Monday, July 13, 2015

Pa State Budget

After Tom Corbett was elected governor, I wrote a post about his first budget.  That was 2011.  At the time, I was saddened by the deep cuts the first Corbett budget offered as a way to balance the state's income and revenue, but not surprised, as he ran on a campaign of no new taxes.  What surprised me was the general sense of outrage over that budget, and the next 3 budgets, that helped lead to the first incumbent governor to lose a reelection bid in PA history. 

I say surprised because he told us he wouldn't raise taxes, we foolishly believed that was the solution to our problems, then gnashed our teeth over the cuts that were passed.  Of course, since we seem to be stuck in a no win battle of raise taxes or cut benefits kind of thinking, no new solutions were offered either.  So, for 4 years we passed a balanced budget only to find ourselves towards the bottom of lists such as state revenue growth, job creations, and education funding. 

Now comes the 2015-16 budget battle between newly elected Democratic Governor Tom Wolf and the increased GOP majority in the House and Senate.  In some ways, I admire Pa voters for choosing a new leader while presenting him with a similar arrangement of house reps and senators.  Not sure if we meant to do that, not sure if we are actually thinking that when we vote, but by electing a DEM Gov and a GOP controlled legislature, we are saying to our public servants, Hey, we aren't sure what we want, but we expect you to work together to find common ground between our own schizophrenic needs and wants, and make the best choices possible for all of us.

So far, unfortunately, neither side has acted as adults.  Wolf's budget is unanimously voted down due to a clever politically motivated approach by the GOP, then the GOP budget is vetoed by Wolf.  One might say, score 1-1; or one might say score 0-2 where 0 represents the citizens of PA, and 2 represents the bullshit of PA politics.

Admittedly, Pennsylvania is a difficult nut.  A huge portion of our state population lives in or near a city, while a majority of state reps and senators come from counties that are rural.  The phrase Pennsyltucky has been used to describe this dichotomy.  It takes quite a balancing act to understand the opinions, perspectives and needs of such a diverse population.  One might even say it takes a lot of compromising so that each position gets a bit of what they want.  And, while compromise is an extremely dirty word in our national political debate, it is only a bit less dirty in our state debates.

As a tax payer, a parent with one child still in college and one a recent graduate with large college debt, and as a public employee with a job in the oft maligned PLCB, I believe I have a rather unique perspective.  Here are my thoughts.

Education funding should be our top priority.  When we continue to allow wave after wave of urban children leave school early, or graduate with inferior skill sets, we create future expenses that cost much more per individual whether it be through incarceration, public assistance, or reduced tax revenue.  Funding needs to be from stable sources and needs to be equitable in its dispersion.  There is a new formula recently proposed that, with a few tweaks, should be enacted so that so school systems with the least ability to generate revenue, get a bigger share of state aid.

Just as important, since less money is finding its way to the classroom, pension reform goes hand in hand with education funding.  The fact that it is through poor, past legislative decisions and the refusal by the state to always pay their legal obligations to the pension fund that has created this mess seems lost in the solutions.  That being said, there will need to be a reduction in the multiplier which is used to calculate pensions.  We can't continue to promise money that is not there.  Of course, those about to retire must not be affected, but for those decades away, a new formula needs to be enacted.  Perhaps even an option to take the money already invested, and opt out of future contributions and a future pension.  Personal choice.  And, however the details shake out, the state needs to recognize its debt to the pension fund and find a (hopefully) temporary revenue source to erase that debt.

There is also a huge need for transportation funding.  Literally billions of dollars are needed to fix our infrastructure.  Inevitably, higher taxes will be required.   A small increase in the base income tax rate, in addition to a sliding tax rate not unlike what many states have in place will help.  Also, while I have said many times before that the window to tax the Marcellus shale boom has closed somewhat, an extraction tax needs to be enacted.  For now it will not provide as much revenue as needed, but the cycle of high oil prices will certainly return again, and perhaps this tax will become a more productive source of revenue in the future.  I am not a big fan of applying the sales tax to more products and services as it tends to fall disproportionately on the lower income brackets, but there are luxury products and services that could be removed from the exempt list.  Perhaps even an increase in the liquor tax which began as the Johnstown Flood tax.  Clearly, the tax money no longer goes to anything related to Johnstown, but is a stable revenue source for the state.  Lets rename it what it is, an alcohol tax, increase it by 2%, and earmark the money for education or transportation or both.

