Chairman Testifies Before Senate Committee on Investigations and Government Operations - March 24, 2010

 March 24, 2010


Good morning, Chairman Johnson, and distinguished Members of the Committee. My name is Dennis Rosen and I am the Chairman of the New York State Liquor Authority. I want to thank you for inviting me here today and providing me with the opportunity to testify.

I have submitted my full statement to the committee, which I ask be made part of the hearing record. I will now give an opening statement and I look forward to answering any questions you may have.

I would like to begin by first providing some brief information on my background and how I came to the State Liquor Authority. I’ll then proceed to update the Committee on recent developments at the SLA, and legislative proposals we will be offering that address concerns raised in the Commission’s Report.

From September 2005 to December 2006, I was the lead attorney in the statewide investigation by then Attorney General Spitzer into widespread violations of the ABC Law, which regulates the sale of wine and spirits. The investigation concluded with many of the liquor industry's largest wholesalers, manufacturers, and retailers agreeing to court orders which fined them a total of $4.6 million. More importantly, the orders also ended what were referred to as "pay-to-play" practices that had created an uneven playing field, putting companies that followed the law at a competitive disadvantage. The orders also set forth comprehensive guidelines for all industry members to adhere to, providing a degree of clarity that had been lacking. As a result of the investigation, I was already somewhat aware of the challenges facing the SLA and the industry it regulates prior to my arrival at the agency seven months ago.

As the members of the Committee are well aware, and as the Commission’s Report makes clear, the SLA faces massive challenges and the ABC Law is in dire need of an overhaul. The Report states that “Since its inception, the SLA has been plagued with problems of licensing delays, inadequate enforcement, inefficient and ineffective administration and, indeed, bribery and corruption.” As the Commission notes, the task before the SLA, and I would add, before your Committee and the Legislature, is “herculean.”

One of the major hurdles facing the alcohol industry as well as the SLA is trying to do business in the 21st Century with a statute that was passed in 1934 coming out of Prohibition. Since its inception, there have been various amendments to the ABC Law. While many of these amendments have been well-intentioned and indeed necessary, what I believe is needed today is a total overhaul of the statute. I recently told a reporter that what we have with the ABC Law is not what one would typically call a statute. A statute is logically written. What we have with the ABC Law is a collage. This is because it has persistently been jerry-rigged to suit the perceived needs of the moment without much deference to its overall structure or logic. Thus, it is difficult for even attorneys to understand, and almost impossible for the average licensee to know exactly what their responsibilities are under the statute.

I believe we have a great opportunity, here and now, to fix an agency and a statute. The Commission’s Report provides a basic blueprint for how we can move this agency and this industry forward. And for this, I think the Commission should be commended for their exhaustive and exceptional work. I agree with the Commission’s approach that piecemeal changes to the law are no longer sufficient if this industry and the SLA are to function in the 21st Century.

In addition to providing a blueprint for going forward, the Commission also notes that the SLA has made “remarkable” progress in the past few months. I would like to briefly outline some of the changes we have recently implemented in our effort to process license applications more efficiently, as well as to ensure that serious violations of the law are dealt with swiftly and effectively.

When I started on August 19, 2009, the agency was facing a backlog of over 3,000 pending applications. In upstate NY alone, the backlog was over 1,000. This backlog meant that business owners faced a six to seven month wait north of Westchester, and an average wait of nine months to get a liquor license in the city and on Long Island. These delays, which should be considered unacceptable during good times, are simply intolerable given the current economic climate. Consequently, I am pleased to report that the backlog has been eliminated north of Westchester County, and license applications there, if complete when submitted, are being acted upon within the statutorily required period of one month for the first time in years. Overall, the backlog has been reduced from over 3,000 to about 1,700. Obviously, this is still a burden on entrepreneurs trying to start a business in the New York City metropolitan area, but we are making tremendous progress. The Governor has directed me to eliminate the backlog by October, 2010, and I am prepared to live or die with that deadline.

One of the policies that we have implemented to tackle the backlog that has received a lot of attention is the Attorney Self-Certification program. But while this program has received the most attention, I want to stress it is just part of an overall strategy to eliminate the backlog; it is but one arrow in our quiver. Before describing some of the other changes we have implemented, I would like to address some of the criticisms that the Self- Certification program has received.

First, the program has been criticized as creating a two-tier system, where the review process for applications submitted by attorneys under the program are fast-tracked. Self-Certified applications are expedited. However, expediting these applications was necessary to encourage attorneys to participate in the program. Simply put, attorneys under this program are putting a lot on the line, because, they are called upon to engage in extensive due diligence to ensure the truthfulness of certain categories of information contained in the applications. To certify that information is true which, in fact, is not, constitutes a crime. This process saves hours of reviewing time, thereby substantially shortening the waiting line for all applications. This benefits all applicants.

