Commonwealth of Virginia Alcoholic Beverages...

Proposal to the

Commonwealth of Virginia Alcoholic Beverages Control

The PFM Group 4350 North Fairfax Drive

Suite 580 Arlington, VA

22203 703 741-0175

Two Logan Square

Suite 1600 18th & Arch Streets

Philadelphia, PA 19103

215 567-6100

www.pfm.com

November 2, 2010

Public Financial Management, Inc.PFM Asset Management, LLCPFM Advisors

November 2, 2010

Ron Bell Director Commonwealth of Virginia Department of General Services Division of Purchases and Supply 1111 E Broad St, Patrick Henry Building Fl 6 Richmond, VA 23218 Dear Mr. Bell, Please accept the following proposal to assist the Commonwealth of Virginia Department of Alcoholic Beverage Control with an analysis of alternate service delivery methods. The PFM Group (PFM) is the nation’s leading independent financial and management advisory firm for the public sector, and we are the leader in providing financial advisory services for governments in the Commonwealth of Virginia. As a leader of our strategic consulting practice, I am dedicated to building strong relationships with the Commonwealth, and we have put together an experienced team that has worked both as senior professionals in government and as financial and management consultants to government entities. We are excited about the opportunity to work with you. PFM is fully committed to providing the senior professionals and the resources necessary to serve the Commonwealth’s complex and challenging needs. As a partner at PFM, I will serve as Engagement Director and will ensure that the necessary resources are provided to fully serve the needs of the OCTA. Randall Bauer will serve as project manager. Randall has led similar state projects at PFM; these have included efforts for the States of Nebraska, Minnesota, Georgia, Illinois, Pennsylvania and New York. In addition to Randall and me, the proposed team brings high-level experience with state governments across the country. Government clients are our first and only priority, and we are dedicated to that work. PFM has a long history of service as a financial advisor to the Commonwealth and Virginia local governments; we are excited about the opportunity to provide even broader services to the Commonwealth. We understand that time is of the essence in this engagement and are committed to beginning work, on the ground in Richmond, immediately upon being given notice to proceed. We sincerely appreciate the opportunity to present our team and qualifications. Thank you for your consideration, and please do not hesitate to contact Randall or me with questions and/or if further information is desired. We look forward to working with you.

Sincerely, Public Financial Management

John Cape Managing Director

Public Financial Management, Inc.PFM Asset Management, LLCPFM Advisors

Two Logan Square Suite 1600 18th & Arch Streets Philadelphia, PA 19103-2770

215 567-4180 215 567-4180 fax www.pfm.com

Firm Qualifications

FIRM QUALIFICATIONS

Commonwealth of Virginia ABC Procurement | 2

Public Financial Management, Inc. (“PFM”) was founded with a staff of 5 in 1975 and has grown to be the nation’s largest independent financial and management advisory service for state and local governments. PFM now has over 400 employees nationwide in 33 offices. PFM has been the nation’s number one ranked financial advisor for six consecutive years. Depending upon needs, our clients can have access to any of our five primary business activities: Financial Advising: managing transactions related to debt issuance;

Investment Management: providing investment advice and portfolio management for working capital and bond proceeds;

Investment Consulting: structuring simple, reliable, and fundamentally sound asset management strategies and retirement plans;

Structured Products: developing innovative financing techniques and investment products.

Strategic Consulting: offering highly effective management, planning, budget and operations advice.

Regardless of which service you may need, the PFM Group of companies serves only one interest: that of our clients and no one else.

This fact, coupled with our proven track record and comprehensive approach to finance, makes the PFM Group of companies a leader in providing sound, independent financial, management and investment advisory services to local and state

governments.

