Some city officials have questioned whether Savage’s municipal liquor operation should continue after years of losing money, though others say it’s not as much of a problem as it appears.

Over the past 20 years, profits from the city of Savage’s municipal liquor operation have contributed millions of dollars to community facilities. However, the cash flow currently sits more than half of a million dollars in the red, inventory is sitting unsold, and the last transfer to the community’s benefit took place in 2010.

“I think the bottom question is should we be in the liquor store business,” Savage Mayor Janet Williams said at a recent City Council meeting that looked into the operation.

According to the Office of the State Auditor for Minnesota, Savage’s municipal liquor operation had the third largest operating loss in 2017 of all the municipal liquor operations in the state.

Finlayson, population 304, experienced the biggest loss, and Rush City, which came in second, ended their liquor operation during the year. According to the report, 54 cities total had a loss on their liquor fund in 2017, but Savage’s was the only municipal liquor operation within the seven-county metro area to show a loss.

According to the state auditor, operations within the metro are generally larger more profitable than those outstate. The report shows that Lakeville’s municipal liquor operation raked in over $960,000 in profit in 2017 with a total sales revenue over $14 million.

City officials say a perfect storm of circumstances contribute to missing sales targets and discussed the future of the liquor operation on Nov. 19.

The city’s municipal liquor operation began in 1935. City Administrator Brad Larson said these operations started primarily to control the sale of liquor and generate profits for community projects. Today, Savage city officials own and operate two stores — Marketplace Liquor and Savage Wine & Spirits at Hy-Vee. Other entities can’t open liquor stores within the city.

Savage is the only city in Scott County with a municipal liquor operation.

Savage Wine & Spirits at Hy-Vee opened last year after the city closed Dan Patch Liquors, which hadn’t broken even for several years, in 2016.

The city council held a public hearing about the liquor fund at the recent meeting. The hearing is a requirement for any city that reports a year-end liquor fund operating loss for two consecutive years.

In 2016, liquor operations saw a loss of $106,175. Around $80,000 of the loss came from setting aside money for future employee pension benefits, which is a federal requirement.

In 2017, liquor operations saw a $73,469 loss. The year turned out better than anticipated given the costs of closing Dan Patch Liquors and opening the new store, Larson said. The city recognized an $80,000 loss on the sale of the Dan Patch Liquors building because it was valued in the books higher than it sold for. Without that “paper loss,” Larson said, the city would have broken even.

Sales were ultimately $180,639 higher than expected in 2017, but only the Savage Wine & Sprits at Hy-Vee contributed to the profit. Marketplace Liquor hasn’t broken even since 2015. The closing of Rainbow Foods in 2014 and this summer’s construction on County Road 42 likely contributed to struggling sales at Marketplace Liquor, Larson said.

The 2018 year-to-date numbers show that Marketplace Liquor is $58,000 in the hole and Savage Wine & Spirits is $87,442 in the black. Larson said they are anticipating being profitable in 2018 because the holiday season is when liquor sales experience an uptick.

“It’s not a losing business,” said council member Bob Coughlen. “It just looks bad on the books right now.”

Savage Finance Director Julie Stahl said that residents are not subsidizing the liquor stores and the operation is not increasing taxes for anyone. The fund balance is tied up in inventory, but pooled enterprise funds mean the liquor fund can operate in the red without having to go to the bank for a loan.

During the discussion, council member Matt Johnson questioned how proactive the city should be about closing Marketplace Liquors rather than watching it falter for years as they did with Dan Patch Liquors. Ultimately, he said he was still in favor of continuing the watch the funds rather than make plans to discontinue the operation.

In the old days, there was a dedication to purchasing liquor in the city to help the community, Williams said, but today things are different, and the fund isn’t helping the city to the extent that it used to. More liquor stores and brewpubs in neighboring communities have brought more competition to the area. Williams said he was also concerned about rent increasing at Hy-Vee in the coming years.

“I think having a conversation about whether or not we should be in the liquor business is actually a really good conversation for us to have,” said council member Christine Kelly. “My feeling is generally that the city belongs in the position of city government. However, I think to walk away at this point and discontinue everything would be shooting ourselves in the foot.”

At the hearing, former city administrator and Savage resident Barry Stock addressed the mayor and council members. He said that these numbers aren’t a surprise to anyone and that he is optimistic about the future of the liquor operation.

“I too sometimes struggle with why a city would be in this type of business,” he said. “However, as a taxpayer, if there’s any opportunity for the city to generate revenue which will reduce my taxes or provide amenities that I can benefit from — I’m there, I’m for it.”

Since 1998, Liquor operations have contributed $4.6 million to the city. Projects included $2.3 million towards the Savage Library and nearly $600,000 to the Environmental Learning Center. Kelly said that they didn’t anticipate the circumstances that are driving down sales years ago when they withdrew these fund, but reiterated that she doesn’t think it’s time to jump ship.

“Things have changed, I never thought we’d have a liquor store next to a grocery store that close,” Stock said. “That has created a huge opportunity for us in terms of sales.”

Inventory at Marketplace Liquors is nearly three times greater than industry targets reported by the Municipal Beverage Association, meaning liquor is sitting on the shelves or in storage for three times as long as is ideal, according to data presented by Larson. Inventory is also higher at Savage Wine & Spirits.

Regulations prohibit the city from moving inventory around between the two stores, so the city had to purchase an entirely new batch of inventory to open the Savage Wine & Spirits at Hy-Vee, despite inventory overflowing in the basement of Marketplace Liquor. These ratios hurt the cash balance, and Larson said they are hoping to meet these targets in 2019.

Even if things improve, Larson said it’ll likely be another three to five years before they’d be able to make another fund transfer to benefit the community.

“Will those advantages continue? That’s the key question,” Williams said. “What I’m saying is that it doesn’t look like it.”

Correction: A version of this article published Nov. 24 reported that Lakeville's municipal liquor operation earned over $14 million in profit in 2017. The profit earned was $960,127 with a sales revenue over $14 million.

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