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Hearing Privatization of State Liquor Stores

House Democratic Policy Committee
April 14, 2011


Testimony of the Pennsylvania Liquor Control Board:
Joe Conti
Chief Executive Officer


Chairman Sturla, Vice Chairmen, Members of the House Democratic Policy
Committee, distinguished guests, good morning.

On behalf of the Pennsylvania Liquor Control Board, thank you for the opportunity to
provide testimony today. In the next few minutes, I will briefly give you an overview
of the PLCBs current sales and revenue information, and an overview of three of the
agencys legislative initiatives which we believe would make the agency more
efficient and even more profitable for the Commonwealth and the PLCBs
shareholders, the residents of Pennsylvania.

As a preliminary matter, earlier this week, the U.S. Centers for Disease Control
(CDC), Task Force on Community Preventive Services, announced its decision and
rationale against further privatization of alcohol sales. After completing a systemic
review of available research, the task force determined there was clear evidence to
show that privatization ultimately results in increased consumption, which so often
brings unnecessary and senseless harm to families and tragically their children, not
just here on our home soil, but all across the world.

The issue of whether to divest the PLCB from its legislative mandate to operate wine
and spirits stores for the benefit of all Pennsylvania residents in favor of a more
deregulated, privatized system is an extremely important public policy issue which
requires careful deliberation after reviewing and evaluating all relevant facts. I am

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here to offer the assistance of the PLCB to the General Assembly, and to the
Governors Office, on this important matter, and to serve as a resource for any
information regarding the PLCBs operations, its employees, and the profits and tax
revenue generated for the benefit of the Commonwealth.

Despite the continued weakness in the economy, PLCB sales continue to increase.
Through its operation of six hundred forty-five wine and spirits stores, consisting of
six hundred twelve brick and mortar stores, thirty-two wine kiosks and one e-
commerce site (current as of April 11th), the PLCB generated more than 1.5 billion
dollars in (pre-tax) sales during Fiscal Year 2009-10. This represents an increase of
3.65% in total sales over the previous fiscal year. Sales continue to trend upwards in
2011; in fact, the PLCB experienced 7% sales growth in March of this year, due in
part to significant savings offered by the PLCB on items which were recently
delisted.

The PLCB transferred one hundred five million dollars to the General Fund, and
more than three hundred seventy-six million dollars in tax revenue, in Fiscal Year
2009-10. Further, the PLCB contributed more than twenty million dollars to the
Pennsylvania State Police, Bureau of Liquor Control Enforcement, and more than
two million dollars to the Department of Health in Fiscal Year 2009-10. Over the
past five years, the PLCB has contributed nearly 2.3 billion dollars to the State
Treasury. These figures do not include local tax revenue collected and transmitted
back to Philadelphia and Allegheny County.

To view it from a different perspective, the Distilled Spirits Council of the United
States (DISCUS) ranks states both by consumption rates of beer, wine and spirits
and by revenue per gallon. This information has also recently been cited by
Pennsylvania State Treasurer Rob McCord and was recently published in April 8,

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2011 special edition of the McCord Report, available on Treasurys website. In
2008, Pennsylvania ranked thirty-sixth out of fifty-one jurisdictions in wine per capita
consumption and forty-second out of fifty-one in spirits per capita consumption. It
ranked first out of fifty-one in revenue per gallon of wine and tenth out of fifty-one in
revenue per gallon of spirits. It seems that the current system of state owned wine
and spirit stores does an excellent job of maximizing the financial benefits of the sale
of alcohol for the Commonwealth while minimizing the social costs associated with
such sales.
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Based on information received from the National Alcohol Beverage Control
Association (NABCA), control states, like Pennsylvania, are readily able to
appropriate moneys through their wholesale or retail operations to fund various
alcohol and drug-related prevention and enforcement initiatives. In 2010, for
example, in addition to the monies contributed by the PLCB to the Department of
Healths Drug and Alcohol Programs, the PLCB awarded grants totaling nearly one
million dollars to municipalities and universities to support initiatives aimed at
preventing underage and dangerous drinking, impaired driving, and other alcohol-
related problems. Open states, in contrast, must often look to divert funds from
general tax revenues or rely upon the strained resources of privately-funded non-
profit entities to pay for such initiatives.

It should be further noted that Pennsylvania stands in a relatively unique position
among control states, due to its wholesale and retail functions, its licensing function,
and its alcohol education function. It is this unique combination of roles, coupled
with the agencys mission statement, which allows the PLCB to play a central, if not

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This point is made ever clearer in the April 8
th
edition of the McCord Report, which examined the data from DISCUS
by comparing Pennsylvania with its to neighboring states (i.e., Delaware, Maryland, District of Columbia, New Jersey,
New York, Ohio, and West Virginia), Among its neighbors, Pennsylvania ranked seventh out of eight jurisdictions in
wine per capita consumption and sixth out of eight in spirits per capita consumption, while ranking first out of eight in
revenue per gallon of wine and second out of eight in revenue per gallon of spirits.

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often pivotal, role in addressing statewide issues involving alcohol and drugs (e.g.,
addressing nuisance bar issues, taking initiative in controlling the sale of potentially
dangerous products (Four Loko, for example), providing resources to local
governments for underage enforcement initiatives, hosting various statewide
conferences for community and educational leaders to reduce underage drinking and
alcohol abuse, funding Commonwealth drug and alcohol programs, and providing the
licensed community with statewide, comprehensive responsible alcohol server/seller
and owner/manager training (also known as the Responsible Alcohol Management
Program (or RAMP)).

In prior hearings on the privatization issue and, more recently, during testimony
provided before the Appropriations Committees, the PLCB has suggested a number
of statutory amendments designed to make the agency more efficient, more nimble as
a world-class retailer, and more profitable for the Commonwealth. These proposed
amendments are contained in a document which I have attached to copies of my
testimony this morning. I would respectfully ask that you give serious consideration
to these proposals, which would inure to the benefit of all Pennsylvania residents. I
would be pleased to provide you with any additional information that I can regarding
these proposals.

We look forward to continuing our role in serving as a resource of information in
your discussions surrounding privatization. Further, we will keep you updated on the
findings of the CDC task force relative to its position and rationale against further
privatization of alcohol sales, as these findings may have a significant impact on the
topics raised in todays hearing.

Thank you and I would be happy to answer any questions you may have at this time.
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PROPOSED STATUTORY AMENDMENTS OF THE PENNSYLVANIA
LIQUOR CONTROL BOARD


1) Allow the PLCB to implement a Consumer Relations Marketing
(CRM) Program and issue its own coupons to customers:

The Liquor Code currently prevents the PLCB from recognizing and
rewarding regular customers through the use of what is commonly
referred to as a Consumer Relations Marketing (CRM) program
(e.g., supermarket or retailer loyalty programs).
Such a CRM program which would allow the PLCB to offer exclusive
product coupons, award points to returning customers which could be
redeemed for discounts on products, and alert customers to upcoming
sales and promotions.
With respect to the issuance of coupons, the PLCB currently envisions
issuing three (3) different types of coupons: 1) discounts that are not
specific to products or brands, but may be used towards any product
of the customers choosing (e.g., 10% off all purchases throughout the
store); 2) volume discounts (e.g., 10% off your entire purchase if you
make a purchase of more than $100.00; and 3) product giveaways
based upon an aggregate purchase amount (e.g., get a free sample
bottle of X when you purchase more than $25.00).
New Hampshire, a control state, has a successful CRM program
(including the issuance of coupons), and it has been well-received by
consumers.
Language which would have allowed the PLCB to implement such a
CRM program had been included in Senate Bill No. 81, which was
signed by both the House and Senate but was ultimately vetoed by
Governor Rendell in May 2010 (it should be noted that the veto was
not due to this provision).
In the current session, HB 260, which would effectuate the intent of
this initiative, was recently introduced and referred to the House
Liquor Control Committee.
FISCAL IMPACT:
o There are three (3) primary objectives for this initiative: 1)
coupons and loyalty programs are industry-proved consumer
drivers which get customers into stores; 2) offering discounts on
slower selling / lower velocity items allows the PLCB to sell
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inventory which may otherwise languish in its warehouses, while
passing significant savings on to Pennsylvania consumers; and 3)
offering discounts on higher-quality items may encourage buyers
to trade-up for higher priced items, yielding higher markups for
the PLCB.
o As an example, following a recent e-mail blast advertising a sale
on the PLCBs Sommelier Collection items, resulting sales totaled
more than one hundred fifty thousand dollars ($150,000.00) and
many of the sale items were depleted within a week.


