Giving Away the Store: A Preliminary Analysis of the Corbett Administration-commissioned Liquor Privatization Analysis

Authors: 
Roland Zullo
Authors: 
Stephen Herzenberg
Publication Date: 
November 2, 2011

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Giving Away the StoreOverview

A study commissioned by Governor Tom Corbett’s administration contains several flaws that cast doubts on its findings in support of privatizing Pennsylvania’s wine and spirit stores. Based upon an initial review, the study by Public Finance Management (PFM) appears to inflate the upfront revenue a sale would fetch, ignores the privatization experiences of other states, overstates public operational costs of the current system, and presents an overly optimistic estimate of revenues under a privatized system, among other concerns. The study also recommends a privatization approach that may reduce access to wine and spirit stores for some rural consumers while contributing to more alcohol-related social problems across the Commonwealth. Finally, the PFM study fails to present sufficiently detailed data, models and calculations needed to fully assess the validity of the results. Complete public access to PFM’s models and data is needed. 

Significant Flaws Found in Initial Review of Study

On October 25, 2011, the Corbett administration released Liquor Privatization Analysis (hereafter LPA), a study by Public Finance Management (PFM) evaluating the state revenue, tax, and consumer implications of a possible privatization of Pennsylvania’s state wine and spirits distribution system.[1]. While a full analysis of the 285-page PFM study will require many weeks, even a preliminary review reveals significant potential flaws. These flaws call into question (a) the PFM projections that the state would receive over $1 billion up front and that privatization would still be revenue neutral for the Commonwealth over time (i.e., deliver the same annual funds to the Pennsylvania General Fund), and (b) PFM’s claim that privatization would not increase alcohol-related traffic fatalities or other social problems associated with excessive consumption of alcohol.

Given more realistic assumptions and based on experience with privatization in West Virginia, auctioning off Pennsylvania’s wine and spirits stores still appears to be a bad deal for the Commonwealth. Jeopardizing a reliable revenue source during these austere economic times could burden the Commonwealth's ability to fund other services in the years ahead. Moreover, this privatization venture will substantially increase the availability of wine and spirits and reduce the Commonwealth’s ability to regulate liquor and wine consumption, potentially exacerbating social costs related to alcohol abuse.

One general problem with the PFM study is that it does not start with the question “Is it in the best interest of Pennsylvania to privatize this service?” and then proceed with an assessment of the pros and cons of privatization on a range of issues (impact on state revenues, impact on consumers, social impacts, etc.). Instead, PFM appears to take its assignment as making the case for privatization in part by justifying prior claims of privatization proponents. One indication of the PFM study’s pro-privatization orientation is that it only evaluates privatization and does not compare privatization options against keeping the service public. In particular, several potential improvements to the public operations are mentioned in the study but never factored into the long-term cost and revenue projections for sustaining the service as a public operation.

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Footnotes

[1] The PFM report is available online at http://www.budget.state.pa.us/portal/server.pt/community/liquor_privatization_analysis__final_report/4575.