BILL ANALYSIS �
Bill No: SB
1401
SENATE COMMITTEE ON GOVERNMENTAL ORGANIZATION
Senator Lou Correa, Chair
2013-2014 Regular Session
Staff Analysis
SB 1401 Author: Block
As Amended: March 26, 2014
Hearing Date: April 22, 2014
Consultant: Art Terzakis
SUBJECT
Alcoholic Beverages
DESCRIPTION
SB 1401 authorizes the Department of Alcoholic Beverage
Control (ABC) to hire six additional full-time staff to its
trade enforcement unit and makes it explicit that the ABC
has the authority to investigate violations relating to
beer price posting and marketing regulations and provisions
relating to labeling and containers. Specifically, this
measure:
1)Makes various legislative findings and declarations
relative to the importance and necessity of maintaining a
regulated process for investigation and enforcement of
violations of the state's "tied-house" laws for the
stated purpose of preserving a fair and orderly market in
the manufacture, distribution, and retail sales of
alcoholic beverages.
2)Encourages the Department of ABC to devote the necessary
resources to adequately and aggressively enforce the
state's tied-house laws.
3)Stipulates that the Department of ABC has the authority
to investigate violations relating to beer price posting
and marketing regulations and provisions relating to
labeling and containers.
SB 1401 (Block) continued
Page 2
4)Directs and authorizes the Department of ABC to hire six,
full-time equivalent personnel, additional to ABC's
current staff, to investigate and prosecute violations of
the state's tied-house laws.
5)Also, makes minor code maintenance changes and deletes
obsolete cross-references to certain provisions of the
ABC Act relating to alcoholic beverages fair trade
contracts and price posting and wine fair trade contracts
and price posting.
EXISTING LAW
The enactment of the 21st Amendment to the U.S.
Constitution in 1933 repealed the 18th Amendment and ended
the era of Prohibition. Accordingly, states were granted
the authority to establish alcoholic beverage laws and
administrative structures to regulate the sale and
distribution of alcoholic beverages.
Existing law establishes the Department of ABC and grants
it exclusive authority to administer the provisions of the
ABC Act in accordance with laws enacted by the Legislature
to ensure uniform administration and enforcement of the
laws throughout the State. This involves licensing
individuals and businesses associated with the manufacture,
importation and sale of alcoholic beverages in this state
and the collection of license fees for this purpose.
Existing law establishes the ABC Fund into which original
and annual alcoholic beverage license fees are deposited.
Moneys from this fund are allocated, upon appropriation by
the Legislature, to the ABC for the administration and
enforcement of the ABC Act. The ABC Act also establishes
various alcoholic beverage license categories and a
schedule of annual fees charged to the alcoholic beverage
licensees.
Existing law, known as the "tied-house" law or "three-tier"
system, separates the alcoholic beverage industry into
three component parts of manufacturer (the first tier),
wholesaler (the second tier), and retailer (the third
tier).
SB 1401 (Block) continued
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Tied-house refers to a practice in this country prior to
Prohibition and still occurring in England today where a
bar or public house, from whence comes the "house" of tied
house, is tied to the products of a particular
manufacturer, either because the manufacturer owns the
house, or the house is contractually obligated to carry
only a particular manufacturer's products.
The original policy rationale for this body of law was to:
(a) promote the state's interest in an orderly market; (b)
prohibit the vertical integration and dominance by a single
producer in the marketplace; (c) prohibit commercial
bribery and protect the public from predatory marketing
practices; and, (d) discourage and/or prevent the
intemperate use of alcoholic beverages. Generally, other
than exceptions granted by the Legislature, the holder of
one type of license is not permitted to do business as
another type of licensee within the "three-tier" system.
Existing law grants the ABC the authority to investigate
violations of tied-house laws.
BACKGROUND
Purpose of SB 1401: The author's office notes that the
craft beer industry has witnessed tremendous growth over
the years (currently, there are over 430 craft breweries in
California) and generates approximately $4.7 billion in
total economic impact to the State. The author's office
states that tied-house investigations conducted by the ABC
are often extremely complex, take considerable time, and
require extensive resources. Also, alcoholic beverage
industry members who comply with the tied-house laws are
generally placed at a competitive disadvantage by those few
members of the industry that choose to violate the laws.
The author's office believes that more effective
enforcement will help ensure market fairness to protect
this fast-growing segment of the economy and curb illegal
activities by bad actors.
According to the author's office, this measure is simply
intended to enable the ABC to appropriately enforce
existing regulations imposed on the alcoholic beverage
industry by adding six additional full-time equivalent
staff positions to investigate and prosecute violations of
the tied-house laws. As noted above, "tied-house" refers
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to laws, adopted both on the federal level and by every
state, that regulate how alcoholic beverages are marketed
and how the three tiers of the alcoholic beverage industry
interact.
The author's office contends that in the 1960s, ABC had a
total of 200 field officers to oversee 50,000 permanent
alcoholic beverage licensees - a ratio of one agent for
every 250 licenses. At the end of the 2012-13 fiscal year,
ABC was authorized a total of 133 agents to police the
activities of approximately 85,788 permanent alcoholic
beverage licensees as well as an additional 37,427 "special
event" licenses issued by ABC. This equates to a ratio of
one agent for every 926 licensees. Furthermore, the
author's office points out that at the end of the 2012-13
fiscal year, ABC had only two full-time trade enforcement
investigators with a backlog of approximately 1,729 cases.