FIRM QUALIFICATIONS


Strategic Consulting Services While originally a financial advisory practice, PFM’s lines of service have grown to more fully serve the broad and complex needs of its clients. Its Strategic Consulting practice was initiated 10 years ago, and it now includes over 30 professionals located in offices in Arlington, Philadelphia, Albany, Des Moines, Atlanta, Orlando and San Francisco. PFM’s Strategic Consulting practice has engaged in literally scores of projects with governments of similar scope and complexity. Its clients have included the States of Georgia, Illinois, Minnesota, Nebraska, New York, Pennsylvania and Tennessee, as well as the Cities of Baltimore, Atlanta, Memphis and Dallas, Washington Metro Area Transit Authority and the District of Columbia. The PFM Strategic Consulting practice includes individuals with extensive state government experience – including John Cape, who served as Budget Director for the New York State Division of the Budget; Randall Bauer, who served as State of Iowa Budget Director; Vijay Kapoor, who served as Executive Director of the Commonwealth of Pennsylvania’s Office of Management and Productivity; Seth Williams, who served as Deputy Director of Management and Operations for the Office of the New Jersey Governor; and Heidi Patterson, who served as Executive Director of the Iowa Accountancy Examining Board. In addition to this direct state government experience, nearly every member of the PFM Strategic Consulting practice has project experience with large governments – such as New York City, Philadelphia, Washington DC, Dallas, Minneapolis and St. Louis - on-the-job training is not necessary, and, as a result, its project teams can quickly get up to speed and effectively manage tight deadlines. PFM serves its clients by creating project teams comprised of experts in specific forms of government, governmental businesses and geographic regions. These project teams are designed to meet the specific needs of individual clients. Our specialized project teams ensure that our clients receive complete and thorough advice directly from the optimal mix of the PFM Group companies’ professionals.

In the case of the Commonwealth of Virginia, this includes financial advisory professionals who have broad experience with state and local governments. JoAnne Carter directs the firm’s Virginia practice and advises a mix of cities, counties and authorities including the Cities of Norfolk and Portsmouth, and the Counties of Arlington, Fairfax and Prince William. She also advises the Virginia Port Authority, Fairfax Water and the District of Columbia Water & Sewer Authority. Nelson Bush assists Virginia municipal governments, operating authorities, the Commonwealth of Virginia, the Commonwealth’s agencies, and institutions of higher education with the investment of bond proceeds, operating funds, reserve funds, and monies set aside to fund OPEB liabilities. Mr. Bush is also the Program Administrator for the Virginia State Non-Arbitrage Program (VA SNAP).

SELECTED PFM STRATEGIC CONSULTING CLIENTS:

CALIFORNIA

Los Angeles County (LAFCO) City of Long Beach City of Oakland

COLORADO City of Aurora City of Colorado Springs

DISTRICT OF COLUMBIA District of Columbia Government

Washington Metro Area Transit Authority

ILLINOIS Governor’s Office of Management

and Budget

MARYLAND City of Baltimore

Montgomery County

MINNESOTA Minnesota Management and

Budget City of Minneapolis City of St. Paul

MISSOURI City of Kansas City City of St. Louis

NEBRASKA Nebraska Department of

Administrative Services

NEW YORK New York Metropolitan Transit

Authority Nassau County City of New York

NORTH CAROLINA Wake County

OKLAHOMA City of Oklahoma City

PENNSYLVANIA Department of Community and Economic Development

City of Philadelphia

TENNESSEE State of Tennessee

City of Memphis

TEXAS City of Austin City of Dallas

VIRGINIA Cityof Portsmouth City of Virginia Beach

FIRM QUALIFICATIONS


PFM’s project teams combine professionals based on geographic location, experience and sector expertise. This approach is exemplified in the following graphic:

The PFM Group’s flexible project-oriented approach to staffing engagements enables us to bring the proper mix of resources and experience to bear on a given client’s problem or transaction. In this case, the PFM team brings strategic planning and performance management experience from the Strategic Consulting practice and combines it with Virginia and transportation-specific knowledge and experience located in its Arlington and other offices. Beginning with its work with the City of Philadelphia over a decade ago, and continuing with many governments today, PFM’s Strategic Consulting practice has helped to develop the standard for public sector multi-year financial planning. From a $225 million deficit and “junk bond” credit ratings in 1991, Philadelphia used its annual Five-Year Financial Plans to regain investment grade ratings and to achieve a series of surpluses that reached $295 million by 2001.

Locations

Project

Management

Products

Practices

Arbitrage Rebate Balance Sheet

Management

Debt Issuance

Financial Planning Investment Policies Lease Negotiation

Pension Management Portfolio Management

Be nchmarking

Strategic Consulting

General MunicipalHealthcare & Higher Education

HousingInvestment Management Investment Consulting

Public Power School Districts Solid Waste

Sports Facilities & Convention CentersStrategic Consulting

Transpo rtation Water & Wastewater

Workforce & Labor Development

AlbanyAnn ArborArlingtonAtlantaAustinBostonCharlotteChicagoClevelandDes MoinesFargoHarrisburgLong IslandLos AngelesMalvern

MemphisMiamiMilwaukeeMinneapolis New YorkNewport BeachOakland OrlandoPhiladelphia Phoenix Pittsburgh Princeton

San FranciscoSeattleSt. Louis

San Antonio

FIRM QUALIFICATIONS


PFM’s strategic consulting practice has moved beyond its local government roots and become increasingly involved with state-level work. The co-leaders of the state strategic consulting practice, John Cape and Randall Bauer, bring over 50 years of senior level state government experience; the team brings a combined 100+ years of experience in state government. PFM’s state practice focuses on strong analytics, analysis and an understanding of the key issues that will impact state government decisionmaking.