2) Direct Shipping/Direct Delivery

Various measures have been introduced in both houses of the General
Assembly in the last few sessions to address the issue of direct shipment,
in light of recent cases addressing the disparities of the direct shipping
privileges of in-state and out-of-state wineries, and due to increasing
consumer interest in having wine, regardless of its point of origin,
shipped directly to a consumers residence.
As a result of recent court decisions, any winery that produces less than
two hundred thousand (200,000) gallons of wine annually, whether
located in-state or out-of-state, that applies for and obtains a limited
winery license from the PLCB may ship wine directly to Pennsylvania
residents, at their homes, who have placed orders to such entities via
telephone or the Internet. Such wines are subject to the applicable state
sales tax, but not the eighteen percent (18%) Johnstown Flood Tax. It
should be noted, however, that only five (5) out-of-state wineries have
applied for and acquired a limited winery license: Kistler Wineries of
California, My Wines Direct, Inc. of California, Johnson Estate Winery
of New York, Hopewell Valley Vineyards of New Jersey, and Thorn Hill
Vineyards, Inc., of California. In addition, there is one (1) out-of-state
application pending: Robert Mazza, Inc. of New York.
The Board is not opposed to the idea of allowing direct shipment of wine
by retailers and manufacturers, located in-state or out-of-state, to
Pennsylvania residents for personal consumption, provided that certain
controls remain in place.
o Minors there must be a mechanism in place to guard against the
sale and delivery to persons under the age of twenty-one (21).
o Safeguarding Commonwealth Revenue
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To safeguard against lost Commonwealth tax revenue, all
sales should be subject to the six percent (6%) sales tax and
the eighteen percent (18%) Johnstown Flood Tax.
Further, as such sales would be exempt from the Boards
mark-up (currently thirty percent (30%)), resale of such
wine should be expressly prohibited. This would preclude
licensees from circumventing the state store system (and the
PLCBs mark-up) by having all of their products shipped
directly to them.
If the General Assembly decides to permit direct shipment by out-of-state
retailers, the PLCB believes that it should be given the corresponding
authority to deliver or ship directly to residents and/or licensees of other
states.
o As one of the worlds largest purchasers of wine and spirits in the
U.S., the PLCB believes that it can exercise its significant market
leverage in other states markets, representing a significant revenue
opportunity for the Commonwealth.
o The PLCB is currently evaluating the concept of direct delivery to
residents and licensees of Pennsylvania, which would not require a
legislative amendment.
o However, a legislative change to section 207 would be required to
authorize the PLCB to sell and deliver its products to out-of-state
individuals and entities.
o The PLCB has identified more than a dozen states where it might
be permitted to ship directly to residents and/or licensees,
including California, provided that it complies with all state and
federal requirements.
Pursuant to section 23661.2 of Californias ABC Act:
Notwithstanding any other law, an individual or retail
licensee in a state that affords California retail licensees or
individuals an equal reciprocal shipping privilege, may ship,
for personal use and not for resale, no more than two cases
of wine (no more than nine liters each case) per month to
any adult resident in this state. Delivery of a shipment
pursuant to this subdivision shall not be deemed to constitute
a sale in this state.

In 2006 the state asserted a no-enforcement policy of the
reciprocity provision in response to a lawsuit filed by a
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retailer trade association. Although the litigation has since
been dismissed, the policy apparently remains in force.


3) Remove the restriction regarding the percentage of stores which may be
open on Sundays, and extend Sunday sales hours:

Under the Liquor Code, only 25% of stores may be open on Sundays.
With the introduction of the wine kiosks, since each kiosk constitutes a
store, kiosks are also subject to the 25% restriction. To achieve any
meaningful success, kiosks must remain open on Sundays, the second
busiest retail day of the week.
Without legislative change removing the current restriction, as new stores
are opened or kiosks are rolled out for operation, the PLCB must either
close down a number of brick and mortar stores or shut down certain
kiosks on Sundays in order to remain within the legislatively-imposed
25% limitation.
The PLCB has suggested removing the current 25% restriction, allowing
the Board the complete discretion to make necessary business calls on
whether to operate any given store or kiosk on Sunday. The Board has
also suggested allowing stores to operate until 9:00 p.m. on Sundays,
instead of the current 5:00 p.m. closing time. The PLCB believes that
extending Sunday hours will enhance revenue and offer greater customer
convenience.
House Bill 160 would remove the 25% restriction as contained in section
304(b) of the Liquor Code; the measure would not, as drafted, extend
Sunday hours. However, HB 260, which was recently introduced and
referred to the House Liquor Control Committee, would remove the 25%
restriction and extend Sunday hours to 9:00 p.m.
FISCAL IMPACT:
o The potential fiscal impact of allowing the Board complete
discretion to determine whether to operate its stores or kiosks on
Sundays is difficult to quantify. Sunday is considered to be the
second busiest retail day of the following, following Saturday.
Sales numbers would be further enhanced with the proposed
extension of Sunday hours.
o Currently the PLCB operates one hundred sixty (160) stores on
Sunday. Sunday sales total $22,094,926.00 for the thirteen (13)
Sundays, beginning December 5, 2010 and ending February 27,
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2011, averaging $1,699,609.00 per Sunday, $10,622.00 per store,
and $2,124.00 per hour based on one hundred sixty (160) stores
operating from 12:00 p.m. to 5:00 p.m. Expanding Sunday hours
from 5:00 p.m. to 9:00 p.m. at stores currently able to sell on
Sundays should increase sales between 10% to 25% overall,
translating into additional revenue of between $160,000.00 to
$400,000.00. This will also spread a portion of a stores existing
Sunday sales over the extended hours. It is estimated that opening
additional stores from 12:00 p.m. to 5:00 p.m. or longer in areas
that currently do not have a store would increase Sunday sales by
$10,000.00 or more per store.


4) Allow the PLCB to be a Pennsylvania Lottery Retailer:

Lottery ticket sales are commonplace at the licensed liquor stores of
other states. The State Lottery Law already allows all departments,
commissions, agencies and instrumentalities of the State to be
licensed as Lottery Sales Agents. However, section 207 of the Liquor
Code does not specifically authorize the PLCB to sell lottery tickets.
The PLCB has met with lottery representatives of the Pennsylvania
Department of Revenue (Revenue), which agrees that the concept of
allowing automated, self-service lottery machines on the premises of
the PLCBs wine and spirits stores would increase the
Commonwealths revenue from lottery ticket sales, while adding to
the convenience of the Pennsylvania consumer.
FISCAL IMPACT: Recent data submitted by Revenue indicates that
if the PLCB were permitted to sell lottery tickets through counter
sales and vending machines in its state store system, and retained the
5% retail commission (plus bonuses) as other lottery sales agents are
permitted to retain, it could see an increase in revenue of
approximately $8,000,000.00 per year (or approximately
$2,000,000.00 per year for sales through vending machines only).