The Self-Certification program is not a “rubber stamping” of applications. Applications submitted under the program receive a full review. While there is certain information that we rely on from attorneys under the program, we are auditing these applications to verify they are complete and accurate. On January 6, 2010, my fellow Commissioners and I passed a resolution delegating power to the Deputy Commissioner of Licensing to remove any attorneys from the “Self-Certification” program who are found submitting incomplete applications or applications containing misrepresentations. Two attorneys have been excluded from the program for submitting incomplete applications that they certified as complete. We are regularly auditing certified applications. In addition, any attorney found to knowingly submit an improper filing will be criminally prosecuted. I personally successfully prosecuted an attorney who submitted a false certification with respect to the conversion of a rental complex to cooperative apartments while I was with the Attorney General’s office. I can assure the Committee we will not hesitate to send a strong message if we find false certifications.

The other criticism of the program has been that it short-circuits local government, including Community Board involvement, in the licensing process. This is not the case. Applications submitted under the Self- Certification program are treated identically to those submitted under the normal process with respect to meeting the requirements of the ABC Law. Applicants must still notify their Community Board or municipality 30 days prior to applying for a license. This ensures that the Community Board has sufficient time to comment. Also, any application that falls under the 500 Foot Law must still have a 500 Foot Hearing. These hearings are a further opportunity for the community and the Community Boards to weigh in on pending applications. In addition, applications that require a Full Board determination, for example applications that receive Community Board opposition, are not eligible for the Self-Certification program.

We have taken other steps to improve the agency, some of which I will briefly note here. As acknowledged in the Commission’s Report, the SLA has instituted a number of technological as well as common sense solutions designed to make the review process more efficient. These include allowing for the submission of digital photographs in place of costly front elevation diagrams, accepting digital fingerprints, and allowing licensees to submit a notice to the SLA to change their trade name, rather than going through the onerous “endorsement application” process. Additionally, in partnership with the Division of the Budget (“DOB”), the SLA is embarking on a comprehensive computer upgrade, the SLA / ABC Revitalization Project. We recently hosted a discussion between a panel consisting of stakeholders in the agency – industry and community representatives – and over one-hundred prospective technology vendors. Our stakeholders described to us and our prospective vendors where they need the agency to be technologically so that we may operate more efficiently, facilitate economic development, provide more information to the community, and more effectively communicate with other law enforcement agencies.

We have reorganized the agency and brought in highly experienced professionals. As recommended by the Commission, we hired an Internal Auditor who is critically scrutinizing every procedure by which the agency conducts its business. Because many of the problems within the agency have emanated from our New York City office, the Commission recommended that we hire a regional director for that office. Accordingly, we have moved our Deputy CEO position from Albany to New York City, and reorganized Counsel’s Office so that our newly hired Counsel is based in New York City as opposed to Albany, where our former Counsel was stationed. Our new Deputy CEO in New York City is a former Manhattan Asst. District Attorney with extensive law enforcement contacts, and our newly hired Director of Enforcement is a 30-year police professional, who had a highly successful eight-year tenure as the first female Chief of Police in Indiana. Having these quality professionals on the job has allowed our agency to stretch our resources by forging partnerships with local law enforcement agencies across the state. The agency is refocusing our enforcement priorities. We are getting away from counting fruit flies in bottles to cracking down on underage drinking, sales to intoxicated patrons, and the bars and nightclubs that wreak havoc on their neighborhoods. We are requesting that the maximum fine be raised from $10,000 to $25,000 for the most egregious violations. The Emergency Summary Suspension is a regulatory tool that we are employing exponentially more than ever before.

The Board recently passed a resolution to delegate the authority to individual SLA Commissioners, on a rotating basis, to render penalties on minor disciplinary actions. This frees up a substantial portion of the calendar so that we can focus on more serious cases affecting public health and safety. We have also recently added five new license examiners to our staff, while remaining well within our budget targets through the elimination of several administrative positions and substantial reductions in non-personnel related spending.

We are not just adding staff to licensing to address the backlog. After an extensive review of licensing processes and procedures, we initiated many changes in addition to the Self-Certification process. We implemented a process whereby three senior experienced examiners review backlogged cases only. These designated employees are not answering telephones or receiving current applications so that they may address the backlog efficiently. Less senior and temporary staff are answering phones, typing letters, faxing, scanning and assuming all the lower level tasks previously handled by the senior examiners. We are imposing stricter guidelines on accepting applications. Higher level employees perform a thorough review at intake to eliminate accepting applications that are incomplete or not approvable, as acceptance of such applications leads to wasted staff time and adds to the backlog. Applicants are no longer permitted to “piecemeal” information or documentation required by the Authority, which has led to examiners starting and stopping and restarting the examination process. The examining process will now come back into compliance with statute. If the required information is not provided in compliance with the applicable ABC Law, the application will be disapproved for failure to comply. The applicant will have the right to request a hearing on the disapproval or may reapply. The SLA spent months reviewing applications that were incomplete, which was unfair to applicants who have properly filled out their applications and added substantially to the backlog.

