HOUSE BILL NO. 299 "An Act extending the termination date of the Alcoholic Beverage Control Board; and providing for an effective date." 2:28:48 PM KRIS CURTIS, LEGISLATIVE AUDITOR, ALASKA DIVISION OF LEGISLATIVE AUDIT, referenced the audit report pertaining to the Alcoholic Beverage Control Board (ABC) dated November 17, 2017 [Sunset Review Audit Control Number 08- 20099-17](copy on file). She read the report conclusions: In all areas except licensing, the audit found the board was operating in the public's interest. Meetings were conducted effectively, investigations were processed timely, and the board developed and adopted regulations necessary to implement statutes. The audit concluded the board should improve its procedures for issuing renewals, recreational site licenses, and beverage dispensary licenses that encourage tourism. Testing found these licenses were not consistently issued in accordance with statutes. Additionally, operational improvements are needed in enforcing laws, monitoring board-related local law enforcement activity, and processing refunds to municipalities. In accordance with AS 44.66.010(a)(1), the board is scheduled to terminate on June 30, 2018. We recommend the legislature extend the board's termination date to June 30, 2022 Ms. Curtis cited page 8 of the audit and reported further on the conclusions. She announced the boards "enforcement efforts had declined, and operational improvements were needed." She read the following: The board, through AMCO investigators, has historically conducted compliance checks where investigators employ underage individuals who attempt to purchase alcoholic beverages. Licensees who fail a compliance check receive criminal summons or citations. According to management, the federal grant funding for this program was terminated at the end of 2012, and the board received supplemental funds to keep the program going through June 2014. AMCO's enforcement section continued to conduct compliance checks funded by program receipts until April 2015. Although there is no statutory or regulatory requirement to conduct compliance checks, AMCO management reported it is an integral part of the enforcement of alcoholic beverage laws and is evaluating alternative means for providing the enforcement through shared services with other agencies. The audit noted the board and AMCO management have not established a written enforcement plan to direct its limited enforcement resources. (Recommendation 4) For example, the board has not formally established how often licensed premises should be inspected. Furthermore, the control office does not monitor and track all complaints to ensure complaints are assessed for follow up action and investigated in a timely manner. (Recommendation 5) Ms. Curtis turned to page 9 and read: As discussed in the Background Information, for communities designated as a restricted area for controlling the availability of alcoholic beverages, the board enforces limits on alcoholic beverages purchased from package stores. However, the audit found the board and control office staff have not maintained the list of restricted purchasers within the statewide database of written orders in accordance with regulation, potentially allowing persons convicted of illegally selling alcoholic beverages to continue purchasing alcohol via written order. (Recommendation 6) Ms. Curtis indicated that the audit contained 8 recommendations for improvements that began on page 12. 2:30:47 PM  Vice-Chair Gara handed Co-Chair Foster the gavel. Ms. Curtis continued to provide details about the audit report. She addressed the first recommendation. "The authority to renew licenses should be limited to the board." She read the following from page 12: Per AS 04.11.070, only the board may issue, renew, transfer, relocate, suspend, or revoke a license under AS 04. Alaska Statute 04.06.080 states that notwithstanding AS 04.11.070, the board may delegate authority to the director to temporarily grant or deny the issuance, renewal, or transfer of licenses and permits. In a past board meeting, the board voted to delegate its authority to renew licenses to the director under the incorrect understanding that such delegation was legal. The AMCO director, in turn, assigned the function to license examiners. Ms. Curtis highlighted the second recommendation: "The board should issue recreational site licenses in accordance with statutory requirements." She reported the following findings: Ten of 29 recreational site licenses active during the audit period were judgmentally selected for testing. All 10 did not meet the statutory definition of a recreational site?. This same finding was reported in the prior 2014 sunset audit. Alaska Statute 04.11.210(c) defines recreational sites as locations where baseball games, car races, hockey games, dog sled racing events, or curling matches are regularly held during a season. The 10 noncompliant licensees noted above included travel tour companies, bowling alleys, an art council, a pool hall, movie theater, and a spa?. Review of board meeting minutes revealed that board members understood these businesses did not meet the definition of a recreational site license yet believed it to be in the public interest to issue them. Furthermore, board members anticipated the criteria for recreational site licenses would be addressed in a future rewrite of AS 04.06. The issuance of these licenses expanded the number of establishments licensed to sell alcohol over the number allowed by statute. Ms. Curtis summarized recommendation 3: "The board should issue beverage dispensary licenses in accordance with statutory requirements." She read: In a sample of 169 of 126 beverage dispensary licenses issued to encourage tourism, the audit found five licenses were transferred and six were renewed