LCB's epic run might be near end
Some say that selling the system may net $2 billion. Corbett strongly favors it.
HARRISBURG - For nearly 80 years, the government-run liquor store in Pennsylvania born after Prohibition has been nothing if not a survivor.
It has dodged multiple assassination attempts by three aggressive and popular governors. It has weathered a torrent of complaints, criticism, and scorn by its patrons. Yet no one has been able to write its obituary.
But 2011 may usher in a different outcome for the state Liquor Control Board and the 620 wine and spirits stores it runs: Gov.-elect Tom Corbett appears committed to yanking state government out of the business of selling alcohol once and for all.
And unlike those before him who have tried - and tried - but failed, Corbett advocates privatizing the stores to help balance the state's cash-starved budget, which next year faces an estimated $4 billion deficit. Some Republicans estimate that auctioning off the system could rake in a cool $2 billion.
He can expect an epic battle.
U.S. District Judge John E. Jones 3d, Gov. Tom Ridge's point person on the unsuccessful privatization drive in the 1990s - the last serious stab at selling off the system - received so many threats at the time that he was assigned a security detail.
"It was brutal," said Jones, recalling long days testifying in the House and Senate. "I had the stuffing kicked out of me. It was a blood sport."
Though Corbett has given little detail about his proposal or when he may roll it out, many in the Capitol expect he will do so in his first budget address, in March.
It will not be a quick or easy process.
Past efforts have been thwarted by an unlikely alliance including unions that want to protect the jobs of state workers, and the so-called "moral" forces who believe alcohol should be tightly controlled and regulated.
Their argument for keeping the state system is clear and crisp: One, selling it to private industry will spike underage drinking as well as drunken-driving tragedies. Two, the state system reaps hundreds of millions in taxes and profits every year. And three: State Store customers now have access to improved stores with good selections and values.
"I don't know any legislator who gets a volume of calls from constituents saying it's time to privatize," said Wendell W. Young 4th, president of the United Food and Commercial Workers Local 1776, which represents 3,000 employees in the state's wine and spirits shops.
"Do they have some campaign contributors that bend their ear who are wine connoisseurs? Sure," Young said. "But there isn't this critical mass screaming for change."
To be sure, the state's wine and liquor stores have come a long way since their darkest days. In the 1970s and '80s, counter stores were the norm, store clerks more often than not didn't know a cabernet from a chianti, and credit cards weren't accepted.
The wine and spirits shop of today offers wider selection, improved service, and employees schooled in the finer points of choosing and selling a wine.
The Liquor Control Board, which also controls the purchase and distribution of wine and spirits, has embarked on an aggressive campaign these last few years to run the stores more like a business.
It has opened upscale stores in selected cities; placed wine kiosks in supermarkets; and launched "boutique" or wine-only stores adjacent to high-end gourmet food shops, catering to oenophiles and "foodies."
"We believe strongly in the agency and the strong service it provides," LCB Chairman Patrick J. "P.J." Stapleton 3d said.
Stapleton believes the public doesn't fully understand the agency's mission: first and foremost, to ensure that wine and liquor are sold responsibly and to "the right people." LCB stores are not driven by profit, he said, and its clerks don't sell to the teenage set or the visibly intoxicated.
"Alcohol is a dangerous product, and it needs to be judiciously sold," he said. "There is a social aspect here that needs to be fully vetted."
Critics reply that government simply can't compete with the private sector, which can sell alcohol just as responsibly while offering longer hours and discounts. That's why, they argue, Pennsylvania residents still visit Delaware and New Jersey in a retail phenomenon that state bureaucrats call "border bleed."
And the LCB has been a recent subject of scorn for such things as its initiative to teach store employees manners, and the ad it aired on Mother's Day plying vodka as the perfect gift for Mom.
"I think it's a tad insulting to consumers, not to mention an anachronism, that you have to go to a state-owned store to purchase a product," said Jonathan Newman, the LCB's former chairman, who is credited with bringing more quality wines to state-run stores, including ones bought at discount and featured in "Chairman's Selection" specials.
Newman now runs a business supplying out-of-state wine retailers with discounted wines.
Matt Brouillette, who heads the Commonwealth Foundation, a libertarian think tank in Harrisburg, said a study his organization commissioned found that privatization would not increase social problems or threaten public safety. "The evidence simply does not support that conclusion," Brouillette said.
