House Appropriations Committee February 25, Written Remarks Submitted for the Record on behalf of the Pennsylvania Liquor Control Board (PLCB)

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1 House Appropriations Committee February 25, 2016 Written Remarks Submitted for the Record on behalf of the Pennsylvania Liquor Control Board (PLCB) Tim Holden, Board Chairman, testifying with Mike Negra, Board Member, and John Metzger, Executive Director Chairman Adolph, Chairman Markosek, House Liquor Control Committee Chairman Ross, Chairman Costa, members of the committee, thank you for the opportunity to submit remarks for the PLCB s budget hearing and to address you today. We welcome the opportunity to discuss the successes our agency has achieved, the challenges we face and our plans for operational improvement over the next year. We also look forward to continuing dialogue about legislative options we believe would improve consumer convenience and enhance commonwealth revenue. In the most recently completed fiscal year, FY , PLCB sales of wines and spirits totaled a record $2.34 billion (inclusive of all taxes), an increase of 4.2 percent over the previous year. Sales growth was broad-based with spirit sales growing by 4.2 percent and wine sales growing slightly faster at 4.3 percent. Sales of the Chairman s Selection product line grew at a robust 7.8 percent. Retail customer sales grew by 4.7 percent and licensee sales improved significantly by 2.5 percent (growing only 0.7 percent in FY ). As a result of our sales growth, the PLCB was able to return increased revenue to the commonwealth in FY : $464.6 million in tax revenue was remitted to the General Fund ($334.4 million in liquor tax and $130.2 million in sales tax), representing an increase of $18.8 million over the prior fiscal year. $80 million of operational profits was transferred to the General Fund ($80 million was transferred in the prior fiscal year, and $100 million will be transferred in the current fiscal year per Act 10A of 2016). $25.7 million was provided to the Pennsylvania State Police Bureau of Liquor Control Enforcement, representing an increase of $768,000 over the prior fiscal year. $4.5 million in license fees were returned to local municipalities via the Liquor License Fund (approximately the same as the prior fiscal year). Page 1 of 5

2 $2.3 million was provided in alcohol education grants to 65 programs promoting responsible alcohol consumption and deterring underage drinking (approximately the same as the prior fiscal year). $1.7 million was provided to support the Department of Drug and Alcohol Programs, representing a decrease of nearly $802, Over the last five years, the PLCB has transferred $2.6 billion in cash to the General Fund as a result of its operations. The implementation of certain commonwealth benefit accounting and reporting changes required by the Governmental Accounting Standards Board are reflected for the first time in our FY financials. 2 Our financial statements also reflect the effect of the commonwealth s growing benefit costs and liabilities related to pensions, workers compensation and other post-employment benefits, as well as sizeable increases of the PLCB s share of these expenses and liabilities due to recently implemented changes in the method by which they are allocated among various commonwealth agencies. As a result, our net income for FY was reduced by $49.2 million. Had these changes not been implemented, net profit for the year would have totaled a record $132.8 million, 2.5 percent growth from FY Instead, our FY financials show net profit of $83.6 million, down $40.1 million (or 32.4 percent) from the prior fiscal year. These benefit accounting and reporting changes, the methods by which the PLCB is allocated its share of the unfunded liability of these employment benefits, and the extent to which the commonwealth funds such liabilities, are outside the PLCB s control. We continue to have discussions with the Comptroller s Office regarding how the PLCB s share is calculated. For example, the PLCB employs a significantly higher proportion of part-time wage personnel than other agencies (e.g., intermittent liquor store clerks). Few of our part-time employees work sufficient hours to be eligible for certain commonwealth benefits, and only half of those who do qualify actually choose to participate. Therefore, it is our position that it is not appropriate to include all part-time employees in calculating the PLCB s share of benefit expense and liability based on payroll numbers that include part-time wage employees. 1 The transfer to Drug and Alcohol is established by the Liquor Code. Pursuant to Section 802(c) of the Liquor Code, 2 percent of the PLCB s annual profits are to be transferred to Drug and Alcohol. As described in the remarks, the PLCB s reported net income was reduced from the prior fiscal year, resulting in a corresponding reduction in the statutory transfer to Drug and Alcohol. 2 The PLCB is one of only two completely self-funded state agencies that return operational profits to the commonwealth. As such, we are unique in that this agency produces detailed annual financial statements (profit and loss statements, income statements, balance sheets) similar to those seen in private industry reporting a level of detail not exposed in other agencies financials. Page 2 of 5