5) Increase fines for violations of the Liquor Code and the PLCBs
Regulations:

The structure of fines in the Liquor Code has not been changed since
1987.
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The amount of fines collected fall short of covering the costs of
enforcement, as demonstrated in the following chart:

Total # of
Citations
Issued

Total Funds
Collected
Through
Enforcement
Amount
Appropriated
from PLCB to
BLCE
1

Operating
Budget of
OALJ
2

Cost of
Enforcement
3



2008 3,216

$2,468,538.33 $21,624,590.00 $2,059,227.82 $23,683,817.82
2009 3,050

$2,187,492.72 $23,242,342.00 $1,997,402.65 $25,239,744.65
2010 2,783 $ 1,835,110.39 $25,252,000.00 $1,506,860.52 $26,758,860.52


As noted in the above chart, the amount of fines collected fall
significantly short of covering the costs of enforcement each year, a
trend which continues to worsen each year. For example, in 2008, the
total funds collected through enforcement efforts covered
approximately 10.4% of the overall costs of enforcement, while in
2010, the funds collected covered less than 6.9% of the overall costs
of enforcement. It should be noted that the differences between funds
collected and costs borne by the Board result in reduced contributions
to the General Fund.
With the enactment of table games (Act 1 of 2010), slot machine
licensees are now subject to a higher range of fines (between $250.00
and $25,000.00) for all types of liquor-related offenses. However, no
other licensees have experienced an increase to the fine structure of
the Liquor Code in twenty-three (23) years.
Among other control state jurisdictions, Pennsylvanias structure of
fines falls into the lower range of fines for violations. The chart
provided below demonstrates where Pennsylvanias fines for two (2)
of the more serious violations among a sampling of a few other
control jurisdictions:


1
Figures are based on fiscal years (i.e., FY 2007-08, FY 2008-09, and FY 2009-10).

2
Figures are based on fiscal years (i.e., FY 2007-08, FY 2008-09, and FY 2009-10).

3
It should be noted that there are other costs not included in this calculation, including the PLCBs costs associated
with handling appeals of OALJ decisions, borne by the PLCBs Office of Chief Counsel.

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An amendment to section 471 of the Liquor Code would be required
to increase the current fees.
In the current session, two (2) measures, namely HB 260 and HB
1231, have thus far been introduced which would effectuate the intent
of this initiative. Both measures would increase fines for non-
enhanced citations to a maximum of $2,000.00 (currently, $1,000.00),
and increase the range of fines for enhanced citations to a range of
$2,000.00 to $10,000.00 (currently, the range is $1,000.00 to
$5,000.00.
FISCAL IMPACT: If all fines imposed in 2010 had merely been
doubled by the OALJ, the Commonwealth would have realized an
approximate increase in revenue of nearly $2,000,000.00.


6) Increase Licensing Fees by Assessing an Administrative Fee on
Licensing Applications:

The existing fee structure has remained the same since 1991, twenty (20)
years ago. While most fees are set forth in the Administrative Code of
1929, some are defined by the Liquor Code or the PLCBs Regulations.
Altogether, approximately sixty thousand (60,000) individual fee
transactions are processed through the PLCBs Bureau of Licensing
(Licensing) each year.
For FY 2009-10, more than $15,900,000.00 was collected by Licensing
for fees associated with licensing transactions. Of that amount,

Sales to a Minor
Sales to a Visibly
Intoxicated Person
Alabama $750.00 - $1,000.00 $300.00 - $1,000.00
Pennsylvania $1,000.00 - $5,000.00

$1,000.00 - $5,000.00
North Carolina
$1,200.00 - $3,500.00 +
5 days suspension
$1,000.00 - $5,000.00 +
20 - 60 days suspension
Montgomery
Co., MD
$1,000.00 - $20,000.00 $1,000.00 - $20,000.00
Virginia
$2,000.00 + 25 days
suspension
$2,000.00 + 25 days
suspension
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approximately 28% (or $4,500,000.00) was returned to municipalities
(via the Liquor License Fund) in which the licensees are located,
pursuant to section 801 of the Liquor Code.
As originally intended by the General Assembly, such licensing fees,
coupled with fines assessed against licensees in enforcement actions,
would cover administrative licensing costs and fund enforcement efforts.
However, the current fee schedule only partially funds the administrative
costs associated with processing licensing applications, and does not
provide sufficient revenue to cover the PLCBs costs in funding the
operational budget of the Pennsylvania State Police, Bureau of Liquor
Control Enforcement (Bureau) for compliance and enforcement efforts.
Below is a chart which compares many of the PLCBs existing licensing
fees with those of neighboring states. It should be noted that many of
Pennsylvanias licensing fees are far less than those assessed in other
states. It is recommended that, at the very least, licensing fees be raised
so that they are comparable to the fees assessed in other neighboring
states for similar licensing transactions.

Compiled Licensing Fee Comparison

License or Permit Type Pennsylvania
Average Other
States
Restaurant Liquor License $250.00 - $700.00 $1,509.50
Club/Catering Club License $150.00 $1,025.19
Eating Place Malt Beverage
License
$200.00 400.00 $582.63
Hotel License $250.00 - $700.00 $1,584.19
Distributor License $600.00 $2,054.00
Special Occasion Permit
$30.00 - $85.00
per day
$547.50
Brewery License $1,425.00 $3,261.57
Limited Winery License $385.00 $519.89
Winery License $385.00 $1,049.43
Distillery License $5,400.00 $6,819.07
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License or Permit Type Pennsylvania
Average Other
States
Private Golf Course Restaurant
License
$250.00 - $700.00 $1,744.43
Private Golf Course Club License $150.00 $1,753.17
Public Golf Course Restaurant
License
$250.00 - $700.00 $1,946.67
Transporter-for-Hire License $160.00 - $265.00 $171.67
Bailee/Warehouse License $265.00 $1,159.50


Accordingly, an increase to the current fee schedule is recommended for
licensing applications in order to cover the costs associated with
processing licensing applications and in funding the operational budget
of the Bureau for compliance and enforcement efforts.
Given that certain licensing fees are retained by the Board, while others
are remitted to municipalities where the licensees are located, increasing
fees across the board will not allow the PLCB to capture the full value of
the fee increases. In order to realize 100% of the increased revenue
associated with increasing licensing fees, it is recommended that an
administrative fee be assessed for all license renewal and validation
applications.
FISCAL IMPACT: It is estimated that if, for example, a $700.00
administrative fee were assessed on all renewal and validation license
applications, this would result in approximately $14,000,000.00 in
additional revenue per year.
o To cushion the impact that an increase in licensing fees would
have on the licensee community, the PLCB submits that the
increase could be phased in over a number of years. Once the fee
reaches the level necessary to cover all licensing and enforcement
costs, it is recommended that the legislation allow for incremental
increases tied to the Consumer Price Index (CPI) to cover future
administrative cost increases.


7) Authorize the Board to charge bailment fees to suppliers:

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The PLCB is working towards changing its inventory management to a
bailment system, so that its warehoused product would be owned by
the supplier until it is sent to stores. Presently, the PLCB purchases,
upfront, 100% of the inventory stored in its three (3) warehouses
throughout the Commonwealth.
Under a bailment model, vendors/manufacturers/suppliers of liquor,
including both wine and spirits, will retain title to merchandise through
the importation and, subsequently, the storage of the merchandise in a
warehouse operated by a PLCB contractor.
o Title will only pass to the PLCB when merchandise is actually sent
to a Pennsylvania wine and spirits store.
o Vendors/manufacturers/suppliers of liquor will be contractually
obligated to maintain a supply of merchandise in PLCB
warehouses sufficient to satisfy the Boards projected inventory
needs.
o It should be noted that the bailment model for importation and
storage of alcohol has been in existence since 1936 and is now
utilized by all eighteen (18) control states with the exception of
Pennsylvania and Wyoming.
A pilot bailment program will be initiated in January 2012. It is expected
that the majority of vendors will be moved into bailment through the 2
nd

