Principles for Liquor Privatization

Jul 25, 2015

Key Points:

  • Government should permanently get out of the business of selling alcohol and end the system in which state-run liquor stores compete against private business.
  • Modernization fails to move Pennsylvania into the 21st century.
  • Only full privatization ends the conflict of interest inherent in having the PLCB both regulate and promote wine and liquor sales with tax dollars.
  • Pennsylvania is not safer or more sober because of government-sold alcohol.
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The PLCB: A Winner in a Race with No Competitors

In 2013, the Pennsylvania Liquor Control Board (PLCB) released its first annual report, emphasizing record sales and “profits.” Neither of these is impressive when analyzed in context, but the PLCB continues to tout them as accomplishments.

As we’ve pointed out repeatedly, the PLCB has—until the passage of Act 39—had a monopoly on wine and liquor sales. Bragging about sales and profits when shielded from competition is like running a victory lap after ‘winning’ a race with no competitors. Nevertheless, the latest report unwittingly makes the case for full privatization. 

By its own numbers, the agency is a liability rather than an asset for Pennsylvania. Here’s why:

  • The PLCB’s net income in 2015-16—although higher than the prior year—is still down 19 percent from fiscal year 2012-13. This despite reporting record sales of $2.43 billion.
  • The PLCB’s operating expenses continue to rise and were 22 percent higher in 2015-16 than in 2011-12. Higher expenses may be justified if the PLCB were operating more stores. It’s not. Store locations declined from 608 to 601 over the same time period.
  • Total liabilities increased by $105.4 million for the year, due largely to the agency’s pension obligations. Overall, its poor net financial position did not change significantly. It ended the year approximately $238.2 million in the red

Still, PLCB apologists remain steadfast in opposing privatization. They claim the agency makes money for the state and eliminating it would blow a hole in the budget. Yet, 77 percent of PLCB transfers to the General Fund come from taxes, which consumers and businesses would still pay under a private system. In fact, revenue would likely increase under a competitive system, which gives consumers more choices and fewer reasons to buy alcohol in other states—a problem known as “border bleed.”  

The case against the PLCB isn’t strictly financial. The agency has a long history of corruption and a string of shortcomings that are well documented. The latest was on display just before Thanksgiving, when the state stores’ credit card system overloaded and failed because it could not handle the sales volume. This statewide failure would not have been possible in a truly competitive market.

The good news is the legislature recognizes the futility of the PLCB’s market operations. Last year, lawmakers voted for the first time in state history to privatize the system. However, Gov. Wolf vetoed the bill for dubious reasons. This should not stop the legislature from putting another privatization bill on his desk.

With the Taxpayer Party set to increase its majorities in the General Assembly, Gov. Wolf may finally have to acknowledge a political reality: liquor privatization is popular inside and outside state government.

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posted by Bob Dick, Andrew Ryan | 03:50 PM

PA's Liquor Monopoly is in Red Ink Again

The Failure of Government-run liquor stores

The Pennsylvania Liquor Control Board (PLCB) is boasting about record sales again. But as we've pointed out in the past, that’s not much of a feat when you have a monopoly over liquor sales. And the claim is even less impressive when you realize the agency is $238 million in debt.

Like a private business, the PLCB now has to include pension liabilities on its balance sheet. These liabilities are in excess of the agency's assets, putting the PLCB (officially) in the red for the second year in a row.

Despite the agency's financial position, it's generated positive attention recently by allowing grocery stores to sell wine, but this is only a small step in the right direction. The most effective way to serve Pennsylvanians is to fully privatize the system. This is important for two reasons.

First, it eliminates any potential future bailout of the PLCB. Approximately 85% of PLCB’s revenue comes from taxes. That means the state will still collect revenue with a privatized system, but the $238 million debt will only grow as the pension liabilities rise. We should take the initiative to privatize the system before it becomes a bigger burden on taxpayers.

Second, privatization would benefit consumers. It would give consumers more choices, convenience and competitive pricing.

It’s time Pennsylvania joins the 48 other states that enjoy more efficient government and consumer convenience.

