PLCB Numbers, PLCB lies: the truth about Bailment

A little over six years ago, the PLCB put in place a system called Bailment. Bailment is a common regimen in the business world...which is probably why the PLCB took 80 years to get there.

Bailment is a pretty simple idea; for instance, when you "give" your car to your mechanic with the implicit understanding that there's only a change of possession, not ownership. The mechanic holds your car until the work is done, and it's understood that the car never changes ownership; you don't have to stand there with your hand on the car to maintain your ownership of it.

In the case of the PLCB, bailment is a little more complicated, but not that much. The way it used to be, a wholesaler would deliver product to the PLCB warehouses, and they'd submit a bill immediately. Under bailment, the product is delivered to the warehouse, but the PLCB doesn't take ownership of it until it is subsequently taken from the warehouse for delivery to the stores. At that point, the wholesaler submits the bill, and PLCB will pay them. Well, not right then, that's not how business works, after all. Everyone works on "net 30," where you have 30 days to pay. The PLCB, of course, pays on "net 90." Because they're a monopoly, so there.

Bailment was touted as a big money-saver for the PLCB, a major 'get' the agency wanted legislative permission to use. It would reduce the PLCB's actual inventory costs, which would seem likely. But it would also allow the PLCB to skip the need for their annual $110,000,000 tax-free, interest-free loan from the General Fund at the start of every year, so they could buy product and have something to sell in the stores. Isn't that the way every business works? Borrow money from Mama to buy stock, and then pay her back...interest-free?

Well...the PLCB did stop taking the loan. Which you would think meant that they should have had some extra money to turn into the General Fund, you know, that big "contribution" that the Legislature tells them they're going to make. Yeah, that didn't happen. The amount after bailment was the same as the amount before bailment - $80,000,000.

We don't care -- it ain't OUR money, it's YOUR money.

The big talkers from the clerks' union say that there wouldn't be any increase just because the loan wasn't needed, because that money was used to buy the startup inventory. Let's look at that in round numbers to make it easier to follow.

Say I (as the PLCB) borrow...$100 million to buy inventory. In the course of the year, I make $500 million selling that booze to unhappy Pennsylvania citizens (unhappy because they have to buy from me!) before expenses. I then have to pay back the $100 million, which leaves me with $400 million to pay my other bills. But because of The Wonder Of Bailment!!!, I didn't spend as much just to have things sitting in my warehouse, so I didn't need that $100 million loan...which means I have the full $500 million before expenses. That money is now mine to spend on other things...like increasing the amount turned into the General Fund.

But that didn't happen, nor is that money accounted for in store remodels, in fact, there are fewer stores now than there were then. It's not accounted for in increased education, increased money to enforcement, or buying new LCBee costumes. So where did it go? 

Well...about the same time, the PLCB was putting in a new Oracle computer system. Unfortunately, just like the system they installed before, they didn't do a very good job (the Auditor General said so; both times). The cost overrun was about $40,000,000 (although it was spread out over a few years). Inventory expenses went up over $20,000,000 the first year, even though Bailment was supposed to reduce inventory costs and keep them low. Store, warehouse, and transportation costs went up $25,000,000. Stores' operations and supervision expenses went up $25,000.000  Overall, for the first two years of bailment, PLCB Operating expenses went up over $82,000,000! While both years had "record sales" (so knock-down easy to do in a monopoly that we wonder why they keep saying it), the PLCB had record expenses to go with them and pretty soon...the $100 million was gone.

So...all that money bailment was going to save through reduction in inventory costs? Last year, inventory was about 2.5% shy of pre-Bailment levels. One gets the feeling that the PLCB uses the Servpro motto - "Like it never happened."

After seeing what a bang-up job the PLCB did with our money here, maybe we'll check into how well variable pricing is screwing the citizens, and why we aren't seeing that extra $185 million that wonderful plan was supposed to bring in. We have a sneaking suspicion that the words "rising operations costs" are involved...

PLCB Math

So here we are, about to be screwed again by the PLCB. What is it this time? More nepotism? More corruption? No, this time it's just plain monopoly gorilla tactics (yeah, gorilla, not guerrilla). They wanted to force a private business to lower their margin so the PLCB could raise theirs.

Once again, they're just playing at being a business. A real business increases profits when it reduces costs through innovation or consolidation, they change benefits, they leverage productivity, they control operating costs. The PLCB does none of that; well or even at all.

For every dollar the PLCB spends buying booze, they make just over $1.45 selling it. (PLCB Financial Report 2015-16), but that isn't enough apparently. How can that be? Back in 2013 when Bailment was put in place -- that "nifty little system" that was going to make such a big difference -- the PLCB saved enough to no longer need a tax and interest free loan of $110 million from the state to start up their operation every year.  So where did that $110 million saved per year for the past 4 years go?  It isn't zero sum as some PLCB supporters suggest. 

For instance, if you start the year in debt by $100 million, and over the course of the year you make $500 million, your net is $400 million for the year. If you have no debt to begin with, then your net is the full $500 million. The PLCB no longer has that debt every year and so should be making $110 million more every year. Are they? Not according to their own financial reports.

