No Financial Windfall but Plenty of Social Costs Come with Privatizing State Wine and Spirits Stores, Keystone Researchers Testify

House Liquor Control Committee Hearings Examine Flawed Public Finance Management Study
Date of Press Release: 
December 1, 2011

PHILADELPHIA, PA (December 1, 2011) — Privatizing Pennsylvania’s wine and spirits shops would not generate a large up-front fee but would cost the state at least $100 million annually, University of Michigan research scientist Roland Zullo told the Pennsylvania House Liquor Control Committee in hearings today at the Philadelphia Convention Center.

On Wednesday, Keystone Research Center economist Mark Price presented to the committee the research evidence showing that privatization would increase social problems associated with excessive alcohol use, including traffic fatalities.

“Beware the free lunch,” Zullo told the committee in summarizing the results of his review of a Public Finance Management (PFM) study of privatization that was commissioned by the Pennsylvania Governor’s Budget Office. “PFM made flawed assumptions to maximize the estimated up-front sales value and assure officials that there would be no annual loss of revenue to the state. They fulfilled their assignment but undermined the credibility of their report.”

Zullo was asked to review the PFM study by the Keystone Research Center. Among the flaws he identified in the PFM study, two stand out:

  • PFM’s claim that privatizing wine and spirits distribution would deliver as much money to the state each year as the current state-owned system rests on using a single year when the PLCB’s net income was low (2009-10) to forecast through 2015 what the state would receive without privatization.  Actual revenues already exist for the very first year of PFM’s projection, 2010-11, and are much higher than PFM projected. Comparing actual PLCB net income against what would have been received using PFM’s favored privatization scenario shows that privatization would have cost the state $96 million in lost revenue in 2010-11—and that’s before fixing other PFM assumptions tilted in favor of privatization.
  • PFM’s estimate that Pennsylvania would receive $1.1 billion to $1.6 billion in up-front auction fees is dramatically overstated. Taking the 2010 West Virginia auction results, and adjusting for consumption and population differences, Zullo arrived at an auction value for retail distribution that was less than half of PFM’s projection. Even this lower figure is overstated because it fails to take into account annual fees and high taxes built into PFM’s recommended privatization options as part of an effort to avoid annual revenue losses. The high annual fees and taxes would make liquor distribution franchises less profitable and so companies won’t pay as much for them.


“You can’t get something for nothing,” Zullo concluded. “To maintain annual revenues to the state, PFM needs to assume high taxes, high annual fees, and low mark-ups so that prices don’t drive customers to other states or reduce consumption. But companies won’t pay the state much for franchise fees under a scenario  that makes the industry unprofitable.”

Zullo also renewed KRC’s call November 2 for public release of all of the PFM models and spreadsheets. “Despite its great length,” Zullo said, “the PFM report is not completely transparent. Researchers and the public need access to the models so that we can ‘take apart the engine’ and see if it runs.”

On Wednesday, Dr. Mark Price, KRC labor economist, presented testimony showing that privatization would have negative social consequences. Dr. Price highlighted the recommendation against retail privatization made in an April 2011 review of the highest-quality academic research by a prestigious national Task Force of public health researchers.

Dr. Price also presented preliminary results of a KRC re-analysis of research by John Pulito and Antony Davies published by Commonwealth Foundation and cited by Commonwealth President Matt Brouillette yesterday. This research purports to show that traffic fatalities are the same or even lower in states with privatized alcohol distribution systems. The researchers cited by Commonwealth, left two key variables out of their analysis of state differences in alcohol-related traffic fatalities: average miles traveled and per capita income.

Fixing this omission reveals that alcohol-related traffic fatalities are higher in privatized states than “heavy control” states such as Pennsylvania. KRC’s preliminary estimate is that moving Pennsylvania from the “heavy control” to the privatized category would result in 58 more alcohol-related traffic deaths annually.

The Keystone Research Center is a nonprofit, nonpartisan research organization that promotes a more prosperous and equitable Pennsylvania economy. Learn more: www.keystoneresearch.org.