Key Staff Resumes

KEY STAFF RESUMES


John F. Cape, Managing Director is a national expert on state budgets and public policy, with over 30 years experience in the public sector. His PFM clients have included the Commonwealth of Pennsylvania’s Governor’s Office, Governor’s Budget Office, Department of Public Welfare, and Nassau County, NY and Montgomery County, MD. Prior to joining PFM, Mr. Cape served as the Director of the Budget for New York State. As Director, he was New York’s chief financial officer and the principal fiscal advisor to the Governor, heading the Division of the Budget, whose 350 staff members oversee a $113 billion operating budget and $50 billion debt portfolio. A nationally known speaker on state fiscal and policy issues, and a recognized advocate for fiscal integrity and transparency, Mr. Cape serves as a Senior Fellow of the Rockefeller Institute of Government, is a Fellow of the State Academy of Public Administrators, and has served on the Executive Board of the National Association of State Budget Officers. He is the 2006 recipient of the Center for Technology in Government’s Rudolph W. Giuliani Leadership Award, and recipient of the American Society for Public Administration’s Charles Evans Hughes Award. During his tenure with New York State, Mr. Cape oversaw numerous organizational, regulatory and tax changes regarding distilled spirits, the State Liquor Authority and the State Alcoholic Beverage Control Board. Randall Bauer, Director, joined PFM’s strategic consulting practice in 2005. His clients have included the States of Georgia, Illinois, Minnesota, Nebraska, New York and Pennsylvania, and major local governments from Baltimore, MD to Colorado Springs, CO. At PFM, he specializes in strategic and financial planning, process improvement and organizational change. He has managed multiple projects for the State of Nebraska, as well as projects for the States of Illinois, Minnesota, Georgia, Pennsylvania and New York. He has also led revenue projection projects for Portsmouth, VA; Aurora and Colorado Springs, CO; and Pittsburgh, PA. Prior to joining PFM, Mr. Bauer served for nearly seven years as Budget Director for the State of Iowa. In that capacity, he was Governor Thomas Villack’s chief adviser for the State’s $12 billion budget as well as a senior adviser on tax and public finance issues. During Mr. Bauer’s tenure, Iowa created a new results-focused budget process, implemented a performance reporting system, and developed a web-based budget system. Prior to his work as State Budget Director, Mr. Bauer served for over ten years as a senior analyst for the Iowa Senate with primary responsibilities on budget, tax, transportation, infrastructure and economic development issues. During that time, Mr. Bauer served as the Senate lead staff analyst for Iowa’s privatization of its retail alcoholic beverages operation. Valesa S. J. Wells, Senior Managing Consultant has been employed with PFM since 1995. As a Senior Managing Consultant in the Memphis office, Ms. Wells has extensive experience advising cities, counties, and related governmental entities on a broad range of financial concerns

KEY STAFF RESUMES


.In conjunction with the firm’s Strategic Consulting practice, she has provided extensive budget development support to the City of New Orleans, and has worked with Shelby County, TN on government streamlining initiatives. As a financial adviser, Ms. Wells has worked with clients including the City of Memphis, TN; Shelby County, TN, the Metropolitan Government of Nashville and Davidson County, TN; the City of Chattanooga, TN; and the Metro Government of Louisville/Jefferson County, KY. Ms. Wells specializes in quantitative and technical financial analysis, including debt analysis and the development of debt management and fund balance policies. Ms. Wells also works closely with clients to develop comprehensive credit rating presentations that demonstrate the client’s historical financial performance relative to industry benchmarks, management practices, and provides a detailed look into the client’s long-term strategy for capital investment, economic development and debt management. Seth Williams, Consultant, supports PFM’s State Strategic Consulting group. Prior to joining PFM, Seth worked for the Office of the New Jersey Governor as Cabinet Liaison and a Deputy Director of Management and Operations. He was the primary point of contact in the Governor’s Office on operations, budget preparation, organizational management issues, and tactical activities for 12 cabinet departments and sub-cabinet agencies. Seth co-led departmental budget preparation, strategy, and coordination for all departments/agencies in his portfolio; including oversight of testimony content, analysis of the impact on policy decisions and fiscal year revisions. In addition to Seth’s other responsibilities, Seth was also a lead staff member to the New Jersey Commission on Government Efficiency and Reform (NJ GEAR) where he managed all operations, created agenda, and drafted reports for the Commission appointed by the Governor. Select topics included: Health Care Costs; enterprise-wide Information Technology status; Performance Management actions; Personnel Management Reform; and Correctional Sentencing Reform. Heidi Patterson, Consultant, is based in the Des Moines office where she is currently the lead consultant on projects including organizational reviews for the State of Pennsylvania Public Utility Commission and the City of Cleveland Public Utilities and a cost of service study for the City of Boise Planning Division. Since joining PFM, she has been the lead consultant for the City of Colorado Springs cost-saving initiatives and revenue analysis to achieve a sustainable funding structure; supported revenue analysis for clients in Kansas City and St. Louis in an effort to maximize revenue opportunites; as well as participated in an evaluation of proposed racino bids for the New York State Division of the Budget. Ms. Patterson also worked closely with the Emergency Financial Manager of the Detroit Public Schools on PFM’s team to develop and implement fiscal control policies, procedures, and cost saving initiatives during a fiscal crisis.