State Store defenders deride that study as unscientific and counter with research done over the years linking privatization in other states to higher alcohol sales and consumption.
The debate dates to the end of Prohibition in 1933, when the legislature created the Liquor Control Board. At that time, legislators set up a separate system for selling beer in the state that, although multi-tiered and heavily regulated, lets private businesses do the selling.
That system was meant to protect "the public welfare, health, peace and morals of the people of the Commonwealth," the state's liquor code of 1933 read. Those words are still in the code.
In all, 18 states took the "control" route after Prohibition. But only Pennsylvania and Utah completely control - no exceptions - both the distribution and the retail end of wine and spirits.
And no "control" state has ever switched entirely to privatized operations, said Steven Schmidt, vice president of public policy at the National Alcohol Beverage Control Association, which represents such states. The last states to privatize - West Virginia and Iowa - retained some state controls.
"Privatization is never an easy thing to do," said Schmidt, who used to work for the LCB. "And in Pennsylvania, you have a large part of the population that is not comfortable with real easy access to beverage alcohol. There is also a good percentage of the population that are abstainers."
It is no surprise, then, that three governors attempted and failed to privatize. Democrat Milton J. Shapp was first, in the 1970s. Then Dick Thornburgh, a Republican, tried in the 1980s.
"It never made sense to me that the state should be in any business normally controlled by private enterprise," Thornburgh said in a recent interview. "This [the LCB] was a reaction to the end of Prohibition that ended up acquiring a life of its own."
Opposition was fast and furious and lasted through his tenure. In his final year, Thornburgh signed an executive order to dismantle the LCB and sell off its stores. He called it his "going-away present" to Pennsylvanians.
He lost the ensuing legal brawl - but not before he'd traveled the state, making his pitch at State Stores, where he put up "For Sale" signs.
"We had a lot of fun with that," Thornburgh recalled.
A decade later, Tom Ridge tried. Again, the opposition was formidable: unions, religious groups, Mothers Against Drunk Driving.
Jones, the LCB's chairman at the time, remembers state store workers making the rounds in the Capitol, beseeching lawmakers to vote no. Some workers clutched pictures of their children.
Other groups threatened to personally blame legislators for drunken-driving accidents in their districts.
"That's a very chilling thing to contend with," Jones said.
In the end, there was no strong constituency pushing for privatization, aside from Ridge's Republican administration, he said.
Moreover, there was less urgency in those flush times. Ridge wanted the money generated from selling the stores to help build stadiums, among other projects.
This time around, the state is deep in red ink. Federal stimulus money runs out next year, and mandated costs, including prisons and Medicaid, are on the rise.
"Things are different now because of the fiscal situation," Brouillette said. "I believe there is a good chance it may happen."
Corbett must grapple with a deficit now projected at $4 billion. Having pledged not to raise taxes, he will have to close the gap with steep cuts, a sale of state assets, or some combination of both.
Working in the governor-elect's favor is the fact that both the House and Senate are now ruled by his party - and that the House's new majority leader, Rep. Mike Turzai (R., Allegheny), is staunchly pro-privatization.
Turzai has floated a proposal to auction off wholesale and retail licenses and establish biennial licensing fees for the newly private stores. He would also eliminate some taxes now imposed on wine and spirits, replacing them with a per-gallon tax of $3.50 to $7.
Wine and spirits are now subject to an 18 percent Johnstown flood tax - imposed in 1936 to help that city rebuild from floods that year. Intended to be temporary, that tax is atop the 30 percent markup that LCB customers pay - along with an LCB handling fee that averages $1.31 a bottle.
Turzai's proposal includes language meant to soften the blow for LCB employees whose jobs would evaporate: tax credits for private employers who hire them, tuition aid for their education, and a leg up for those who apply for other state jobs.
He and others say the sale of stores could fetch up to $2 billion and net the state annually more than it gets now in liquor revenue.
Not so fast, LCB officials say. They dispute the $2 billion estimate; they note that the agency last year kicked in $481 million in revenue; they brag of funding drug and alcohol programs and state police enforcement efforts.
Stapleton said the agency will ask the legislature to consider phasing out the Johnstown tax and lowering the 30 percent markup.
"If people want to change the system, they are entitled to do so," Stapleton said. "But in desperate times, people sometimes make desperate decisions. And at the end of the day, somebody will have to do a solid analysis about what the impact will be first."