Moving on to the Law Revision Commission’s Report, we agree with most of the Commission’s recommendations. Accordingly, we will be offering shortly what is probably the most comprehensive overhaul of the statute ever proposed. Most of our proposal consists of simply reorganizing what is already in the statute so that it is more logical and coherent, and less of a collage. The 11 existing articles are replaced with 15 articles organized by subject matter or type of license. All fees would be contained in one article, as opposed to being sprinkled throughout the statute which is the current situation. A number of anachronistic provisions would be eliminated, such as that which requires that a liquor store must be level with the street and can only have a second entrance if it opens up onto a parking lot for five or more vehicles.

Per the Report’s recommendations, the laws regarding wineries and small distilleries and breweries will be simplified and liberalized to encourage growth in these industries. For example, distillery and brewery applicants will be able to obtain temporary permits to operate while their applications are pending (this is currently available to only wineries). Our proposal also contains provisions to increase our ability to move against licensees who become focal points of police or community concerns, or who otherwise seriously violate the terms of their licenses. For example, it requires that licensees request approval from the Authority for material changes in their methods of operation. This is another change recommended by the Commission’s Report. Under our proposal, if a business is granted a license based on an application that says it is going to be a small, intimate restaurant, and then decides to become a strip club, that change in operation would be permitted only on notice to the community and with SLA approval. Currently, no such procedure is in place and this scenario is a very common one that has caused much community concern in New York City and its surrounding counties.

Our proposal also includes a free-standing primary source provision that would strengthen the three-tier system, protect the public by insuring that the product people drink is what the label represents it to be, and would also facilitate cracking down on the sale of untaxed liquor brought in from out-of-state. We also clarify the criteria to be considered by the Board when applying certain statutory standards that are currently ambiguous, such as “public convenience and advantage,” which is the standard applied in the case of whether or not a license for a liquor store should be granted. I must single out one recommendation of the Commission’s report as particularly crucial to the effective administration of the agency. It is the Commission’s recommendation that the Chair be given exclusive administrative authority, including the power to hire and fire. The Report recommends that the Chair and the two commissioners continue to have equal authority regarding regulatory matters – the granting of new licenses, revocation of existing ones, as well as conferring over broad agency policy and proposed regulatory changes. However, the statute currently designates the Chair as the administrator of the agency, but it vests the ability to hire and fire in the Full Board. This raises nettlesome issues regarding where the Chair’s authority ends and that of the other members begins. This causes conflicts and inefficiencies even with three qualified well intentioned Commissioners. Vesting sole administrative power in the Chair would allow for the expeditious hiring, firing, and movement of personnel within the agency. It would generally grease the wheels of administration and lighten the burdens of staff who must, under the current scheme, report to three separate bosses.

Perhaps the two primary areas of disagreement involve the Commission’s discussion of general rulemaking authority and Bring Your Own Bottle (“BYOB”). The Commission suggests deferring any decision on the former, while it would allow the latter as long as there is a backlog of licensing applications.

With respect to allowing BYOB, we believe that the elimination of the licensing application backlog, and the passing of a temporary licensing bill such as that proposed by the Chair of this committee, Senator Johnson, along with Senators Little and Valesky, and the bill introduced by Assemblyman Schimminger in the Assembly, would better serve the public interest than allowing the consumption of alcoholic beverages at establishments that are not subject to the supervision of the Authority.

The Commission recommends that a decision with respect to general rulemaking authority be deferred until outstanding divisional orders, bulletins, and regulations have been reviewed and codified. We are addressing these right now. The Authority was designated as one of the agencies to participate in the first round of regulatory review directed by the Governor in Executive Order 25. The public comment period recently ended and the agency is now working to identify those regulations that meet the Governor’s criteria and we will take the necessary steps to rescind or modify them. Moreover, the Authority has commenced its own review of its regulations to identify ones that should be amended or rescinded as well as areas where rulemaking may be needed. In addition, we have also commenced a review of all bulletins and divisional orders. They have all been scanned in a searchable format. It is anticipated that by June, 2010, the Board will have designated most of these as obsolete. Those bulletins and divisional orders that are deemed to be in full force and effect will be available on the Authority’s website. Frankly, I believe that this hodge-podge of uncodified directives was instigated by the absence of general rulemaking authority. That is unfortunate because the process of issuing orders and bulletins contains almost no checks and balances, while the rulemaking process has many built-in protections.

