Free Minds & Free Markets

Pennsylvania Wants to Get Drunk on Debt

Gov. Tom Wolf's plan to borrow $1.2 billion against future state-run liquor store profits is fiscally risky and legally questionable.

Andre Jenny Stock Connection Worldwide/NewscomAndre Jenny Stock Connection Worldwide/NewscomA decade ago, state lawmakers in Pennsylvania faced a budget deficit and political pressure to privatize the Pennsylvania Turnpike, which was then run as a quasi-independent state agency.

Selling the nation's oldest toll highway to a private operator would have netted billions for the state, but lawmakers and then-Gov. Ed Rendell thought they had a better idea. They sold bonds backed by future toll revenues—a process known in investment lingo as "securitizing"—and turned the Pennsylvania Turnpike into an off-the-books source of borrowing that would, in theory, provide a steady stream of revenue for 50 years.

It didn't work out that way.

Turnpike tolls climbed every year to meet the new debt obligations since Act 44 passed in 2007. A drive from Philadelphia to Pittsburgh today costs more than double what it did a decade ago. After state audits showed future toll increases would be unsustainable, lawmakers in 2013 had the turnpike subsumed into the state Department of Transportation.

Even with that minor fix, Act 44 has become a case study—see this report from the University of Pennsylvania published last year—in what not to do when states take on debt.

Lawmakers in Pennsylvania, however, are preparing to make nearly the same mistake.

Facing a $1.2 billion budget deficit and political pressure to privatize Pennsylvania's state-run liquor system, Gov. Tom Wolf wants to securitize future liquor sales to eliminate the debt. Borrowing, Wolf said last week, would "pay off nearly all of our prior year deficit and significantly reduce the need for additional temporary borrowing to pay our bills."

The analogy with the turnpike isn't a perfect one. Motorists have options other than toll roads when they want to drive across the state. The Pennsylvania Liquor Control Board is a monopoly on liquor store operators and wine and spirits wholesalers that kicked in $210 million to state coffers last year.

But like the Turnpike deal, borrowing risks long-term problems if the Pennsylvania Liquor Control Board can't meet its debt obligations. And issuing bonds would also further entrench state-run liquor stores, an outdated system most states abandoned long ago.

The state faces a budget crisis because lawmakers in June delivered a $32 billion spending plan to the governor but have failed to pass a bill specifying how the budget will be funded. Wolf is asking for new taxes on gas drillers and hotels to close the budget gap.

"There are definitely questions," House GOP spokesman Steve Miskin told WITF's Katie Meyer this week. "The main concern is, is it legal, and can he unilaterally do it?"

The better question is whether or not he should.

Wolf's borrowing plan correctly points out the amount the Liquor Control Board contributes to the budget each year is less than what would be required to make annual payments on the $1.2 billion in borrowing. Wolf's top budget adviser told PennLive's Charlie Thompson that the annual debt service would amount to about $85 million.

True, but shortsighted. Funds siphoned off to pay for new debt service will not be available for future state budgets.

And a new paper published Thursday by Jarrett Dieterle, a fellow at the R Street Institute in Washington, D.C., questions whether state-run liquor operations charging what amounts to secret taxes in the form of price mark-ups on alcohol are illegal.

The PLCB used to apply a 30 percent mark-up on the wholesale price of liquor, but recently switched to a variable markup that fluctuates from product to product. Either way, that added fee is "a tax in everything but name," says Dieterle.

The mark-up system lacks accountability, because taxpayers can't remove PLCB board members at the ballot box. A lawsuit built on Dieterle's premise could undermine the state's ability to continue collecting this unseen tax.

"This setup ultimately allows state officials to hide the bill from taxpayers and to rely on what amounts to backdoor taxes to plug budget gaps, all while avoiding politically contentious policy decisions," Dieterle says.

Borrowing against the liquor system also serves a political purpose. Republicans in Harrisburg have been trying to privatize the state's liquor monopoly for years, but have faced opposition from Democrats and their public sector union allies. The state-run liquor stores are staffed by public sector workers who would likely lose their jobs if privatization passed.

Burying the Pennsylvania Turnpike in a mountain of debt effectively ended the private operator debate. Piling $1.2 billion of debt onto the liquor system—and those $85 million annual payments—would likely chill the ongoing debate over its privatization.

Bonds could lock-in the current system with language preventing the state from selling the liquor system, says Nathan Benefield, vice president of the Commonwealth Foundation, a free market think tank in Harrisburg that favors privatization. Even if that doesn't happen, the debt "could make privatization more difficult—or at least more inconvenient, as you'd have to price annual license fees high enough to generate the revenue to pay off the bonds."

Perhaps the best reason to be skeptical about the plan is that it does nothing to correct the underlying imbalance in the state budget. Even as tax collections hit record high levels, spending continues to outstrip Pennsylvania's (and many other states') revenue.

With Republicans in control of the legislature and a Democrat in the governor's mansion, it's unlikely spending cuts or massive tax hikes will find their way into law.

A real solution is sorely needed, one not dependent on financially dicey, questionably legal borrowing to paper over a major budget hole. The state has been down this road before; lawmakers should know better this time around.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Fist of Etiquette||

    And issuing bonds would also further entrench state-run liquor stores, an outdated system most states abandoned long ago.


  • ||

    I hear Tom Wolf's speaking at Lincoln Center. Well of course we're going to throw poo at him!

  • Rhywun||

    The state-run liquor stores are staffed by public sector workers

    That sounds so depressing.

  • loveconstitution1789||

    They slip alcohol into their eco-friendly drinking containers.

