Liquor Store Privatization
Last year, Gov. Tom Wolf promised he would take state government in a "different direction" and grow the middle class. He pledged to do this by making Pennsylvania a magnet for private sector entrepreneurs without giving massive tax breaks to special interests.
Throughout 2015, the governor has strayed from those promises by vetoing a budget that held the line on taxes, privatized liquor and made an effort to protect the state's credit ratings through pension reform.
Of course, a new year provides new opportunities…or should we say a fresh start. So with the new year in mind, here are five resolutions the governor can work toward to deliver on his promises to Pennsylvanians:
Resolution #1: Return to the campaign promise not to raise taxes on working people.
As a candidate, Tom Wolf promised to protect low and middle-income people from a tax increase, but in 2015, he broke that promise. Fortunately, the governor has an opportunity to stand on the side of an overtaxed working class, and prevent policies that will expedite the exodus of Pennsylvanians.
Resolution #2: Level the playing field and cut spending on corporate welfare programs.
Unbelievably, government spending has increased in 44 of the last 45 budget years. Cutting down or eliminating nearly $700 million in corporate welfare is a great way to save tax dollars and level the playing field for all Pennsylvanians.
Resolution #3: Deliver property tax relief by signing real pension reform.
Over the past year, the governor highlighted the onerous property tax system in Pennsylvania and proposed a tax shift to help, but such a shift does not solve the real problem: school budgets squeezed by pension costs.
To provide relief to homeowners, we need comprehensive pension reform that stops adding new debt and provides a method to pay down existing debt. That means converting to a 401k-type system and finding additional revenue (either through spending cuts or non-tax revenue sources) to pay for the more than $53 billion in benefits promised to public employees.
Resolution #4: Make government work smarter by getting out of the booze business.
Selling wine and liquor is not a function of state government. Government booze control leads to higher prices, fewer choices, less convenience, an inefficient bureaucracy. Selling the state stores would be a windfall for both taxpayers and consumers alike.
Resolution #5: Create "government that works" by increasing transparency and ensuring taxpayer resources are not used for politics.
Government should not grant any private organization unfair political privileges. This includes using taxpayer resources for the collection of political money. A true “transparency governor” will end these favors and restore accountability to taxpayers.
To strengthen our state and give Pennsylvania a real fresh start, these are five resolutions worth keeping.
Now that the Pennsylvania Senate has begun passing legislation, taxpayers can finally see what’s in Gov. Wolf’s “framework” for a new budget. Based on the passage of SB 1073 and SB 1082 today in the Senate, here are five things we know about the budget framework:
1. Excessive Spending Growth. The $30.788 billion budget represents spending growth of 5.4 percent over last year’s budget. Even including items shifted off budget last year, this amounts to an increase of $500 million more than inflation and population growth.
2. WAMs are back. The budget passed by the Senate includes a $103 million increase (51 percent) in Community and Economic Development spending. This includes several line-items identified as WAMs and eliminated in previous budgets.
WAMs (or “walking around money”) are slush funds used for special projects, usually controlled by legislative leaders. In the past, they’ve been used to buy votes and have been the abused with rampant corruption.
3. Problematic pension reform. The revised pension bill included a side-by-side hybrid, with a smaller defined benefit pension and a defined contribution component. This reform is weaker than SB 1 (vetoed by the governor) and while a step in the right direction, doesn’t get the politics out of pensions.
Here’s the positive: For current employees, the legislation would alter the calculations for “lump sum withdrawals” (the money employees can take in one single payment when they retire, with a reduced pension) and the calculation of “average final salary.”
On the negative side, the bill underfunds pensions. The proposal reduces collared contribution rates, which further underfunds the pension plan and adds an estimated $500 million to its unfunded liability.
Moreover, the bill suspends the provision that all pension bills have an actuarial note attached before being voted on. Actuarial notes summarize any changes that would occur and estimate the cost to taxpayers. This is a stunning lack of transparency.
4. No privatization in “liquor privatization.” The Senate liquor plan—which has been reported on but not yet passed—strips out many of the components of “privatization.” For starters, it would retain the government monopoly over the wholesale side—every retailer would still have to buy wine and spirits from the PLCB. Instead, there would be a “study” to recommend whether the state should privatize wholesale liquor sales.
This monopoly gives a few bureaucrats power to determine what can be sold in Pennsylvania, maintains the conflict of interest whereby the state sells and controls alcohol, and has led to numerous cases of corruption and bribes.
Restaurants and bars would be able to sell wine (and only wine) to-go, while beer distributors would also be able to sell wine and spirits. There would be no new liquor licenses for grocery stores or other private retailers. State stores would remain open in perpetuity.