KEY STAFF RESUMES


Prior to joining PFM, she served as the Executive Director of the Iowa Accountancy Examining Board where she was responsible for the licensing and regulation of the State’s 10,000 CPAs and LPAs. Ms. Patterson also served on the National Association of State Boards of Accountancy Executive Director's Committee and the National CPA Mobility Taskforce. In addition, as the Executive Assistant to the Governor’s Chief of Staff and the Director of the Iowa Department of Management, she supported strategic planning and government accountability initiatives across State government. Ms. Patterson participated in multiple aspects of Iowa's Budgeting for Results efforts, including training and coordination on the performance measures component of the web-based budget system and formulating communication strategies for lawmakers, constituents, and decision-makers.

PROJECT APPROACH

PROJECT APPROACH


PFM is prepared to dedicate an experienced team – beginning on day on of the signing of the contract – that will immediately begin an in-depth analysis of the key issues facing the Commonwealth. With its experience, expertise and quantitative skills, PFM will: Identify retail privatization options. This will include:

1. Privatize retail functions creating liquor retail licenses. This analysis will discuss: a. Cap the number of licenses and auction them to the highest

bidder; use population as the mdeans to apportion stores throughout the state

b. Use a four-tired system of distribution that sets aside a specific number of licenses by type of store, based on overall square footage of retail space and linear shelf space for distilled spirits

c. Auction licenses by locality based on established minimum bids 2. Privatize retail functions creating liquor agent contracts (e.g. Ohio

model) a. Establish a commission rate based on sales volume and/or type

of sale b. Use a four-tiered system of distribution that sets aside a specific

number of agents by type of store, based on overall square footage of retail space and linear shelf space for distilled spirits.

c. Cap the number of licenses and issue RFP’s to attract potential agents. Use population as the means to apportion stores throughout the state.

3. Discussion of assumptions a. ABC remains the wholesaler of distilled spirits b. ABC supplies retail liquor licensees and agents who in turn

serve retail and restaurant sectors c. ABC applies mark-up and excise tax at the wholesale level d. Current applicable state and local taxes on gross receipts and

income apply e. Options 1 and 2 may be modified during the development

process basd on further analysis Based on this analysis, a final report will be provided in January 2011. The Commonwealth may, at its discretion, require supplemental work to be performed and included, subject to negotiation with PFM regarding any additional compensation, which may include the following options:

1. Issues and options for privatizing and licensing wholesale operations whether in whole or int part

2. Issues and options that arise from the final JLARC Study on on the Governor’s initial privatization plan

3. Issues and options that arise from certain legislative working groups

PROJECT APPROACH


To ensure that a full vetting has been done of the alternatives, the analysis will include: Analysis of the reasonableness of the assumptions and whether these

assumptions are supported by data and research The degree to which the assumptions (and projected revenue streams)

are susceptible to variation, based on sales volume, number of stores and other conditions

Risks faced by the Commonwealth based on the degree of risk associated with the alternatives analyzed above

To ensure that the analysis includes the issues that may impact on its results, the PFM work will:

a. Examine current and post privatization sales volumes. Determine what the anticipated regional and statewide changes in volume will be under each scenario.

b. Evaluate the potential to attract customers for liquor and wine back from neighboring jurisdictions.

c. Examine price elasticity assumptions and the impact of potential price increases on projected sales volumes. Identify potential price impacts for a sample of premium and economy brands.

