	HSB 724	The Governor's tax proposal advocates a 60¢ per pack increase. It has not moved thus far. Ms. Gehl stated there are no proposals to reduce taxes.
	SF 3159	The division worked with the Department of Management on this bill to create efficiencies, save the state money and increase revenue to the state. The division's proposals are: 1) allow the ABD to wholesale native wine, in addition to private wine wholesalers; 2) stop making refunds less than $50; and 3) create a "designated purchaser" allowing the division to sell alcoholic beverages at wholesale to entities that are currently not eligible to hold a liquor license [for example a PX on a military installation in Iowa and in other states.] The first portion of this bill is an economic development issue allowing ABD to use its existing infrastructure at no additional cost to the state to help grow the wine business. Wine distributed by the ABD would be subjected to the ABD markup and wine distributed by a private wholesaler would be subject to the wine gallonage tax. Lyle Stutzman stated when his company approached wineries in the past to offer delivery service there was no interest. Mr. Stutzman is concerned that California wineries will bring in bulk juice and produce it in Iowa bypassing the state tax system. Judy Seib commented the key words are processed in Iowa. The wineries can bring juice in from out of state but they have to ferment or process it in Iowa to be considered a native winery. Blending is governed by the federal government. With regard to the third proposal, Mr. Walding commented federal law allows the state to be the provider of alcohol to the two military bases in Iowa as the lowest cost provider. In addition, federal law requires the military to provide all costs including transportation, administrative costs, etc. The bases are currently supplied by a Texas military installation and they are resisting providing their total costs. Commissioner Doll asked if the ABD would cut normal pricing to become the low-cost provider and if so, would that create an issue on selling to the PXs at a different price than to a regular Iowa retailer. Mr. Walding responded the ABD may have to cut normal pricing; however, the state would be looking at existing sales that now take place in our jurisdiction - not trying to supplement or increase sales. Jerry Fleagle commented his industry's concern would be "widening the circle" being served which could create an unfair price advantage. Mr. Walding responded that his understanding is that the sales can not leave the camp grounds so the circle could not be widened to include relatives.

There has been a real movement this year, according to Ms. Gehl, to clamp down on the administrative rule making process. The division has been monitoring several of these bills.

Iowa Responsible Retailing Report

As part of a four state study with the National Responsible Retailing Forum, Iowa hosted a regional responsible retailing forum with regulatory agency retailers, law enforcement and other substance abuse groups invited to take part. A unique aspect of the forum was the youth panel composed of Ankeny High School students who talked about their perspective and what really works. Over 120 people attended the forum which was held at the Hy-Vee Conference Center in West Des Moines.

Cedar Valley Responsible Retailers Forum

Approximately 80 people attended a second conference in Cedar Falls on March 25th. The conference was sponsored by the Substance Abuse Services of the University of Northern Iowa.

Commissioner Doll commented the meeting was very informative. He participated in a very positive roundtable discussion. Although more education is great, Commissioner Doll suggested future meetings focus more on the retailer and how they can make a difference. Ms. Gehl responded that the Des Moines forum had resources that were not available at the Cedar Falls Forum such as retailers having the opportunity to participate in mystery shopper inspections and other things.

Commissioner Hunter suggested that legislators be invited to participate in future meetings. Commissioner Daggett would like to see forums held in the eastern and western portions of the state.

Tobacco Enforcement

The first round of compliance checks is almost complete with an 88% compliance rate according to Gary Marker. Approximately 1/3 of the partners will again participate in the Cops in Shops programs. In addition, the division will use FY04 tobacco funds to partner with law enforcement officials to identify and cite juveniles who are smoking at 22 special events.

The division has developed in-house certified tobacco training sessions for retailers similar to the TIPS program. By the end of the month the division will be ready to teach partners in all 99 counties how to conduct the certified training sessions. Every retailer in the state will receive a letter about the training with instructions for registering on-line. Employees will be required to pre-register, check in at the training site and show a photo ID to law enforcement personnel conducting the training. Following the class, attendees take a 20 question test on-line from a pool of 50 questions. Test results will be given immediately and a certificate issued. The certification gives the employer one affirmative defense in a four-year period; it does not give the employee an affirmative defense. Registrants who did not attend the class will not be able to take the test.

