Arizona Department of Liquor Licenses and Control (August 2009, Report No. 09-08)

SUMMARY

The Office of the Auditor General has conducted a performance audit and sunset review of the Arizona Department of Liquor Licenses and Control (Department) pursuant to an October 5, 2006, resolution of the Joint Legislative Audit Committee. This audit was conducted as part of the sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.

The Department regulates the manufacturing, distribution, and sale of liquor in the State. The Department reported issuing or renewing more than 15,000 liquor licenses in fiscal year 2008, primarily for restaurants, bars, beer and wine stores, and liquor stores, but also to producers, wholesalers, and sponsors of special events and festivals. Besides issuing licenses, the Department also conducts investigations to ensure licensees are complying with state liquor laws. These investigations include responding to complaints and police reports, conducting routine visits to determine compliance with state laws, and conducting covert investigations to check for such violations as selling or serving alcohol to underage patrons. Additionally, the Department imposes penalties, such as fines or license suspensions or revocations, against licensees who violate state liquor laws.

The audit focused on the Department’s investigations approach, its processes and practices for taking disciplinary action against licensees who violate state liquor laws, and its process for issuing new quota liquor licenses for bars, beer and wine bars, and liquor stores.

Department has improved investigative approach, but
additional steps needed (see pages 13 through 21)

Although the Department has improved its investigative approach, it should take additional steps to further improve its investigations. Auditors observed officers during their shifts and identified the following:

• During the shifts observed, officers spent a significant portion of their shift driving around looking for licensed establishments to visit, traveling back and forth between the opposite ends of their assigned areas during the same shift, and passing numerous licensed establishments without stopping. Each officer’s area has hundreds of licensees. Time spent driving decreases the amount of time available to visit licensees.
  
  
• After conducting a covert investigation, officers do not identify themselves unless they find a violation, nor does the Department notify the licensee that an investigation was conducted. Research indicates that active, visible law enforcement is a way to deter licensees from violating liquor laws.¹ Seventy-five percent of the investigative activities on the shifts auditors observed were covert investigations. If licensees remain unaware that investigations have taken place, the Department does not realize any deterrent effect from its investigations.

In response to auditors’ findings and to staff reductions brought on by fiscal year 2009 budget cuts, the Department is pursuing a new investigations approach. Among other things, this approach centralizes officers but retains an investigative presence throughout the State, revises officers’ schedules, and establishes a more visible presence by requiring officers to conduct additional routine inspections. This revised approach should enhance the Department’s enforcement presence. However, several additional steps can further enhance this approach. Specifically, the Department should develop and implement policies and procedures that incorporate guidance for prioritizing officer workloads and effectively planning investigation shifts. Additionally, the Department should notify licensees about the results of all investigations, including covert investigations, and conduct follow-up investigations of licensees who have seriously or repeatedly violated state liquor laws.

The Department should also improve the way it collects, analyzes, and uses data to support its investigative activities. Although the Department collects a variety of information related to its investigative activities, some of this information is inaccurate and incomplete. This includes inaccurate and incomplete information recorded on officer weekly activity logs and entered into the Department’s database. As a result, the Department cannot track who has been investigated or what types of investigations are being conducted and does not have the information to determine investigative priorities and activities. The Department is in the process of implementing a new information system, which it anticipates will improve investigation tracking and analysis. However, to ensure the information within this system is accurate, complete, and useful, the Department should establish and implement additional policies and procedures for collecting, entering, analyzing, and using the information.

Department should take stronger action against repeat
and serious violators (see pages 23 through 31)

Research indicates that strong enforcement actions can help deter liquor law violations and lessen the negative effects of the inappropriate and illegal use of alcohol. The Department has established policies to help guide its enforcement actions, and for the most part, it follows these policies. However, when auditors examined a sample of enforcement cases the Department processed from 2004 through 2008, they found that the Department deviated from penalty guidelines about one-fourth of the time without providing required explanation. This is an improvement from the previous performance audit conducted in 1998, which found that disciplinary actions deviated from penalty guidelines approximately two-thirds of the time. Nonetheless, the Department still needs to follow its policy of stating the reasons for such deviations.

Several of the Department’s enforcement policies and practices weaken enforcement efforts over repeat and serious violators. Specifically:

• Incomplete penalty guidelines lead to inconsistent discipline—The Department has established penalty guidelines that outline penalties for 75 offenses, but 59 other offenses lack such guidelines. Inconsistent penalties can result for offenses not included in the guidelines. For example, the Department imposed a $375 fine for one licensee and a $1,000 fine for another licensee for first-time violations of a statutory requirement that licensees purchase alcohol from an authorized supplier. This violation is not included in the Department’s penalty guidelines.
  
  
• Policies limit Department’s ability to take strong action against repeat offenders—To help identify licensees who repeatedly commit similar offenses, the Department groups some similar violations into classifications, such as underage drinking. A licensee who is cited within 2 years for a second offense in the same classification is considered a repeat offender. However, these groupings contain only 19 of the 134 potential liquor-related violations. For example, there are 12 different underage violations, but the Department includes only 5 of these offenses in its underage classification. In addition, under department policy, a licensee who commits an offense in one classification and a second offense in another classification within 2 years is not considered a repeat offender.
  
  
• Reduced fines imposed for some serious first offenses—Department policy states that if a case against a licensee is a minor first-time offense and the licensee has no other violations within the last 2 years, the Department may offer the licensee a 50 percent reduction of the fine designated by its penalty guidelines. However, the Department does not define the term “minor,” and auditors found that this policy is frequently applied to serious offenses relating to underage drinking, over-service, and public health and safety. Sixteen of the 40 enforcement cases involving 13 of the 14 licensees auditors reviewed were first offenses that received a discount for serious violations, such as selling alcohol to a minor and employees consuming alcohol while on duty.

Application of these policies has allowed some licensees to commit serious and repeated violations without receiving consistently strong discipline. For example, auditors identified one licensee with a 4-year history of underage violations who, despite six different violations over this time, had received at most a $4,500 fine.

The Department should take several steps to strengthen its enforcement policies and take consistently strong and effective disciplinary action against licensees who commit serious violations or repeatedly violate state liquor laws. Specifically, the Department should revise its penalty guidelines to include penalties for all possible state liquor law violations, revise/expand its violation groupings to encompass more liquor violations, and group violations by the severity of the offense instead of only on the nature of the violation. The Department should also weigh any violation within 2 years as an aggravating circumstance, regardless of its classification. Finally, the Department should either eliminate discounts for minor offenses altogether or revise its policies to define “minor” and limit the number of times a licensee can receive the discount.

Other Pertinent Information (see pages 33 through 38)

During the course of the audit, auditors collected and reviewed information regarding statutory requirements and department processes for issuing new quota liquor licenses for bars, beer and wine bars, and liquor stores, and for determining the licenses’ fair market value. Laws 2005, Ch. 284, §16, required the Department to issue new quota licenses annually based on each Arizona county’s population through fiscal year 2010. In response to these requirements, the Department has issued 151 new quota liquor licenses state-wide from fiscal years 2006 through 2009. The number of new licenses is only about 31 percent of the number authorized by statute. Department officials indicated that applicants’ interest has not matched the number of licenses available. In accordance with state laws, the Department has issued these licenses at their fair market value, which it reports has generated more than $15.2 million in revenues for the State General Fund.

Beginning in fiscal year 2011, A.R.S. §4-206.01(B) will require the Department to issue new quota liquor licenses based on population growth in each county instead of total county population.

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