PA Liquor Control Board Suffers Pension Hangover

By Andrew Staub | PA Independent

Pennsylvania sold $2.34 billion worth of booze in the past fiscal year, when counting for taxes. It’s a record number and a source of celebration for the state liquor control board, which released its financials for fiscal 2014-15.

Yet the same financial report shows a more troubling number.

The Pennsylvania Liquor’s Control Board’s total net position is actually in the red, and not just by a little. Rather, it’s $238.7 million in the hole, largely because the PLCB owns $362.7 million in pension debt.

That’s enough to wipe out the PLCB’s 2014-15 net income of $83.6 million — and enough to bolster the continued calls to privatize the 600 or so state-owned wine and liquor stores.

“When you figure out that the LCB is contributing significantly to the cost of our pension system, that ought to change the lens through which many legislators are viewing this so-called asset, because this clearly is not an asset, but it is a liability as long as the state stays in this business,” said Matthew Brouillette, president and CEO of the Commonwealth Foundation, a free-market think tank based in Harrisburg.

The state has owned a monopoly on wholesale and retail wine and liquor sales since the repeal of Prohibition in 1933. Republican lawmakers passed a privatization bill earlier this year, but Democratic Gov. Tom Wolf vetoed it before offering to lease the state liquor system to a private manager.

Republican lawmakers also want to reform the state’s public pension system, but Wolf vetoed that, too. The two issues intersect on the PLCB’s financial report, perhaps crystallizing why conservatives consider both important reforms.

But those legislative priorities have been mired amid a state budget standoff that reached its 133rd day Tuesday. House Majority Leader Dave Reed, R-Indiana, reported signs of progress in a recent email to Republicans, saying a budget could be finished by Thanksgiving.

“If this works out, we will be making some pretty historic votes to change how wine and spirits are bought and sold in the state; to reform our public pension system while keeping our promises to existing employees and transitioning new public sector workers into a plan more reflective of today’s world; to more fairly fund our schools; and to bring some real property tax relief to struggling homeowners,” Reed wrote.

The PLCB’s latest financials figure to play a large part in that upcoming discussion. On Monday, Steve Miskin, a spokesman for Reed, said lawmakers are still trying to work out the details of a potential change to the liquor system and gave no elaboration on what that change could be.

“Anything we do, the ultimate goal is privatization,” he said.

Even with the pension obligations dragging down the PLCB’s bottom line, lawmakers in favor of keeping the liquor monopoly intact can point to the fact it can still funnel $80 million to the general fund. Sales growth also led to growing tax revenue, including $334.4 million in the state liquor tax and $130.2 million in the sales tax, said Elizabeth Brassell, a PLCB spokeswoman.

“The impact of growing pension and benefit costs is a systemic problem facing all commonwealth agencies,” she said. “The PLCB is unique in that we are a self-funded organization with an enterprise fund reporting this level of detail in our annual income and loss statements.”

This is the first year in which the Governmental Accounting Standards Board is requiring the PLCB to report its pension debt. Other accounting changes related to workers’ compensation and post-retirement benefits also cut into the PLCB’s net income.

Without those changes, net profit would have totaled a record $132.8 million, 2.5 percent more than in 2013-14, Brassell noted.

The new rules, though, give a clearer picture of the PLCB’s financials. It isn’t good for defenders of the state-store system.

“This should be a game-changer, because this is akin to saying, ‘Well, my family’s budget was fine until you made me start to put my mortgage payment in our budget,’” Brouillette said.

The PLCB’s pension debt is a relatively small drop in a bigger bucket of pension problems. It’s about 3 percent of the State Employees Retirement System’s $12.3 billion unfunded liability.

With the accounting changes, that problem will come into clearer view now, too. Like the PLCB pension debt, it’s always been there. But it has been hidden.

Truth in Accounting, a Chicago-based think tank, found Pennsylvania fails to list $53 billion in debt on its balance sheet, most of it connected to retirement benefits. That’s enough to give the Keystone State the third-most hidden debt among 10 Northeast states.

Bill Bergman, research director with Truth in Accounting, said the cost of government is understated and the PLCB is only an early example of the government agencies that will have to more fully reveal their financial standing to the public.

While the PLCB financials would raise an alarm for the private sector, Bergman doesn’t necessarily see the state liquor stores collapsing.

“It’s not like this is a bank that’s about to go under,” Bergman said. “It’s a government, it’s a stable enterprise, it’s a stable stream of cash flow and, certainly, alcohol isn’t going to go away.”