January 23, 2007

Pennsylvania Senate Law and Justice Committee Holds a Hearing on the Hiring of a CEO at PLCB

You may recall former PLCB Chairman Jonathan Newman saying that Pennsylvania Senator John Rafferty, the Chairman of the Senate Law and Justice Committee, was planning to hold a hearing at the end of January regarding the process used to hire a CEO for the PLCB. That hearing, in fact, was held today.

For all of you Pennsylvania politics geeks out there, you can find links to video of the hearing on the Pennsylvania Senate Republican News site, including:

(1) the Testimony of Former PLCB Chairman Jonathan Newman (followed by Q&A) [56 minutes]; and

(2) the Testimony of PLCB Chairman Patrick J. Stapleton and PLCB Member Thomas Goldsmith (followed by Q&A) [1 hour 20 minutes].

It’s worth clicking on the testimony of PLCB Chairman P.J. Stapelton. After his response to a question hits the 8 minute mark (and cartoonishly involves several black-and-white charts), the microphone inadvertently catches the Senator who asked the question whispering to a colleague, "I’m sorry I asked the question." (See time index 23:27.) Too funny. What's funnier, though, is that Stapelton's response then goes on for another 4 minutes.

It appears that the hearing continues on Jan. 30. Following the link below, you will find the text of former Chairman Newman’s testimony.

JANUARY 23, 2007

Thank you for allowing me the opportunity to testify today regarding the Pennsylvania Liquor Control Board and the selection of its new Chief Executive Officer.

Let me begin by saying that I thoroughly enjoyed my 7 ½ year tenure on the PLCB, having served as Board Chairman for the last 4 ½ years.

I have been appointed by three Governors and have been unanimously confirmed three times by this Senate, for which I am grateful. I take pride in the entire PLCB team and its record of accomplishment during my tenure. I believe that together we have erased much of the negative perception of the Agency from the past, and that Pennsylvania’s taxpayers and consumers believed we were making strong progress.

When Governor Rendell reappointed me as Chairman in June 2006, he stated, “[B]y incorporating innovative e-commerce practices and initiating the Chairman’s Selection Wine program, Jonathan has helped position Pennsylvania as a national leader in the growing wine industry.” The Governor also stated, “By adding new stores, expanding product selection and educating employees, he has led the Board’s efforts to improve the PLCB’s retail operation.” I appreciate the Governor’s kind words and emphasize again that the credit is shared by the entire PLCB team. For my part, I will say that I enjoyed my fulltime commitment to Pennsylvania’s consumers and worked my 60-to-70 hour weeks believing I was making a difference in people’s lives.

The PLCB has been a labor of love for me. I enjoyed it all: visiting stores; getting to know our employees; conducting tastings with our specialty wine team; improving selection, prices and the consumer experience; building morale; and developing our esprit de corps. I also believed it was important to connect with consumers and enjoyed my many evenings with them at Chairman’s Selection dinners, wine tastings, store openings and our other consumer-oriented events. While my family is happy to have me with them nights again, and I’m certainly delighted to be with them, I will miss these events and interacting with our consumers.

To my great satisfaction, the many marketing and legislative initiatives successfully implemented during my time with the PLCB seemed to resonate with consumers: Enhanced employee training; stores in supermarkets; more attractive Premium Collection stores; the Chairman’s Selection wine program; gift cards; temperature control for fine wine; an e-commerce website and wine clubs; the Philadelphia, Central Pennsylvania and Pittsburgh Wine Festivals; outlet stores; Sunday sales; new holiday openings; accessory sales and in-store samplings. Consumers voted in favor of such innovations with their hard earned dollars.

And I was certainly looking forward to the exciting new initiatives I had in the pipeline, including the Virtual Store, which would make a much greater product selection available to consumers anywhere in the state with superior web functionality.

On July 10, 2006, the PLCB issued a press release approved by the Administration’s Press Office. The release was titled “PLCB Announces Record Sales Performance: Sales Growth Exceeds 7 Percent For The Third-Consecutive Year.” It noted that for FY 05-06, the PLCB would return $80 million in profits and $315 million in taxes to the Commonwealth. It reported the PLCB would provide more than $18.5 million to the Pennsylvania State Police for enforcement, $2 million to the Department of Health for drug and alcohol programs, and $4.5 million in license fees to local municipalities. Member Goldsmith noted that “the PLCB will have contributed more than $420 million to the Commonwealth, bringing the total to more than $1.5 billion for the past four years.”