Speaking of the PLCB, Pennsylvania is one of only two states that controls the sale of wine and spirits.  It is a system that was historically poorly run with little concern for customer service.  When I first was legally able to drink, the state stores were of the "conventional" model.  That meant you stood on one side of the counter, told the clerk what you wanted, and he picked your product for you then tallied up the total and collected the money.  Now, 30+ years later, wine and spirits shops are self service.  There is a website which provides information on store hours, product availability, an online store, monthly wine club subscriptions, and even advice on mixing drinks and hosting parties.

Even better, the PLCB generates millions of dollars in profits in addition to the taxes that are automatically collected.

Still, product availability is restricted to the 600 or so state run stores.  Legislation that will allow for direct wine purchases by Pennsylvanians from out of state wineries and vineyards while also offering separate liquor licenses to existing beer distributors and restaurants to allow their patrons to purchase wine and spirits will increase revenue while improving convenience.  Additional legislation that frees the PLCB to expand hours when and where necessary, vary profit margin by product, and other such common business practices will also improve customer satisfaction while increasing revenue.

If we want to allow beer and wine sales in grocery stores (I would not include spirits at first), then we need to make sure that this decision will create jobs, not just convenience. New items in convenience stores do not require new employees, but getting new product to those new outlets might.  That is why maintaining the PLCB's wholesale system is key.  This will force importers to find new ways to get their product to market, resulting in the need for sales, warehousing, and transportation positions.  As a PLCB manager, I am less concerned about losing our monopoly as I am about losing much needed state revenue.  A compromise approach (oops, there is that word again), that maintains the state presence in alcohol sales, while creating more outlets for the consumers seems the best of both worlds.  And, again, an increased revenue stream that can be earmarked for specific needs helps eliminate the yearly wrangling over what benefits to cut or what taxes to raise.

Also, what about more cooperation between the business sector and government?  It is so often presented as an adversarial relationship but the truth is that with cooperation both sides win.  Don't all business owners want our schools to produce smarter kids, don't they want safe roads to more their goods, don't they want a strong middle class to purchase their products and services?  And, don't politicians want successful businesses which means a bigger tax base along with less need for public assistance?  You would think that such intelligent, innovative people who can build businesses and win elections would also realize that we succeed, or fail together. 

Obviously, there are no easy answers.  But solutions come more readily, if priorities are set and referenced with each possible answer.  Lastly, and perhaps most importantly, sometimes sacrifice is required.  We can't eat our cake and have it too.  Sometimes we must decide to forego satisfying a need now, for a more complete satisfaction in the future.  I truly believe that most Pennsylvanians accept that philosophy, but don't often trust their public servants to use additional money (the sacrifice today) for a better tomorrow.  Frankly, the performance regarding the 2015-16 budget does nothing to alleviate that concern.  Let's hope that compromise becomes the buzz word in Harrisburg over the next few months, and that common sense, and common goals are the methods used to craft the 2015-16 state budget.   



  1. So why isn't privatizing the state stores an option? Historically that will increase sales at least 15%. In our case it will reduce border bleed - which will increase sales even more due to the increase convenience factor. PA does have the largest border bleed in the nation after all and your idea of raising the tax would only increase it.

    Add in collecting license fees - which the PLCB doesn't pay, collecting business taxes - which the PLCB doesn't pay and the increase in employment full privatization brings, it has tripled employment in the industry every place that fully privatized. All that along with the influx of true selection, stores that have in stock more products on the shelf than the entire state store system stocks and you have a win for consumers and the revenue stream.

    Plus it would remove the conflict of interest with licensing and "controlling" the only competition - beer and allow the PLCB to give more time and effort into regulation and safety. We don't stack up too well in that regard as it is now.