despite not meeting statutory requirements. Alaska Statute 04.11.400(d) states the board may approve the issuance or transfer of ownership of a beverage dispensary license without regard to statutory population limits if it appears that the issuance or transfer will encourage tourism. Statutes provide for the minimum number of rental rooms that must be met by a business to encourage the tourist trade. Alaska Statute 04.11.330(a)(4) states the renewal of a license shall be denied if the board finds the issuance of an existing license under AS 04.11.400(d) has not encouraged the tourist trade. The board believed it was appropriate to approve the licenses, as the original licenses were issued before June 1985;10 however, there was no statutory provision to "grandfather" the licenses. The issuance of the licenses expanded the number of establishments licensed to sell alcohol over the number allowed by statute. Ms. Curtis reviewed Recommendation 4: "The board, AMCO director, and enforcement supervisor should work together to formally establish an enforcement plan to direct AMCO's limited enforcement resources." She noted that the same recommendation along with recommendation 5 were included in the Marijuana Control Board audit. She moved to Recommendation 5: "The board and AMCO director should implement a process to monitor and track complaints to ensure they are assessed for follow up action and investigated in a timely manner." Ms. Curtis underlined Recommendation 6: "The board and AMCO director should develop written procedures for updating the statewide database with restricted purchasers." She cited the Background Information section of the audit and explained that the section described the Statewide Database of Written Orders. She explained that the database was used to control and monitor the sale of alcohol to restricted areas of the state. Furthermore, regulation 3 AAC 304.645 requires the board to maintain a list of persons convicted of a violation of AS 04.11.0103 [illegal sale or manufacture of alcohol] and provide the listing of these restricted purchasers to package store licensees. Package store licensees were prohibited from selling alcoholic beverages to a person who is identified as a restricted purchaser in the statewide database. She noted that restricted purchasers were not entered in the statewide database, and reports of convictions were not routinely forwarded to the office from the Court System. Ms. Curtis pointed to Recommendation 7: "The board and AMCO director should improve procedures to ensure municipalities report violations of alcoholic beverage laws." She reported that municipalities must report the information as a condition to receive half of the biannual license fees. The audit discovered that only four of 40 locations submitted reports in FY 17 regarding enforcement efforts by municipalities, yet the fees were routinely funded. 2:36:28 PM She summarized Recommendation 8: "The AMCO director should develop and implement procedures to ensure refunds to municipalities are appropriately reviewed." She indicated that the audit found one employee in the control office was responsible for calculating the amounts to be refunded to municipalities, and the calculation was not reviewed prior to processing the refund. By not having procedures that require a separate review, the risk that refunds were inaccurate was increased. Ms. Curtis highlighted the Agency Response from the Office of the Governor on page 27, of the audit report. She relayed that the administration agreed that the board sunset should be extended. She pointed out that the department's response was found on page 29. She indicated that the agency concurred with all the audit's finding except Recommendation 1. The commissioner [Mike Navarre} believed that an alternative interpretation of statute existed but agreed to move forward with corrective action. She mentioned that the board's response was found on page 33. The board concurred with all recommendations except Recommendation 3 that related to issuing beverage dispensary licenses to encourage tourism. The board chair felt that grandfathering the licenses issued before June 1985 was appropriate. In response to the board's conclusions regarding recommendation 3, the division of audit wrote a letter found on page 35, that reaffirmed the audit's conclusion and recommendation. She noted that the board chair provided no legal basis for his disagreement. 2:38:26 PM Representative Wilson asked if the last audit was performed in 2014. Ms. Curtis answered in the affirmative. Representative Wilson thought the audit had several recommendations that were very serious. She asked when a board "could finally get shut down" due to repeatedly ignoring findings and recommendations. Ms. Curtis qualified her earlier statement. She revealed that the audit originally granted the board a conditional 6-year extension that was reduced to 3 years if the marijuana initiative passed. She interpreted Representative Wilson's question to mean how bad findings would have to be to reduce the extension to one year. She specified that a bad audit would never receive less than a two-year extension due to the time it took to perform an audit. She referred to the list of "License Count by Type" on page 7. She noted that there were only 27 recreational site licenses out of a total of 1,800 licenses. She indicated that "materiality" was factored into the audit conclusions. The issues regarding enforcement plans and complaint tracking was a symptom of the two boards lack of resources, sharing staff, and defining their organizational structure. She wanted to give at least 4 years to allow time to establish a working structure between the two boards and allow the Marijuana Control Board to become functional. She was very concerned about the decrease in enforcement activities and how the issue factored into the public's interest. Representative Wilson responded that if there was not enough money for enforcement then the fees needed to be adjusted. She related that the lack of enforcement was her largest concern. She wondered whether money was the issue. 