LB&B's Response to August 9, 2018 State Auditor Performance Audit Report

RALEIGH, N.C., Aug. 9, 2018 /PRNewswire/ -- On August 9, 2018, the State Auditor completed its Performance Audit of the State Alcohol Beverage Control Commission Warehouse Contract with LB&B Associates Inc. and published its final report. LB&B is disappointed by the State Auditor's final report, which failed to recognize the correct statutory authority as mandated to the ABC Commission by the North Carolina General Assembly and improperly attributed excessive costs and underpayments to the Contract.

Despite LB&B performing at the highest level, the North Carolina State Auditor chose to conduct a Performance Audit of the ABC Commission Warehouse Contract covering the procurement and administration of the Contract for the period of 2004-2017, as well as the ABC Commission's monitoring and oversight of the Contract and LB&B's performance for State Fiscal Years 2016 and 2017. LB&B fully cooperated with the State Auditor and provided detailed information and supporting documents and records as requested. LB&B also provided a substantive response to the State Auditor's draft report.  LB&B's response identified key legal and factual errors made by the State Auditor and requested correction.

The State Auditor addressed four main points as referenced below while at the same time finding no substantive issues with the performance of the ABC Contract by LB&B.

1. Authority to Contract for Warehouse Services.

The North Carolina General Assembly expressly provided the ABC Commission with statutory authority under N.C.G.S. § 18B-204(a) to provide for the receipt, storage and distribution of spirituous liquor by negotiated contract, or, if it chooses, through the use of the State's purchases and contracts procedure. Use of the purchases and contracts procedure is not mandatory under the plain language of the statute. The State Administrative Code further confirms that the ABC Commission may elect, but is not required, to use the procedures of the Division of Purchase and Contract. 01 NCAC 05B.1601(a)(1). Despite the clear language of the statute and intent of the General Assembly, the State Auditor chose to ignore the statutory authority granted to the ABC Commission and incorrectly concluded the Warehouse Contract was required to be procured through the Division of Purchase and Contract and is subject to the Division's requirements (including a three-year term limit). The State Auditor's legal conclusion is erroneous, and stands in direct contrast to the clear and unambiguous statutory and regulatory language under North Carolina law.

2. Contract Modifications.

The State Auditor also determined that agreed-upon, negotiated increases in the Contract price were not allowed. The State Auditor's position is that even upon renegotiation of the Contract, extension of the Contract term, and fundamental and material changes in the scope of services, the parties were subject to a cap on any price increase (between 0-4.9% per year based on the Average Wages of N.C. Employees in Wholesale Trades or the Consumer Price Index for Motor Fuels). The State Auditor is incorrect because the Contract explicitly permits modification by written amendment. The ABC Commission was therefore within its right to increase the scope, increase the price, and otherwise modify the Contract upon agreement with LB&B.                                                                                 

Furthermore, the information provided by LB&B shows the price increases were more than reasonable and in the best interests of the State. Over the past 13 years, the scope and magnitude of the Warehouse Contract services have increased dramatically. In 2004, total shipments numbered 3.8 million cases and total sales were $520 million. In 2017, on the other hand, total shipments numbered more than 6 million cases and sales were over $1 billion. More than 700 new products have been listed, and LB&B now leases a second 200,000 square foot warehouse in Clayton in addition to the original 200,000 square foot state-owned warehouse for housing and distributing spirituous liquor.

To expect a contractor to perform these greatly increased services with no (or very limited) price increases over a 13-year period is unreasonable. The ABC Commission had every right to negotiate and agree to price increases commensurate with the increased demands on LB&B and increased costs of performance, as it did in this case. Despite these increases, the ABC Commission continues to pay one of the lowest costs in the country for the warehousing, storage, and transport of spirituous liquor.

3. Procurement of Additional Warehouse Space.

The State Auditor also takes issue with the ABC Commission's decision to procure an additional 200,000 square foot warehouse in Clayton in 2011. This was done at a time when the ABC Commission was experiencing a shortage of warehouse space due to increase in sales and because the State of North Carolina was experiencing budget shortfalls that prevented a capital investment for additional warehouse space. Thus, the ABC Commission requested LB&B to procure 200,000 square feet of additional warehouse space and include that space in the existing Contract. The new warehouse allowed the ABC Commission to add over 700 new products, relieved issues with out of stock products and logistical complications due to the limited number of bay doors at the state-owned facility, and resulted in greater profitability and improved supplier relations. While it did result in increased contract costs, it was a critical factor in the dramatic revenue increases experienced by the ABC Commission (which have more than accounted for the cost increase).

According to the State Auditor, however, in retrospect, a 92,000 square foot warehouse should have been sufficient. The State Auditor claims that only 23% of the Clayton warehouse is allocated for regularly listed spirituous liquor, implying that the remainder is underutilized. However, 80% of the warehouse is at full utilization on a regular basis. LB&B's records, which were submitted to the State Auditor, document this high-level of utilization. The additional 20% capacity is necessary for specialty products and orders, limited time offers, holiday inventory and overflow products. A warehouse of 92,000 square foot would be insufficient to meet the ABC Commission's current or projected needs – in fact, if the current growth trajectory continues, additional storage space will become a critical need in the near future.

4. Monitoring by State.

The State Auditor report also points to alleged underpayments to the ABC Commission of approximately $300,000 in State Fiscal Years 2016 and 2017. Importantly, to the extent the State Auditor suggests LB&B is responsible for any such underpayments, LB&B has not and indeed could not ever underpay the ABC Commission as LB&B never deposits or disburses any funds to the ABC Commission; all payments are made payable to and hand delivered to the Commission for processing. Moreover, the funds LB&B allegedly received in error were in fact properly paid to LB&B. The State Auditor failed to correctly allocate the distribution of incidental charges and special service fees as between LB&B and the ABC Commission, and thus incorrectly determined that LB&B received excess payments. The State Auditor also overlooked a 2018 payment for inventory shrinkage for SFY 2017.

Background:

LB&B Associates Inc. is a diversified service company that provides facilities operations and maintenance as well as logistics services to both Federal and state government, as well as commercial clients, throughout the United States. Since 2004, LB&B has been the contractor responsible for providing for the receipt, storage and distribution of spirituous liquor within the State of North Carolina under a Warehouse Contract with the State Alcoholic Beverage Control Commission. LB&B agreed to assume the ABC Commission Contract after the previous contractor filed for bankruptcy. LB&B has consistently achieved high performance marks from the ABC Commission, local ABC Boards and suppliers while maintaining an exemplary performance record on this Contract during a period of unprecedented growth in sales of spiritous liquor in North Carolina.

SOURCE LB&B Associates Inc.