quarter of 2012; any remaining targeted vendors will be moved into
bailment early in the 3
rd
quarter of 2012.
While the Liquor Code grants the PLCB broad authority and such
authority could be read to include the implementation of a bailment
model for the storage and distribution of liquor within the
Commonwealth, neither the Liquor Code nor the Administrative Code of
1929, provides the Board with the specific authority to assess bailment
fees on the PLCBs vendors.
Some states which utilize a bailment model assess a bailment fee,
where manufacturers are charged a reasonable fee in order to store
inventory at a warehouse which is operated by a warehouse operator
under contract with the state. If such fees were assessed in Pennsylvania,
the funds could be utilized to off-set any costs associated with
maintenance of these warehouses.
FISCAL IMPACT:
o One of the major advantages of a conversion to bailment is the
freeing-up of operating capital, which has been estimated to
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present the PLCB with a one (1)-time cash realization of between
$60,000,000.00 $80,000,000.00.
This one-time cash realization is the result of depletion of
existing Board-owned inventory as conversion to bailment
takes place.
In simpler terms, if the PLCB converts to a bailment model,
it would not purchase new merchandise until its existing
stock is utilized. This immediate reduction in purchasing
will result in increased capital that may be utilized by the
Board.
o With respect to bailment fees:
If the Board were to move to a bailment model, and were to
charge suppliers a fee of $1.00 per case per month (a figure
that is in line with fees assessed in other states utilizing
bailment), such a fee would generate approximately
$1,000,000.00 per month, or $12,000,000.00 per year, based
on the number of cases currently moving through the
Boards warehouses.


8) Allow the PLCB to acquire goods and services without the restrictions
of the Commonwealths Procurement Code:

The General Assembly, recognizing that the PLCBs legislatively-
mandated functions are unique, exempted the PLCBs purchases of wine
and spirits and alcohol-related accessories from the provisions of the
Commonwealths Procurement Code.
In addition to being one of the largest purchasers of wine and spirits in
the United States, the PLCB has a significant need for supporting goods
and services in carrying out its statutory functions under the Liquor Code
(e.g., goods shopping bags, computers and software; services
information technology services, warehousing functions, and marketing
and advertising services).
To acquire other goods and services, however, the PLCB must comply
with the Procurement Code and the regulations of Department of General
Services (DGS).
While the PLCB recognizes that the careful review and analysis of bids
and proposals are necessary for projects of large magnitude or potential
impact, the PLCB can cite to numerous examples of instances in which
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the procedural dictates of the Procurement Code have resulted in lengthy
delays and unfavorable results.
o For example, the Board initiated a Request for Proposal (RFP)
committee for the purpose of consolidating two (2) of its three (3)
distribution centers in January 2010, to realize significant cost
savings for the Commonwealth, but due to the procedural
mandates of the Procurement Code, an RFP was not issued until
July 2010, and responses were not received until September 2010.
Ultimately, the Board rejected all proposals in February 2011, as
the marketplace had changed in the preceding thirteen (13) months.
Another RFP committee to consolidate all of the PLCBs
warehouses is being convened. The time-consuming and laborious
process inherent in the Procurement Code may nullify the very cost
savings the Board initially intended to produce by exploring this
initiative.
Therefore, the PLCB requests that the General Assembly, in furtherance
of its recognition that the PLCB is unique given its statutory mandates,
permit the PLCB to establish its own procurement procedures in
acquiring all of its goods and services.
To ensure that procurement decisions would be made with an adequate
level of control in the absence of the Procurement Code, the PLCB
proposes to develop and promulgate regulations, through the Independent
Regulatory Review Commission (IRRC), to establish consistent and
judicious procurement policies designed to maximize the
Commonwealths savings. This will allow for public comment and an
opportunity for the standing liquor committees to provide input relative
to the Boards procurement policies.
Further, the PLCB believes that its demand for goods and services, and
its ability to exercise significant market leverage in applicable markets,
could represent a significant revenue opportunity for the Commonwealth
if the PLCB is permitted to sell its goods and services to out-of-state
entities and governments.
o By way of example, another control state or local entity looking
to acquire liquor and liquor-related products may benefit from
being able to purchase such products via the PLCB, through the
PLCBs market leverage, at lower prices than it could on its own in
the marketplace.
o Further, other control jurisdictions may need the services
provided by the PLCBs customized Enterprise Resource Program
(ERP) and compensate the PLCB. Accordingly, if such an
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arrangement were permitted, the PLCB would realize additional
revenue from sales to the other state.
o The converse may be true for certain goods or services in which
the PLCB may benefit from lower prices in acquiring certain goods
or services through another state or local entity, resulting in cost
savings to the PLCB.
o Such potentially beneficial arrangements, however, would only be
permissible with a specific statutory amendment to section 207 of
the Liquor Code.
FISCAL IMPACT: Ultimately, the PLCB believes that, if given the
authority to establish its own criteria for procuring goods and services
(via an informal bid process for goods and services under a certain
threshold amount, or via a formal bidding process for higher value goods
and services), it can acquire goods and services on its behalf in a more
expeditious fashion, and, in certain instances, at more competitive prices.


9) Changes to Staffing and Human Resource Management:

Restrictions imposed on the PLCB by the Civil Service Act and the
Administrative Code impair its ability to effectively hire the right
employees with the right skill sets in a timely fashion, remove under-
performing or insubordinate employees, and establish the right amount of
pay and benefits to its employees. These existing limitations hamper the
PLCBs ability to effectively operate as a business and create
inefficiencies within the agency.
Assuming that the below statutory changes would be implemented, the
PLCB would ensure that appropriate employment, classification, and
salary policies would be put in place to provide necessary controls and
structure to the Boards decisions.
Exemption from Civil Service coverage for future hires -
o Section 302 of the Liquor Code provides that employees of the
PLCB shall be appointed and employed subject to the provisions of
the Civil Service Act.
o Section 741.3(d)(1) of the Civil Service Act provides that all
positions (with limited exceptions such as department heads,
PLCB members, attorneys, unskilled labor and public relations
positions) created by the PLCB are covered by Civil Service.
14

o The PLCB currently pays the Civil Service Commission
approximately $1,000,000.00 per year to administer examinations.
This money would be directly saved by the PLCB.
o The Civil Service process is cumbersome and discourages
recruitment of qualified candidates from outside state government.
It is also extraordinarily difficult to remove unsatisfactory
employees once hired under Civil Service.
o When qualified candidates from the private sector are persuaded to
come to the PLCB, a lengthy process is required to get that
candidate actually working.
o It should be noted that if legislative measures are enacted, thereby
exempting future hires from Civil Service, current employees
would remain Civil Service until such time that they are promoted
to another classification. This would effectuate a gradual shift of
the Boards current complement to non-civil service status, similar
to what occurred for the Pennsylvania State System of Higher
Education.
Ability to classify or reclassify its own positions -
o Because of the PLCBs retail functions, many positions are unique
to the PLCB.
o Under current practices, the Governors Office of Administration
(OA) approves the classification of positions. However, OA
lacks the operational knowledge of the unique functions of the
PLCB to properly classify many positions.
o Allowing the PLCB to classify these positions in accordance with
the candidates actual duties will allow the PLCB to fill the
positions with qualified candidates who possess the right skill sets.
o This proposal is revenue neutral as some costs associated will be
higher and some lower.
Ability to set compensation of all employees
o The PLCB is a unique organization within Pennsylvania
government in that it possesses not only a significant and far
reaching regulatory function, but that it also has a massive retail
function as the sole retailer of alcoholic beverages in Pennsylvania.
As a result, many of its job titles are unique to the PLCB and many
of the titles it shares with other state agencies involve a number of
duties beyond a traditional governmental function.
o Given these highly specialized needs, it is imperative that the
PLCB be given the discretion as to compensation and pay scale,
because it is most familiar with its position requirements.
15

o This proposal is revenue neutral, as some costs associated will be
higher and some lower for individual employees.
It should be noted that, in its enabling legislation (Act 188 of 1982), the
Pennsylvania State System of Higher Education (PASSHE) was not
made subject to the Civil Service Act; rather, the agency was given the
authority, subject to existing collective bargaining agreements and
policies of the agency, to appoint such employees, professional and
noninstructional, graduate assistants, etc. as necessary, to fix the salaries
and benefits of employees, professional and noninstructional, and to
establish policies and procedures governing employment rights,
promotion, dismissal, tenure, leaves of absence, grievances and salary
schedules.
FISCAL IMPACT: The PLCB is in the best position to understand the
operational needs of the agency, and the qualifications an individual
needs for a specific role. The primary goal of this initiative is the
autonomy and independence needed by the PLCB to place the right
people in the right positions at the right rates of pay and benefits. The
PLCB firmly believes that this will result in efficiency across the agency,
leading to cost savings, better service for the residents of Pennsylvania
(the PLCBs shareholders), and vastly improved profitability.