  • Brandybuck||

    I've never been in a state liquor store. Despite living in hyper-progressive leftist California, it's an alien concept to me. I can buy liquor at a liquor store, a boutique liquor store, a grocery, and even the damned bodega on the corner. The idea that some states require you to get your beer from a government store s downright bizarre.

    Yet there it is. I've been in regulated alcohol stores in some states. Places that can only sell beer, not wine or liquor. Places where you couldn't buy alcohol on Sundays. Groceries where you couldn't buy wine with your pasta. I've even been to a military base PX. But never a state store. So I'm sort of left imagining they're like a PX crossed with the DMV, painted in Post Office drab and manned by the TSA.

    It's enough to drive one to drink.

  • Magnitogorsk||

    I've lived in PA and UT, probably the two most backwards states when it comes to alcohol regulation (UT by far being the most backwards). PA liquor stores are so nice you wouldn't believe they were government-run if everything didn't cost 20% more than neighboring states. UT liquor stores are what you would imagine a government-run liquor store to look like. And in UT any beverage that's more than 4% ABV is considered "liquor", and must be sold in a state store.

    And no alcohol at all can be brought into the state, except by the government! Cops literally hang out by the Wyoming border to pull over people bringing in kegs and shit. Small government republicans at work.

  • Unicorn Abattoir||

    They used to do that in PA, too (at least when I lived there). Spotters would get plates leaving the liquor store just across the border in Delaware and police would try to catch them coming across the state line.

  • juris imprudent||

    Moving from CA to PA did induce some culture shock, particularly in the realm of alcoholic beverages. Thankfully, for all the rest of the commonwealth's liquor backwardness, micro-brewing is thriving.

  • esteve7||

    LOL, Democrat's gotta Democrat. Just keep mashing that square peg into a round hole and maybe it'll work eventually.

    The left sees round pegs going into round holes and thinks, hey my square peg doesn't work and their round peg does. So clearly the solution is to give everyone square pegs instead of changing yours to a round one.

  • Enjoy Every Sandwich||

    Round hole privilege!

  • loveconstitution1789||

    They sold bonds backed by future toll revenues—a process known in investment lingo as "securitizing"....
    This is also a process that I predict will be our next economic bubble bursting. More cities, counties and states are using bonds that are huge risk because the ability to pay them back is political wishful thinking.

    This is just an example of the kind of junk bond that are out there. Bonds that cover pensions are typically junk bonds too.

    I guess people will be surprised when that bubble bursts like when the housing market collapsed. Good 'ol government making the shittiest bubbles around.

  • Brandybuck||

    They sold bonds backed by future toll revenues—a process known in investment lingo as "securitizing"—and turned the Pennsylvania Turnpike into an off-the-books source of borrowing that would, in theory, provide a steady stream of revenue for 50 years.

    This is what is known as government putting on business clothes and pretending to be a business. But government is not a business, does not think like a business, and can never be a business. Government is about commanding people, stealing stuff, and breaking things. Business is about persuading people, providing value, and building things.

    Government should not be trying to be like business. Everytime I hear someone say government should be run like a business I know I am listening to an idiot. Everytime a businessman runs for office I have to cringe, wondering if they're one of those kind folk who think that way.

    Sell of the turnpike, and stick to providing basic infrastructure financed through ordinary bonds. Sheesh.

  • Rat on a train||

    state-run liquor stores, an outdated system most states abandoned long ago
    Privatizing Virginia's ABC has been proposed, but rejected because the revenue it generates. At least I can buy beer and wine in supermarkets. On the downside, we have the ABC beverage police.

  • Rhywun||

    If revenue was the reason for pubsec alcohol, NYS would be all over that. I suspect politics is the real reason, esp. the unionized workers mentioned above.

  • creech||

    The Penna. budget deficit is $2.2. billion for 2017-2018. The GOP comfortably controls both houses of the legislature but refuses to cut spending enough to eliminate the deficit. The voters here, and every where it seems, want their cake and to eat it too. So the scramble is on to identify those least powerless on whom new taxes can be implemented.

  • juris imprudent||

    Party of fiscal responsibility?


  • creech||

    s/b "most powerless"

  • Rhywun||

    Smokers and tourists, open your wallets again.

  • ||

    There is a reason I say we have the laziest legislature this side of the Mississippi. They don't do anything but what they've always done.

  • Enjoy Every Sandwich||

    Ah, yes. Jack up the price of liquor to try to cover the shortfalls, then stand in stupid amazement as smuggling and moonshining takes off. " could this have happened?"

  • Hank Stamper||

    Them Duke boys are at it again.

  • Unicorn Abattoir||

    Wolf is asking for new taxes on gas drillers and hotels to close the budget gap.

    He wanted to keep it a secret, but the hotel everybody.

  • JudoPete||

    Ever try to buy an adult beverage in Pennsylvania? It's madness. I've visited there a few years ago and found that beer could only be purchased in 24 pack quantities at state run beer stores, liquor could only be purchased at liquor stores, you couldn't buy any alcohol at gas stations, and I could buy a 12 pack at Pizza Hut.

  • Patricia Sanders||

    I don't know' what to say, but I am really very skeptical about borrowing $1.2 billion against future state-run liquor store profit. Even due to tax hikes, the collections may hit record high levels, but is it really gonna increase annual license fees high enough to generate the revenue to pay off the bonds.

  • Loss of Reason||

    Come-on Reason can you at least say if the Governor is a D or an R? Not much difference usually but in some cases.

    Awww Fast Eddy Randell - major of Flithadelphia, than the governor. I do give him credit for being an Eagles fan (That is hard on all of us). He used to be cozy with the Clintons too. Wonder if he still is.

    So the State whats to borrow against future liquor sales and the biggest city has an idiotic soda tax. Yikes!


Get Reason's print or digital edition before it’s posted online