PIERRE - A bill to allow South Dakota cities and counties to grant more liquor licenses goes to the full state Senate today.

The bill pits owners of existing liquor licenses against developers who want new licenses to help attract national chain restaurants to large projects, such as the proposed Rushmore Crossing development in Rapid City.

The Senate State Affairs Committee voted 7-2 to send the measure to the Senate with a recommendation to approve it.

"It's a good economic development tool," said Sen. Royal "Mac" McCracken, R-S.D., who voted in favor of the bill in committee.

A similar measure failed at last year's legislative session, after liquor-license owners argued it would devalue current licenses sometimes worth hundreds of thousands of dollars.

This year's version, SB126, adds a complicated formula to compensate current liquor-license owners. However, bar and restaurant owners told the committee Wednesday that the compensation was inadequate.

"The compensation plan to us is somewhat frightening," Dean Kinney of Sturgis told the State Affairs Committee. Kinney and partners own the Loud American Roadhouse in Sturgis.

Kinney said the compensation would be based on what license owners originally paid for their licenses, not on the current market value. If real estate were condemned for a highway, he argued, "It would be valued on present market value."

Kinney said he and his partners got loans based in part on the increasing market value of liquor licenses in Sturgis.

Current state law restricts the number of on-sale alcohol licenses available to cities based on population. So-called "secondary market" prices are high in Meade County because of the Sturgis motorcycle rally.

Prices also are high in growing communities such as Sioux Falls and Rapid City. Rapid City has 55 licenses.

Sen. Ed Olson, R-Mitchell, who sponsored the bill and who testified for it Wednesday, said the secondary market for on-sale alcohol licenses was more like a "black market." Limits on the number of liquor licenses have stifled completion and growth, Olson said.

He said it is time "to take a real, hard look at this cap that prevents quality economic development."

Sen. Gene Abdallah, R-Sioux Falls, who fought against last year's version of the bill, was just as adamantly opposed to the new version. He also is a member of the Senate State Affairs Committee.

"This is a special -interest bill," Abdallah said. "They're talking about 16 licenses (in Sioux Falls) and four licenses in Rapid City."

Developers do support the bill, but so does the South Dakota Municipal League, which represents cities, and the South Dakota Chamber of Commerce and Industry.

Sioux Falls developer Craig Lloyd, who also consulted on the new Rushmore Crossing project in Rapid City, defended the measure, which he said was opposed by a well-financed, well-run liquor lobby. "We're just a bunch of little contractors trying to figure out how to promote our developments in the cities and counties we live in."

Municipal League lobbyist Yvonne Taylor explained that the new law would allow cities and counties to decide whether to issue new licenses, whether to restrict them to restaurants and how to pay compensation to current license holders.

Cities and counties would set a value on new licenses. If current license holders (as of Jan. 1, 2008), paid more for their licenses than the new set price, the owners would be compensated for the difference.

Disagreements would be settled in circuit court. "We are drawing a fence around the existing license holders and protecting them," Taylor said. "For the future, we're saying there's going to be a new deal."

Taylor said members of the Municipal League reluctantly supported the compensation plan. "We liken this to chemotherapy," she said. "Sometimes you have to take something that makes you sick in order to get rid of a disease in the system."

She also pointed out that the measures could be referred to voters.

But two Rapid City license holders also objected to the bill.

Mike Derby, who owns the Chop House, said he bought the business in its entirety - the building, property and license together - and it would be difficult to determine the value of the license alone.

The compensation scheme in SB126, he said, would lead to legal battles. "Under the rules proposed now, I will be in circuit court trying to defend the value of this license."

Rapid City attorney Rex Hagg, who is a partner with his brothers in a bar near Piedmont, said the value of current licenses like theirs could be "gutted overnight."

The bill will face the same arguments on the floor of the Senate. Sen. Jerry Apa, R-Lead, who was in the bar business for many years, said the measure would destroy the "blue sky" value of current licenses. "Right or wrong, this is what's been in place in South Dakota."

If the bill passes the Senate, it will go to the House.

Even supporters acknowledge the bill is not perfect, but Olson said SB126 would help fix a problem that goes back decades. "Our liquor laws go back to Prohibition," he said.

Contact Bill Harlan at 394-8424 or bill.harlan@rapidcityjournal.com