Jerry Fleagle attended the session in Marshalltown and found it to be informative. In response to his question about a database of certified clerks, Nicole Gehl stated the information is available on the website by entering the individual's first and last name and the date of birth.

Financial Report

Jim Kuhlman reported sales through February were up $8 million and all other revenues combined were also up approximately $8 million. Total expenses are up 9.45% year to date; however, liquor purchases were up 9.76%. Revenue over expenses reflects a $2.6 million increase year-to-date. Through February, the Division has transferred an additional $2 million which is roughly 8% ahead of last year. The Division transferred additional dollars in March and April and if ABD holds to its projections, the division will transfer $6 million more this year than the year before. Liquor sales have been extremely strong.

People are drinking upscale products paying as much as $10 - $15 for cocktails. Suppliers have increased their marketing efforts and spent a considerable amount of money advertising in the media, periodicals, magazines and cable TV.

In response to a question from Commissioner Doll, Mr. Kuhlman explained that the transfer funds to the Department of Economic Development are derived from collections made from native wine and native beer taxes. Those taxes get transferred to the Department of Economic Development for use in the promotion of those industries.

Dollars and Gallons of liquor sales through February show 89.6 million sold July through February of this fiscal year compared to 81 million last year. Wine tax is up year-to-date and beer tax continues to be down slightly.

Commissioner Collins inquired if the state collects tax on wine and alcohol purchased on-line. Mr. Walding responded the state does not; however, he thinks it is a mistake not to collect tax. It is almost more affordable to order on-line than it is to buy from a local retailer because the retailer has to pay license fees, sales tax and gallonage tax from which on-line sales are exempt. Mr. Walding commented that he recently received a report from UPS showing who and how much wine was purchased through UPS in the past six months.

Sales Report

Year-to-date sales through March are $100 million compared to $90 million for the same time period last year. Mr. Walding remarked that the Division hit $100 million in sales three years ago which gives an indication of the consumption increase rate. Mr. Kuhlman added that inflation usually accounts for 1 ½ to 2%.

Bottles YTD through March were up 8%.

In response to Commissioner Stoffer's question, Mr. Kuhlman explained that the inventory completed in January resulted in an overage of approximately $2,000 - $3,000. The J. A. Jones Company does not receive cash for overages; overage amounts are applied to a future shortage.

Product Buy-Outs

The Division has invested $8 million in the buy-out program which is $1.98 million more year-to-date than for the same time period last year. This investment has resulted in an additional $640,000 revenue year-to-date. Mr. Walding added that one of the charter agency initiatives is to be more aggressive with the product buy-out program. During the month the discount is offered, the division passes the savings through to the retailer. At the end of the month the division purchases a 30 or 60-day supply of the remaining inventory at the discounted price.

Counsel's Report

Karen Doland reported hearings are scheduled throughout April and May as well as the summer. She is also working on a judicial review response brief due next week with regard to a licensee who's license was not renewed in Webster county.

Lynn Walding added that the docket contains numerous violations in Iowa City. Jim Clayton from the Stepping Up Project relayed that bars are beginning to pay very close attention to the consequences they are suffering because of their violations. The city council will revisit the 21 issue in August and several of the bars who were staunch supporters of 19 say they will be staunch supports of 21 because the risk to their license and livelihood is substantial. There are several licensees on the docket with A-2 and A-3 violations who could be facing termination. Mr. Walding added that the Union Bar has an A-4 - a 4th violation which is revocable. The hearing is set for May 20th and is designated as non-alterable because they have already had their containment. Mr. Clayton inquired if there is public input at the hearings. While the public can attend, Mr. Walding suggested that any information should be provided to the prosecutor through Karen Doland at the A.G.'s Office. The notice requirement to the licensee requires that the licensee be aware of what they are being charged with when they go into the hearing.

Listings

Jodi Christensen gave a preview of several items recently listed by the division. With the exception of two or three items, all were flavored vodkas or rums. Qualifications for listing a product include: 1) has the product been sold elsewhere? 2) does the product fit into the division's premium category? 3) has the company run promotions on the product? and 4) is there public demand for the product? NABCA also provides statistical data in New Products and New Listings Reports that the division utilizes when determining whether to list a product.