2:42:59 PM Representative Kawasaki contended that the audit was not "clean" and wanted the bill held over. He repeated some of the findings. He commented that in Recommendation 3 the auditor sampled 16 of 126 beverage dispensary licenses and discovered that 11 did not meet statutory requirements. In Recommendation 1, 36 out of 40 licenses were renewed by AMCO license examiners without board approval, contrary to statute. All 10 of 10 recreational sites tested in Recommendation 2 did not meet statutory definition. He believed the audit was "bad." He wondered whether the issues were related to AMCO and the consolidation of the functions between both boards. He discerned that merging two boards under one administrative organization was problematic. He questioned how AMCO was functioning. Ms. Curtis responded that she did not routinely hear that AMCO was "the cause of findings." Vice-Chair Gara apologized for not allowing the sponsor to present his bill before Ms. Curtis testified. 2:45:32 PM LAURA STIDOLPH, STAFF, REPRESENTATIVE ADAM WOOL, thought that the members had already heard a significant amount about how the ABC Board functioned. She reiterated some of the findings. She related that the sponsor felt the ABC Board served an important function in public safety and appreciated the support of the committee. Vice-Chair Gara mentioned the testimony that the marijuana board set its license fees for marijuana through regulation and the ABC board fees were set through statute. He mentioned a change in the ABC board's fees and asked whether the fees were changing. REPRESENTATIVE ADAM WOOL, SPONSOR, remarked that renewal fees remained the same and acknowledged that other fees were increasing but did not have access to the information. Representative Pruitt opined that there were 2 policy calls beyond an extension. He asked why the director was not a member of the board and what regulation the board was annulling. Representative Wool responded to his question as to why the director was no longer able to cast a tie- breaking vote nor a voting member. The related statute had been repealed, but the regulation remained. He wanted regulations to remain consistent with statute. He indicated that the board hired the director and he thought the director's tie-breaking vote was a conflict of interest. He deferred to Ms. Stidolph to answer his second question. Ms. Stidolph cited the Administrative Code, AAC 304.025 "Conduct of Board Meetings" Section C and read the following: For the purposes of AS.04.06060 the whole membership is all persons appointed in serving as members of the board if necessary the director shall cast a tiebreaking vote with consent of the board executed at the beginning of the meeting. Ms. Stidolph identified the regulation as the one that was annulled. 2:50:44 PM Representative Guttenberg asked for Representative Wool's perspective on the audit based on his own personal experience from the industries' perspective. Representative Wool remarked that he agreed with the staff's handling of the renewal process due to the high volume of renewals. He had been satisfied with the answer form the board chairman and director regarding the issue. Overall, even though there were administrative issues with the board and AMCO, he believed the entities were working through the initial growth stage of the new organizational structure. He thought it was a heavy lift to combine the two boards and previously shared some of Representative Kawasaki's concerns but believed that things were leveling out. ^PUBLIC TESTIMONY 2:53:04 PM Co-Chair Foster OPENED Public Testimony. Co-Chair Foster CLOSED Public Testimony. 2:53:34 PM AT EASE 2:53:58 PM RECONVENED Representative Wool had an additional response to Representative Guttenberg's question. He referred to the questions regarding enforcement and whether the board had adequate resources to carry out the function properly. He surmised that considering its limited resources the board should prioritize enforcement of more serious violations. Representative Wilson declared that the board had the authority to raise fees. She was concerned that ABC was not enforcing serious violations like underage drinking. She asked whether he discussed the matter with the board. She wondered what it would take to change the fees to maintain sufficient staff to carry out adequate enforcement. Representative Wool replied that he did not engage in discussions over the issue and was uncertain how much fees needed to increase. He related his personal experience paying licensing fees and would not advocate for the amount to increase. He knew that some of the fees were increasing and was uncertain whether the increases were sufficient to provide adequate enforcement. Representative Wilson knew that licensees would not want fees increased. She imagined that a budget would be proposed by the board that enabled them to carry out its statutory duties and generate the fees from the bottom line. She wanted to know how much would be needed to comply and fix the concerns. She requested budgetary information and reiterated her concern over lack of enforcement. Representative Wool understood her request. 