The PLCB has not achieved this kind of consecutive year-over-year growth since the end of World War II—and this while our state’s population has remained fairly stagnant. In fact, the PLCB’s Breakout Flash Report, dated just the day before the CEO was approved by the Board, shows this trend as sustained through my tenure. This December 12th report shows that sales for the present fiscal year were already up over 5.7% in units and a healthy 7.6% in dollars.

And as you will hear, our bottom line is as healthy as our top line.

A review of PLCB Comparative Operating results over the last three fiscal years shows gross sales increased to $1.38 billion in FY 03-04, $1.465 in FY 04-05, and $1.573 billion in FY 05-06, with expenses holding steady as a percent of gross sales at 20.44%, 20.59% and 20.78%, respectively. Total revenues provided have been $348 million, $369 million and $414 million , respectively for those years. For FY 06-07, the total revenue transfer is projected to be over $484 million which includes over $334 million in taxes and a $150 million PLCB profit transfer we are able to make because of sustained growth over the last few years. Thus, the revenue transfers over the last four years are expected to total $1.615 billion.

As a means of legitimatizing the CEO appointment, the Administration disingenuously points to a projected $12 million increase in what it labels “expenses” for FY 06-07. I say “disingenuously” for two reasons.

First, as the direct result of increases in compensation and benefits negotiated by the Governor’s administration itself, and an increase in the licensee discount signed by the Governor, our expenses will increase by more than $18 million in FY 06 – 07.

Second, as noted, the Agency’s contribution to the Commonwealth’s general fund is projected to increase by over $70 million in FY 06-07, over the previous year. This means that in the same year in which what the Administration terms an increase in PLCB “expenses” is projected to be $12 million, we will actually contribute more than $70 million in additional funds because of our strong, sustained business. This is an impressive performance we should all be very proud of.

Allow me to give you the specifics.

Two PLCB tax revenue streams, consisting of the Johnstown Flood Tax and the PA Sales Tax, go directly to the Commonwealth’s bottom line and rise and fall with sales volume. They are not affected by expenses. A third revenue stream, consisting of the PLCB mark-up on product sold, also rises and falls with sales volume, but is affected by costs such as wages and salaries, PSP enforcement, store and other rents, plus the cost of inventory. Therefore, when PLCB sales spike up, as they have dramatically for several years, the two tax streams grow proportionally without offset, while the third stream grows too, though offset by increased expenses.

It should be evident that what really matters to the state, fiscally, is not the PLCB’s expenses considered in a vacuum, but the revenues provided to the Commonwealth, and the expenses in relation to those revenues.

Let’s examine these expenses.

The PLCB Budget office has analyzed the additional expenses for FY 06-07. Its conclusions are most interesting. First, the increase of the licensee discount supported by the Administration took it from 7% to 10%, resulting in a $8.8 million reduction to the PLCB’s bottom line in FY 05-06. In FY 06-07, the full year discount is projected to increase by $2.4 million, for a reduction of $11.2 million to the bottom line.

Second, the compensation and benefits increases negotiated by the Administration will result in expense increases of $10.32 million and $6 million, respectively, in FY 06-07. Additionally, there is an increase in potential GAAP leave liability, outside of the PLCB’s control, of $2.3 million relating to retirements. Therefore, in total, the increase in expenses brought about directly by the Governor’s Administration totals $18.72 million at a minimum in FY 06-07.

It should also be noted that increases in sales volume drive increases in sales related expenses. For example, our increase in gross sales volume this year of over 7%—part of a total 24% increase during the last three years—has resulted in an increase of $4.7 million in real estate rents, and of $6.5 million in fees relating to credit card processing and product handling/freight.

As we have proved, upgraded stores and better locations drive increased traffic and yield greater sales, especially in border locations. These new, nicer stores do cost more to build and operate, but they generate much more revenue. And they keep our citizens’ dollars in the state, whereas lesser stores would send consumers into neighboring states.

Some have suggested that smaller stores with sub-par locations are more than adequate because the PLCB has no competition. Any Pennsylvanian who lives within driving distance of a state border knows that simply isn’t the case.

I am very proud of our financial performance and record sales and appreciate the opportunity to set the record straight.

Let me turn now to the events of the past weeks. I am very concerned that the lack of transparency and heavy handed politics resulting in the appointment of a CEO to the PLCB, may have already undermined the positive change in perception among consumers that the PLCB has accomplished in recent years. The controversy may have already begun to hurt sales and started to erode our valuable goodwill. Customers vote with their pocketbooks and they know there are out of state shopping alternatives.

