COLUMBUS, Ohio (CGE) - New Republican Ohio Gov. John Kasich has proudly pointed to the innovation of his administration's efforts to raise a steady stream of funding for his pet project, a privatized state development entity called JobsOhio, by tying funding of it to the state's liquor profits.
Drink up Ohio
Backers of Gov. Kasich say that when the economy turns sour, as it has done in Ohio long before the Great Recession hit, the steady stream of profits from selling liquor represents a dependable source of funding that is independent of the ups and downs of any individual biennial budget. Helping business is always important, but if the normal sources dry up, tapping into liquor profits is a convenient and correct option Ohio should act on.
Republicans have lauded the plan as creative and a common sense market-based business solution. Its critics, on the other hand, call the deal a give-away to special interests who ought to pay far more for these steady profits than Gov. Kasich has said he thinks the state can reap from this deal, about 1.2 billion.
Liquor deal not a good deal
In a new report on the topic from Community Solutions, author Jon Honeck, Ph.D., shows that the proposed transfer of the liquor enterprise in Ohio will shortchange the state in the long run.
Ohio, for decades, has held a monopoly on the distribution and sale of liquor, an enterprise managed by the Department of Commerce that is self-financing and generates a growing source of income that is transferred to fund various state programs, including debt service on bonds for economic development loans and Clean Ohio brownfield remediation.
In Fiscal Year (FY) 2010, net profits from the liquor enterprise were $228 million, Honeck notes, emphasizing that the proceeds were earmarked for specific programs and also provided a General Revenue Fund [GRF] transfer of $167 million.
In his first two-year budget, first revealed this year on the Ides of March, Gov. Kasich submitted budget language to lease the state’s liquor enterprise to JobsOhio, his controversial plan to create a private entity he would be at the apex of that would use public funds that once went to the Ohio Dept. of Development.
As it's understood to date, the lease of the liquor profits is not subject to competitive bidding or approval of the Controlling Board, a bi-partisan legislative panel that has authority over certain state spending. Honeck notes that the budget language does not specify a minimum price for the liquor profits, which will be used to retire bonds issued by JobsOhio, compensate the state, retire existing debt and potentially provide seed funding for its own use.
Each year, Honeck writes, JobsOhio will utilize the portion of liquor profits not used for debt service. The lease may extend for up to 25 years after which time the liquor enterprise will revert to the state.
Honeck analyzes the fiscal implications of the lease arrangement by developing estimates of future growth in sales and profits related to the state liquor enterprise.
Kasick jobs director says Ohio protected
Kvamme, a long-time friend of Gov. Kasich who has contributed significant amounts of funds to the governor over the years who statehouse watchers expect will be on the board of JobsOhio, have said the deal will protect Ohioans from any losses if JobsOhio fails to deliver as intended. In addition, Kvamme said, the deal provides JobsOhio with a steady stream of funds to invest in the state's current businesses, lure outside companies to Ohio, and help new businesses rise from the ashes, according to one published report.
Liquor profits undervalued
And what are Honeck's considered conclusions? In a growth scenario based on historical trends, Honeck projects that liquor profits will reach $265.7 million annually by FY 2014 and $412.3 million by FY 2023. Over this 10-year period, cumulative liquor profits will total $3.3 billion. In the 25th year of the lease, annual profits will be $857 million, and cumulative profits will have amounted to $12.7 billion. In a slow-growth scenario, annual net profits reach $530 million in the 25th year of the lease, and cumulative profits will total $9.5 billion.
Gov. Kasich's plan calls for $500 million to be used to make a one-time payment to the GRF in FY 2012. That figure, Honeck concludes, "is far too small to be realistic for a medium- to long-term lease and represents little more than two years of liquor profits." Over 25 years, he says, the figure represents just 3.9 percent of cumulative profits in the higher-growth scenario, and 5.3 percent in the low-growth scenario.
"Legislative language should be changed to mandate, rather than simply permit, an annuity payment to the state to compensate for future losses," Honeck opines.
He says the future of the brownfield remediation portion of the voter-approved Clean Ohio program is in doubt with the removal of liquor profits as a source of revenue for debt service. Moreover, Ohio will also lose the ability to use liquor profits to fund debt service for new programs.
In an alternative scenario, Honeck says the legislature could provide liquor profits directly to JobsOhio through biennial appropriations or with the proceeds of a bond issuance without undertaking a full transfer of the liquor enterprise to JobsOhio. But if the legislature decides to authorize the transfer, he says, "it should do so with the full understanding of the functions that JobsOhio will undertake and how the transfer will affect other existing programs, including Clean Ohio and various alcohol-related programs in the departments of Health, Alcohol and Drug Addiction Services, and Public Safety."
The arrangement would be greatly improved by adding budget language to specify the amount of the annuity payment and to require Controlling Board approval of the contract.
Unique in concept, Jeff Finkle, president and chief executive of the 4,500-member International Economic Development Council in Washington, told one blogger that the estimated revenue stream would be larger than similar arrangements in Michigan, Kentucky and California, and it would be one of the biggest such dedicated funding sources in the U.S.
According to Finkle, "It’s a very big number. You may see some other states using the argument, ‘This is what Ohio is doing. We need to do it.”
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