Power: Corkscrewed!

Booze czar Jonathan Newman miraculously made state stores customer- friendly, then quit in a snit when Governor Rendell undermined him by appointing a political hack as CEO. That’s how Newman saw it, anyway

ON THE AFTERNOON of Saturday, December 9th, Tom Goldsmith was attending the Pennsylvania Society, the clubby annual gathering in New York City of Commonwealth pols and their hangers-on, when he heard a rumor from two state legislators. Goldsmith, who sits on the three-member state Liquor Control Board, quickly thumbed a BlackBerry message to the board’s chairman, Jonathan Newman, who was also attending the weekend. Had Newman heard the rumor conveyed by Goldsmith, the portly and genial former mayor of Easton — that Governor Ed Rendell was about to name recently retired senator Joe Conti to the newly created position of CEO at the LCB?

Newman, too, had heard the rumor, only his version had Conti running the LCB. “I was dumbfounded,” Newman says. “I’d just been appointed to a second four-year term as chairman. Before the election, Governor Rendell’s stump speech was very complimentary to me. I had no idea what anyone was talking about.”

Over the next month and a half, Pennsylvanians watched as what appeared to be a grand if depressingly familiar injustice transpired. For decades, the LCB had been an impersonal monopoly with the paradoxical purpose of both selling and regulating wine and spirits. To the state, it was a cash cow, throwing off $85 million last year to the general fund and another $250 million-plus in taxes. To consumers and restaurants, it was one of the banes of life in this state, with its drab stores, indifferent employees, limited wine offerings and criminal markups. Under Newman, almost miraculously, things had started to change, and his tenure as chairman had become that rare government story the citizenry could feel good about: Mr. Smith Goes to Harrisburg! Change Agent Fights Good Fight Against Loathed and Recalcitrant Bureaucracy! Glasnost, Pennsylvania-Style!

And now, under cover of night — or of legislative recess, at least — the politicians were giving their crony pal, a retired state senator best known for his support of the infamous lawmakers’ pay raise, a make-work $150,000-a-year job that would displace the brave maverick who single-handedly seemed to be making a difference. But Newman wasn’t going down without a fight! He went public, and spoke truth to power. There were Senate hearings, and the daily press almost unanimously portrayed l’affaire Newman as a stark fable. “Rendell rams through new job for pay-jacker” … “Politics as usual? Seems like it for Ed” … “Same Old Song and Dance” … “Chateau Rendell? It Smells.”

And so it went. Newman resigned. Conti took office. Wine drinkers were left to wonder if the transition marked the end of an era, and the start of a Vladimir Putin-style regression to the bad old days. And that would have been that, except that the colleagues Newman left behind were mystified by his actions. While his public statements accompanying his resignation suggested he had been a reformer done in by the usual reactionary forces, the proximate cause of his departure was the long-overdue creation of a position designed to bring the LCB up-to-date. “I didn’t think the hiring of a CEO would inflame anybody,” says P.J. Stapleton, who replaced Newman as chairman. “It was patently clear to virtually all of us that the organization of the bureaucracy was dysfunctional.”

Events had played out tidily in the public eye — Newman, good; Rendell, bad — but the fable, it turns out, wasn’t so simple.

WHEN JONATHAN NEWMAN became chairman of the LCB in 2002, it was certainly ripe for change. Since its post-Prohibition founding in 1933, the LCB had remained virtually static. Modernization began, ostensibly, in the late 1960s, but its pace was glacial, measured in decades instead of years. The first self-serve stores were opened in 1969. Stores began accepting credit cards in 1987. The first superstore opened in 1990. State stores — and the high wine prices in restaurants — remained on everyone’s short list of least-appealing aspects of life in Pennsylvania.

Newman, a Republican, had joined the LCB as a member in 1999, in the midst of Governor Tom Ridge’s failed efforts to privatize the system. Traditionally, an LCB board seat was a plush sinecure for a governor’s political allies. (“I didn’t want to break my neck” is how Goldsmith describes one of the job’s appeals.) But when Newman was made chairman, he became an activist. The chairman serves as the front man, dealing with the press, testifying before the legislature, and running board meetings; Newman was also interested in marketing, and had begun to develop a personal interest in wine.

Newman drafted a five-year marketing plan with the slogan “The Customer Is King,” and in the first year of Rendell’s governorship, a slew of changes transformed the state system. Trade groups, with the blessing of the Governor, had spurred the legislature into approving a pilot program, in 10 percent of stores, of Sunday sales. Joe Conti, as head of the State Senate’s Law and Justice Committee, which has oversight of the LCB, drove the passage of a law allowing the stores to sell accessories like corkscrews and Riedel stemware and Wine Spectator magazine. Rendell had swept into office promising “one-stop shops” — state stores inside of grocery stores — and in December of 2003, the first of these opened.

Some of the initiatives originated with Newman. In an effort to stanch “border bleed” — Pennsylvanians driving out-of-state for better selection and prices — Newman pushed the creation of six “outlet” stores, positioned near the boundaries with Delaware, New Jersey, Maryland and West Virginia. These stores offered discounts mostly in the form of extra-large bottles for the price of regular bottles in other state stores. Sales at these stores increased dramatically.