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posted by Andrew Becker | 02:30 PM

5 Reasons to Continue the Push for Liquor Privatization

Some lawmakers and the media have labeled the latest liquor reforms as "historic" and "sweeping." The Patriot-News described the reform as the "most substantial overhaul of Pennsylvania's liquor system since Prohibition became law."

We won't go quite that far, wine in select grocery stores is not exactly groundbreaking.

Is there more convenience? Sure. But it doesn't take much to improve on the incredibly inconvenient and corrupt Pennsylvania Liquor Control Board (PLCB).

Here are five reasons Pennsylvanians should view Act 39 as the first step toward full privatization.

1. Wine in select stores. Grocery and convenience stores currently allowed to sell beer will now be able to sell wine. But that's only an estimated 300 to 350 stores in the entire state. Moreover, you'll be limited to purchasing four bottles of wine at a time. And the wine must be purchased from the PLCB. In other words, bureaucrats will still control your wine selection.

2. Beer in gas stations. The law codifies a PLCB decision to allow gas stations with prepared foods to sell beer if they meet PLCB requirements. Just nine gas stations have been approved thus far. If you are lucky enough to be near one of these gas stations, you'll still need to purchase your beer and gas at separate counters.

3. Wine delivery. Finally Pennsylvanians will be able to order wine from other states and have it delivered directly to their door, instead of a PLCB store. Though, a licensee authorized to deliver wine will be limited in the amount they can ship.

4. Expanded PLCB store hours. The PLCB will have the power to keep state stores open longer on Sundays and holidays.

5. Variable pricing. The law allows state stores to arbitrarily increase (or decrease) prices on their best-selling products, thereby costing consumers even more.

These changes (excluding variable pricing) are positive, but they don't go far enough.

The government-run liquor system has led to product shortages, inconvenience for entrepreneurs, and outright neglect of their property. As long as government maintains its wholesale monopoly on wine and liquor, mismanagement and inconvenience will be the status quo.

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posted by Elizabeth Stelle | 04:17 PM

An Easy Way to Give School Budgets a Boost

“I want to put more education dollars in our classrooms, not our school buses,” said Auditor General Eugene DePasquale, while releasing an analysis of 19 school districts that exceeded their state busing allowance.

According to the report, 95% of overspending districts do not make use of competitive bidding. DePasquale says it’s time to make contract bidding for transportation services mandatory:

Some school districts simply don’t believe what the audits showed. In fact, six of the 19 districts indicate either in response to their audit or in their action, that would be Scranton, that they have no intention of seeking bids for transportation services. Even though the audits showed, and they agreed, that they were paying too much. . . they offer some type of justification as to why they don’t seek competitive bids. It will range from well there isn’t any competition out there, it’s not a requirement. And the list goes on and on and on. And I just view them as lame excuse, after lame excuse, after lame excuse.

DePasquale indicates school districts could save nearly $55 million without raising taxes or cutting programs. Making use of competitive bidding to save public funds should be standard operating procedure. This is a critical step school boards must take to ensure education dollars are spent in the classroom, where they belong. 

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posted by Elizabeth Stelle | 11:33 AM

Liquor Liberty Loophole for DNC

As Pennsylvania residents and visitors know quite well, our state's liquor laws are outdated. Pennsylvania remains one of only two states where the government completely controls the sale of wine and spirits.

Good News: Pending legislation would allow some businesses to circumvent the state store system.

Bad News: The only people to benefit are those attending the Democratic National Convention.

That’s right, Pennsylvania liquor laws are so ridiculous, we need to suspend them when representatives of other states visit, so as to not embarrass ourselves.

The Philadelphia Inquirer provides some of the details:

A bill that passed a key Senate committee would allow those businesses to apply for a special permit to extend serving hours past the current 2 a.m. last call.

The legislation also would let them temporarily circumvent the strict and costly requirement that all wine and liquor be purchased from the State Stores, which slap products with an automatic markup and various taxes. (Much of the liquor at big events like political conventions is donated.)