I was certainly surprised and saddened by the recent rushed process to have the PLCB rubberstamp the Governor’s hand selected CEO, which I firmly believe was not consistent with transparency and good government. I believe the lack of process and heavy handed politics have now completely politicized the PLCB. I’m very concerned about a perceived return to the old bureaucratic mentality of “the consumer be damned.” I am hopeful that the Legislature will take appropriate action to restore the PLCB’s status as an independent government agency acting in the best interest of consumers and taxpayers, and not because of political dictates.

I would like to detail some of the background regarding the PLCB’s 2-to-1 approval of the Governor’s choice for a CEO of the PLCB, a position that has never existed since the agency was formed in 1933.

During August of 2005, I first heard rumblings the Administration might be considering a political appointment of a CEO to the PLCB. I next heard the political appointment might be of an Executive Director to replace the outgoing Director of Administration. Not sure what was in the works, and wanting to ensure the continued integrity of the Agency, I wrote the Governor’s Chief of Staff. In my letter, I expressed that any positions should be subject to appropriate process and set forth my concern that as Chairman I had not been consulted regarding any proposed actions.

In advance of a meeting with the Governor on October 20, 2005, I wrote him a detailed memorandum advising him of the information I was hearing and my concerns that I had never been provided any documentation regarding proposed actions at the Agency. When I met with the Governor on that date, he assured me he had no plans to appoint a CEO to the PLCB.

In the memorandum to the Governor to which I just referred, I wrote,

“As Chairman of the PLCB, I have performed as a de-facto CEO at a salary of $60,000. As you know, the salary is a non-issue for me. I thoroughly enjoy my dual role of overseeing and managing this $1.5 billion agency. As Chairman, I have worked full time at the position as required by Section 202 of the Liquor Code, which covers Qualifications of Members. ‘Board members shall devote full time to their official duties’.”

I also wrote,

“In the era of the pay raise, I think it would be difficult to launch a costly nationwide search for a highly qualified individual for a management position with the media scrutinizing the hiring of such a highly paid government official.”

I also made clear in the memorandum that I did not want a dime more to continue performing responsibilities consistent with those of a CEO/Chairman position. I noted that the continued de-facto duality of my role was important toward assuring a chairman not merely engaged in oversight, but also responsible for operations as mandated by statute.

And I stated explicitly that if there was a need for a Chief Operating Officer or similar position, a thorough national search would be needed “mindful of the limits of salary in state government.” To the very best of my recollection, I never personally discussed this topic with the Governor again until he called me on December 11, 2006.

In early 2006, Joseph Martz, the Secretary of the Office of Administration, began work at the PLCB as the Acting Director of Administration. We did discuss this topic on several occasions during his tenure, before he left the Commonwealth to work on the Governor’s re-election campaign. Secretary Martz told me he believed the PLCB should do a Request For Proposal looking at the management structure of the organization before even considering additional positions. He also believed that once a top national consulting firm reviewed management structure and identified advantageous positions, if any, we should do a national search to fill them with the best qualified individuals. He confirmed to me on several occasions that the Board would have a chance to review any such RFP and make a thorough evaluation regarding any proposed changes or positions.

This was my last interaction with the Administration on this topic until Monday, December 11, 2006 when I learned from the Governor that he was naming Joe Conti as CEO of the Agency. The Governor spoke with me at 2:30 PM that day. He informed me he was referring Joe Conti as CEO of the Agency and that he expected the Board to vote its approval the day after next at our Wednesday Board meeting.

I told the Governor on that call that I had concerns and that I needed to sit down and speak with him. I expressed concern that the appointment would render me a paper tiger as chairman, unable to continue with the kind of accomplishments we had achieved to date. He responded that he would set up a meeting and get back to me. I did not hear from him again Monday and, concerned that the Board meeting at which he expected approval was imminent, I called him that evening and e-mailed his Secretary, Ann Shriver. I said that I would be in Harrisburg all day and evening on Tuesday and would be glad to meet with him at anytime. He never responded and, to this day, I have not heard from or spoken with the Governor.

I did receive a phone call from Secretary Martz’s office. He and Senator Conti wanted to meet with me in Martz’s office at 3 p.m. on Tuesday, December 12, the day before the Board meeting. Shortly before I left for this meeting, I called the PLCB’s Director of Human Resources to see if a salary was already set for the appointee and whether a job description existed. He told me that the salary would be $150,000 and that Joe Martz would give me the job description at the meeting. I told him that I had very serious problems with the salary and lack of process.

