Bottoms Up 

Think the state will someday privatize its liquor stores? 
What have you been drinking? 

BRIAN HICKEY (bhickey@philadelphiaweekly.com) 

Signs hanging from the ceiling direct customers to their jug wines, bourbons
or other libations. Posters thumb-tacked to the walls warn that the state
is watching. 

Under 21? Don't try it. Gonna drive later? Don't try it. 

Still they come in droves to Pennsylvania's wine and spirit shops. They
browse for selections they'll never find, suspiciously eye the inflated
prices and wonder why the uniformed security guard keeps checking them
out. 

As they stand in line, they can't help wondering why it has to be this way.
Booze can be bought in other states at lower prices and with a lot more
choices, but this is the only game in town for anyone without the means or
ambition to head across the river to New Jersey. 

The complaints have been loudly registered for decades. But as maligned as
Pennsylvania's state- controlled liquor industry is, it won't be going away any
time soon. 

In fact, the Liquor Control Board (LCB) system, to the disdain of many, may
be more firmly entrenched today than it has ever been in its history. 

A week before Prohibition was repealed in 1933 the state Legislature created
the LCB to protect the "health, peace and morals" of its constituents. While
every state decided how to control alcohol within its borders, only
Pennsylvania opted to control all wine and spirits through state stores. 

Subsequent decades brought more babysitting and few changes. The LCB
became the largest purchaser of wine and spirits (or hard liquor) in the nation,
a status it retains today. 

The alcohol they purchase is warehoused in state-owned facilities and then
shipped to the 639 stores operated statewide. (The 20,000 Pennsylvania
businesses with liquor licenses comprise a roughly $13 billion industry.) 

Harrisburg decides which products will be sold, and after tacking on taxes
that inflate prices beyond those in other states, they declare what it'll cost. To
those who hate the system, and they're not hard to find, it's a monopoly. 

If someone wants booze--whether it's a margarita-craving urbanite on a
scorching summer day, a Main Line socialite who needs wine for a dinner
party, a bar owner or a restaurateur--as long as they buy in Pennsylvania,
they must buy from the LCB. 

LCB supporters say the system brings Pennsylvanians prices lower than
those in states that have private-sector alcohol sales. How, then, to explain
the parade of cars with Pennsylvania tags lined up at out-of-state liquor
stores? 

Every decade or so there's movement to have the state government sell off its
booze stranglehold. 

And the movement always fails. 

The state store system is protected by unions guarding their jobs, mothers
who think a new system will unleash drunken drivers onto the streets and
religious types who cringe at the thought of easier availability. Residents who
think a privatized system would run more smoothly don't stand a chance. 

What makes change so unlikely is that for the first time the LCB may not even
 need those weighty supporters. 

Critics, particularly those in the hospitality industry, abhor the state store
system, but have largely given up hope of scrapping it. Instead they've
adopted a strategy of working with the system. 

When restaurateurs complain that they can't get the selection they need at
LCB stores, they're told they can order any wine they want. But the
process remains an unnecessary hassle. 

Still, most give the LCB credit for attempting to modernize and for being
willing to participate in a dialogue about the system's problems. 

"They're trying to be more customer- friendly in their typically socialist way,
but Philadelphia is not a good place to live if you like fine wines," says
Marnie Old, a Philadelphia wine consultant. "But after years of nothing,
a lot is happening now. They're finally realizing that Pennsylvania's Quaker
mindset has got to go." 

The Quaker mindset might be on its way out, but the LCB as it stands
today won't be going anywhere soon particularly because the LCB
assisted state legislators by transferring money to help cushion the blow
of a disastrous budget last month. 

Though the LCB has always seemed awash in money, the politically
appointed board started moving away from keeping all booze behind glass
and allowing customers to order from a catalog at the counter back in the
1980s. 

Employing some logic, they started forcing licensees to pay back taxes
come renewal time, turned over some enforcement efforts to the state
police, let customers use credit cards and checks and allowed stores to
keep some alcohol refrigerated. Then they lifted an odd ban on beer
advertising. 

"We did things that wouldn't hurt anybody," says an LCB commissioner
 from that era. 

This attempt to catch up with the times continued in the 1990s when the
LCB simplified the licensing process, updated its auditing procedures
and christened a Pennsylvania Grape Month to bring wine discounts to
the stores. They wound up making more money than ever before. 