2:58:29 PM Representative Guttenberg ascertained that currently the board's resources were spread across both boards causing the loss of priorities by the ABC. He guessed that the problem was created by combing the two boards since the ABC was self-sustaining when it operated as a single entity. As a license holder, he wondered whether Representative Wool thought things were in a state of flux until the marijuana board's costs were determined and if ABC was "suffering" under the combined organization and newness of the marijuana board. Representative Wool had not heard any concerns from the alcohol industry consistent with Representative Guttenberg's supposition. He referred to "sting operations" to determine whether underage youth was being served alcohol. He understood that a large federal grant previously supported sting operations and had been eliminated, which affected the frequency of current sting operations. He did not feel that his industry lacked proper enforcement and oversight and believed the industry "had done a good job" carrying out enforcement. He was uncertain whether the limited resources were due to the inception of the marijuana board. He related that most ABC revenues collected were from license renewals and that marijuana licenses were new and there were more revenue streams for its board. He suggested that an examination of whether less revenue from some of the ABC fees could be directed from municipalities and more redirected to the state. He believed that the issue of limited resources should not fall directly on the alcohol industry to raise fees. 3:03:22 PM Co-Chair Seaton referred to the analysis on page 2 of the fiscal note that stated the license fee were mostly set in statute. He wondered whether the issue was related to the statutory fee structure and if he thought it was necessary for a fee structure change in statute. Representative Wool deferred to the AMCO director for the answer. Ms. McConnell reported that the fiscal note was almost identical to that of HB 273. She reiterated that 8 positions would be eliminated if one board was not reauthorized and noted that the positions were detailed in the fiscal note analysis as well as the portion of travel, services and commodities that would not be expended. She reported that the ABC was fully supported through license and application fees and if the board was not extended the revenue loss would total of roughly $1.6 million. Co-Chair Seaton inquired whether "it was a characteristic of the board that it did not set the fees to actually fund the enforcement by the department." Ms. McConnell clarified that the license fees for alcohol were set mostly by statute and the application fees were set by regulation. She was uncertain of when the last statutory fee increase occurred. She explained that ABC recently increased its application fees for FY 2019. She listed the fee increases from $200 to $300 totaling $570 thousand for 1,900 applications. She informed the committee that SB 76 (Alcoholic Beverage Control; Alcohol Reg) was a "re-write of Title 4" statutes that included a reexamining of alcohol license fees, but she was uncertain whether the fees increased. Prior to the inclusion of the marijuana board, ABC had 5 enforcement officers that had "clear" priorities. Currently, AMCO had 8 enforcement officers. She shared Representative Wilson's concerns about enforcement and agreed with the audit's findings on the need to establish priorities on how resources would be distributed. She thought 8 enforcement officers based on the number of licenses in the state might be inadequate but deferred to the legislature to make the determination. She commented that marijuana licenses were generally on the road system due to challenges related to transporting the substance that was still illegal on the federal level. The alcohol licenses were much more distributed around the state including many rural areas and travel costs related to enforcement was higher. She indicated that the matters she just mentioned were the types of issues needed to be worked out in terms of setting priorities as directed by the audit. 3:10:42 PM Co-Chair Seaton asked whether the extra $570,000 in increased revenue was sufficient enough to fulfill the recommendations listed in the audit. Ms. McConnell apologized for the mix-up and clarified that the $570,000 was the total revenue over a two-year period. Currently, AMCO collected $280,000 in renewal fees and the increase amounted to approximately $310,000. The board had two programs and 8 enforcement officers and believed that there was only a certain amount the board could do to mitigate the situation, since some of its fees were set through statute. Co-Chair Seaton inquired whether the $310,000 was sufficient to address the audit recommendations. Ms. McConnell determined that the additional funds would help. She could not speak to the decisions that would be made by the board. 3:13:13 PM Representative Kawasaki compared the two board's fiscal notes and highlighted that both boards showed each had 8 full-time positions. He referenced slide 12 from the previous bill and asked what the yellow lines through certain position titles denoted. Ms. McConnell answered that the yellow "X" represented those positions that would be eliminated if one board was not extended. Co-Chair Foster relayed that amendments were due on Thursday, February 22, 2018. HB 299 was HEARD and HELD in committee for further consideration. Representative Wilson wondered whether the policy to combine the two boards was appropriate. She believed the question was over sufficient resources and understood it was difficult to determine given the newness of the marijuana board. She wanted to ensure that one board was not being disadvantaged due to the other board's inclusion. She requested further information regarding whether combining the board's administration and sharing enforcement was the reason for the lack of enforcement. She did not want to "stifle" either industry. Co-Chair Foster agreed with getting things right the first time and wanted the committee to take deliberate action. 3:16:29 PM AT EASE 3:17:14 PM RECONVENED