We emphatically disagree with the Commission’s recommendation that any decision regarding granting general rulemaking authority be postponed. The Authority has often been accused of impeding economic development, particularly in upstate communities. General rulemaking authority would enable us to not just get out of the way of economic development, but would enable us to affirmatively encourage it. For example, there are many new industry products constantly coming onto the market. Many do not fit the statute’s strict definitions of what wine, beer, liquor, or wine products are. Our legislative proposal seeks to define many of these new products so that, once properly classified, we can then determine the appropriate level of regulation they should be subject to. This is a function best accomplished through regulation. Every other New York state agency that I am familiar with has general rulemaking authority, and forty-three states have granted it to their liquor industry regulators so that they may interpret the idiosyncratic statutes they operate under in a manner consistent with the exigencies of modern times. New York State must follow them, or the SLA cannot but continue to be rightfully accused of standing in the way of economic development in the 21st Century. How could the agency do otherwise when it has limited tools with which to temper the mandates of an archaic statute which was passed in 1934 upon the repeal of Prohibition? In recent weeks, I have spoken with representatives of the wine and spirits, beer, and grocery store and supermarket industries. They all agree that general rulemaking authority should be granted, although certain segments of the industry have qualified their support with the suggestion that any legislation giving the agency such authority contain a two or three year sunset provision as this is a departure from past practice. I think that is a good idea. See how we perform, and if we do not fulfill our obligations let the statute terminate of its own accord.

There is much evidence in the public policy literature that shows the time and circumstances that surround the formation of an agency have a tremendous effect on the behavior or culture of that agency, long after the agency was created. The report of the Law Revision Commission provides excellent analysis demonstrating that the SLA and the ABC Law are not just 75 years old, but were developed during an anachronistic time, coming out of Prohibition. The goals of the SLA, in part, were to stop the excesses that occurred during Prohibition; stop the illegal trafficking, stop organized crime, stop the violence, stop the over consumption of alcohol, and to stop the political corruption surrounding the industry.

These were the formative years of the SLA and the ABC Law, and one can still see this culture present at the agency today. What I found when I came to the agency wasn’t lazy bureaucrats who didn’t want to do the job, but rather what could be described as a culture of “No.” No, you can’t open a liquor store if it isn’t precisely level with the street. No, your restaurant can’t serve alcohol on the patio if it isn’t contiguous with the building. No, your convenience store can’t stock items that might be convenient to your customers unless 50% or more of those items are food. The list could go on and on.

But the “no’s” didn’t just apply to getting in the way of business – they also too often applied to shutting down businesses that threaten their communities. Are six assaults in one month enough to warrant action? The answer too often also seemed to be “no” – not if they occurred right in front of the premises, not if the owner and manager were not present when they occurred, not if the fights seemed to start without warning.

In short, what I found at the SLA was too many agency resources, too many agency man hours, and too much of the Full Board’s time spent deliberating and debating about whether the 75 year-old statute might say that something may or may not be done. What I believed the agency needed, and what I am trying to do is spend our time and our resources figuring out how we can help our licensees who are trying to do the right thing, and how we can shut down the ones who are not.

While we are certainly not now a culture of “yes” – and I don’t think a regulatory agency should ever become one - I believe we have moved to becoming a culture of “maybe;” a culture where we look at the facts, look at the law and try to make a rational decision, weighing both public interest and public health and safety.

Changing this culture is tough, but I believe many in the industry, including representatives who will testify today will attest to the fact that we are changing. While no one, including me, will tell you we’ve reached a point of regulatory nirvana, I believe most impartial observers will agree that we are headed in the right direction. But continuing down this road is going to be next to impossible if the agency is shackled with a 75 year-old statute, and without the regulatory tools to be flexible to a changing marketplace. We need your help, both to overhaul the statute and to have the flexibility to make regulations that would allow us to get out of the way of entrepreneurial activity as well as to crack down on licensees who threaten their communities.

There are those who have told me this is not the best time to seek such an ambitious overhaul of the statute. I am not ready to accept that. I think that, with the leadership of this committee, we can collaborate on bringing a sea change to the SLA. So I ask you to join me in seizing the momentum created by both the Law Revision Commission’s Report and by some of the successes we have had at the agency in the past seven months. To those who would say now is not the time, I offer the following words of William Shakespeare, which were written 400 years ago:

There is a tide in the affairs of men Which, taken at the flood, leads on to fortune. Omitted, all the voyage of their life Is bound in shallows and in miseries. On such a full sea we are now afloat, And we must take the current when it serves, Or lose our ventures.

Again, thank you, Mr. Chairman and committee members, for the opportunity to appear before you today. I stand ready to answer any questions you might have.

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