The Pennsylvania Liquor Control Board on Friday voted to hire financial and legal advisers to help pursue Gov. Wolf’s proposal to borrow $1.25 billion against future profits of the state’s alcoholic beverage monopoly, even as those profits are under pressure.
Public Financial Management Inc. was hired to provide financial advice under an existing state contract. The law firm is Eckert Seamens Cherin & Mellott LLC, which is already under contract to provide intellectual property advice to the PLCB. Each have a $300,000 cap on their contracts.
The borrowing, which could happen by the end of the year, could have a major side effect of preventing the privatization of the state liquor system for the duration of the borrowing, unless taxpayers were willing to buy out the investors before the lending term ended.
The vote was 2-1, with board member Mike Negra voting against the proposal, though he pledged to work with the board’s two other members on the plan.
“My issue with it is just with the speed of the process,” Negra told chairman Tim Holden.
Holden and the third board member, Michael Newsome, said the advisers were necessary to make progress on the borrowing plan, which is designed to help Gov. Wolf do an end run around the General Assembly’s budget stalemate.
“It’s easy money, but it’s a lousy idea because you probably haven’t done anything to alter the underlying imbalance, so next year you have to come back to the well and do something else,” said municipal finance expert William Glasgall, of the Volcker Alliance.
The PLCB is a longtime source of money for lawmakers. Since 2007, the board has paid into the state’s coffers annually between $80 million and $217 million — the amount in fiscal 2017. For the current fiscal year, the agency has agreed to pay $185 million to the state, on top of the $1.25 billion in possible borrowing.
Pa. House Republican spokesman Stephen Miskin said in response to the PLCB vote: “The House just passed a revenue plan and we are all awaiting Senate action. With all the questions and concerns surrounding this proposal, we hope this will be the last action on it.”
Nevertheless, at the governor’s direction, the PLCB is on a fast track to borrow.
“At this point we have to start putting together a financial offering to present the PLCB in the best possible financial light that we can to reflect the profitability that we have,” Newsome said at Friday’s meeting. “We’ll be moving very, very quickly to make this happen.”
As it is, the PLCB, which operates more than 600 stores and has a monopoly on wholesale wine and spirits in the state, is facing some difficult trends.
In the five years ended June 30, sales net of taxes rose 21 percent while expenses climbed 35 percent, according to agency financial reports.
The board had slightly more than $2 billion in sales net of taxes in its most recent fiscal year, but its operating margin was the lowest since 2010.
“Part of what is driving down the operating margin are the annual increases in post-employment benefits and pension. This agency has discretion in managing just about all its operating expenses, except personnel,” Oren Bachman, the PLCB’s director of finance, said in an interview Monday.
“The pension increases that we’ve had of $10 to $18 million per year, you can only soak that up for so long,” Bachman said. Workers compensation costs are another expense dictated to the PLCB by the state, he said.
The agency’s less-than-stellar financial trends mean it is not clear how Wall Street will value the PLCB’s future profits.
The proposal being explored by the PLCB involves certificates of participation, a form of financing where investors buy a share of future revenue.
David Ozgo, chief economist of the Distilled Spirits Council, panned the borrowing plan.
“Normally, when a business takes on debt, they are doing it to recapitalize, they are doing it to buy new plants and equipment. They are investing in productive assets,” Ozgo said. “Well, the PLCB is not investing in productive assets here. They are using the money to pay ongoing state expenses.”