10) Allow market-based pricing:
Under the Liquor Code, the PLCB must apply its markup (currently 30%)
equally on all products (i.e., it must adhere to proportional pricing on all
products).
Flexibility would allow the PLCB to function more like a private retailer,
with the ability to increase revenue and profitability on certain products,
while being able to offer better deals to consumers on other products.
Private retailers enjoy complete flexibility to mark-up their products.
o Some may argue that because the PLCB has the ability to adjust its
markup, albeit proportionally, it already has the ability to establish
its own pricing. However, the PLCBs prices are inextricably tied
to the price vendors charge for their products. For example, if the
PLCB decided to increase its mark-up by 5%, it would have to
increase the mark-up on all products across the board, without
regard to how a particular vendor may subsequently adjust its price
to the PLCB. The ability to have readily adjustable and dynamic
16

pricing authority is key for any retailer to maximize profits. The
PLCB is merely asking for the ability to adjust pricing based on
fluid market conditions, as any other retailer could.
The PLCB is not seeking variable pricing; for example, the PLCB
intends to charge the same price for a bottle of Grey Goose Vodka
regardless of whether it is sold in Pittsburgh, Harrisburg, or Philadelphia,
thereby eliminating any potential regional bias.
An amendment to the Liquor Code which would effectuate the intent of
this initiative has been introduced in the current session, as HB 159.
On a separate but related note, consideration should be given to allowing
the PLCB to adjust the licensee discount (currently 10% pursuant to
section 305(b) of the Liquor Code) on a periodic basis to provide an
incentive for licensee participation in various initiatives, such as, utilizing
the PLCBs licensee service centers.
o In addition to amending section 305(b), any proposed amendment
would need to explicitly supersede the Regulatory Review Act,
given that the Regulatory Review Act currently defines a
regulation, among other things, as any action by the PLCB which
has an effect on the discount rate for retail licensees.
FISCAL IMPACT: While it is difficult to quantify the actual fiscal
impact of the initiative, granting the PLCB the discretion to make such
pricing decisions could easily lead to an increase of between
$25,000,000.00 to $75,000,000.00 per year, depending on market
conditions and timing of implementation. The PLCB is awaiting an
analysis of market surveys designed to evaluate the competitiveness of
the prices currently quoted by various vendors to the PLCB.
TIME TO PRIVATIZE PAS GOVERNMENT-RUN BOOZE BUSINESS
Testimony of Matthew J. Brouillette
President & CEO, Commonwealth Foundation for Public Policy Alternatives
PENNSYLVANIA HOUSE DEMOCRATIC POLICY COMMITTEE
April 14, 2011

Thank you Chairman Sturla and members of the committee for the opportunity to testify. Im Matt
Brouillette, President and CEO of the Commonwealth Foundation for Public Policy Alternatives, a
nonprofit education and research institute based in Harrisburg.

My testimony will focus on three areas: a brief overview of Pennsylvania current government-run
system, the expected social impacts of privatizing the state stores, and how to best consider up-front and
annual revenues from privatization.

When the Pennsylvania Liquor Control Board (PLCB) was organized in 1933, Governor Gifford Pinchot
stated that the purpose of the Board was to discourage the purchase of alcoholic beverages by making it
as inconvenient and expensive as possible. In that regard, the PLCB has been a smashing success.

Not only is Pennsylvanias government-run system both inconvenient and expensive, it has also
discouraged citizens from buying their alcohol in Pennsylvaniaturning them into criminals when they
cross borders to neighboring states to access more convenient and less expensive wine and spirits. While
48 other states have turned to the private sector for much of the retail and wholesale of alcohol, only
Pennsylvania and Utah maintain government monopolies of booze.

The result is that Pennsylvanians pay up to 50 percent more for liquor than in other states. Yet
privately run stores in other states tend to offer a greater variety of wines not available to Pennsylvanians,
and they allow wine bought online to be delivered to your door. Worse yet, Pennsylvania customers
selection is about to get even more limited, as the PLCB is in the process of cutting 400 wine and spirit
products from its shelves. And the state stores current push for variable pricing will drive costs up for
consumers even more.

Limited hours, limited selection, and cookie-cutter stores are not providing the type of services
customers want. So it is no surprise that proprietors in our border states of New Jersey, Delaware, Ohio,
and Maryland have located liquor stores with better selection and prices that cater to underserved
Pennsylvanians. Poll after poll reveals that Pennsylvanians want better services, lower prices and greater
selection on alcoholic products.
1
Furthermore, the government-run system does not prevent underage consumption. If it did,
Pennsylvania would be rated amongst the lowest in underage drinking rates, but that's not the case. The


Despite the greater cost of PLCB to consumers, it does not provide the public with any greater
protection. Currently, there is a double standard in liquor control enforcement that benefits the PLCB.
While state police regularly perform sting operations on privately owned and operated bars and
restaurants to ensure staff and bar tenders arent selling alcohol to underage consumers, these same
compliance checks are not carried out in state-run liquor stores. The PLCB has been allowed to police its
own operations without outside oversight.

Defenders of the government-run liquor system argue that the current enforcement system is working
because there have only been five incidences in the last six years where state employees sold alcohol to
minors. We are rather surprised that there were even five incidences when theyre not even checking.


1
A February 2011 Quinnipiac University Poll found that 65% of Pennsylvania voters (including more than 60 percent of Republicans, Democrats,
and Independents) favor privatizing the liquor stores to help balance the state budget. Accessed at
http://www.quinnipiac.edu/x1327.xml?ReleaseID=1558
National Survey on Drug Use and Health ranks Pennsylvania
2
middle-of-the-pack, or worse, on rates of
underage drinking and binge drinking. Moreover, PLCB's own 2011 report
3
Pennsylvania ranks 30
th
to the General Assembly
(ordered by Act 86 of 2006) found statewide high school drinking rates are higher than the U.S. average.
According to Mothers Against Drunk Driving (MADD),
4
In contrast, neighboring New Jersey, has three times the number of liquor stores (in a state two-thirds
as populous and much more geographically concentrated than Pennsylvania) and only has about one-
third the
in DUI-related accidents
per capita (1 being best, or fewest DUI-accidents).

number of alcohol-related traffic fatalities.
5
The
If state control of liquor sales were a driving factor in
underage drinking, alcohol abuse, or drunk driving, Pennsylvania should be number one or two on every
measure, but this is just not the case.

This is supported by research done by Dr. Antony Davies, an associate professor of economics at
Duquesne University. Dr. Davies is an expert in economic statistical analysis. He developed the
methodology that is now the standard for analyzing complex data sets, and his research has appeared in
places such as the Journal of Econometrics, Cambridge University Press, and the Oxford University Press.

