Sworn Testimony on PLCB Privatization by Wendell W. Young IV, President, UFCW Local 1776, April 14, 2011

Testimony submitted by Wendell W. Young, IV,
President, United Food and Commercial Workers Local 1776  and Chairman, United Food and Commercial Workers PA Wine and Spirits Council and Tony Helfer, President, United Food and Commercial Workers Local 23

The Pennsylvania House Democratic Policy Committee Hearing April 14, 2011, Harrisburg, PA

Mr. Chairman and Members of the Committee:

Thank you for holding these hearings as a way to bring out more details on the complex question of whether Pennsylvania should consider privatizing its Wine and Spirits stores.  The members of UFCW Local 1776 and our colleagues in UFCW Locals 23 and 27 very much appreciate your efforts to hear from every corner of the state.
 
Your hearing today is especially timely because just this past Tuesday an independent panel of experts at the U.S. Centers for Disease Control (CDC) issued a strong recommendation against the further privatization of alcohol sales in our nation.
   
The report – by the CDC’s Task Force on Community Preventive Services – cites strong evidence from 21 different studies that say that privatization results in increased per capita alcohol consumption.  It points to “excessive evidence” that the result is “excessive consumption, which is one of the leading causes of preventable death and disability.”

We have attached a copy of the full report.

Mr. Chairman, we believe that these hearings have served to show that there are many independent and professional studies available that lead to one conclusion: the PLCB and its Wine and Spirits stores, as currently configured, offer the best balance between delivering revenue while offering good service, selection and pricing of alcoholic beverages combined with the highest level of control of what is not an ordinary consumer product.  In fact, by fulfilling this mission, the PLCB works very well for all Pennsylvanians.

UFCW Locals 1776, 23 and 27 represent the clerks who staff the Pennsylvania Wine and Spirits shops.  Our union’s primary mission is to make sure that all of our members are treated fairly and can provide for their families.  We always have been totally transparent and up front in our role because we have nothing to hide.

As we have testified in past hearings, we see three key components to consider when weighing this issue:

First is the VALUE of the Wine and Spirits stores.  The case made by privateers is based on phony numbers. Any independent, rational look at the numbers shows that a sale of the system makes no financial sense.  These hearings have served a useful purpose in helping to debunk the validity of the $2 billion myth that the privateers have been promoting over the past months.

Testimony also has shown that a privatized retail system would cost consumers and taxpayers much more than what could be gained from any sale of retail liquor licenses.

Second is the SOCIAL COSTS of privatization.  Privatization absolutely would have a negative social and fiscal impact on many if not all communities in the Commonwealth.  Virtually every independent peer-reviewed study proves this fact.  This is why groups such as SADD, the Pennsylvania DUI Association and the NAACP oppose any privatization scheme.

The facts show us that the increased costs related to the social impact of privatization must be taken into consideration and balanced against the claims of a financial windfall before any decisions are made on privatization.

Third is the IMPACT ON THE CONSUMER AND MODERNIZATION.   These hearings have served to show that there is no doubt privatization makes no sense for your constituents who frequent the Wine and Spirits stores.  Prices will not go down.  Selection and convenience will not improve.  Your constituents would lose under any privatization scheme.

Instead of privatizing the PLCB, the Legislature should consider the various modernization proposals the PLCB has in development and encourage any modernization that will result in increased revenue, better service and improved control – the three key roles of the system.

THE VALUE :

Rep. Mike Turzai, who we understand is working to redraft his original privatization legislation, still claims that an auction of 850 licenses would generate $2 billion or more.  That’s a myth, and he knows it.  The fact remains that to get $2 billion the licenses would have to average $2.3 million each.  As our prior testimony has noted, this just doesn’t happen anywhere in our country. 

The privateers also gloss over the long-term revenue implications for our Commonwealth and, when challenged on the facts, they are now resorting to a philosophical argument that says the State should not be in the retail liquor sales business.

This policy position shift has come about partly due to the work of this Committee in exposing the flaws in the financial projections made by the privateers.
 
You have heard unimpeachable testimony that detailed how Pennsylvania’s Wine and Spirits shops generate more than $500 million a year for the taxpayers.  Some people claim that roughly $400 million of that total would still exist because it is tax revenue. 

However, that assumption fails to consider that right now we collect 100 percent of the taxes owed because the state manages the system. There is no delinquency of tax revenues.  Compare this to the collection rate of liquor taxes in other states, or for that matter compare the collection rate of liquor, cigarette and sales taxes by the PA Department of Revenue from all other retailers in Pennsylvania.
Pennsylvania also currently controls the wholesale, the mark-up rate, and the tax structure.  The state is able to establish the profit.  But if you look at Rep. Turzai’s original proposal, the state would give up the wholesale component of the system.  We no longer would be in position to set prices.
 
We also have to understand that his proposal changes the tax structure from a dollar-based tax to what is called a “gallonage tax.”  Our tax revenues would not grow with inflation as they do now because the gallonage tax is based on volume.  In addition, the data shows that the non-control states with a gallonage tax typically collect anywhere from only one-tenth to one-third of the revenue that we collect here in Pennsylvania.

