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Audit: Nearly $14 million wasted in ABC liquor contract

August 9th, 2018

— Poor contract management and too much warehouse space cost the state nearly $14 million over 13 years, according to a state audit of Alcoholic Beverage Control Commission operations released Thursday.

The ABC Commission repeatedly allowed annual contract price increases above what the contract itself allowed, leadership thought someone else was monitoring the contract and the commission paid hundreds of thousands of dollars a year for a 200,000-square-foot warehouse in Clayton that was largely empty, even during the busy holiday season, the audit found.

“The Commission did not explain why it repeatedly approved price increases that exceeded the maximum allowed amounts,” State Auditor Beth Wood’s office wrote. “But the Commission offered that it had little to no resources dedicated to monitoring the contract.”

The state has contracted with LBB Associates Inc., which is based in Maryland, since 2004 to handle liquor warehousing and distribution. In fiscal 2017, the contract totaled $8.3 million, and it has cost the state more than $80 million over its life, the auditor’s office said.

The price repeatedly increased without the ABC Commission evaluating the reasons for those increases, meaning the commission “cannot provide reasonable assurance that over $5.5 million in price increases were reasonable or necessary,” the auditor’s office said.

LBB took issue with Wood’s audit Thursday, saying its price increases were reasonable, that the extra warehouse space was needed and that the auditor’s office misstated contract rules in its report. Over the 13-year life of the contract, the ABC Commission went from shipping 3.8 million cases on total sales of $520 million to 6 million cases and sales over $1 billion, the company said in a statement.

“The price increases were more than reasonable and in the best interests of the state,” the company said.

ABC Chairman Zander Guy accepted the auditor’s findings in a letter on behalf of the commission, but he noted that the contract’s last extension pre-dated his 2017 appointment as chairman. The audit period covered the tenures of four commission chairs and two chief administrators, Wood’s office said.

Michael Herring, who retired as the ABC Commission’s chief administrator at the end of 2014 and is now an appointed commissioner, declined to comment on the audit Thursday.

Guy said in his letter that the current contract expires in 2021 and will be re-bid in 2020. The commission recently changed head administrators: Robert Hamilton left abruptly in July. Agnes Stevens, the ABC’s public relations director who became a deputy director at the ABC last year, was made interim director to oversee day-to-day operations.

Wood’s office said in its audit letter that it received “limited assistance” from the ABC under Guy as it sought documents needed to perform the audit and that, at one point, it considered subpoenaing the company for documents that “the Commission should be requesting from LBB as part of their ongoing oversight and monitoring responsibilities.”

A subpoena was ultimately unnecessary, the audit states. LBB said in its statement that fully cooperated with auditors. According to its website, the company has more than 65 contracts nationwide, with government and private clients, and nearly 1,000 employees.

The audit says that the commission’s chief administrator told auditors that ABC thought it didn’t have to monitor this contract because local ABC boards and distillers would notice problems with LBB’s service.

“However, local ABC boards and distillers do not have the ability to monitor LBB’s compliance with the state contract,” the audit states. “Local ABC boards and distillers do not receive LBB reports or have access to LBB systems, except for information related to orders.”

Among the issues noted in the audit: LBB requested an increase in 2016 based in part on increased fuel usage, but documents show fuel costs decreased by more than $221,000 that year.

The audit also describes a $300,000-a-year warehouse in Clayton, which was contracted for without the commission verifying LBB needed that much space. When Wood’s office visited last December, auditors found the warehouse largely empty, the audit states.

LBB said the new warehouse allowed North Carolina to add more than 700 new products and relieved logisitical complications tied to the limited number of bay doors at the state-owned warehouse.

“While it did result in increased contract costs, it was a critical factor in the dramatic revenue increases experienced by the ABC Commission (which have more than accounted for the cost increase),” LBB said in its statement.

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