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102207 CC Public ForumCITY OF SHOREWOOD 5755 COUNTRY CLUB ROAD PUBLIC FORUM COUNCIL CHAMBERS OCTOBER 22, 2007 6:00 P.M. MINUTES 1. CONVENE PUBLIC FORUM ON POSSIBLE DISCONTINUATION OF CITY LIQUOR OPERATIONS Mayor Lizee opened the public forum at 6:02 P.M. A. Roll Call Present. Mayor Lizee; Councilmembers Callies, Turgeon, Wellens, and Woodruff; Administrator Dawson; Finance Director Burton; Planning Director Nielsen; Director of Public Works Brown; and Engineer Landini Absent: None B. Review Agenda Without objection from the Council, Mayor Lizee proceeded with the Agenda for the public forum. 2. OVERVIEW Mayor Lizee stated the reason for this public forum was to discuss the possible sale of the City's off-sale liquor operations which the City had since 1961. She explained that after many discussions, Council had agreed to hold a public forum to take public comment on and answer questions about the sale. She explained Administrator Dawson would provide an overview, and then Council would take public comment. Administrator Dawson stated he had prepared a document available to the public which summarized the performance of the liquor operations since 2004, and presented various investment rates of return on different amounts of funds that may be available from sales proceeds. Dawson highlighted the document he had prepared for the public. Through 2002, Shorewood had athree-store system as it operated and managed the City of Tonka Bay's off-sale store. From September 2002 through October 2003, the Shorewood Village Shopping Center did not have a grocery store open, and the City relocated and upgraded its store within that Center. Atwo- store operation, with the major grocery store tenant in the Shorewood Village Shopping Center, had been constant since the start of 2004. The combined liquor operations sales in 2004 were approximately $2.2 million with a net income of approximately $54,500; in 2005 the sales were approximately $2,035,000 with a net income of slightly more than $42,000; and in 2006 the sales were slightly less than $2 million with a net loss of slightly less than $16,000. The year-end Liquor Fund cash balance had been declining for the last few years. There lead also been a transfer from the Liquor Fund to the General Fund since 2004. The transfers as a percent of the tax levy were: 0.90 percent in 2004; 1.33 percent in 2005; and 1.19 percent in 2006 and 0.92 percent in 2007. CITY OF SHOREWOOD PUBLIC FORUM October 22, 2007 Page 2 of 6 In April 2007, the City reduced. operating costs by eliminating one full-time liquor operations position. With revised budget projections made in May 2007, the estimated net income from both stores was slightly less than $4,000 for 2007 and slightly more than $10,500 for 2008. In May 2007, the City engaged the services of a business valuation consultant in order to give Council a preliminary indication of the range of prices the City might reasonably receive if the City sold its liquor operations. In August 2007, the Council agreed to the terms of extending the lease of the Waterford Store to October 31, 2008. With that action, the leases of both stores would expire on October 3 1, 2008. In August 2007, the Council directed staff to begin the process to engage a broker to sell the liquor operations, and in September 2007 it selected a broker to perform these services. The City had since received proposals from potential purchasers, which had been preliminarily reviewed by the Liquor Committee. Minnesota Statutes required the City Council to hold a public hearing regarding continuation of municipal liquor operations if, in any two of three consecutive years, the liquor operations showed net losses. This was not the case at present, and the City was not required to hold a public hearing for that reason. The Statutes did not require that a public hearing be held prior to making a decision to discontinue municipal operations which was currently being evaluated by the Council. Council chose to hold this public forum voluntarily to provide the residents with an opportunity to make comments for the Council to consider in its decision-making process. Minnesota Statutes prescribe municipal off-sale operations as an all-or-nothing proposition. Liquor stores may only be municipal or only be private operations -City and private liquor stores may not be in business in the same city at the same time. Administrator Dawson commented the City had received several emails on this topic, and Council had been provided copies of those emails. 3. PUBLIC COMMENT John Garfunkel 5665 Grant Lorenz Road, questioned why the investment examples did not include what the potential proceeds from a sale could be. Director Burton explained at this time there were only vague estimates of what the potential proceeds could be. She stated the Liquor Fund cash balance was $350,000. Councilmember Callies stated the market study estimated what the possible ranges would be. Burton stated the market study indicated a collective value of $500,000 - $600,000. Mr. Garfunkel thanked the Council for Administrator Dawson's document which contained valuable information. He stated over the years the City had invested in upgrading the Shorewood Plaza store, and it had right-sized the Waterford Store. From his vantage point, those efforts had made the liquor operations much more valuable; he thought the City would have had a difficult time selling the operations for a reasonable amount of money prior to those efforts. He believed that eventually the State Legislature would allow the sale of wine in grocery stores; when that happened the Shorewood Plaza store would be negatively impacted. He did not think that all true costs (e.g., City staff's time, Council's time; etc.) were captured in the operating costs. He thought running a retail business was not one of a city's core competencies. He also thought selling the liquor operations would be the best