  2. Albert,

    Thanks for your comment. I appreciate it.

    Of course, privatizing is an option. My opinion is that it is a poor option, although you might note that allowing wine sales at already established beer distributors and restaurants is a step in that direction.

    I don't share your view of border bleed. In fact, my experience is that there is more reverse border bleed, more people from New York and New Jersey crossing into PA for better prices and selections than leaving PA. Stop at the Newtown store some day and you will see many NJ plates in the lot. Also, most smart consumers buy in PA before going to shore locations because the prices at the shore are very high.

    As for fees, if we add 10000 outlets for alcohol in PA (at $2,000 per license) we will collect $20 million in fees. The problem is that the PLCB generates over $80 million is profit per year.

    Not sure why you think selection is bad. Small stores in PA stock an equivalent number of SKUs as those in New Jersey; 1400-2000. Large stores in PA stock upwards of 4000 SKUs, and we have a special order program that allows consumers to purchase many more thousands of SKUs. In addition, we often transfer product from store to store for customers. Please don't use the Total Wine chain as an example to compare as there are only a few of those compared to the 600 PLCB stores. Also, how do you think prices and availability might change when stores in low population areas are now subject to market factors. PA has many low population counties that are served by the PLCB at reduced profit, so those living in those areas have some access. Still, to your point, I would be OK with allowing liquor licenses to be sold in those low density areas as a pilot program, especially if that includes allowing wine and beer in grocery stores.

    Also, while it has only been a couple of years, the experience of Washington State, the last state to privatize, has not reduced prices or improved selection. Small mom and pop stores charged more than the state had or went out of business, and large box stores like Costco did not offer that big of a selection.'

    Not sure what you are referring to in terms of not stacking up too well with regulation and safety. The PLCB "cards" more people than any entity in America. And, the vast amount of "problem" establishments are those run by the private sector where profit sometimes trumps public safety.

    Again, thanks for the comment.

    Feel free to contact me directly at

  3. Part 1

    You don't have to share my opinion of border bleed since the PLCB already does. The Neiman report of 2011 puts border bleed at over $230 million. Now I'd say it is closer to $300 million than not. I did a write up on my blog but I can't link that here.

    For fees, lets use some real numbers instead of guessing. Under HB 466 as amended there would be approximately 14,200 licensed establishment. It fluctuates as the amount of active licenses isn't constant. Then there are the wholesale licenses and fees. Since PA spent $1,230,666,757 on wine and spirits in 2014 and the historic increase from privatization is 15% that would be $1.42 billion. The wholesale license fee is 15% of gross sales per year meaning that the state would collect $210 million just from that alone. Toss in the less border bleed, minimal other licenses and the other items I mentioned and it totals well above $220 the JFT and sales tax are still collected

    The question is if the 15% fee would raise prices. Since the effective markup for the PLCB is 45.2% already can a private store work with a 30% markup. Depending on volume I'd say yes they can. Washington added 27% in fees and there are stores selling at or near the old state store prices. That shows you what competition can do, something we don't have in PA.

    It isn't that selection is bad per se but that you have to wait for whatever some bureaucrat thinks isn't worth stocking to get. My point is that there are stores that physically have on hand more different wines and spirits then the entire state stocks.Stores with 12-13,000 wine and liquor skus. Stores that we will have in this state if privatized. They also can order things too so that isn't a plus for the PLCB.

    There are more than a few Total Wines, I believe they are up to 126 stores now. 5 in Washington State alone since they privatized. However, it isn't just Total, it is BevMo, Joe Canal's, Moore Brothers, Buy-Rite, Binnys and hundreds of others that have stores that dwarf the largest state store.

    Stores in low volume areas will charge what they need to so they can remain in business just like any other store. You seem to think that the state has an obligation to make sure people have access to liquor. They don't any more then the state has to make sure they have access to French cheese. The problem isn't that the stores loose money, the problem is the PLCB doesn't know how to run a store that has a complete monopoly of product without using the same cookie cutter approach they apply everywhere. I mean if you can't turn a profit selling liquor with no competition how bad does your business model have to be?