The remainder of ABC's investigators is engaged in the
investigation of direct public safety violations, such as
sales of alcohol to minors and other licensing violations.
The author's office emphasizes that the ABC Fund has a
surplus of $28.5 million in the 2013-14 fiscal year and
that a $26.2 million surplus is projected through the
2014-15 fiscal year. The salaries and benefits of the six
new investigators, provided by this measure, will be paid
out of the ABC Fund at an estimated cost of approximately
$800,000.
Staff Comments:
The state's economic downturn in the early 1990's forced
ABC to lay off a significant number of employees. This, in
turn, prompted the Legislature in 1992 to convert ABC from
a General Fund agency to a special fund agency supported
solely from license fees charged to holders of alcoholic
beverage licenses. This was done to provide ABC with a
dedicated and more stable funding source so ABC could
continue to process license applications and to enforce
point of sale violations such as sales to minors and
policing disorderly premises. (Currently, ABC has
authorization for 133 agents to police the more than 85,000
licensed establishments in California. By comparison, in
1965, ABC had slightly more than 200 field investigators to
regulate about 48,000 licensed outlets.)
SB 1401 (Block) continued
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In the mid 1990's the Legislature continued in its efforts
to provide ABC with additional funding to assist the
department in maintaining its existing programs and
services. This was thought to be necessary given the
increased costs due to inflation and the additional
enforcement activities resulting from a significant
increase in the number of establishments licensed to sell
alcohol in California.
In 1997, for example, the Legislature augmented ABC's
1997-98 budget by $2.5 million, $2 million of which was to
provide for 18 additional field investigator positions and
six associated positions and $500,000 for additional local
law enforcement grants. The Governor did not veto the
legislative augmentation, but he noted that the
augmentation could not be sustained in subsequent years
without an increase in ABC revenues. Budget trailer
legislation that would have provided additional revenue by
utilizing the fines imposed upon ABC Act violators was
vetoed because of the Governor's objections to using
revenues which otherwise would be deposited into the
General Fund. However, the Governor stated in his veto
message that in order to maintain the level of enforcement,
additional revenues would be necessary. The Governor
suggested he would be amenable to support legislation that
provided ABC additional revenues as long as it did not
affect the General Fund.
Subsequently, in his 1998-99 Budget, the Governor proposed
an "enforcement surcharge" that would have been imposed on
a range of ABC license types to provide the funding
necessary for ABC to maintain its existing enforcement
programs. However, the alcoholic beverage industry was not
willing to support a fee increase because of the General
Fund budget surplus that existed at that time. The
industry questioned how much, if any, General Fund revenues
could be used to offset the fee increase and thus reduce
the impact on the industry. The lack of consensus
regarding this matter eventually undermined the proposal.
In the Legislative Analyst's analysis of the 2001-02 Budget
Bill, the Legislative Analyst recommended that the
Legislature "enact legislation allowing ABC to increase
license fees to sustain current enforcement levels and
avoid budgetary shortfalls." The Analyst also affirmed the
fact that ABC's operating costs had increased because of
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inflation and additional enforcement activities, but that
license fees had not kept pace with these costs.
The Analyst suggested that ideally the ABC fee structure
should generate sufficient operating revenue to fund needed
ABC operations and establish a reasonable reserve. In
addition, the Analyst recommended that the fees should be
structured with sufficient flexibility to periodically
allow adjustments to match enforcement activities and
associated budget changes approved by the Legislature. The
Legislature heeded the Analyst's recommendation and enacted
AB 1298 (Wesson), Chapter 488 of 2001, which increased
annual license fees by specified amounts through 2004, and
authorized the Department of ABC to annually adjust the
fees charged by an amount not to exceed an inflation factor
based on the Consumer Price Index for the west region. AB
1298 of 2001 also required the Department of ABC to publish
the adjusted fees and transmit them to the Legislature for
approval as part of the department's budget submission for
the fiscal year in which the adjusted fees would be
implemented. AB 1389, Chapter 751 of 2008, a Budget
trailer bill, was the most recent vehicle for increasing
ABC license fees that took effect beginning in January of
2009.
PRIOR/RELATED LEGISLATION
AB 2004 (Chesbro) 2013-14 Session. Would require the
Department of ABC to include in its annual report to the
Legislature the number of active field agents employed by
it and the number and type of enforcement activities
conducted by it and by local law enforcement agencies in
conjunction with ABC by license type and by region or
county. (Pending on Assembly floor)
AB 1389 (Committee on Budget), Chapter 751, Statutes of
2008. Among other things, increased ABC annual license
fees by 11.78% beginning January 1, 2009, in lieu of any
annual fee adjustments that could have been imposed for the
previous 4 years. Also, authorized the Department of ABC to
annually adjust the fees charged commencing with the 2010
calendar year by an amount not to exceed an inflation
factor based on the Consumer Price Index.
AB 1298 (Wesson), Chapter 488, Statutes of 2001. Among
other things, increased ABC annual license fees by
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specified amounts through 2004, and authorized the
Department of ABC to annually adjust the fees charged
commencing with the 2005 calendar year by an amount not to
exceed an inflation factor based on the Consumer Price
Index.
SUPPORT: As of April 17, 2014:
California Craft Brewers Association
OPPOSE: None on file as of April 17, 2014.
FISCAL COMMITTEE: Senate Appropriations Committee
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