d. Examine minimum bids for retail stores and evaluate the likelihood that projected revenues will be achieved based on other state experiences, changes in assumptions, etc.

e. Examine the value of license transferability and identify impacts to the revenue stream should this feature be eliminated (only applies to license scenario).

f. Evaluate the impact of termed licenses. Understanding the critical importance of timely analysis, PFM will begin the project within one business day after award of contract. PFM will alsoprovide a report of analytical findings in draft form no later than November 26, 2010 for management review. The report will outline assumptions, address sensitivity and risk of failure; include test work and research supporting the findings, etc. If applicable, the report wll also identify any other viable alternatives or modifications to Options #1 and # 2 that are not specifically set forth in this statement of work or the final contract. PFM will also provide the final interim report, including the associated financial analysis and present to representatives from ABC and the Governor’s office no later than December 1, 2010. PFM will also make, as needed, presentations and/or testimony to members and committees of the General Assembly before and during the General Assembly’s 2011 regular session, subsequent reports and analysis on options related to ABC privatization, etc. PFM will provide the final report and present to representatives from ABC and the Governor’s office in January 2011 with a firm date to be set in conjunction with the schedule of the 2011 General Assembly regular session.

WORK PLAN

Work Plan


General Approach As noted above, PFM is ready to begin this project on day one. The Engagement Director, John Cape, will be on site and begin to develop the day-to-day work plan and meet with appropriate Commonwealth subject matter experts. Randall Bauer will serve as the project manager, and he and John will serve as both subject matter experts and key staff. Given the quick turnaround, PFM will dedicate an experienced, senior team to the project, and John and Randy will be the primary project contacts. The following is the expected high level project timeline:

Activity 5-Nov 12-Nov 19-Nov 26-Nov 3-Dec 1-Jan

Project Definition and Data/Research ReviewSelected Analyst and Stakeholder InterviewsOther State Research and BenchmarkingAnalysis and Options Definition and DevelopmentPresent Preliminary ResultsCoordinate with Transportation Team in SIB OptionsDevelop Recommendations, Presentations and ReportsPresentations

Commonwealth of VirginiaGovernor's Office of Mangement and Budget

ABC Privatization AnalysisOctober, 2010

Dates

Cost and Price Proposal



PFM proposes a fixed fee engagement for $75,000. In developing the price proposal, PFM estimated the hours necessary, by classification of the individuals responsible for the work, using the following hourly rates:

Managing Director: $275/hour Director/Senior Managing Consultant: $225/hour Consultant $205/hour Research Assistant/ $125/hour Administrative Staff

The following identifies estimated hours for the project, based on likely tasks associated with the Commonwealth’s proposed statement of work:

Est.Activity Man. Direct.Sr. Mng. Con. Consultant Associate Total Expenses

1 Project Definition and Data/Research Review 8 16 16 0 402 Selected Analyst and Stakeholder Interviews 4 12 12 0 28 $2,0003 Other State Research and Benchmarking 0 8 16 6 304 Analysis and Options Definition and Development 16 24 40 0 805 Present Preliminary Results 8 8 8 2 26 $2,0006 Coordinate with Transportation Team in SIB Options 4 8 8 0 207 Develop Recommendations, Presentations and Reports 8 24 32 4 688 Presentations 8 8 8 0 24 $3,000

Totals: 56 108 140 12 316 $7,000*

Costs Category: Rate/Hr. Hours Total:

Managing Director $275 56 $15,400Senior managing Consultant $225 108 $24,300Consultant $205 140 $28,700Associate/Researcher $125 12 $1,500

Total: $221 316 $69,900

Additional Expenses: $7,000

Total: $76,900

Hours

Commonwealth of VirginiaGovernor's Office of Mangement and Budget

ABC Privatization AnalysisOctober, 2010



As noted, this includes an estimate of probable expenses at the Virginia per diem. While we believe that these expenses will be commeasurate with expected project activity – which assumes 2 to 3 team on-site visits – PFM has committed to fully supporting any and all activities related to meetings and/or presentations with other groups after submission of the project deliverables. While PFM assumes the business risk for expenses related to completion of the scope of work proposed, the scope of these activities is difficult to estimate at this time. PFM would seek an agreement that, if travel and project expenses are materially beyond the above estimates due to the client’s desire for more meetings or presentations than anticipated, PFM and the Commonwealth will negotiate an agreed-upon resolution, with any additional agreed-upon reimbursement at Commonwealth reimbursement rates.

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