Appointed to the board by former Gov. Tom Ridge three years ago,
Philadelphia attorney Jonathan Newman says even greater steps have
been taken this year alone, the latest in a "slow evolution." 

April 22 was the first day that Pennsylvania consumers could purchase
up to a case of out-of-state wine over the Internet (though it has to be
shipped for distribution through the LCB, which still gets its tax cut, of
course). Within a matter of weeks they hosted the first annual Philadelphia
Wine Festival, a gathering that drew hundreds to town for a slew of "wine
dinners" with vintners from across the globe. 

During the festivities they also opened a new 4,000-item "superstore" at
12th and Chestnut, a move that was touted as a way to bring more fine
wines to the city, no doubt pleasing the state's long-suffering wine
connoisseurs. 

It was during that week that Newman boldly declared, "This is a new
Pennsylvania LCB." 

"People from all over the state and country came to Philly and said, 'Wow,
what a great city. A dining mecca," he says. "It was symbolic of where we're
going from here." 

With the board grabbing some rare positive PR these days, critics base their
opposition on financial grounds. They say that unless the LCB loosens its
financial chokehold on them, businesses could go under. 

As the LCB's biggest customer, the hospitality industry in particular wants
financial relief. Their restaurants and bars, they say, aren't getting a fair shake.
With the state prohibiting them from buying alcohol from out of state, they're
at the LCB's mercy when it comes to price and selection. 

Patrick Conway, head of the Pennsylvania Restaurant Association, estimates
that 30 percent of LCB business comes from his industry. Conway says
businesses are left teetering on the brink of ruin because of what it costs to
stock their bars and wine cellars. 

After shelling out up to $35,000 for a liquor license, it's onto buying product.
And by some estimates, by the time a single bottle of wine wends its way
through the LCB, handling charges and taxes can double the price. 

"Our industry needs help and it needs it now," Conway says. "The system is
just unfair. We get bulk discounts for seafood, for produce, for meats. It's just
the way business should work, but it's just not that way here. We have to
deal with the monopoly." 

It hasn't always been this way. 

Bulk purchasers got a 16.67 percent discount in the 1970s. But in the
intervening years the discount has steadily dropped to 7 percent. 

Today there's a movement afoot to get the state to establish an 18 percent
discount to help businesses that forecast even rougher times ahead. But with
the state now predicting dire straits across the board, it's unlikely that the
hospitality folks will get their way. 

Their lingering hope is the pending legislation that brought members of the
state Senate Law and Justice committee to a public hearing at the convention
center last month. Holding a public hearing was in itself a step forward for an
LCB that's perceived as isolated in its power and indifferent to outside criticism. 

People packed the room to lobby for change, saying liquor taxes hit them too
hard in their wallets and send potential customers out of state for better prices
as nearby as New Jersey. 

(Even the LCB admits that they lose a nice chunk of revenues to businesses
across the Delaware because most people ignore the threat of a $25 per bottle
fine for crossing state lines. "To me that's the same thing as urban flight. Why
not keep that business here?" asks Old.) 

Some of the same people say they know of businesses that have steered clear
of setting up shop in Pennsylvania because of the liquor woes. Others, they
say, who haven't been in Center City long may find themselves wondering
whether they'll renew their leases. 

And that's not even saying how hard it is to bring conventions back for
another visit when they find out how expensive it is to entertain in Philadelphia.
But publicly naming names would hurt business more than it would help. 

"The restaurant industry runs on a slim profit margin to begin with,"
Conway says. "The budget situation makes it difficult to put something like
this out there, but the increased sales in Philadelphia alone would make up for it." 

Those against a discount don't look too far beyond the $35 million the LCB
estimates it would lose in the first year alone. State Rep. Roy Reinard--the
Republican from Bucks County who serves as the legislative Liquor Control
Committee majority chair--would like to see discounts for both businesses and
consumers. The problem, committee executive director Jay Wiederhold says,
"is the budget, of course." 

"There was talk about it when things were good," says state Rep. Robert
Donatucci, a Democrat from Philadelphia and Montgomery counties who
serves as the committee's minority chair. "They're hoping for 16 to 18 percent,
but there's no way. If it goes anywhere, I can't see it above 10 [percent]." 