    Since there are more beer distributors in every county and more grocery stores in every county than there are state stores those areas would probably be served better than they are now with 20 counties only having one or two state stores.

    Since you didn't mention increased employment or the conflict of interest I'll take that as silent agreement.

  4. Part 2

    Having lived in Washington State I have a pretty good first hand knowledge of their state system before privatization. You say that selection has decreased but that is easily disproved by standing in any of the 30+ superstores currently in the state. Everyone stocks more than Washington state stores did. Every county but one has more stores. There are 112 distributors in the state when there was only one. If you want to know who killed off the small Mom & Pop stores look no further than the WSLCB. The state did them in by "interpreting" I-1183 in a way that hadn't been agreed on. They said that stores that bought from a wholesaler were to be charged the 17% reseller tax while stores that were large enough to buy directly from the distributors didn't have to pay that tax. That immediately made the prices in the small stores higher and lost them the bar and restaurant trade that they had before privatization. That's what happens when you have "interpretation" instead of codified law..The WSLCB ruling was finally overturned by the courts but by then it was too late for a number of the small stores. BTW, Costco is not the largest seller in Washington but they are #2..

    Safety - PA has higher binge drinking rates than 5 of the 6 border states and above the national average - both adult and underage. PA has a higher DUI rate than 4 of the 6 border states and is barely average nationally. Pa has a higher underage drinking rate than the national average. Carding is great except the state stores are never checked for compliance and carding is used for a number of other store activities besides checking legality. Wine club pickup, returns and refunds, SLO orders etc etc. So there is no known quantitative measure of how well state store carding works.

    Perhaps there would be fewer problem establishments if the PLCB concentrated on regulation instead of retail.

    Sorry for the length, you won't believe how much I cut out trying to make it less than a chapter in a book and I still had to split it. Thank you for your reply and the offer to contact you. I'd prefer to keep this public for all to see and judge both positions.

  5. Albert,

    Obviously you have done a lot of research on this subject and I applaud you for presenting facts as opposed to opinion or conjecture. Just so you know, the PLCB report done in 2011 that identified border bleed was done under the direction of those in Harrisburg who wanted a high number to justify their push for privatization. No attempt was made to identify reverse border bleed. Are you aware of any studies?

    I did not include wholesale fees in my first response, so I see where your license fee collection number is higher. I was using what I had seen as 12000 new licenses at $2000 a pop. Not to sound too cynical, do you really believe that the winner(s) of the wholesale licenses in PA will pay 15%? Is that in HB466? If so, I stand corrected. If not, perhaps those pushing for this change intend to grant some tax waivers in the guise of job creation. It is something that has been done before in PA when special interests win the day. I may also account for why "they" demanded that tax when product was not purchased from the distributor. Large companies like to "ask" their elected reps to add these kind of interpretations to give them a business edge. Would it happen here also?

    When I researched Washington State, I found many articles bemoaning their recent privatization. Perhaps those I read were written by those unhappy with the results, just as, perhaps, your opinion is colored by your agreement with the Washington decision. Still, I respect your viewpoint as it appears to emanate from some on the ground experience. I would comment however, that if Washington added 27% fees (are you assuming PA will eliminate the 18% emergency tax?), and the retailers were still staying competitive, they must be saving money somewhere. Salaries? Benefits? The markup in PA prices provide livable wages for the employees and good benefits. Do you foresee those new outlets hiring new employees at livable wages? It seems that the jobs that will be created will be of the retail category, not usually known for good compensation packages.

    In the end, it is hard to advocate for a state run business in a country where capitalism and entrepreneurship are the mantra. It goes against our instincts and I understand. But the PLCB does generate a profit, year after year, despite being hamstrung by Harrisburg politics that dictate markup, hours, number of stores, etc. Is it too farfetched to imagine that public sector employees can run an efficient, profitable business if allowed to? I assume you don't paint all of us as lazy, state employees who don't care about good service or improved selection.