5. Higher Taxes. We know there will be higher taxes. We know this will include some broad-based tax increase to generate the $600-$700 million needed to pay for the spending.
We don’t know what taxes will go up. There is no agreement on a tax plan; that is, the Senate passed a budget without the revenues to pay for it.
It’s unclear if there is support in the Senate to pass a tax hike, and very clear signs there isn’t support in the House for a tax hike of this magnitude.
Tomorrow marks 82 years since the official end of Prohibition. Yet, Pennsylvania is still dealing with its own version of Prohibition in the form of the Pennsylvania Liquor Control Board. The agency has complete control of both the wholesale and retail side of wine and liquor sales, and as you might expect, the results have been subpar.
Recognizing the liquor control board’s failures, the Republican-dominated General Assembly sent Governor Wolf legislation to privatize the government-run liquor system. The governor vetoed it, citing a number of weak excuses to justify an unpopular position. A couple of months later, Gov. Wolf offered his own “compromise” to break the budget impasse, which is now in month six.
But as my colleague Nate pointed out, the proposal was not true privatization. And it appears the governor has not moved from his anti-privatization stance since he vetoed the legislation back in July. Now there is talk of liquor ”modernization” as part of the deal to break the budget gridlock, but the ghosts of modernization’s past are well known. Modernization is still government-run booze. Voters should accept nothing less than real privatization as part of any budget deal.
For more on Pennsylvania’s risible liquor laws and why we need reform, have a listen to my interview with the Cato Institute’s Caleb Brown.
Gov. Wolf is committed to protecting the government's monopoly on the sale of wine and liquor. When talking to reporters this past Monday, the governor’s spokesman said of Wolf “The [liquor privatization] bill he vetoed earlier this year is not something that he'd accept."
The governor’s position is head-scratching given the shortcomings of the state-run system. Perhaps the governor opposes liquor liberty because he isn’t privy to the liquor monopoly’s many failings. So, for the benefit of Gov. Wolf, and in the spirit of David Letterman, here are the top 10 reasons why state government should exit the booze business:
10.) It would end state government's conflict of interest.
7.) The agency's “modernization” efforts have failed miserably. Remember the failed wine kiosks?
6.) Opening up the market to competition will lead to lower liquor prices.
5.) The government monopoly is driving border bleed, costing the state at least $180 million in sales.
4.) The PLCB makes life difficult for entrepreneurs trying to sell their products in Pennsylvania.
3.) The public overwhelming favors privatization.
2.) The liquor control board is more than $238 million in the red.
1.) The PLCB is a corrupt, scandal-plagued agency.
Supporters of the state liquor monopoly defend the Pennsylvania Liquor Control Board (PLCB) as a cash spigot for the state, which is one of the reasons they refuse to support privatization. But the agency's days as a cash cow are numbered.
According to the PLCB’s own report, it’s on the verge of insolvency. After changing its accounting practices to mirror those used in the private sector, the agency ended the year more than $238 million in the red. Chris Comisac of Capitolwire lays out the biggest reason why (paywall):
Not only did the new accounting requirements mandate annual changes in the pension liability and other actuarial assumptions be reflected against the fund’s net income, the PLCB had to record on its financial sheets its share of the State Employees’ Retirement System (SERS) unfunded liability.
That means the PLCB’s $362.7 million pension obligation (2.9 percent of SERS’ total $12.3 billion unfunded pension liability), when applied to the State Stores Fund, leaves the fund in a negative net position. Compared to last year when the fund had a net ending position that was more than $77 million dollars in the black, FY2014-15 ended at negative $238.7 million.
The rising cost of pensions, along with other personnel expenses is eating away at the liquor board’s profitability. Its reported net income was only $84 million after accounting for all expenses. This figure is much lower than the one reported back in August and the lowest since the 2010-2011 fiscal year.
The PLCB’s poor finances are confirmation of what we already know: the state’s government-run liquor system isn’t an asset for taxpayers, just an asset for those in positions of power who use the system to enrich themselves.
The revolving door of politics—when top government officials change careers and become consultants for the industry they once regulated—is alive and well in Pennsylvania. Except in the case of the commonwealth’s Liquor Control Board (LCB), the revolving door involves regulators who were previously cited for improperly accepting gifts and other forms of outright corruption.
Kari Andren of the Tribune Review has the story of formerly sanctioned LCB officials now representing the wine and spirits industry before the LCB:
From January through mid-September, the former officials — and vendors who provided the gifts — collectively visited LCB offices more than 120 times, according to visitor logs for the Northwest Office Building in Harrisburg, obtained under the state's Right to Know Law.