The duly elected fiscal watchdogs of the Commonwealth, Treasurer Rob McCord and Auditor Jack Wagner, are continuing to look into this issue.  They have produced evidence from the revenue side to support maintaining and improving the operations of the PLCB as opposed to privatizing it.

The evidence presented in this series of public hearings should be enough to call into question the financial benefit projections that Rep. Turzai is using to make the argument for privatization.

SOCIAL COSTS :

As we established in prior testimony, almost every independent study on the social impact of privatization during the last 30 years shows that privatizing retail liquor sales results in negative consequences for local communities and increased governmental costs for state and local governments.

The only exception to this well established research data is the recent policy brief bought and paid for by the Commonwealth Foundation that seeks to overturn years of independent professional studies by manipulating the data and inventing new, untested criteria to arrive at conclusions that were predetermined.

The fact that the Commonwealth Foundation-funded policy brief by Antony Davies has not been peer reviewed and subsequently published in any reputable scientific journals, and is unlikely to ever be published given its lack of scientific validity, should disqualify it from serious consideration in the current discussion.

It is nothing more than propaganda masquerading as science.
For Pennsylvania, the social advantages of controlled liquor sales that would be put in jeopardy are real and telling. 

Here are just a few facts to keep in mind:

Pennsylvania has the nation’s 7th lowest rate of drinking and binge drinking among high school students.

The alcohol-impaired driving fatality rate in Pennsylvania is nine percent below the national average.  For people under 21, it is 25 percent below the national average.

We have the lowest rate of alcohol-related deaths in the nation.  And we rank second overall in revenue generated by the sale of wine and spirits.

14.5 percent fewer high school students reported drinking and 16.7 percent fewer reported binge drinking in states which keep control of alcohol sales one study found.

Lower consumption rates are associated with a 9.3 percent lower alcohol-impaired driving death rate in states which keep control of alcohol sales.

A long term study of the consequences of privatization by the University of Victoria in British Columbia reported that there was a 27.5 percent increase in alcohol-related deaths for every extra private liquor store per 1,000 population.

It must be noted once again that our UFCW members do not sell to minors.  They have no motive or incentive to do so.  In the past seven years, we have found only a few instances in which our members have sold to a minor.  This record of strict control speaks for itself, and it cannot be matched anywhere in the private sector.

Just in the last few weeks our UFCW Wine and Spirits store members were the first state employees to call attention to the new influx of high quality phony ID cards that some enterprising foreign companies are now selling to underage drinkers here and around the nation.

These false IDs, which are being marketed to young people by free market entrepreneurs, are designed to mimic valid state-issued drivers’ licenses and can be used to break the law. The fact that our UFCW members were able to spot the false IDs and take immediate action is directly related to the unique positions they hold as control agents. They have the institutional and legal support, the technology and most of all the training to do the job properly.

Those attributes combined with a disincentive to serve underage or intoxicated customers have resulted in the confiscation of hundreds of false IDs and the denial of service to more than 19,000 illegal or impaired customers in the last year.

Those services have helped to prevent alcohol related problems that would cost state and local governments tax dollars for criminal and social services.

The proponents of privatization like to say that it is a revenue and budget issue – until their numbers are refuted. Then they resort to talking about privatization as a “proper role of government” issue.
They can’t have it both ways. Either it is about the money or it isn’t.

The real science tells us that a private system would hurt Pennsylvanians, but the numbers related to those social costs make an even stronger argument.

At a prior hearing before the Senate Committee on Law and Justice, Doctor Ted Miller presented testimony that quantified the added costs to the taxpayers, based on an assumption that privatizing the wine and Spirits stores would result in an increase in retail outlets from the current 625 stores to 1,300.

By a sophisticated analysis that took into consideration all of the related social costs, Dr. Miller showed that aside from losing the ongoing revenue the PLCB currently produces, Pennsylvania would be incurring additional growing costs directly related to increases in alcohol consumption, crime and alcohol related injuries and deaths that would far exceed any perceived fiscal benefit to the state’s coffers of a one-time infusion of cash from the sales of retail liquor licenses.

A summary of Dr. Miller’s conclusions reveals the following:

Spirit sales would rise by 21%, wine sales by 64%, and total alcohol sales by 13%.
More than a quarter of the increased sales would be liquor consumed illegally by children and youth under age 21.
PA would go from 42nd lowest state in alcohol consumption per youth to 27th.
Quality of life lost would equate to 800 deaths per year
570 due to injury and 230 due to alcohol-attributable illness
Harms from rising consumption would cost PA residents an estimated $3.6 billion over 10 years:
$320 million in medical costs
$110 million in criminal justice and public program costs
$100 million in property damage and other resource costs
$890 million in lost work
$2.2 billion in quality of life losses
In the first year, annual costs would be roughly $135 million.
$108 in criminal justice and public program costs
$13 million in medical costs
$14 million in lost sales tax
Over the next 10 years, as the longer-term costs kick in, the annual bill would exceed $150 million.
Even if private wine and spirit sales outlets do not rise above 750, the social costs to Pennsylvania taxpayers is still significant, according to Dr. Miller:

Alcohol consumption would rise by six percent; the annual harm bill would drop from $150 million to $67 million, with crime-related costs dominating that bill.