During the meeting with Secretary Martz and Joe Conti, Mr. Martz made it quite clear that my two fellow Board members would vote the next morning to approve the CEO appointment. He said my support was expected. He informed me Kate Phillips would be calling me and that the Administration expected me to give her positive quotes for a press release. He told me that the salary was set at $150,000 and handed me a five-page job description someone had prepared.

When I suggested that a salary that high would not sit well with the public, Senator Conti explained that the Governor had wanted him to take more than $150,000 but that he had declined. I pointed out to Secretary Martz as I quickly reviewed the job description for the first time that the “Definition” and “Examples of Work” seemed to indicate the Board would be abdicating all of its statutorily mandated responsibilities to the CEO. I explained this was completely unacceptable because the Chairman’s role would be almost wholly ceremonial, and the Board’s confined to policy and regulatory matters only.

I looked at the many responsibilities delegated to the CEO, the required skills listed for the position, and noted that the Minimum Experience and Training called for, “Ten years of progressively responsible experience in directing the purchasing, distribution, marketing and sales operation for a business,…” I had never even received Mr. Conti’s resume, yet we were forced to vote on the very next morning. I asked Mr. Martz to delay the vote to allow for adequate reflection and appropriate input.

I was told that the CEO appointment would be approved the next morning with or without me—that this was what the Governor wanted.

I responded that I would vote against this action and would state the reasons for my dissent.

The following morning at 10 a.m., I was outvoted at the Board Meeting and Joe Conti was approved 2-to-1 by the Board. PJ Stapleton, who the Governor has now appointed as the new Chairman, has told the press he thinks Conti’s $150,000 salary is “peanuts.”

I do not. I am very concerned about a brand new position, the lack of transparency in creating it, the absence of appropriate process in filling it, and its improper usurpation of the Board’s statutorily mandated duties. And, yes, I’m concerned about the unprecedented high government salary to be paid for it. It is simply insensitive to the citizens of this Commonwealth who work hard for their dollars to call it “peanuts.”

I believe a hard working Board doing its job can run the PLCB, as the law requires. I hope I’ve proved that. A Board with all members fulfilling their statutory obligation to work for the agency fulltime should not require a CEO to do its work for it. If new positions are going to be created there needs to be rigorous evaluation of what additional skill sets are required, and then a real process to fill it, with an opportunity for public discussion, media scrutiny and a national search process.

And if, instead, the Board is to be circumscribed in its duties, with part time efforts acceptable and only policy and regulatory functions, then its salary should be reduced. There should, in this event, be serious consideration given to adopting the practice of commissions of control states like Oregon, and many private companies, which compensate Board members on a per diem basis for their attendance at Board meetings.

As Senator Rafferty, and Representatives Donatucci and Raymond, the Chairmen of the House Liquor Control Committee, observed of the new CEO position in their letter to the Board of December 13, 2006, “If such a position is created, we no longer understand the significance of the Board, given that their power is now subject to a chief executive officer that has not been appointed by the Governor, nor confirmed by the Senate.”

The Board is mandated by statute to run the operations of the agency. It is not a board of directors of the corporate world which provides oversight and advisory functions, leaving operations to management. It is management. Appointing a CEO for the Agency has improperly created a second, parallel management structure. Neither the Governor nor the Board itself can reduce the statutorily conferred fulltime management role of the Board. Yet the Governor has anointed a CEO to perform the very same functions.

I would propose for clarity that the title CEO be added to Chairman Stapleton’s title to underscore that the Board is the statutorily mandated fulltime management of the PLCB; and that if the Board needs assistance in areas such as finance and operations, it may conduct a national search for true expertise. I would further propose that the $150,000-plus-benefits to be paid for the redundant CEO position be returned to the taxpayers.

Of course the continued vesting of operational authority in the Board, as required by law, necessitates Board members work fulltime for the agency, as they are paid and required by law to do. Board members of talent and accomplishment willing to undertake such fulltime roles within government salary parameters are motivated by dedication to public service—by the desire to make a difference in peoples’ lives. They are out there.

If, as the Governor has proposed, the role of the Board is to be eviscerated and operational authority improperly vested in a CEO, then, as alluded to above, the salary of Board members ought certainly to be reduced to a per diem.

I believe we need to ask if the process here was appropriate. Has a good-government standard of openness, transparency and process been met?

Will this method of appointment suffice for the creation and filling of future positions on other boards and commissions throughout the Commonwealth?

I would like to thank the Senate Law and Justice Committee for their oversight hearings into the process resulting in the appointment of the CEO, and would be glad to answer your questions.

Thank You.

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