The logs show:
• [Matt] Schwenk, now a spirits sales representative for Palm Bay International, visited LCB officials six times, typically in the product selection division. Palm Bay imports dozens of brands of wines and spirits. Schwenk was cited by the state Ethics Commission in 2014 for taking gifts of golf outings and trips from vendors.
• Former CEO Joe Conti, who accepted golf outings, dinners and gifts from vendors, attended board meetings and met with LCB attorneys and board Chairman Tim Holden. He's a registered lobbyist who counts among his clients Majestic Wine and Spirits, which distributed all but one of the LCB's controversial in-house brands of wines and spirits, and the United Food and Commercial Workers union representing liquor store clerks.
• Former LCB Chairman Patrick “P.J.” Stapleton, who accepted rounds of golf, meals and Philadelphia Phillies tickets, has made three trips to the agency. He is a partner at the law firm Weber Gallagher in Philadelphia, where his biography notes that he has represented alcohol suppliers regarding recent changes to the state liquor code.
As Andren explains, sanctions against LCB officials are not roadblocks for these same individuals to gain lucrative employment in the alcohol industry. This lack of accountability could explain why LCB officials hindered the release of information that, according to Pennsylvania’s open record law, should be matter of public record. Why follow the law when there are no consequences?
My CF colleague Dawn Toguchi said it best: You can’t spell corruption without L-C-B. The state's monopoly over the wine and spirits industry has produced numerous scandals on top of its shoddy service and uncompetitive prices.
Now add the revolving door of corruption to the endless list of reasons to get the government out of the alcohol business, once and for all.
Last week, Gov. Wolf unveiled new, bad policy ideas—to slightly adjust a misguided pension proposal, and to propose a private manager to a government run liquor monopoly.
But just as it was with the fabled wardrobe-challenged emperor, we aren't the only ones who have seen through the Governor's new clothes. Editorial boards across Pennsylvania have pointed out Wolf's new proposals are transparent and immaterial.
Lehigh Valley Live writes (emphasis added)
Instead of offering a real compromise, Wolf dredged up what can only be called Reform Lite — privatizing the management of the liquor system (but not the ownership or the workforce). He also came down in price on his hybrid pension proposal, saying that the earnings of new state employees over $75,000 would be shifted to a defined-contribution pension plan (down from his earlier ceiling of $100,000).
Leasing the Liquor Control Board's management function to a private firm 10 to 25 years, as Wolf proposes, is worse than doing nothing, because it would prevent conversion to a market-driven system during that time. Nothing in Wolf's offer would greatly increase service or selection, or reduce prices. The unionized sales force would stay in place. So would the number of stores. Wolf's idea to extend beer and wine sales to convenience stores and restaurants is tepid at best, and pits government against private enterprise.
The Pittsburgh Post-Gazette adds (emphasis mine):
The plan is a loser. It privatizes nothing. What’s worse is that by projecting an aura of private operation it could perpetuate Pennsylvania’s antiquated system for far longer. The state needs to get out of the liquor business, once and for all, as soon as possible, without the use of Tom Wolf’s smoke and mirrors.
The Bucks County Courier Times editorializes (emphasis mine):
Now that we’ve gotten an unvarnished look at those “historic” reforms, here’s our take: phony-baloney “reforms” that create the appearance of movement for a Democratic governor locked in a budget impasse with Republican legislative leaders.
Lastly, Lancaster Online pans the proposal, urging Wolf to look to real liquor store privatization:
Forget his proposal last week to offer a long-term lease to manage the state liquor stores; private firms would bid on a contract to manage the system, which would stay under state ownership.
If Gov. Wolf can make a deal with Republican leaders that would make good on his promise to boost funding for Pennsylvania’s public schools, he should choose our children over the unions that oppose privatizing our state-owned liquor stores. If he fails to do so, he could lose the support of those who elected him because they’re rightly frustrated with the human costs of the ongoing budget impasse.
Gov. Wolf may have trotted out new clothes last week, but they don't cover up the bad policies he started with.
Yesterday, 28 days after receiving a budget compromise proposal from legislative Republicans, Gov. Wolf rejected that offer and issued his own plan—hiring a private contractor to manage the government liquor system and slightly modifying his earlier pension proposal.
While Governor Wolf’s proposals are significant, and new to the current budget debate, they represent bad public policy.
- Wolf’s plan to hire a private manager to run the liquor system replaces a government-run monopoly with a government monopoly run by a private company. In contrast to Wolf’s comments that he doesn’t want to “give this away to a crony,” that is precisely what this plan would do.
- Consumers will not see better selection, prices, or service.
- This plan doesn’t provide consumers new choices or true competition
- This plan retains the one-size-fits all model that Pennsylvania consumers have come to hate—and drive to other states to avoid.