Commonwealth Foundation commissioned a study
6
Dr. Davies and Pulito conducted
by Dr. Davies along with John Pulito. The
study looked at the social impacts of liquor control on all states over sixteen years, and compared the
incidence of underage drinking and underage binge drinking across states with different degrees of alcohol
control. They found no relationship between alcohol control and underage drinking, no difference in
the incidence of underage binge drinking among the four levels of control and found that states with the
most stringent controls have higher DUI fatality rates.

a separate study
7
, currently under peer review, of forty-nine states
over twenty-one years looking only at DUI fatalities, controlling for differences in other state alcohol laws.
Instead of using the simple cross-state comparison employed in the previous study, they used the most
sophisticated panel data analytic techniques.
8
A comprehensive
This study also concluded that control states had higher
alcohol-involved fatality rates among the legal age population.

review of the existing academic literature
9
Yet while the unions in control of the PLCB workforce oppose privatization, the Board continues to try
to imitate the best practices of private retailers. From spending
on privatization by Dr. Davies found
overall, there is no clear evidence that privatization of alcohol markets leads to negative social behaviors.
The studies detailed in the literature review submitted provide conflicting stories as to the relationship
between privatization and social outcomes. Some studies link liquor control with lower consumption,
underage drinking, and DUI rates. Others studies find the opposition relationship, and some find no
relationship whatsoever. The idea that Pennsylvanias control system provides the best protection against
underage drinking and alcohol abuse is simply not based on the best available evidence.

$90,000 per store in advertising last year,
implementing the very unpopular wine kiosk program to sell wine in grocery stores, operating wine
boutiques connected with BYOB restaurants, and spending hundreds of thousands to upgrade its website,
the government agency recognizes the need to operate more like a private business.

Indeed, the recent PLCB proposal presented as an alternative to privatization, asks legislators to
allow it to operate more like a private retailer engaging in market-based pricing, being exempt from
state civil service laws and procurement rules, issuing coupons to customers, and expanded store and
kiosk hours.

2
http://www.oas.samhsa.gov/2k8State/Ch3.htm#Fig3-1
3 http://www.scribd.com/doc/50207612/PLCB-2011-Report-Underage-Drinking
4
http://www.madd.org/drunk-driving/campaign/state-ranking/
5
http://www.commonwealthfoundation.org/policyblog/detail/how-many-state-liquor-stores-should-pennsylvania-have
6
http://www.commonwealthfoundation.org/docLib/20091029_StateStores(Pulito).pdf
7
http://www.commonwealthfoundation.org/docLib/20110214_WorkingPaper.pdf
8 Pulito, J and A. Davies, 2010. State control of alcohol sales as a means of reducing traffic fatalities: A panel analysis. Under review.
9
http://www.commonwealthfoundation.org/docLib/20110201_PrivatizationLitReview.pdf
Critics to privatization on one hand are claiming privately runs stores will cause uncontrollable social
ills, and on the other hand, are telling the legislature that the current state bureaucracy isnt working and
asking to be allowed to operate more like privateers. The PLCB's proposal demonstrates that its
opposition to liquor store privatization is simply rooted in a desire to preserve its political power.
Finally, some have questioned the amount of the upfront revenues the state would receive from
auctioning off licenses for wine and spirit sales by citing the license prices in other states. This is not an
apples-to-apples comparison. For starters, Pennsylvania state stores sell both wine and spirits; most other
states had control only over spirits. Furthermore, Pennsylvania has far fewer retail stores than most other
states per capita, with just over 600 outlets. While last years proposal from Rep. Mike Turzai would
auction of 750 retail licenses, those are well below the national average number of retail stores. Indeed, if
Pennsylvania were to be at the national average there would more than 3,000 outlets across the state.

The number of liquor licenses to be offered undoubtedly affects the price of the licenses, as well as the
degree of competition among stores and options for consumersand therefore should be carefully
considered by legislators debating privatization.

In 2010, West Virginia received bids as high as $675,000 for liquor licenses. The licenses were for
spirit sales only, and expired after 10 years (Rep. Turzais plan offered perpetual licenses, with annual
processing fees). West Virginia also offers more than twice as many liquor outlets per capita as
Pennsylvania; if Pennsylvania were to match West Virginia, the state would offer almost 1,500 licenses.



Privatization in Pennsylvania could also entail more than just licensing retail stores, but offer licensing
for wholesale operations that is, the distribution of wine and spirits to restaurants and bars. The value of
wholesale licenses has been estimated to be equal to that of the retail stores. Privatization would also
involve selling off the entire inventory of the state liquor stores. As of June 30, 2010, according to the
PLCB the inventory on hand plus the value of assets of the state stores was $320 million.

A study commissioned by Gov. Tom Corbett examining liquor store privatization is currently
underway and will provide the legislature with a detailed analysis. However, we will never know the true
value of privatization until taking up competitive bids for licenses and legislators should work to ensure
that privatization involves an open and competitive bidding process

There is also the argument that the state stores provide $500 million each year to the state. However,
most of this revenue (about $400 million) is from state alcohol taxes and state sales taxes. The remainder
described as state stores profits is really just the additional markup on the price of alcohol and
merely serves as another tax on Pennsylvanians at the government-run stores.
Price of Licenses Number of Licenses Total
750 (Tuzai Bill) $450,000,000
$600,000 (per license) 1,482 (WV per-capita rate) $889,200,000
(Based on WV 2010) 3,000 (national average per-capita) $1,800,000,000
Wholesale Licenses
Based on prior valuations
which estimate value to be
equal to retail value
100 (Turzai Bill) $450,000,000
Inventory and Equipment $320,356,421
Total (Low Estimate) $1,220,356,421
Total (Medium Estimate) $1,659,556,421
Total (High Estimate) $2,570,356,421
Retail Licenses
Potential Initial Revenue from Privatization*
PLCB Annual Report (6/30/2010)
* For illustrative purposes only, CF recommends a formal valuation.

This revenue would be
replaced by taxes under a
license plan. Lawmakers
will set tax rateseither
using the current liquor
tax structure or replacing
it with a different alcohol
tax, such as a gallonage
tax and can set the rate
to match current revenues
from taxes and state store
markups.

Additionally, by relying on private vendors, the state will collect corporate income taxes and other
business taxes from operators, that government stores dont pay. And by improving service, selection, and
reducing prices, Pennsylvania can recapture some of the revenue and economic activity lost to other states
through border bleed.

Finally, the debate over privatization is at its heart a question of whether government should be in the
liquor business, and what is in the best interest for Pennsylvania consumers and residents. Forty-eight
other states have said governments role is in the regulation of alcohol, not its sale. Getting state
government out of the sales business and allowing the PLCB to focus on enforcement of alcohol laws not
only makes sense policy wise, it will make cents for state government as well.