Former Governors Dick Thornburgh and Ridge both turned the state store
system into a major issue during their tenures, maintaining Pennsylvania
would be better off auctioning them off. 

During the Thornburgh years it was a matter of busting a patronage-seeped
monopoly; he tried twice to no avail. Ridge preferred to sell the shops for a
$600 million to $1 billion windfall while keeping the state in on the
distribution side. He couldn't even get it to a vote. 

In his farewell address to Pennsylvania before heading for his homeland
security post, Ridge revisited the issue. 

"If you need more revenue, consider selling the state stores. It would generate
hundreds of millions for important programs. Forty-eight states offer proof that
we can safely enforce our laws against underage drinking without having
government employees behind the counter," Ridge said, alluding to the fact
that Utah also has a heavy hand in its liquor stores. "It would eliminate the last
symbol of the old Pennsylvania." 

Republican gubernatorial candidate Mike Fisher has quietly picked up where
Ridge left off. 

Estimating he could raise roughly $1.5 billion for special education, he wants
to sell the system to Wall Street investors who'd then dole out the stores to
private interests. 

Even before this latest budget quagmire hit the public's radar, Fisher was
lobbying for a cause that's been with him since he was in the Legislature
during the 1970s. 

At a June debate in State College with Democratic foe Ed Rendell, Fisher again
publicized his stance, though tempered this time. 

"It's not a front-burner issue, but it's one that shows a difference between the
candidates," Fisher spokesperson Kent Gates explains. 

He's right on both counts. 

When the plan was brought up, Rendell said the idea was politically good but
a pipe dream since no other governor's been able to push it through the House
and Senate. This is the same Ed Rendell who's known for never letting political
opposition get in his way. 

The little matter of the LCB having support from the unions, Mothers Against
Drunk Driving and religious conservatives always prevents it from happening. 

With the state so heavily dependent on LCB revenues, privatization doesn't
seem possible. 

Were it not for the LCB, legislators would've found it much more difficult to pass
this year's budget without making more painful cuts or, in the worst case, raising
income taxes. The city's schools quite possibly wouldn't have seen such an
unexpected windfall without it, either. 

As Pennsylvania's economic dam seemed to be cracking, the LCB came up with
hundreds of millions of dollars to help stabilize things. The rescue went publicly
unnoticed as the board nearly tripled its annual deposit to the state's general
fund during the past two years. 

Already bound to turn over all tax revenues, the LCB generally delivers an
additional $50 million in profits to the state. When that donation jumped to $120
million last year, the LCB dipped into its own rainy-day fund. For the fiscal year
that started July 1, they're on the hook for $155 million. 

"There are definitely problems with the system, and people want improvements,"
says Rendell spokesperson Dan Fee. "But the fact is that even with Republicans
in control, they couldn't get it done. How's it going to get done now? Fisher's
been trying for 25 years and hasn't been able to do it." 

Fee notes, though, that his boss could support the liquor discount for bulk
purchasers. He says he's a strong supporter of small businesses like those affected. 

But Gates still holds out hope in saying his boss, Fisher, knows how to get a
measure through. 

Some laugh it off. 

"What I'd love to ask Mike is that if we sell the stores, are we going to do away
with the Johnstown tax?" says state Rep. Donatucci of the 18 percent tariff
levied on alcohol to help Johnstown rebuild after the disastrous floods of 1936.
That tax remains intact today and serves to boost booze prices in the street. 

Donatucci says that even the promise of better prices won't likely rally the
privatization troops. His test- balloon effort to open "a handful" of specialty
stores for a couple hours on Sundays went down "like a bomb" when
conservatives got their hands on it several months back. 

"As far as selling it, it'll never happen," he says. "Mike should know better
than that." 

Quietly, some maintain that asking the LCB--long-considered a Republican
job stream--for the big transfers that helped save this year's budget served
another purpose: to saddle Rendell with a huge deficit that would leave him
no other choice than to raise taxes, should he win. 

"They're setting the next regime up for failure," says one liquor distributor
who's opposed to the current system. "When they get up there, they'll have
to find a way to come up with this money." 

Says Fee, "That money is no joke, but they couldn't do anything worse to
the next governor than what they did with this budget." 

Political consultant Larry Ceisler--who says such accusations are regularly a
part of Pennsylvania's political landscape--predicts neither candidate
would tap into the favors they'd need to bring change. 

