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SALT LAKE CITY — A privately run liquor packaging agency lost the state nearly $300,000 in its one year of operation and the Department of Alcoholic Beverage Control shares in the blame, according to a legislative audit released Tuesday.
Those results did not sit well with members of the Legislative Audit Subcommittee, nor with the lawmaker who requested the audit, Sen. John Valentine, R-Provo. Valentine told the Deseret News it may be time changes at the DABC.
Government servants should facilitate private business activities, especially during the very difficult times faced by all during the Great Recession.
"I think the governor should look at a change in personnel," Valentine said He said he sought the audit after hearing allegations the agency was attempting to cover up the losses but now it appears to be "more mismanagement."
Gov. Gary Herbert's office said he was not considering making management changes at DABC as a result of the audit and Dennis Kellen, who has been at the agency that controls the sale of alcohol in the state for some 36 years, said he had no plans to step down "at this time."
Valentine's request for a more extensive audit of package agencies contracted by the DABC to sell alcohol was approved the subcommittee and given priority status.
Senate President Michael Waddoups, R-Taylorsville, stopped short of calling for Kellen to be replaced, but told him during the meeting that the loss "shows terrible management skills on your part....You're the person responsible for this debacle."
House Speaker Becky Lockhart, R-Provo, also was openly critical during the meeting.
She said, "$300,000 is a lot of money to my constituents. It's a lot of money. And whether you like it or not, we are a control state."
"The DABC exercised poor management of the Eden Package Agency."
The Legislative Auditor General's office concluded in the 18-page report that, "The DABC exercised poor management of the Eden Package Agency," and their actions led to the state's financial loss.
The agency continued to supply the store in the Ogden Valley town with liquor even though it was behind on payments, the report states. The facility was in debt for 11 out of the 12 months it was in business.
"DABC management did not limit shipments of liquor despite the package agency's continued failure to pay invoices," the report states. DABC administrators told auditors they supplied the Eden facility with liquor despite its debt in an effort to keep the agency alive.
Package agencies are privately operated, state contracted liquor outlets located in communities too small for a state store, and in resorts and hotels. The Eden location opened after Wolf Creek Resort chose not to renew its contract in 2009.
The DABC failed to complete an audit of the agency — which was supposed to be conducted every six months — until 10 months after its opening. By that time the agency's debt to the state was more than $400,000, the report states.
The DABC's audit of the facility found $190,000 unaccounted for. DABC also retroactively increased the package agent Bill Lyman's compensation from $1,000 a month to almost $8,000 a month, legislative auditors said.
Kellen said the agency attempted to keep the Ogden packaging facility open for public safety reasons, because having to travel through Ogden Canyon to the next-nearest store meant a trip that he said was dangerous.
In the agency's written response, DABC Commission vice chairman Gordon Strachan also cited economic development reasons.
"Government servants should facilitate private business activities, especially during the very difficult times faced by all during the Great Recession," Strachan wrote.
Auditors also criticized the DABC for failing to report the package agency's issues to both the DABC Commission and the attorney general. The agency's legal counsel, assigned from the attorney general's office, said she was unaware of the situation.
DABC Commissioner Richard Sperry told the subcommittee he did not believe the failure to report the issues to the commission "was an attempt to hide bad management decisions." But he could only say, "I hope not," when asked by the subcommittee if there were similar problems at other package agencies.
Kellen said a DABC auditor is now assigned full-time to watch over the package agencies and will begin reporting to commissioners at their next meeting.
The Eden facility operated as a Type-3 package agency, where operator compensation is based on volume of liquor sold, even though it was approved as a Type-2 agency, where the compensation would be a set amount as outlined in a contract, the report states.
The DABC told auditors it intended to convert the package facility to a Type-3 when funding became available, but that never happened. After the audit, the DABC started compensating Lyman as if he ran a Type-3 operation when the agency was still tagged as a Type-2, the report states.
A mandatory background check was never conducted on Lyman, which the DABC explained was an oversight on its part.
When the package agency was closed in June 2010, it had more than $417,000 in outstanding debt, the report states. The DABC was able to recover $93,000 in inventory, and after other credits were issued the facility's debt was $298,177. The report states the DABC waived the majority of interest charges against the Eden facility in an effort to help it manage its debt.
But the DABC claimed the loss to the state's general fund was $110,000 at most, and that the money represents the profit the state did not collect on liquor that would have been sold.