Products that don't meet the division's criteria of 2% of revenue and 2% of case sales within a category are subject to delisting. Unique items such as high-end products that are not big sellers but produce a lot of revenue are exempted from the list. In addition, brokers occasionally opt to "trade" a different item for delisting. Brokers are given 3 - 6 months to move the inventory out of the warehouse before delisting occurs. Discounts are offered and often there is little remaining product in the warehouse at the time of delisting. It is not uncommon for a broker to tell the division to take title to the remaining product because it is too expensive to ship back to the supplier. When that happens, the division runs a super discount deal to dispose of the remaining inventory.

Hy-Vee has a program to reach out to the Hispanic community and several brokers are now making similar pitches to get products currently popular in Mexico listed in Iowa. Products not stocked by the division are available through the division's special orders program to customers who want a particular product and are willing to purchase the one case minimum.

In answer to Commissioner Doll's question, Jim Kuhlman stated the 20¢ split case fee is added to each bottle ordered. Customers can order from 1 - 11 bottles.

Dram Shop Reform

Judy Seib has prepared a 250 page draft paper on dram shop reform. The main body of the paper is approximately 60 pages with the remainder Appendices of other states laws. Because Mr. Walding did not want to introduce the paper in mid-session, the paper will be submitted to the Governor's Office and the legislators next legislative session. Mr. Walding plans to have the White Paper ready for final approval sometime this summer.

Charter Agency Initiatives

The buy-out program previously discussed is one of the initiatives. Revenue has increased significantly through this program.

Another significant initiative is the variable markup on vodka which was announced in February and took effect in March. Low-end vodka will be marked up 60% and high-end vodka will be marked up 40% with 2 point variables in between making 11 different markup points. The price compression will help consumers step up to a premium product as well as help the retailer with border sales. Although this will not eradicate the disparity between the borders, it does reduce the incentive to cross the border to purchase alcohol. The goal is to increase the revenue for the state without a corresponding increase in consumption according to Lynn Walding.

The variable markup contributed to a 21% increase in liquor sales in February as people bought up the products. March has been fairly flat. It will take 2-3 months to determine the success of the program and decide whether to expand the variable markup to other categories such as rum and American whiskeys.

Thus far, there has been no verbal response from the general public. They will vote at the cash registers according to Walding. Some of the value companies do not like the variable markup. David Day with the David Sherman Company acknowledged the state would make more money; however, he said it will be at the expense of the value companies and their customers who will pay an extra 30¢ a bottle. Retailers are split on the issue. Some border community retailers preferred a 70 - 30 split while other retailers oppose the variable markup. Tom Duax of Central City was initially very opposed to the program; however he recently acknowledged it has not hurt him. Mr. Walding reported that the Windsor Heights Hy-Vee has increased their price on the low-end vodkas; however, they have not lowered the price on the high-end vodkas. Brokers have stated that some retailers who have stock on hand are not lowering their price to the consumer until they order new stock at the new price. Mr. Walding argues that the value companies won't notice any difference because value customers are looking for the cheapest product whereas the premium customer will have significant savings if it gets passed on to them. Some retailers have passed through the savings while others have not. Order Entry staff checked prices in various locations before the variable price markup went into effect and they will do another check in a couple months.

Brokers have told Jim Kuhlman that some retailers in the Dubuque and Davenport area are advertising the premium brands across the border. Most retailers on the border have rejected raising the price of the value vodka and are trying to draw people across the border with the premium brands. Most of the retailers throughout the interior of the state passed through the increase on March 1st; however, most have not yet lowered the price on premium goods.

J. A. Jones Bankruptcy

J. A. Jones Company recently declared bankruptcy with 2½ years left on their contract. The German owned conglomerate's construction companies were losing money and although the services portion of the company was doing well, they were dragged down with the construction companies. Two out-of-state companies expressed interest in taking over the contract; however, the state negotiated a deal with J. A. Jones and submitted a proposal to the bankruptcy court for approval. ABD will take over the warehouse operations sometime in May and deliveries will be made as a state entity. Mr. Walding projects that the state can save $1.3 million dollars over the life of the remaining contract as well as enhance customer service. The business plan will be announced after the state assumes the warehouse duties.