    It's funny, but you don't see private interest scrambling to privatize Amtrak. Perhaps mass transit can not be run at a profit, but perhaps it seems unprofitable because no one calculates the cost of thousands of more cars on the road and the increased costs to maintain infrastructure, combat more pollution and account for longer commutes, among other factors.
    I know that Amtrak is not a good analogy here, but my point is that privatizing booze in PA is driven partly by those who want a share of the money, not out of concern for public convenience or selection.

    Booze is big business. PA needs more stable revenue streams. I believe that privatization will result in less money for the state. I believe it will cost PA more money to collect that $200+ million in license fees than it does now. I believe it will cost PA more in law enforcement to monitor the new outlets selling alcohol than it does now. Of course, you disagree. And that my friend, is what makes civil debate on the important issues of the day so critical.

    Feel free to comment any time


    1. One question I missed danswering. Not the JFT will stay as I mentioned in my previous reply. The only question I have is if it will be collected at the wholesale level or not. It certainly would make things easier if it was. Beer tax is collected at wholesale so it isn't a new concept for the state.

    2. No the JFT will stay. The not was a mistake.

  6. Too long again....Part 1

    By those in Harrisburg you mean the PLCB because they are the ones who paid for it. Based on the PA cars I see at Joe Canal's Moore Brothers, Total Wine, Buy Rite and others I would say that even their numbers are low.

    As far as reverse border bleed I think the PLCB has an idea and it is so minor as not to be worth mentioning and as such would be embarrassing compared to the outgoing bleed. Why do I think they know. 2 reasons. First, how often do the bother the crap out of the customers with that zip code nonsense? Second, all you have to do is but a report from the credit card companies for a billing zip code and amount spent. They'd be glad to run one for you. Since the PLCB already knows the percentage of customers that pay cash one can analyze the data and come up with a fairly good number. My business is mostly mail-order (read internet) and I break down sales by state monthly so I think they would do it for a much larger customer.

    The fee is included in HB 466 and yes I think they will pay. Beer wholesalers pay their license fees so why wouldn't wine and spirits? So your whole "what if, tax waivers and spooky "they"" goes out the window.

    Yes I have read most of what has been published in Washington and like most subjects those that complain make more noise than those who are satisfied. Be that as it may, Stores in Washington can still match what used to be the old state store price because the markup is different. WA had the highest liquor prices in the country before they privatized plus they had not only state stores but contract stores they had to pay and they also paid local governments where the stores were located. This was possible because the markup was over 60%. Even after the new fees private stores had room to work with.

    Now we hear all the time about this livable wage. If you look up what is considered "livable wage" and compare ti to PLCB pay guess what? You'll fiind the PLCB DOESN"T pay a "livable wage" for the majority of locations.or at least not until you have about 10 years in and a few steps on the wage scale. Check it out for yourself. Now the PLCB does pay more that what the societal wage is. I did a whole writeup on that. I can send it to your email if you want.

  7. Part 2

    Do I think a state run retail organization can be efficient? Not on your life. First centralized planning is not conducive to efficiency and second there is no incentive in a monopoly to provide more than the minimum because there is no competition to worry about. I did another report on that just last week I can add to your reading list.

    There is a difference between the store worker and the PLCB office worker. I really don't think the front office cares about selection. I mean look, they don't even have any highly certified wine people not a sommelier in the bunch and never have as far as I know. They have had one a a consultant but that is pretty poor for the 2nd largest retail wine buyer. I can go to a hotel or restaurant and find more qualified people.

    While Harrisburg does dictate mark-up they don't dictate hours. The PLCB sets its own hours except for Sunday. If they wanted any store to be open from 7AM until 2AM they could do it. It is in the liquor code. They also set the number of stores. The legislature doesn't which can explain why the number of stores has decreased from a high of 756 (that I know of, it may have been a few more) to a low of 596 without any legislative action.