In 2012, the PLCB contribution to the general fund was $80 million. In 2014, with bailment in full swing...it was $80 million. Maybe they spent it on improving the stores? Nope, store operations only went up $25 million over the two year period - still missing over $195 million. ($110 million times 2 years minus $25 million) Maybe they paid down some of the non-reported (at the time) pension debt. Hard to say, but if they did then they didn't continue it in 2015-16 when they had to report pension debt. That only went down just over half a million on almost $240 million of debt - a 400+ year payback plan.

Now we have "flexible pricing," which is of course all about "our need inside this building." Since none of the top 10 sellers of wine or spirits went down in price (except pints of Nikolai Vodka, which decreased a whopping 30 cents, and let's not talk about what a whopping display of hypocrisy it is for the PA Liquor Control Board to lower the price on The Drunkard's Friend), one can only assume that the PLCB kept all the negotiated differences of the most popular items. Now the question arises: how much more do they have to squeeze us by the balls to make the projected income increase of $165 million (or $137 million, depending on who you believe)? Raising the prices on 424 items isn't going to do that. Keeping all the $2.1 million in Jack Daniel's profit — as I'm sure they are doing or anticipating doing — still leaves a long way to go. 

By the PLCB's own admission of saving $110 million a year from bailment, and $165 million from price gouging the consumer, my math says that even with paying $195 million to the general fund, the pension debt should decrease by at least $50 million, and if you count that $110 million from the 4 previous years, there shouldn't be any pension debt.

Of course, that would assume the PLCB is an efficient, well run business organization with knowledgeable leadership and people who take initiative. None of which is true. It is a political pig sty stocked with innumerable incompetents that have no real business experience and run like a old boys club, hoovering up the hard-earned dollars of the citizens while giving almost nothing worthwhile in return.

So much for the Chairman's statement of:"...we can both generate additional revenue and achieve more competitive retail prices through cost reductions, rather than broad price increases." As a businessman, let me clue you in, Tim. You NEVER achieve more competitive prices by raising the price for consumers. The idea is to gain competitive advantage over other places selling the same or suitable substitute items. I'm betting you don't have a friggin' clue what that means.

Speaking of the Chairman, he was so proud saying that the PLCB didn't initiate any price increases during the period of 02/14 to 10/16. Well, guess what? They don't have to. ANY price increase gives the PLCB more money no matter who initiates it. I bet the suppliers never initiated 424 price increases all at once, though, did they, Tim? If you listen to the fearmongers at the UFCW and their lapdog bureaucrats in Harrisburg, we are told that there are 20,000 products available from the PLCB!! Yet Ol' Chairman Timmy is complaining that suppliers tried to increase prices on about 4% of them over two and a half years! Da noive o' dose guys!

You gotta ask why the $110 million from bailment PLUS the $137-165 million from screwing the public with "variable pricing" PLUS the $80-100 million or so they have been contributing the last 7 years or so doesn't total up to at least $337 Million being turned into the state ABOVE the taxes collected. Just what black hole of incompetence is it disappearing into? The answer is that it is all a lie. While they might make something more than before, the state, the General Fund, we the citizens are never going to see it. The PLCB needs it to keep their ship of mismanagement and incompetence afloat. They always have said that the PLCB will make more, not that the state or the consumer or the citizens would ever benefit from it.

It's OUR money; not yours.

What we need now is another border bleed study next year to see what damage has been done by these idiots. My money is that real border bleed is over $500 million by then, if it isn't there already.

Now more than ever we need to be rid of the PLCB.

Privatize, now.

Reality check: how is "modernization" working out?

The end of February marked eight months gone of the fiscal year, and just under seven months of Act 39's "modernization" of the state's police-enforced monopoly on wine and liquor sales, changes that Governor Wolf trumpeted as "historic."

So things are booming for the State Stores now, right? Well...not exactly.

Remember how bailment was going to cut inventory costs and save the citizens all sorts of money? It may have but it didn't last. Inventory cost went up over 10% so far this year and has now gone up over 46% since bailment was implemented in 2012. It will certainly pass pre-bailment amounts next year with a modest 3% increase. For the same period of time, the inflation rate went up 6.2%. (2012 Inventory $175,902,668; 2017 Inventory (so far) $257,285,382; Pre-bailment inventory $265,816,891)

Still, with all that inventory they must be making more money right? Sorry! Total Operating Income is down almost 5% year to date, while total assets squeaked out a gain of 4.2%. Meanwhile, Total Liabilities jumped almost 16%, from $803.7 million to 930.5 million. (And you know who has to cover that; you and me, the taxpayers.) Total debt is up almost $50 million more than at this time last year; $264,454,330 or about $26 million in additional debt than at the end of last fiscal year. To be fair, the PLCB statement has numerous notations about 'See Note X, Table Y', but they don't provide what those notes are. Are they valid reasons, or just lame excuses? The public doesn't know, and the PLCB clearly doesn't think we need to; it's kind of like their selection, if they don't have it, we don't need it.