- Wolf’s proposal doesn’t end the conflict of interest of government controlling and promoting the sale of alcohol.
- It doesn’t change the fact that we having a single entity (or one person) choosing what products can and cannot be sold in Pennsylvania—which has resulted in rampant corruption and bribery.
- The idea that wine in groceries and restaurants are “to be negotiated” means he isn’t offering the most basic reform consumers want to see.
Consumers will only see better selection, prices, and service when the government gets out of the wholesale business and allows competition, not monopoly, in wholesale and retail wine and spirits sales.
- Wolf’s stacked hybrid pension plan doesn’t offer meaningful reform. It is subject to the same political manipulations that plague the current pension system—increasing benefits and delaying contributions, kicking the can down the road.
- The salary threshold could be adjusted at any point (Wolf proposed putting salary above $75,000 in a defined-contribution account, vs. his proposal of $100,000 a month ago) cutting into any “savings.”
- While several states have created hybrid pension plans (part defined contribution, part defined benefit), no one has implemented a stacked hybrid.
- Wolf’s $3 billion pension obligation (PO) bond proposal should be a nonstarter.
- PO bonds have been historic failures—almost every city or state that has used pension obligation bonds have seen larger deficits after the bond issues. This includes in Philadelphia and Pittsburgh—where Mayor Peduto spoke out against Wolf’s bond proposal.
- Wolf’s projected “savings” in reduced pension contributions don't include the interest payments on those bonds.
- Ratings agencies have cautioned that pension bonds would result in bond rating downgrades.
- Anti-spiking and revenue neutral option 4 reforms are good, commonsense reforms that protect taxpayers. Wolf should be applauded for supporting these reforms, and almost no one would disagree these are necessary changes.
- The risk sharing for current employees is a good reform—but the $2 billion “savings” only occurs if the pension funds earn 6.5% instead of the projection 7.5%, an investment return that would create tens of billions in additional costs versus current projections.
- Reducing Wall Street Investment fees is another good idea—SERS and PSERS have exorbitant costs—but Wolf has indicated he can do this administratively, with no legislation needed. This doesn’t need to be part of a “deal."
- Oddly, the government unions who oppose converting to a defined contribution plan claim 401K plans have higher investment costs—despite the fact that large 401k plans have lower fees than many defined contribution plans, and rates only a fraction of what SERS and PSERS are paying now.
A majority of Pennsylvanians support a privatized liquor industry, but government unions use their financial clout to ensure the state government maintains a monopoly over wine and spirits.
WILK’s Sue Henry spoke with CF’s Matt Brouillette to discuss his recent op-ed in National Review that outlines the problems created by the governement's liquor monopoly–including a system of corruption and higher prices for consumers.
Infusing competition into the industry would solve these problems. Matt explains that “competition provides greater choice for consumers, competition for the providers, and ultimately it will result in better prices for all the people who buy alcohol in Pennsylvania.”
Getting the government out of the booze business and dismissing groundless myths will allow the state to focus solely on its role of public safety and enforcing liquor laws, rather than promoting the sales of wine and spirits.
“It’s better to have the government in the role of oversight rather than in the role of selling liquor.”
Click here or listen below to hear more.
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Last week 90.5 WESA published a story about the PA Preferred Wine Program—a tool designed to help promote Pennsylvania wines. The program allows in-state wine producers to apply for the chance to sell up to 10 products in state stores.
According to the rules governing the program, wine producers must pay $150 for each wine application, which can only be submitted during a short “listing period.” Apparently, this is what qualifies as a "business-friendly practice" in the world of the Pennsylvania Liquor Control Board (PLCB).
In reality, the PLCB hinders entrepreneurs looking to sell their products in Pennsylvania. One PLCB-created roadblock is the uncompetitive price system imposed on its vendors. WESA explains:
That system can be a non-starter for some wineries. Reduce their profit margin too much to offset the state markup and they won’t make any profit; sell the wine at a higher price and potentially turn off customers. Some Pennsylvania wineries are simply too small to provide enough wine to sell in stores, while others only want their product available at their home-base, liquor lawyer Mark Flaherty said. [Bold mine.]
If wineries don’t believe they can make a profit selling to state stores, their consumer base in Pennsylvania shrinks dramatically because of the PLCB's retail monopoly:
Pennsylvania is one of the largest buyers of wine and spirits in the world. Because the state owns the system, there’s only one gatekeeper accepting or rejecting the products that make it into the stores.
Concentrating so much power in one agency has predictably led to corruption and mismanagement. To continue with the current system as-is would be a slap in the face to Pennsylvanians. The people of this state deserve better.
To improve the system, the state's liquor laws need to be modified to reflect the age of Uber, rather than the age of Capone.
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