"There's no political will to do it. Whoever comes in would have to use a
ton of political capital to get it done," he says. "Use it all up for that? Not
when there are much more important issues out there. I can't even see this
hitting the radar." 

Hardly a troubled venture, the LCB has done well for itself in recent years.
But the financial tide could be shifting. In the course of a couple weeks, the
rosy outlook darkened as the LCB's once overflowing well started running
dry. Sure, they were able to pitch in and help the state, but now they're
starting to think they won't be able to next time around. 

Should the state tell the LCB that $50 million won't cut it next year? Even
though most admit the LCB is light years ahead of where it used to be, at
least one board member openly thinks they'll be in a bind. 

"It's going to be tough to deliver the revenues we're supposed to deliver
as it is," Philadelphia attorney Jonathan Newman admits. "If we have to
make a similar transfer next year, we'll probably have to take out a line of
credit. We'll have to borrow money for funds to buy our inventory." 

For their part, those in the hospitality industry predict they could
ultimately feel the pinch in the form of tax hikes. And that, they profess,
could bring shuttered doors at a time when Philadelphia can use all the
business it can get. 

"I've been here 40 years and I can't even tell you how many deals I've
been offered to cave in--deals that would take care of me my entire life,"
says Wendell W. Young III, president of the United Food and Commercial
Workers Union Local 1776, which represents about 3,000 state store employees. 

Young maintains that deep down people know the benefits of selling the
system don't approach the benefits of leaving things the way they are. Still,
his union often gets blamed for being unwilling to let its members take a hit for
the good of Pennsylvanians. (He suggests the privatization debate is
perpetuated by a media that drools over the prospect of increased advertising
revenues.) 

"They say we're selfish, but they never mention that they can sell it for a
boondoggle one year but would lose money in the long run," Young says,
adding that existing taxes make lower prices an impossibility. "Our facts have
passed the test of time. These wouldn't be mom-and-pop stores. Big
conglomerates would come in and take over." 

Young has no problems with modernizing the system. He even advocates
setting up liquor stores in supermarkets as long as the state still has control.
He says making the system more convenient for consumers is the solution. 

Some have suggested selling wine by the bottle at restaurants, privatizing
wine sales (but not spirits) or letting local referendums decide. 

"It's still firewater to some people out there. Don't get me wrong, these are
beautiful Americans, but they think, 'If you want it, fine. Just keep it away
from me and my children," says a former LCB member, pointing to the fact
that about 650 out of 2,700 municipalities don't allow any alcohol sales. 

Considered a long-needed progressive on the board, the attorney Newman
says there's room for more change. He hopes that more specialty stores--like
the one at 12th and Chestnut--will soon crop up across the state. He envisions
in-store Internet kiosks that would allow customers "to find that odd bottle of
wine, even if it's in Erie or Penn State." 

The wine festival will return next year, and a state store in Bryn Mawr will soon
have a temperature-controlled room to protect its wines. Newman may leave the
privatization issue to the politicians but makes a sound argument that the LCB
is moving forward. 

Still there's the fear that with less money in its coffers, the LCB will have
problems continuing that growth. And should they grow stagnant, could
privatization once again muster support? 

State Rep. Donatucci says the only way he could see it happening is if the LCB
"fell into the red." And as for Sunday sales? Well, he says he's already learned
his lesson on that one. 

So for now, even though many Pennsylvanians would like to see a free-market
wine and spirits industry, there's little public outcry. Businesses are relegated to
the background where they patiently wait for their opportunity to rev the issue up. 

They're mad about the discounts--not to mention the fact that they have to pick
up their booze at the stores themselves without having much of a say in what will
be there when they arrive. On the other side of the exchange, smaller distributors
who carry rare wines find it hard to convince the LCB to sell their products in its
stores. 

In any case, sobering reality prevails. People may not like the liquor system here,
but there's not a thing they can do about it. 

"They have the bully pulpit and they know it. It's not right," says a wine vendor
who wanted to remain anonymous as not to offend the LCB. "Will [change] ever
happen? I don't know. Probably not soon, but maybe someday. Just maybe." 

Brian Hickey (bhickey@philadelphiaweekly.com) last wrote about allegations of
fraud against a prominent local car dealer.