Current Under Privatization
Johnstown Flood Tax (18%) $297,700,000 Discontinued?
State Sales Tax (6%) $92,489,000 Continued
State Stores "Profit" (consumer markup) $105,000,000 Discontinued
Gallonage Tax $0 Tax Shift?
CNI Tax and Other Businesses Tax Revenue $0 Additional
Annual License Fees for Liquor Stores $0 Additional
Total $495,189,000 ???
General Fund Revenue from State Liquor Stores, 2010-11
Source: Governor's Executive Budget, 2010-11, February 2010
April 14, 2011
PA House Democratic Policy Committee
Harrisburg, PA
Leonard Gilroy, AICP
Director of Government Reform
Reason Foundation | www.reason.org
Privatization of
State ABC Monopolies:
Policy Issues and Outlook
Context: ABC Systems & Privatization
ABC = Alcoholic Beverage Control
After repeal of Prohibition in 1933, 32 states opted for
private sector wholesale and retail for alcohol
18 states have maintained wholesale and/or retail alcohol
monopolies
Spirits: 18 states
Wine: 4 states (MS, NH, PA, UT)
Beer: 1 state (UT)
Wholesale spirits monopolies in 17 states
Maine 10-year contract w/private operator for
wholesale system
Context: ABC Systems & Privatization
Retail in Control States
State-run stores: 8 (AL, ID, NH, NC, PA, UT, VA, WA)
Exclusively use state stores: 3 (NC, PA, VA)
Agency/Contract stores: 9 (ID, ME, MT, NH, OH, OR, UT,
VT, WA)
Exclusively use agency/contract stores: 5 (ME, MT, OH, OR, VT)
Private Outlets: 6 (AL, IA, MI, MS, WV, WY)
Wholesale in Control States
5 states wholesale only (IA, MI, MS, WV, WY); no retail
Two of these statesIowa (1987) & West Virginia (1990)have
transitioned to entirely privatized ABC retail operations
Whats Driving Interest in ABC
Privatization Now?
Prior to 2009, little major action outside of WV, IA & ME. What
changed?
Widespread state fiscal crises
NCSL: projected state deficits of $149.4B through FY2013
NGA/NASBO: lost fiscal decade for states
Renewed focus on government streamlining, reducing government
involvement in non-core activities
Governments increasingly leveraging/monetizing assets
Examples: Illinois Lottery, Indiana Toll Road, Chicago Skyway,
muni parking systems (Chicago, Indy), muni water systems
In tough economy, growing sentiment that government
should not compete against private enterprise (e.g.,
getting government out of the business of business)
Virginia
Original 2010 McDonnell administration proposal for full
wholesale and retail privatization failed to advance
PFM Group report to Gov. McDonnell (2011):
Recommended full retail privatization over contract-agent model
Reduce state markup from 69% to 50%
Upfront Payments: license auctions would net an estimated $200-
400M (one-time)
Revenue Neutrality: estimated fiscal benefit of $13M in additional
receipts annually.
2011 legislation stalled in Gen. Assembly
Recent State Activity on ABC
Privatization
Washington State
December 2009: WA State Auditor report
State could increase revenues from liquor sales and distribution by
up to $277 million over 5 years under wholesale and retail
privatization
Two ballot measures (I-1100, I-1105) defeated in Nov 2010
Both covered wholesale and retail privatization
April 2011: House-passed Democratic budget includes
wholesale WSLCB lease
$300 million upfront payment; 50-50 revenue share for increased
revenues over current levels;
Target 4% ann. growth (vs. 2.7% current);
$1.5 billion additional revenue to state over 20-year term.
Recent State Activity on ABC
Privatization
Implied Excise Tax Rates: VA vs. PA
Source: DISCUS testimony to Gov. McDonnells Commission on Government Reform and Restructuring, Sept. 2010.
Myth: Privatization = Loss of State
Control
All states control alcohol
Some use state wholesale/retail monopolies (control states)
Others use direct regulation (license states)
Control states only control a small % of alcohol sold
Beer: ~54% of pure alcohol sold in the U.S.; 64% in PA
Hence, PLCB only controls 36% of alcohol sold in PA.
Monopoly system limits access and keeps prices high?
In the 32 license states, regulations limit the number of alcohol
outlets that are allowed.
License states influence pricing through state excise taxes.
Hence, advancing wholesale/retail privatization need not
imply a loss in state control.
Myth: State sponsored monopolies
generate more alcohol dollars for states
Revenue earned from the sale of distilled spirits is only a portion
of total revenue generated from beverage alcohol (spirits + wine
+ beer)
Ignores high variability among states. Average control state
generated $91.05 in alcohol-related revenues per adult in 2008,
however:
Highest per capita revenue: Washington D.C. (license jurisdiction,
$192.64/adult)
7 license states generated more alcohol revenue per adult than the control
state average
6 monopoly states generated less alcohol revenue per adult than the
regulatory state average ($75.83).
1999 Iowa Alcohol Beverage Division report:
Retail privatization "was a good idea and has been a financial success as
well."
Profits increased by >$125M in first 11 years relative to state operation.
Key Policy Issues in ABC Privatization
Structure
retail, wholesale, both?
full, partial, stepped?
license, lease, IPO, hybrid?
Fiscal
if/how to replace markup,
excise taxes?
ongoing revenues to the state
before and after
use of upfront proceeds
Social
conflicting evidence on social
benefits to control structure
operational, marketing
restrictions
addressing local jurisdictional
concerns
Licensing
caps or no caps?
tiering/market balance
auction vs. formula?
minimum bids?
shelf space requirements?
retail density regs?
ABC 2.0
transitions for current ABC
employees (hiring preferences,
mandates, etc.)
regulatory and enforcement role
post-privatization
State Products
promotion/treatment of in-state
wine and spirits?
Recent political shifts suggest sustained interest in privatization
But details will always matter for public acceptance
Ongoing revenues pre/post-privatization matter, perhaps more than
social cost concerns
Use of upfront proceeds also important for public/policymaker
acceptance (pensions? infrastructure? budget?)
Prime mover could set stage for other states
But odd alliances of opponentse.g., social interests, public employee
unions, various industriesare a likely counterforce
Growing acceptance of argument for non-discriminatory policies
among classes of alcohol
Alcohol is alcoholwhy treat spirits, beer & wine differently?
Looking Forward on ABC Privatization
Questions?
Leonard Gilroy, AICP
Director of Government Reform
Reason Foundation
leonard.gilroy@reason.org
(713) 927-8777
www.reason.org
1

Testimony Presented Before the House Democratic Policy Committee
Compass Mark
630 Janet Avenue, Lancaster, PA 17601
www.compassmark.org
717.299.2831
David H. Bender, Executive Director
April 14, 2011
I thank Chairman Sturla, Co-Chairman Santoni and the distinguished members of the House Democratic Policy
Committee for providing the opportunity to present testimony regarding the privatization of wine and spirit
sales.
My name is David H. Bender, the Executive Director of Compass Mark, a non-profit organization dedicated to
the reduction of substance abuse within our communities. We have received state and national recognition for
the repeated success we have demonstrated in building the resiliency of youth, reducing recidivism for underage
drinking, improving academic performance, increasing school attendance and many other areas critical to the
development of a strong, healthy and capable Commonwealth.
To help you understand the context in which I make the statements that follow, I will tell you that my earlier
background is in economics and finance. Over 25 years ago, I found that people close to me in my professional
and personal life were destroying their lives and careers with alcohol. I chose to leave a highly successful career,
give all of my money to a treatment and prevention organization and devote my time to bringing about better
methods of prevention and intervention. My background makes me a believer in the free enterprise system, but
a believer who insists on accountability when individual profit or individual consumption conflicts with
community well-being.
I have no single constituency to which I must answer. I have no financial or political interests in the outcome of
the privatization debate. No one could argue, at least not with a straight face, that I have a large salary to
protect. I have no financial backers in this debate. Professionally and morally, I am bound only to the 12 million
people of this state who deserve to live healthy and productive lives. I am bound to the 6 million citizens who
drink no alcohol at all as well as to the 1 million who have fallen into addiction to it. I am bound especially the
690,000 children living with one or more alcoholic parent. My constituency is your constituency. My
constituency is that of both parties. My constituency is your brother, your sister, your son, your daughter. My
constituency is you.
Being the last witness at todays hearing, I expect that by the time I speak you will have heard of many studies
attempting to answer the question of whether privatization will significantly increase the harm brought to the
people of the Commonwealth. Several of those studies will appear to be in conflict with each other and will
likely be contested frequently over the ensuing months. It is generally acknowledged by individuals on both
sides of this issue that increased access to alcohol will result in increased consumption and, in turn, increased
2