utilization of CITY OF SHOREWOOD PUBLIC FORUM. October 22, 200'7 Page 3 of 6 the capital the City had invested in the liquor operations. He stated he had no recommendation of what should be done with the proceeds from the sale. Lauralee Chellen 26710 Smithtown Road, stated she had been reading information about the potential sale of the liquor operations in the local papers. She stated her core concern was how the City would make up for lost revenue from liquor operations should they be sold. She had spoken with Director Burton and Burton had explained it was anticipated that the proceeds from the sale would be invested and the rate of return on the investment would offset the lost revenue. Chellen stated that once the proceeds were spent and there was no longer investment income the taxpayers would have to offset the revenues. Ms. Chellen questioned how the liquor operations performed over the last five years and what the projected performance was for the next three years. She also questioned what percent of the proceeds would come from the sale of the inventory, and what percent from things such as the name and location of the liquor operations. Administrator Dawson stated that information could not be shared, but the estimated market value stated in the study of $500,000 - $600,000 would include the sale of the inventory. Dawson explained sharing specifics could affect the negotiation of the sale. Ms. Chellen then asked the following questions regarding the performance and future profit potential of the liquor operations. Which stores had strong profits and which did not? How did the different product categories perform at each store? Was the product assortment and shelf space optimized for each store? What affect did the location of each store have on sales? What are the unique competitive pressures each store faced, and what has been done from a marketing perspective to affect those competitive pressures? Was the City Staff and Council confident the liquor operations were being optimally managed? Ms. Chellen questioned if the necessary hard business questions been asked and answered, and was there a sound understanding of the revenue potential for the City. She stated other cities were doing very well with their liquor operations while facing equally challenging competitive environments. Director Burton stated the City's Liquor Committee (which was comprised of two Councilmembers, the City Administrator, the Finance Director, and the Liquor Operations Manager) had considered the financial data in great detail. Burton then stated the Liquor Operations Manager was very aggressive in trying to ensure there was the correct product mix and competitive pricing. Burton stated it was her understanding that some of the Councilmembers wanted to sell the operations for philosophical reasons as well as financial ones. Administrator Dawson explained the potential sale of the operations had been discussed at several work sessions during which the hard business questions were addressed. Councilmember Wellens stated one of the reasons for the possible sale of the liquor operations was the Councilmembers were not experts in running a retail business. He noted the Liquor Operations Manger was paid a flat salary and it was his job to ask the correct business questions. Ms. Chellen clarified that she did not expect the Council to have an answer to all of her questions regarding business operations; she had wondered if the questions had been asked of the Manager. She noted that Eden Prairie municipal off-sale liquor operations appeared to be operating successfully, and she questioned if the City could not be in that same position. Ms. Chellen stated there were two reasons to decide to sell the liquor operations -one was for philosophical reasons, and the other was for purely business reasons. Having municipal liquor operations was acceptable, with many surrounding communities using municipal off-sale liquor operations as a revenue generator. She then stated she hoped Council had considered all the factors and was confident there could not be a future revenue stream from the liquor operations. She commented that once they were sold they were gone for good, and that revenue stream potential was lost. CITY OF SHOREWOOD PUBLIC FORUM October 22, 2007 Page 4 of 6 Ms. Cheilen thanked the Council for the opportunity. Mayor Lizee stated the City had hired a professional liquor operations manager when it hired Don Swandby, and she thought he had done a good job. She commented Minnesota Statutes allowed for the City to be in the liquor operations business. She stated it was not appropriate to compare Shorewood to Eden Prairie and Edina -geographically Shorewood was a mile wide and six miles long, and Eden Prairie was similar to a square in shape. In Eden Prairie the residents shopped at the municipal stores; in Shorewood there were many surrounding liquor stores. Administrator Dawson stated Eden Prairie had a resident and employment population which exceeded 100,000; Shorewood had a population of 7,400 plus the immediate trade area. Councilmember Callies stated that with regard to Councilmember Wellens's statement that none of the Councilmembers were in the liquor operations business, the Councilmembers were also not in other City businesses such as the water business, the utilities business, etc. It was Council's job to ask the necessary questions of City Staff and to rely on their expertise. Councilmember Callies asked Director Burton to explain the amount of funds transferred from the Liquor Fund to the General Fund. Burton stated when the General Fund budget was prepared the City anticipated revenues from different sources. In the past the City had been able to count on a transfer of funds from the Liquor Fund to do special projects. It was anticipated during the budget process that there would be sufficient revenues from liquor operations to fund the transfer. Mike Murrell, 27020 Noble Road, questioned why a public