A new financial report for 2014-15 reveals that the Pennsylvania Liquor Control Board is still a cash cow that delivers more than half a billion dollars annually to commonwealth coffers. Pennsylvania taxpayers and state legislators should remain wary of anyone offering magic beans for this cash cow – an exchange more likely to leave Pennsylvania’s finances in bleaker shape than to produce the payoff magic beans did in the Jack and the Beanstalk fairy tale.
Using the same reporting method as previously (to allows comparison with 2013-14 financial performance), unaudited financial results released by the Pennsylvania Liquor Control Board at the end of October show the agency with a net profit of $132.8 million in 2014-15, an increase of 2.5 percent over the previous year. Assuming a transfer of $80 million to the state treasury out of this profit, and adding in liquor and sales taxes, revenues from the industry to state coffers will total $544.6 million for the year.
Interpreting PLCB financial performance is made more complicated this year because the PLCB applies for the first time a new accounting standard (GASB 68) requiring public entities to show on the books total unfunded pension liabilities accumulated over decades. As school boards and municipalities apply this rule, expect recurring communications that the sky is falling. Consistent with this expectation, when the PLCB’s new report showed $362 million in pension debt for the first time, the Commonwealth Foundation said that “the [PLCB] ended the year more than $238 million in the red.”
In reality, a bookkeeping net loss for the year says nothing about the financial viability of the PLCB long term. In fact, the PLCB reported, net cash generated by operating activities totaled $139.1 million for the fiscal year 2014-15.
Looked at from another angle, the report puts in proper perspective the manageable size of PLCB pension debt: PLCB’s entire accumulated share of pension debt is two-thirds of a single year’s transfers from the PLCB to the General Fund – that is, $362 million is two-thirds of $544.6 million. Paid down over 30 years, PLCB pension debt is a few percent on an annual basis of the income-generating power of the PLCB asset to the state.
What the comparison above shows is that the real issue for state revenues is not pension debt but what privatization will mean for the total revenues transferred on a sustainable basis from the wine and spirits industry to the state: how much of the annual flow of milk from the cash cow will the state lose and how big an upfront sale price will privatization yield? Taxes as well as PLCB profits need to be included in this analysis because once private profit adds additional wholesale and retail markups to price there may be consumer pressure to lower sales and liquor taxes. In addition, under state control 100 percent of sales and liquor taxes are collected. This share will likely decrease with privatization.
Recent research that looks at the total revenues states receive from alcohol distribution, including taxes, found that control states, such as Pennsylvania, raise the most total revenue from the industry. This research is a more reliable guide to the impact of wine and spirits store privatization on state revenues than is a Commonwealth Foundation blog post.
In the context of Pennsylvania’s recent debt downgrades, the red ink we need to be most concerned about is that of the state. And so far, the best evidence suggests that privatization of wine and spirits stores would put Pennsylvania’s budget more in the red over the long term.