The Never-Ending PLCB Story!

The PLCB is selling more product while making less money. In desperation, they're dipping into reserves to make a big payment to try and fend off  privatization, blowing smoke as thick as possible so you don't notice that they're going even further in the hole with liabilities approaching a Billion dollars...all the while remaining as incompetent as ever.

The benefits of modernization? I'm not seeing any evidence of that extra $137 million the Governor said they would make, and I'm willing to bet I won't, with only four months left in the fiscal year.

How many reasons do you need to get rid of this broken system and replace it with one that works for the consumer?

PLCB lies of omission

Sounds like the PLCB to me.

People — or government agencies — don't always tell the truth when their jobs are on the line. Such is the case all too frequently with the management of the PLCB. From the former CEO telling the workers to destroy wine kiosk paperwork, to a different CEO not knowing who came up with the idea to spend millions on anti-Pennsylvania "house brands." 

Now we have the lie of omission from the Board. After years of meetings with the House Appropriations Committee, the Senate Appropriations Committee, the Senate Law and Justice Committee, and others, not once, not ever did they say that "modernization" won't reach the goals that their supporters in the legislature said it would, specifically the $65 (or even $50) million that the Legislature estimated.

Until now, that is.

I'll save you the click, and give you the nut:

"[PLCB director of communications Elizabeth] Brassell says she cannot speak to the specific $65 million figure because it did not come from the PLCB. The number came from a House fiscal analysis in June. A House Appropriations Committee report last month pegged that number at a slightly more conservative $50 million in 2016/17.
“I’m not sure what/when fiscal analyses came from different folks or what may have changed. Sorry, can’t speak for data or assumptions that aren’t ours,” Brassell said. “We have yet to be able to meaningfully estimate how much additional revenue might come from flexible pricing, but it’s certainly not the estimates attributed to Act 39 as a whole.”

Did you notice that she didn't say what the PLCB thought it would be? Another omission designed to keep the "owners" — you and I — in the dark. Why would they do this? Because if they didn't agree and the figure is is much lower, as it appears it will be, then "modernization" would be shown to be the failure that it is. And why not? The recent history of the PLCB is full of schemes that were supposed to make money that never panned out: the bailment scheme, the new POS system, the SLO system, closing stores and reopening them (well, someone's cousin the real estate agent probably DID make money on those deals, right?).

More PLCB excuses.
I didn't say that. I didn't say anything!

Disingenuous? Most certainly. Illegal? Probably not, but should we expect more from the people that run OUR business? Shouldn't we hold public servants to a higher standard because what they do or didn't do affects the entire state? You know who pays the price for these lies isn't the PLCB. It's us, the public that has to put up with more lipstick on the PLCB pig.

After all that has supposedly changed in the past year...can you buy a six-pack of beer, a case of another beer, a bottle of wine, and a bottle of liquor in one place? Nope. Can you buy wine in grocery stores? Not really; the huge majority don't and won't have a license because of the inane "cafe" requirements. Can you find the selection that you see in other states, and on the shelf, not in their "online store," something you can look at buy right now? Not even close: there are private stores that stock on the shelves as many items  as the PLCB carries on their imaginary stocklists.

We deserve better and the free market provides it; the PLCB never will be able to.

Show me the money!

Bailment was supposed to be this great golden road to increasing the profitability of the PLCB. I'm not seeing it.

If you don't know, bailment is the term used by the PLCB where a product is shipped to and accepted by the PLCB's warehouse, but the ownership of the product doesn't transfer from the supplier to the wholesaler (the PLCB) until that product is actually ordered by a retailer (the PLCB again). It is used to save the wholesaler money because they are not responsible for maintaining inventory, the supplier is. The claim is that bailment reduced costs enough that the PLCB didn't have to borrow $110 million (interest free) from the General Fund to kick start their fiscal year, as they have in the past. Is that what's actually happened? 

It's pretty simple to check: if you don't have to borrow and pay back $110 million, you should have $110 million more to spend or save or invest at the end of the year. So where is it? 

We know it isn't being spent on inventory, since 85% of volume is in bailment, according to testimony given just last week by the Board. And we know that the amount turned into the General Fund hasn't increased by $110 million. It was $80 million in 2008 and it was $80 million in 2014. And we know that "Operating Income" hasn't increased by $110 million.

So where did that $110 million go? Operating income was $130 million in FY 2008 and only $17 million more (13%) in FY 2014 (even though gross sales were up 26% in the same time period, meaning 'profits' dropped significantly...but that's for another post). Operating expenses didn't eat it up either, the $64 million increase wouldn't account for it even if Gross Revenue didn't increase at all, which it did by $82 million. Net assets were $77 million in FY 2014 and $105 million in FY 2008 so it isn't squirreled away in assets either.

So I'm asking. Assume I'm a member of the public, your boss, supposedly — explain to me just where that $110 million went exactly? I won't think any worse of you if you say you just blew it on tasting rooms and such — it would be hard to think worse of you, honestly — but where'd the $110 million disappear to? Show me the money!