Mr. Walding stated that charter agency status allows the division to hire employees without an FTE cap so there will be no problem hiring employees. Mr. Kuhlman will meet with the truck leasing company to negotiate a month-to-month lease for the trucks currently being leased by the Jones Company. The Iowa DOT has confirmed that the state is exempt from federal transportation requirements.

In response to Commissioner Hunter's query, Jim Kuhlman responded the $1.3 million savings is net and that includes the buyout agreement with J. A. Jones. The current cost to deliver a case from the warehouse is $1.97 per case and the division plans to reduce that to $1.47 per case over two years.

Commissioner Doll inquired if state employee salaries would be higher or lower than Jones salaries. There are classifications within the state system for employees who will be covered by AFSCME Union according to Mr. Walding. It is anticipated the wages will be parallel or slightly higher than J. A. Jones Company wages.

Jim Kuhlman emphasized that the state is not assuming any J. A. Jones liability for unemployment, workers comp claims, 401Ks or any similar issues. The Jones employees will be terminated and the state will hire new state employees. The number of new hires has not yet been determined. Some functions such as accounting and payroll can be absorbed by current state employees. When Commissioner Doll asked what happens if it is determined later that some jobs need to be cut, Mr. Kuhlman replied the division would initiate a layoff. There is also a 6 month probationary period.

Commissioner Doll asked if the division found someone who could do the trucking cheaper mid-way into the month if the state would stay in the trucking business or contract it out. According to Jim Kuhlman the state does not anticipate recontracting. Mr. Walding added that the state submitted a bid on the project 2 ½ years ago forcing Jones to a lower bid. The bankruptcy created an opportunity for the state to revisit the issue and an economically feasible and beneficial way was found for the state to resume warehouse operations.

Commissioner Doll expressed concern over the rising cost of fuel and additional costs in trucking operations. Jim Kuhlman explained the Jones contract called for an annual price increase each year based on two national factors derived from the Department of Labor. One of those factors is the cost of diesel fuel. The annual increase each year has been averaging 5% so projections for the final two years of the contract factored in a 5% annual price increase. For example the case price will increase from $1.97 to $2.06 this year.

Commissioner Doll asked if any Iowa companies have expressed an interest in taking over the contract. Mr. Kuhlman stated there were four companies, including Jacobsen, who bid last time and Jones was the lowest bidder by a wide margin.

Commissioner Collins commented she was glad the state was resuming the warehouse and delivery operations duties. Issues can be addressed immediately without third party involvement.

Commissioner Doll said there are few situations where government can actually provide a service cheaper than the private sector. He asked if the state has an exit strategy planned in case the costs are higher than calculated. Mr. Walding stated the $1.3 million projected savings provides a lot of cushion and he is confident the system will work very efficiently. If not, the state will rebid the contract. In response to Commissioner Stoffer's request for a financial report, Mr. Walding responded the plan cannot be released at this time; however, a financial report will be shared with the commission after the takeover date.

NABCA Best Practices for Control State Projects

Lynn Walding will become the president of NABCA May 20th. The centerpiece of his presidency will be working with industry to identify ways to make the control state systems more efficient. Six areas have been identified, one of which is the listing procedure. Mr. Kuhlman and Mr. Walding recently attended a meeting in Washington, DC where industry members identified states that have good listing procedures. The goal of the overall project is to identify states that are doing a specific thing well and then for other states to implement the practice if it meets their control initiatives. Mr. Kuhlman added the practice will be a good critique of each state's current system and will identify how each state can become a better business partner with the industry.

Reception

Those in attendance were invited to a reception in the lobby immediately following the meeting to honor Commissioner Daggett and Marty Deaton, the division's chief accountant.

Lynn Walding thanked Commissioner Daggett for her years of service expressing pleasure at having her on the commission. Commissioner Daggett served a total of 9 years on the Commission and by law cannot be appointed to a third term.

Mr. Deaton is leaving the division after 27 years to work for the Department of Public Safety. Mr. Deaton will be missed by his fellow co-workers who wish him well in his new endeavors.

Upcoming Meetings

Mr. Walding announced that Carolyn Cavitt from Iowa City has been appointed by the Governor and approved by the Senate to serve as Commissioner Daggett's replacement on the commission effective May 1, 2004.

Linda Cox will contact the commissioners at a later date to set the time and the place for the next meeting.

Adjournment