If the Legislature is going to decide this issue on the numbers, then all of the predicted fiscal benefits should be put into an equation that also takes into consideration the related social costs.

The testimony that you have received in this series of hearings has conclusively shown that when the entire fiscal equation is written, Pennsylvania taxpayers would lose big if the Wine and Spirits stores are privatized.

The proponents of privatization might want to shift their arguments from a fiscal to a philosophical position but the consequences in terms of additional taxpayer funded social costs cannot be denied.

When every aspect of the issue is quantified it is clear that the fiscally responsible and indeed the fiscally conservative position on this issue is opposition to privatization.

CONSUMER IMPACT; MODERNIZATION

The PLCB has recently come under attack by legislators and others for proposing operational changes that will allow it to better fulfill its unique role as both a modern retail operation offering a wide selection of products at affordable costs while adhering to strict guidelines on the sale and distribution of wine and spirits.

Many of these attacks, especially by supporters of privatization, have mischaracterized the PLCB efforts as a panicked reaction to a legislative push to privatize. Nothing could be farther from the truth.
In fact, many of the modernization proposals being discussed today have been part of a planned effort in the past eight years to create a modern, competitive retail operation.  The PLCB has taken very careful steps towards modernizing its operations due to the nature of the products that it sells – not because of other perceived threats.

The UFCW always has been at the forefront of efforts to bring the PLCB into the modern retail age. We are a far cry from the old fashioned counter store system of a few decades ago, but there always is room for more improvements.
Our union recognizes the need for a well trained, professional sales force and incorporated product training and customer service training into our collective bargaining proposals going back to the late 1970s.

Our union was the first to propose eliminating counter stores and creating wine specialty stores, using credit cards, internet marketing, special ordering, Sunday hours, stores in supermarkets and selling related merchandise in the Wine and Spirits stores.

Many of these changes were met with consternation and outright hostile opposition by some interested parties, but our unions recognized the need to respond to a changing market and we never backed down from that position. We have been a consistent long-term partner with the PLCB, through both Republican and Democratic Administrations, because we have always believed that the PLCB was unique in its ability to use modern business tactics without sacrificing its control of the sale and distribution of alcoholic beverages.

At the retail level our UFCW members maintain the highest standards of customer service and take pride in their ability to meet the consumer’s need for product knowledge. As in any private retail operation the success or failure of a business is directly related to the level of customer satisfaction it provides.  Our own market research, backed up and confirmed by ongoing market research the PLCB conducts on its own, shows that customers who shop at our Wine and Spirits stores report a customer satisfaction rating that far exceeds most retail and service providers in the private sector.

For these reasons we want to make it clear to the Legislature that the UFCW supports the operational modernization proposals the PLCB has asked the Legislature to approve, even though we believe that the Board is well within its right to implement many of these changes unilaterally and without legislative approval.

While we need to have more discussion on some of the modernization changes being proposed by the PLCB, the United Food and Commercial Workers Union does believe that many of the proposed changes would enhance the PLCB’s operations, allow it to improve customer service and increase revenues to the State without sacrificing any of the PLCB’s ability to control the sale of alcoholic beverages.

IN CONCLUSION:

The United Food and Commercial Workers Union would again like to thank the House Democratic Policy Committee for conducting this series of public hearings around the state.

There is no question that the fiscal arguments made by privateers don’t work in favor of the taxpayers.  There also is no question regarding the negative impact on society and the related added costs to the taxpayers of the social consequences of privatization.

The best scientific evidence proves what we already know – our UFCW members do a better job in managing the sale of wine and spirits than the private sector. 

This latest attempt to privatize the PLCB is the first evidence here in Pennsylvania of  the kind of virulent attacks on public sector workers that are sweeping our nation, and it is very important for our elected officials to view this latest attempt in that context.

The push to privatize our system, to destroy a valuable public asset, makes sense only if you’re an investment speculator looking to turn a quick profit by investing in and then flipping licenses. It makes sense only if you’re a chain store retailer looking to clear some shelf space and you want your untrained and inexperienced minimum wage clerks selling this product. 

It certainly won’t create any new jobs, and it won’t create jobs for the current Wine and Spirit employees.  The experience in other states demonstrates that that the licenses have gone to existing stores who use their existing employees to stock the shelves. New jobs, too, are part of the privateers’ myth.

We believe that it is time for responsible legislators in both parties to recognize that this latest reckless attempt to privatize the Wine and Spirits stores flies in the face of scientific evidence, ignores the real customer preferences of those who actually shop in our stores, and limits the PLCB’s ability to carry out its dual sales and control mission. It is time to stop privatization and to continue to embrace modernization in the PLCB’s Wine and Spirits stores.