forum was being held if the value of the liquor operations could not be discussed because of upcoming negotiations. Mayor Lizee stated the Liquor Committee met a week ago because the City had received a few offers and additional offers were anticipated, and Council had not met to discuss the offers yet. Mr. Murrell stated with regard to the City being involved in businesses which Councilmembers were not in the business of, he considered the Council to be similar to a board of directors of a company. He thought the liquor operations had been very successful and there was a knowledgeable liquor operations staff. He questioned if the liquor operations were not broke why was the Council trying to fix it. It was his understanding that once the City sold the enterprise it could not return to it. Councilmember Callies explained as long as the City did not grow to a population greater than 10,000 it was possible to again enter into the business of liquor operations, although that would be highly unlikely. With regard to the timing of the forum, she stated she had thought a public meeting should have been held a long time ago (before the City had put the stores up for sale). The majority of the Council made the decision to put the stores up for sale before holding a public meeting. The forum was finally being held even though the decision actually to sell the operations likely would be made by Council very soon. Councilmember Wellens stated the private sector can run liquor operations, and he thought there was a difference between liquor operations and the other City enterprises. The private sector can't run the law enforcement agencies, and it can't assess people for fire services. Maybe the liquor operations were as successful as they could be; yet the sales and net income were declining. The City's net profit as a percentage of sales was less than one-third of the average of the other liquor operations in the metro area. The Waterford Store needed to be remodeled and eventually wine may be sold in grocery stores; the future of the liquor operations business was a risky enterprise to remain involved in as well as it being risky to get out of. Mr. Murrell stated he thought it was possible for the Liquor Committee or the Liquor Operations Manager to resolve some of the issues and turn the operations around. He agreed that were differences CITY OF SHOREWOOD PUBLIC FORUM October 22, 2007 Page 5 of 6 between running a liquor business and running the law enforcement and fire services businesses, but there were regulatory and legal differences. Ron Johnson, 5355 Shadyhill Circle, stated he supported Councilmember Wellens's assessment of the liquor operations situation. He commented that he had read the various Council meetings and he understood the rationale for the possible sale. Linda Murrell 27020 Noble Road, stated she was not in support of selling the liquor operations. She questioned if the operations were sold, what the proceeds would be used for, and was there a plan for funding projects with the proceeds. Councilmember Callies stated there was no specific project identified that would be funded with the proceeds and interest earnings from the proceeds. Ms. Murrell then questioned would the funding for things such as concerts in the parks no longer be funded because of the loss of revenues. Mayor Lizee stated a plan had not been prepared for how the proceeds and existing Liquor Fund cash balance ($350,000) would be used. Council would have to determine if the funds should be placed in long-term investments (the City was restricted as to what it could invest in), if the interest earned should be used for long-term revenue planning, or if the proceeds plus existing cash balance should be placed in a fund for use as a one-time investment in a project. Ms. Murrell stated as a taxpayer she considered herself a shareholder in the City's assets; as shareholders the City's taxpayers should be given the opportunity to provide input into how the proceeds and cash balance would be used, and that should be done at a public hearing. She then stated a net income loss for one year was not sufficient to justify exiting the business. She asked Council to consider keeping the liquor operations through the end of the leases (October 31, 2008) and allow the operations a chance to improve profitability. She commented that it was possible many residents did not know the City owned the liquor operations, and maybe the residents should be encouraged to support the City-owned businesses. Councilmember Wellens stated the City had a lot of long-term data. He had net income data dating back to 1995, although some of the data were distorted because the City's management of the Tonka Bay liquor store was included in the data. Councilmember Callies stated one of the things that was new this year was one of the leases was renegotiated to a lower rate, and that was not taken into consideration with profitability projections. She thought other things should be considered to determine if the profitability could be improved. Councilmember Turgeon stated she was surprised that Ms. Murrell thought there were residents that did not know the City owned the liquor operations because the City had been in the business since 1961. She then stated the estimated net income for both stores for 2007 was $3,760 and slightly more than $10,500 for 2008. She went on to state there was no plan for how the proceeds and balance would be used, but there were many projects that needed funding. Mayor Lizee thanked the public for coming and for their comments. She stated if the public had additional comments or questions please let the Staff or Council know. She stated Council would continue to meet on the topic and the public would be kept informed of the situation. CITY OF SHOREWOOD PUBLIC FORUM October 22, 2007 Page 6 of 6 ADJOURN Mayor Lizee closed the public forum at 6:47 P.M. RESPECTFULLY SUBMITTED, Christine Freeman, Recorder Christine Lizee, Mayor