This isn't a question of whether the Democratic Party should be allowed to, well, party. Rather, it's about the state denying residents the same benefits as convention attendees.

If suspending the liquor code for a few days in July makes Pennsylvania more attractive for big events, why not suspend these silly rules 365 days a year?

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posted by Nathan Benefield | 10:18 AM

The Consequences of Concentrated Power

We aren't the type of people to begrudge anyone a well-deserved raise. But when it's a $9,000 raise for an inessential position running a government booze monopoly...well, that raises some eyebrows.

The Pennsylvania Liquor Control Board (PLCB) recently gave its executive director John Metzger a 6.2 percent raise, bumping up his salary to $154,035 a year.

A PLCB position commanding a six-figure salary might appear to be essential to the functioning of a government agency. But is this position needed? Gov. Ed Rendell created the controversial position just 10 years ago for former state senator Joe Conti. The PLCB’s Chairman at the time, Jonathan Newman, resigned in protest because he thought the position was unnecessary.

Ignoring the controversy of the hiring, did Conti improve the management of PLCB? Not in the slightest, as this list of boondoggles makes abundantly clear. Additionally, Conti used the position to enrich himself at the expense of people stuck dealing with an inefficient yet powerful booze bureaucracy. And he continues to profit off the PLCB’s existence as a lobbyist for the local United Food and Commerical Workers union.

The source of all these problems—arbitrary raises, unwarranted positions, mismanagement, and corruption—is the control the PLCB has over the sale of wine and liquor. The system consolidates power among a handful of people, giving rise to abuses that every Pennsylvanian should find unacceptable.

The liquor monopoly is hanging on by a thread. Last year, the legislature passed a privatization plan for the first time in 80+ years. Unfortunately, Gov. Wolf vetoed it. But this should not dissuade lawmakers from sending it to his desk again.

Only full privatization can end cronyism and offer the choice, convenience and, competitive pricing consumers and entrepreneurs deserve.

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posted by Bob Dick | 03:57 PM

Tax Hike of Christmas Past?

Given the rumblings of an imminent vote on higher income taxes, it's important to remember what happened 12 years ago (nearly to the day!) with our state budget.

Ed Rendell was governor. Republicans controlled the House (108-95) and Senate (28-22). Republicans passed a no-tax-increase budget in early 2003 and were poised to reject job-crushing tax hikes. The governor had line-item vetoed education spending and was holding kids’ education hostage to get his tax increases. Sound familiar?

Gov. Rendell had demanded a 30 percent increase in the Personal Income Tax. I vividly remember Senate leaders in mid-November as they declared their steadfast resolve to not vote for higher taxes. Many expected the House and Senate would hold the line on tax increases. The public was with them!

But then, just before Christmas, the dam burst. 30 Republican representatives and 14 Republican senators–against the will of the majority of their majority–joined with enough Democrats to pass a 10 percent increase in income taxes. Governor Rendell signed the bill on December 23, 2003.

The borrowing of billions followed quickly in 2004, with massive spending increases each year thereafter.

Much has changed since Rendell’s first year in office. Over 76 percent of the House and Senate has turned over. The Republican majority is the largest in 60 years. What hasn't changed, however, are the forces that profit from Big Government: the government unions, which remain as powerful and wealthy as ever before. 

And yet here we are today. Will the legislature agree to massive tax hikes without meaningful pension or liquor reforms?

Will 2015 be a repeat of 2003?

It doesn’t have to be! Encourage your state Representative and Senator to stand strong against those who only want to tax more, spend more, borrow more.

Gov. Wolf’s year-long pursuit of higher taxes shouldn’t end like Gov. Rendell’s. History doesn’t need to repeat itself.

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posted by Matthew Brouillette | 05:00 PM

With Details, Wolf Budget "Framework" Looks Even Worse

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.

To see how your senator voted, here is the roll call for SB 1073 and SB 1082.

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posted by Nathan Benefield | 05:48 PM

Prohibition Never Ended

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.

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posted by Bob Dick | 03:03 PM

A PLCB Special: Red Ink

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.  

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posted by Bob Dick | 10:33 AM

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