‘Profit enhancements’ might take a while to bear fruit, say PLCB officials

‘Profit enhancements’ might take a while to bear fruit, say PLCB officials


By Chris Comisac, Capitolwire


The General Assembly made several changes to the state’s liquor laws during the past year, but many of the promised fiscal benefits from those changes have yet to be realized by the Commonwealth.


During House and Senate budget hearings for the Pennsylvania Liquor Control Board, lawmaker were told by the PLCB that half-way through the current fiscal year, the state-run liquor monopoly’s expenses have exceeded sales. However, PLCB official said they don’t believe the through-December situation will exist when the fiscal year ends in about four months.


According to PLCB figures, the agency’s net ending financial position through the first six months of the current fiscal year was $5.3 million, or 7.3 percent, lower than through the same time period a year earlier.


Sen. Scott Martin, R-Lancaster, said to PLCB Board Member Mike Negra, “Obviously, there were supposed to be profit enhancement concepts that were implemented – you would think you would see the opposite occurring.”


Negra responded, “Sales were up 4.4 percent. Our cost of goods was up a little higher, and I think that’s a result of selling wine at a lower margin, so you’re seeing our cost of goods going up a little bit … we’re not getting the results of our flexible pricing negotiations yet because of the inventory issue … so our gross profit was up 3.1 percent through Dec. 31.”


“Are your operating costs outpacing sales growth?” asked Martin.


Negra responded, “Absolutely,” and explained pensions, benefits and payroll are the culprits, with pensions being the biggest cost driver – the agency’s net pension liability grew $17 million from FY2014-15 to FY2015-16.


He also noted that the agency expects some of the Act 39 and Act 166 changes to come into play by the end of the fiscal year, such as the $7.8 million they are awaiting from the first round of liquor license auctions.


Additionally, there have been costs incurred – for such things as computer systems, a new wholesale division and supply chain needs – during the ramp-up to some of the profit enhancements, said Negra, so costs have been “front-loaded.”


“I don’t expect that to show by June 30,” he said, but then cautioned, “However, it might take even longer to implement all the different facets of Act 39 so that it shows an overall improved profitability.”


Some of that is due to the agency having to work through its existing inventory before it can realize the benefits the PLCB says it and consumers will receive from what board member Michael Newsome described as “delicate negotiations with our suppliers,” as part of the flexible pricing – the ability to charge different markups on products – allowed by Act 39.


PLCB executive director Charles Mooney told legislators about 12 to 15 of the approximately 80-such meetings were difficult, but the board was able to work things out with those suppliers.


That prompted Newsome to tell House lawmakers savings from flexible pricing is “a moving target” dependent on the outcome of those negotiations.


Despite the uncertainty surrounding the savings, Negra assured the House Appropriations Committee Act 39’s removal of “the shackles” that had been on the PLCB with regard to product pricing would deliver better revenues for the Commonwealth and better product prices and availability for consumers.


Some lawmakers also expressed concern about the size of the transfer being made, as well as the source of a portion of the dollars, to the General Fund this year by the PLCB.


Negra said the agency will, when it’s all said and done, transfer $217.1 million to the General Fund this year, through several different payments. One such payment (actually two separate transfers in February), of $71.6 million, was received by the General Fund in February. Another $73 million was transferred in January, said Newsome.


The Wolf administration proposes transferring another $185 million next year, something Newsome said the PLCB is “comfortable” with doing both next year “and maybe the year after that,” although he noted “things can change over the next three to four years.”


This year’s $217.1 million transfer is a significant increase from the $100 million transferred to the General Fund during FY2015-16, and a significant portion of the FY2016-17 transfer appears as though it will come from the PLCB’s reserves.


Newsome said the PLCB for a few years had been building up its reserves, “So we were able to pay out of reserves – that’s what we’re doing this year [and] we’ll be doing it again next year.”


He indicated PLCB profits this year are expected to be approximately $90 million, while the agency’s cash flow is projected to be “slightly higher.” It’s from that “cash” that transfers are sent to the General Fund, along with money from the PLCB’s reserves, said Newsome.


But it’s not something the PLCB hopes it will have to do in the long-term.


“We’re hoping that as we move forward, we continue to build profits and we’ll not continue to reduce our reserves,” continued Newsome. “We have our staff telling us what they think the minimum reserve number should be – they’re telling us it’s about $150 million – we think it should be closer to $200 million.”


He said at the end of FY2015-16, the PLCB had a cash balance of $295 million, and the agency projects that will drop to $183 million.


“As we continue to pay down our reserves, we’ll have to keep an eye on that,” Newsome told one lawmaker.


Newsome later added, “The bottom line number is the one we’re most concerned about: where will we be after we’ve made those transfers.”


“And hopefully we won’t get to a point where the cash gets so low that it affects operations. And if that happens, well then we’ll have a conversation with you all and the Governor’s Budget Office. But it’s certainly something that we keep a close eye on,” said Negra.


“If your cash is dropping, you’ve got to make adjustments,” Negra later added.


While some on the House Appropriations Committee said they didn’t understand why former Gov. Tom Corbett’s administration chose to transfer only $80 million annually during his gubernatorial tenure, it’s clear from PLCB financial reports the agency’s reserves and its net asset position were of concern: the PLCB’s cash balance had dropped below $100 million (well below at one point), and it had negative net assets during FY2009-10, FY2010-11 and FY2011-12 – it wasn’t until FY2012-13 that PLCB net assets were greater than zero.


House Appropriations Committee Majority Chairman Stan Saylor, R-York, cautioned new cash flow problems could be caused by continued use of PLCB reserves to pump up General Fund transfers from the agency.


“I am concerned that we’re trying to put expectations [on the PLCB] … to kinda make things look good that aren’t necessarily as good as they may appear, simply because of transfers,” said Saylor.


“I think it’s important for us to be honest with ourselves,” he continued. “It’s like anything else – if you pass a budget that’s not real, you end up in big trouble, so I hope we can work with you to make sure that we don’t expect more from you than is reasonable.”