State Stores Not as Profitable as Pa. Says

By Jared Sichel | PA Independent

HARRISBURG — Pennsylvania’s politicians may be saddling the state-owned liquor monopoly with obligations that it can’t long fulfill.

As two separate GOP privatization plans — one in the House and one in the Senate — lay in wait, public documents make clear that the state has consistently overestimated how much the Pennsylvania Liquor Control Board, or PLCB, can afford to remit to the Treasury.

Financial statements made public by the PLCB and examined by PA Independent show that between the three fiscal years of 2008-09 and 2010-11, the Governor’s Budget Office and Legislature under former Gov. Ed Rendell, overestimated by $49.2 million how much in profits Pennsylvania’s 600 liquor stores could transfer to the Treasury.

In FY 2009-10 alone the state overshot its $105 million profit estimate by $32.4 million.

But despite the state’s overestimates, the liquor board still managed to reach deep into its pockets to hand over the $49.2 million in hard cash that it did not bring in through operations in those three years.

How can the PLCB pull off such a maneuver?

Cash flows and a flush rainy day fund.

Because the PLCB routinely takes in more cash than it sends out in any given year, it has been able to withstand major cash hits — such as $105 million transfers to the government.

And historically, when the PLCB’s profits have exceeded the state’s transfer requirement, the PLCB boosts its rainy day fund, also known as equity. That equity comes in handy when the PLCB’s profits don’t cover what the state demands.

But that equity can’t last forever and has in fact dipped into negative territory thanks to the state’s miscalculations.

That means that until the board replenishes its negative equity (-$32.2 million at the end of FY 2010-11), it will have to rely on its cash flows to satisfy the state government.

According to Wayne Guay, a professor of accounting at the University of Pennsylvania’s Wharton School of Business, the liquor board is indeed raking in cash — just not enough to endlessly withstand the government’s overestimation of the board’s profits.

“If the current level of income persists for the PLCB in the future,” Guay said, “The state will have to revise downward the amount that it can siphon off.”

Liquor board spokeswoman Stacey Witalec confirmed that if the board’s profits are consistently less than what the state demands, “something would have to change.”

“Whether it’s any major retailer, you can’t continue operating if you’re making less than you’re asked to give over to another entity,” Witalec said.

From wholesale to retail, Pennsylvania and Utah are the only two states that exercise full government control over bottled wine and liquor sales.

While crafting the annual budget, Pennsylvania’s Legislature and the governor’s budget office decide, without consulting the PLCB, how much the PLCB will transfer to the state.

Because this number is set before anyone knows how much money liquor sales will bring in, the PLCB plays a balancing game. If it sells more, the PLCB can bank some cash after sending money to the state. If it sells less, PLCB dips into its bank account to make up the difference.

But always, the state gets its money.

Supporters of maintaining the PLCB’s monopoly point to the profits as a stable — and sizeable — source of revenue for the government that would be threatened if wine and liquor operated within a traditional marketplace.

But the state has been slowly digging its own grave in terms of endangering the PLCB cash pot.

For example, in fiscal year 2009-10, the state claims that it took $105 million in “profits” from the liquor board. This would suggest that the PLCB’s 2009-10 operations were in the black to the tune of $105 million.

But the liquor board’s actual operating profit in 2009-10 was $72.56 million.

It still transferred $105 million in cash to the state, but the $32.4 million difference did not come from its 2009-10 profits. That was in fact the year that PLCB’s rainy day fund went below zero.

At some point, according to experts, the state needs to be more realistic in its projections or the seemingly stable cash cow won’t have all the dollars that the state demands.

Karen Foust, a professor of accounting and taxation at Tulane University’s Freeman School of Business in New Orleans, agreed with Guay’s analysis, noting that although the PLCB’s cash flows are exceptionally strong, the state’s forecasts will need to come down to earth.

“They can’t continue this forever,” Foust said. “The PLCB will either have to raise their prices, or the state of Pennsylvania will have to loan them some money, or adjust the amount of the transfer.”

According to Witalec, the state-owned stores set their own prices, but the PLCB marks up all of its alcohol 30 percent over the manufacturer’s sale price before it hits the stores. If the PLCB had a cash shortage, one solution could be to bump up their markup.

“We could change the markup without legislation,” Witalec said.

House Republicans, who narrowly missed bringing Majority Leader Rep. Mike Turzai’s privatization plan to a vote in June, are expected to make another push before November elections. House GOP spokesman Steve Miskin said that a potential future cash drain is another reason why liquor should operate within a market.

“It bolsters the case for privatization,” Miskin said. “Government-owned retail ended in the last century … except in Pennsylvania.”