3 The uncertainty and ever-changing nature of these liability allocations make it difficult to accurately forecast our net income. The Comptroller s Office has advised that we may see additional increases to our share of the overall actuarially determined unfunded commonwealth liability for annuitant hospitalization and other post-employment benefits. While we continue to discuss these issues with the Comptroller s Office and await the rationale for any future increases, any changes in the PLCB s share of the unfunded liability must be reflected in future financial statements due to the recently implemented accounting and reporting changes. The PLCB strives to maintain control over operational costs while growing the overall business, but the agency is impacted by many of the same personnel contract issues affecting other agencies with increased health care and pension costs. For FY , the PLCB s primary budgetary expense driver was personnel costs, which increased by $19 million (7 percent), with the majority of that from a $15 million (15 percent) increase in benefits. 3 Excluding these benefit costs, the PLCB s day-to-day operational expenses (e.g., rent, IT costs, equipment, etc.) grew by 5.3 percent last year. We continue to invest in safety, security, our regulatory infrastructure and social responsibility. To that end, operational expense growth last year included long-term investments in the agency such as the development of new licensee systems which will facilitate paperless licensing processes and online wine and spirits orders, as well as upgrades to point-of-sale technology. We also continued our investment in store rebrands, enhancing convenience and the in-store shopping experience for consumers. We remain committed to key improvements that will help us to grow our business and improve the way we serve consumers and licensees. In coming months we will launch PLCB+, a new online platform allowing applicants for licenses and permits to submit applications and supporting documentation quickly, easily and securely through the Internet. When fully implemented, PLCB+ will allow licensees to renew and validate their existing licenses, apply for a new license, apply to transfer a license, update license account information and pay fees online in a prompt, efficient and user-friendly on-line environment. The PLCB made an investment of $4.5 million in the automated system, and expects to realize $9 million in cost savings over the next four fiscal years through attrition of personnel and other operational efficiencies. We continue to look at ways to grow sales, improve margins and implement cost saving and efficiency measures 4, but there are limits to what we can do without making changes 3 Benefits increased most prominently for pensions ($7.6 million), workers compensation ($3.2 million) and annuitant heath care ($2.5 million). 4 As requested by Senator Browne, Majority Chairman of the Senate Appropriations Committee, the PLCB provided an accounting of various cost saving and efficiency measures having financial impacts on FY and beyond in its letter dated February 16, 2016, which was distributed to both the House and Senate Appropriations Committees. Page 3 of 5

4 to the current system, or without legislative action or support. The PLCB has long supported certain changes that would open the door to greater consumer convenience and increased commonwealth revenue. Below is a list of various concepts that we are interested in pursuing, and we welcome discussions on any or all of these issues: Unrestricted sales on Sundays (number of locations and hours of operations) Allowing the PLCB to sell Pennsylvania Lottery tickets Flexibility in procurement of liquor (removing the proportionality requirement and allowing the PLCB to negotiate the wholesale and retail prices of liquor) - requires legislative change. Simplifying the PLCB s existing markup structure (as discussed during the House Liquor Control Committee meeting in August 2015) we would like legislative support for this initiative. Flexibility in offering coupons/incentives (customer relations management program) Increasing existing licensing fees 5 or adding a license surcharge (ensuring that license fees cover our administrative costs in processing applications, rather than subsidizing such regulatory costs from our profits) Increasing fines associated with violations of the liquor laws (helping to ensure that licensees are deterred from wrongdoing instead of accepting fines as simply the cost of doing business) - 6 Allowing the direct shipping of Special Liquor Order items (avoiding the need for handling by PLCB personnel, resulting in cost savings) Creating new license categories (e.g., casinos, grocery stores/convenience stores) Auctioning of licenses that would otherwise expire and pass out of existence - Regardless of what future changes we may have the opportunity to embrace, the role of the Pennsylvania Liquor Control Board is to regulate the sale of wine and spirits based on current law and provide the best selection and customer service we can to consumers. Our goal is to run the agency as efficiently and effectively as we can to benefit our customers and all the people of Pennsylvania. We cannot achieve this goal without the dedication and perseverance of our employees, many of whom have weathered the storms 5 Licensing fees, largely governed by the Administrative Code, have remained unchanged since Act 14 of 1987 created the existing fine structure associated with violations of the Liquor Code $50 to $1,000 for most violations, and $1,000 to $5,000 for major violations. The fine structure of $50 to $1,000 was introduced by Act 518 of The deterrent effect of a $1,000 fine in 1965 was clearly significantly more than the deterrent effect of a fine of the same amount imposed half a century later. Page 4 of 5

5 of the ongoing privatization debate for decades. We would like to end by acknowledging the professionalism and commitment of our store staff across the state as well as that of our administrative staff in Harrisburg their loyalty and devotion to customer service and operational improvements is incomparable. We thank the committee for the opportunity to offer these written remarks, and we look forward to addressing your questions. Page 5 of 5