Pennsylvania's state-owned liquor system is always a favorite target when Harrisburg needs to fill budget gaps.
It was no different when the Wolf administration hired McKinsey & Co. for $1.8 million to examine the state operation for potential savings and new revenue without raising taxes. The administration posted the 79-page report to its budget website late last week.
McKinsey compared Pennsylvania with 15 other control states and found that the Pennsylvania Liquor Control Board had higher-than-average costs to buy wines and spirits and higher operating costs relative to its revenues.
In fiscal 2016, the PLCB had a gross margin of 31.3 percent, compared with an average 34 percent gross margin for the liquor control boards in Alabama, North Carolina, and Virginia. Gross margin is the amount of money a business has left after paying for the goods it sells. If Pennsylvania had the same gross margin, it would have an additional $53 million to pay its operating expenses.
New pricing power the LCB got under the new package of major liquor laws could help to improve the gross margin, but it's too soon tell if it is working.
An LCB spokeswoman said Monday that the agency "consistently considers ways to reduce expenses, increase revenues, and improve the consumer experience," and is reviewing the suggestions in the McKinsey report.
The analysis also found that the LCB's relatively high operating costs, equal to 24 percent of sales net of taxes, compared with an average of 18 percent for Alabama, North Carolina, and Virginia.
The board's financial results show that the state system has been having a hard time keeping expenses in check. Since fiscal 2012, sales have increased at a 4 percent annual clip, but operating expenses have outpaced sales growth, increasing at an annual average of 5.2 percent, the most recent annual report shows.
A big contributor to the increase in operating expenses, starting in fiscal 2014-15, was changes in the way the LCB accounted for pensions, health benefits for retirees, and workers' compensation insurance.
Overall, McKinsey suggested that by negotiating better prices from suppliers, matching the prices of neighboring states (which McKinsey found to be higher for a significant number of popular spirits), and improving store operations, the LCB could generate additional annual profits in the range of $167 million to $231 million, though a boost of that magnitude could not happen in time to help with the state's projected $3 billion budget gap in 2017-18.
That is far more optimistic than the $47 million to $75 million in additional revenue LCB officials estimated two years ago that could be gained from the pricing flexibility that went into effect last year. The LCB is no longer saddled with an across-the-board 30 percent mark-up for all products, which effectively allowed suppliers to dictate prices.
Wendell W. Young IV, president of the United Food and Commercial Workers Local 1776, which represents certain State Store workers, said the McKinsey report showed "good opportunities," but also warned that control states are not all that comparable because they are not all the same in terms of their scope of operations.