    While it is fine to say that you think the people who want to privatize are only in if for the money there is no Privatization fund, no private business is pushing it and none of the big bad box stores can even get a license, or at least not for a year after they are offered and then they have to confront license limitations, and no choice of where the license will be located and they can't transfer if anywhere else. Not usually how they work.

    HB 466 allows for 7 wholesaler areas, I doubt that it will cost very much at all to see if they have electronically deposited their license fee. As I said at the beginning, beer wholesalers do it and there are way more than 7 of the 30's I think.Since every place that can get a wine and liquor OP license ALREADY has a liquor license I'm not sure why it would cost much if anything more to regulate them since they are already being regulated and there aren't any new never before issued licenses. It isn't that I just disagree it is that logic says it won't change.

  8. Here is a quote from Forbes from July 9th that I think pertains to the subject of selection in Washington and PA.

    "Wolf also claims privatization in Washington resulted in “less selection,” but it is hard to see in what sense that is true. A 2012 price list from the Washington State Liquor Control Board includes about 50 varieties of bourbon and about 70 varieties of Scotch. By comparison, Total Wine & More in Seattle currently offers 289 varieties of bourbon and 381 varieties of Scotch."

    "The Total Wine & More in Cherry Hill, New Jersey—less than 10 miles from Philadelphia—likewise has a bigger selection than the Pennsylvania Liquor Control Board (PLCB) offers: 236 varieties of bourbon and 355 varieties of Scotch, compared to 122 and 80, respectively, on the PLCB’s price list."

    1. I'd just add to that...the Total Wine in Cherry Hill actually has all those whiskies on the shelf, not listed online where they may be available in some warehouse to be shipped to your local State Store, or they may not, since the PLCB's web database of products has been shown to have mis-entered and non-available products on a small but regular basis. Comparing the selection at the 600 State Stores to the selection at corner liquor stores is also unfair when you then turn around and say "Please don't use the Total Wine chain as an example to compare". Please don't use the corner liquor stores as an example to compare: that would be as if the PLCB had a monopoly on grocery stores and you compared them to stores in other states like Wawa and Royal Farms -- the equivalent of the corner liquor store -- and then told us we couldn't compare the PLCB's medium-grade grocery stores to Whole Foods, because that wasn't fair. Compare PA's State Stores to the whole spectrum of liquor stores in private sale states. I have, and that's why even though I live 7 minutes from a "Premium Collection" store, I regularly drive 23 minutes to a Canal's in New Jersey. I am Border Bleed. I'd rather buy in PA, but given a straight-up competitive choice between the prices, selection, and yes, sorry, the service in the State Stores and Canal's? Canal's wins, hands down. We're not going to fix that with the State involved in retail and wholesale.

  9. Great comments folks, thanks.

    As a gracious host, I will not counter any of them with more opinion or facts. As a private sector employee for most of my life while working part time for the PLCB for 20 years plus full time for the last five, I know there are issues with the PLCB just as there has been with every company I have ever worked for. I just hope that however this works out, our elected officials keep in mind what I believe are the two most important goals: to improve customer convenience and to maintain a revenue stream to fund our state's needs.

    Thanks again for all the comments.

  10. After saying "And that my friend, is what makes civil debate on the important issues of the day so critical." one would think you would provide a counter that included more facts if this is such a critical issue. It is difficult to have that debate when one side bows out.

    1. I am sorry that you feel I have bowed out. This post was about the PA budget, and all the comments so far have been about liquor privatization which, to me, is a low priority compared to school funding, our unfunded pension liability (state and local), and our crumbling infrastructure.

      Perhaps if more time goes by, I will comment again, but for now I would rather open the floor to some other areas of the budget. Certainly, you and I can continue our conversation via Hotmail - if you would like. You could send me those reports you have mentioned, and I can try to find the one I read which indicated that liquor privatization by past states has rarely produced the revenue promised.

    2. I'm certainly not stopping anybody else from commenting but I seem to be the only player at the table. I can do school funding just as well but prefer one thing at a time and it isn't as interesting to me as liquor privatization.

      If you are thinking of the Wine & Spirits Counsel I can debunk that fairly easily too.