levels of harm and cost to the Commonwealth. In our opinion it is the degree rather than the emergence of
harm that is in question.
The impact on consumption attributable to whether that point of sale is publicly or privately owned depends
upon other mitigating or exacerbating influences such as societal and cultural norms, regulatory environment,
taxation structure, genetic predisposition to addiction, and biological and psychological factors. The numbers
and complexity of studies that could be generated to examine all of these aspects are limitless. We could spend
our time over the next several months poring over the statistics to try to make reasonable judgments as to
degree to which privatization will increase consumption and the related harms. Or we could take a simpler
approach. We propose that the legislature and the people of the Commonwealth review the stated goals of
privatization and ask themselves a different question.
The stated purposes of privatization are to increase consumer selection, decrease prices, increase state
revenues and improve government efficiency. Lets take the first two items: selection and lower prices. Instead
of debating whether those goals can be achieved by privatization and to what degree, if any, they may cause
harm, lets debate the opposite question. Lets debate whether achieving the goals of lower price and greater
selection of alcohol will lead Pennsylvania to a place of national and global excellence. Will a greater selection of
lower priced alcohol improve the health of our citizens? Will it improve workforce readiness? Will it enhance
technological innovation? Will it improve academic performance? Will it foster the development of new cutting
edge industries?
If Pennsylvania is ever to arrive at a place of preeminence in the national and global realm, then these are the
questions to which the legislature ought to devote its time. I know of no research suggesting that greater
selection and lower prices of alcohol would be among the best answers to the questions of how this state will
achieve economic, social or academic excellence.
Given that observation, my next statement may surprise you. The board and leadership of Compass Mark are
not opposed to privatization itself. We neither favor nor oppose the concept. What we support is a system that
accepts responsibility for its implications, regardless of whether it is the current or any future system. You may
ask why an organization whose mission is the reduction of substance abuse would not oppose privatization
when a clear initial outcome of that privatization is the increased consumption of alcohol. The answer is that the
opportunity and responsibility of people to choose their priorities is both the benefit and burden of a democracy
and a free enterprise system. Those freedoms outrank Compass Marks mission.
But those who would choose those freedoms must also accept the responsibilities that accompany them. Lost in
all of this discussion of privatization is the matter of who really bears the burden for excessive consumption
regardless of what system we choose. Ill use rough numbers simply to make the point. In this state of 12 million
people, 6 million drink no alcohol; 5 million drink in relative moderation and 1 million drink addictively.
At Compass Mark, we spend our days cleaning up the mess that surrounds the 1 million, primarily the damage to
their children and spouses, and then we build the skills to keep others from falling into the same situation.
Meanwhile, the 11 million pay the price for the 1 million through higher healthcare costs, auto insurance
premiums, workers comp premiums and taxation for prisons, police and on and on.
3

Lets return to the stated objectives of privatization and look at the revenue piece. In addition to greater
selection and lower prices, two remaining goals are those of increased state revenues and improved
government efficiency. Compass Mark has expressed its concern to the offices of the House Majority Leader and
the Governor that the changes to the excise tax structure proposed in last sessions HB2350 could reduce
revenue, shift even greater burden to the 11 million and reduce even further the limited resources available for
prevention, education, intervention and treatment. Both parties have expressed their commitment to
maintaining current revenues, and we would hope that the PFM study commissioned by the Governor will
address our concerns, the primary ones being:
First, through a business broker we identified 250 liquor stores for sale in all of the surrounding states. The
asking price for an entire going operation, not simply the license, typically ran at 0.55 times gross sales. Actual
sales occurred rarely and were approximately 18% below asking price. Based on these prices it seems unlikely
that an investor would pay 1.3 times gross sales simply for a license in Pennsylvania when he or she could buy
three entire going operations in any surrounding state for the same price. Fair market value for Pennsylvania
licenses appears to be closer to $500 million than $2 billion.
Second, HB2350 proposed significant changes to the alcohol tax structure, and it is expected that HB11 will
propose similar changes. These changes included the elimination of the 18% Johnstown Flood Tax, replacing it
with excise taxes ranging from $3.50 to $7.00 per gallon depending on alcohol content and making all alcohol
sales in bars and restaurants subject to the 6% sales tax. Our limited analysis indicated that this structure would
decrease state revenues by approximately $140 million per year, and this gap would widen over future years
because of the fixed versus percentage rate that would not float with inflation. We would hope that the PFM
study will explore several tax models to ensure that revenues do not decrease. If a shift is made to per-gallon
versus percentage taxes, legislation should insist on annual inflationary adjustments.
The third concern regarding revenue is the nature of any corporate entities purchasing licenses. Seven Eleven is
a Japanese firm; Giant Foods is British. Sheetz and other retailers take advantage of the Delaware Loophole to
avoid PA corporate taxes. Outside investment in Pennsylvania is good. We simply ask that PFM conduct a study
that realistically projects what revenues can and cannot be collected from licensees.
We do not present ourselves here as financial analysts. We have neither the access to data nor the time to
conduct a full analysis. In speaking on behalf of the wellbeing of this Commonwealth, however, we come here to
say that we cannot accept a system that will shift profit to the few and place burden on the many.
An additional stated goal of privatization is improved government efficiency. This is something that Compass
Mark believes can be achieved in either a privatized or control system. For many years, the Pennsylvania Liquor
Control Board has done an admirable job of providing reasonable access to liquor while controlling access by
minors and avoiding excessive promotion. This reasoned approach has likely saved the state considerable
human and hard dollar costs.
However, pressure on the PLCB to generate more revenues for the state has increasingly blurred the standards
by which it is to be held accountable. It is not clear whether it is expected to be a promoter of alcohol or a
promoter of the health and wellbeing of the Commonwealths 12 million citizens.
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We believe the opposing nature of these expectations can be remedied through a clearer separation of the
functions of sales, enforcement, audit and education. Sales can either be privatized or continue as now under
the PLCB, while functions of audit, enforcement and education move to those agencies best suited to the task,
such as the Auditor General, Attorney General and the Department of Healths Bureau of Drug and Alcohol
Programs respectively.
While government time and resources currently devoted to the PLCB could be redirected to other more
essential governmental functions, consideration must also be given to the inefficiencies created by the
monitoring of a diverse and increased number of retail outlets. The current control system has no incentive to
under-report revenues or under-pay sales and excise taxes. Any new system risks the use of sales-suppression
software at point of sale and other skimming methods which are difficult to detect without costly
comprehensive audit. Under-reporting seems commonly expected at 15% to 20% of tax revenues. Either higher
excise taxes or higher expenditures on auditing and investigation or both would be necessary to offset these
inefficiencies in a privatized system.
In summary, we again ask ourselves why it is that we are having this conversation and whether this state is truly
looking at how it can achieve economic, social and academic excellence. Why are goals of lower alcohol prices
and greater selections of vodka more important than lower healthcare premiums and greater selections of jobs?
Do we really want our greatest business growth opportunities to be in the category of liquor stores? If
privatization can indeed generate increased ongoing revenues beyond the increased societal and financial costs
then all of us should stand aside and let it happen. If instead, it will increase the burden on the 11 million to
repair the damage of the 1 million while several hundred profit, then we must stand in opposition.
While this debate continues, we at Compass Mark will commit ourselves to finding common ground and
understanding opposing viewpoints while making our own voice heard. We see the following as goals likely to
garner broad-based support:
Increased prevention of and barriers to direct purchase by minors;
Increased prevention of and barriers to provision of alcohol to minors by adults;
Shift the burden of costs primarily to heavy consumers;
Reduction of conflicts of interest through separation of powers;
Increasing/decreasing resources for education, prevention and treatment linked to
increasing/decreasing alcohol consumption in a structure similar to that within Act 71 for gambling.
HB2350 proposed a review five years after implementation. It was not determined what standards or
benchmarks would be used to determine its success or failure. I would propose that we set those standards
now. I propose that this session of legislature by endorsement of both parties choose a goal of greater worth
than the reduction of alcohol prices. I would propose that it set a goal of the reduction of binge drinking by 20%
over the next five years and that it decide whether that goal will be best achieved through privatization or
through any other system. Higher achievement requires higher goals. Working together I hope we can set and
achieve both.
5

Thank you again for the opportunity to speak on behalf of those who work to prevent and treat substance abuse
and thank you for your time.