Newman organized wine festivals in Philadelphia and Pittsburgh and set up a website facilitating the ordering of specialty items. And in early 2003, along with Italian winemaker Ferdinando Frescobaldi, he held the first-ever in-store public wine tasting as part of the grand opening of the 27th superstore, in Exton. Such superstores, meanwhile, were reconcepted as Premium Collection Stores, with better selection, more high-end wines, climate-controlled wine rooms, and at least one knowledgeable wine person on staff. One of Newman’s greatest successes was a promotion called Chairman’s Selections, in which he took advantage of the state’s purchasing power (the state buys more wine and spirits than any other single U.S. purchaser, and is the top buyer of California wine) to negotiate with wineries for deep discounts on certain wines. The numbers told a similarly bullish story, with sales rising more than seven percent a year.

Acclaim followed, with profiles of Newman in both trade and popular periodicals, including a Philadelphia magazine story. (Full disclosure: Philadelphia produces Wine & Spirits Quarterly for the Liquor Control Board.) Wine Enthusiast, a national magazine, put Newman — a state bureaucrat — on its cover as “Man of the Year.” The feel-good aura around Newman only increased when Ed Rendell kept him on as chairman in 2003 and then renewed his chairmanship in 2006. The Guv was reaching across the aisle in the spirit of bipartisanship and not letting politics get in the way of progress. This Newman guy was that good. Which made it seem all the more strange, from the vantage point of the street-level consumer who’d been enjoying the changes in the state stores, when the Conti hiring was announced.

TO THOSE WHO worked with Newman on the executive floor of the LCB, Conti’s hiring wasn’t strange — Rendell’s transition team had advised him as early as 2003 that the LCB needed a CEO — but Newman’s reaction to it was. Beneath the impressive veneer of the LCB’s makeover was a tangle of pent-up conflicts and resentments. Some were external. Restaurateurs, for example, had long suffered under the high markups they were subject to and felt Newman could do more. “Jonathan’s improvements were geared toward the retail customer,” says Kevin Joyce, a Pittsburgh restaurant owner and chairman of the state restaurant association. “I don’t think he went far enough for our industry.”

Some of Newman’s colleagues had begun to think the chairmanship had gone to his head. In the article in Philadelphia, you could almost see Newman hitching up his pants as he described his prowess at bargaining with California winemakers. “My business is horses,” Newman said, “and I know when there’s weakness in someone’s voice.”

He also seemed to take his title seriously. “The owner of a vineyard told me, ‘Jonathan said he wants to be called ‘chairman,’” says an LCB source. In an August 2006 interview with The Observer, the trade publication for the state’s liquor and beverage industry, he described himself as “the chairman and essentially the CEO of a $1.6 billion business.”

“I never believed he was a real CEO,” Governor Rendell says now, “because he did still divide his time” — between the LCB job and the law firm of Obermayer Rebmann, where Newman was of counsel — “but even assuming that he was the de facto CEO, he wasn’t a very good one — particularly at keeping down costs.”

The lack of a CEO troubled Newman’s fellow board members and political patrons. “This is a $1.7 billion business,” Goldsmith says. “No business that size operates without a centralized executive.” A lack of departmental coordination, according to LCB and administration sources, led to budget conflicts, with no one to referee the competing interests of the various bureau directors, and no one to keep an eye on expenses.

The outlet store program, which was Newman’s initiative, wasn’t as successful as hoped: Some outlets were too close to existing stores, and cannibalized their sales. And because the “discounts” mainly took the form of restaurant-friendly, consumer-unfriendly extra-large bottles, the main beneficiaries in this case weren’t individual customers, but licensees. The percentage of outlet-store products bought by bars and restaurants shot up from 22 to 60 percent. “We’re leaving money on the table,” Goldsmith says of the stores.

Another problem area was real estate, where, Stapleton says, the LCB was spending money on stores that weren’t prudent, and agreeing to lease extensions at exorbitant rates.

But these issues might not have drawn notice were expenses not going up. “Revenues were rising at seven percent. Costs were rising at 10 or 10 and a half percent,” Stapleton says. “That’s not acceptable in private industry.” Newman would later point out that most of the new expenses were due to structural changes beyond the LCB’s control, such as an across-the-board wage increase for state store employees negotiated by the Rendell administration. And, Newman noted, a hike in expenses was also to be expected given the rise in sales volume. What was important, he said, was the robust bottom line. But an administration source counters that although revenues were projected to rise by $100 million in the 2006-’07 fiscal year, profits were expected to decline by $10 million. “If that’s not a red flag,” he says, “I don’t know what is.”

Still, Newman didn’t see the need for a $150,000 CEO when he felt he was performing CEO duties at a bargain $65,000 a year. “I thought it was a bad idea from day one,” he says. “I did the job because it was a labor of love. This board is management, it’s not like a regular board. The way the statute reads, if the board is doing its full-time position, you don’t need to bring in a supervisory person.”

In any case, Ed Rendell says it was never his intent that a CEO would displace the LCB’s chairman. “This was not to get rid of Jonathan,” Rendell says. “I got shit from the Democrats for keeping Jonathan as chairman. I got shit from the Democrats for reappointing Jonathan. I got shit from P.J. Stapleton for it. If I wanted to get rid of Jonathan, I wouldn’t have reappointed him.”

ON MONDAY, December 11th, two days after he first heard the rumor about Joe Conti coming to the LCB, Newman got a call from Rendell. The two exchanged pleasantries, and then, according to Newman, the Governor said he wanted Newman to appoint Conti CEO at the next board meeting, that Wednesday. Newman says he told the Governor he had “real concerns that this will make me a paper tiger,” and asked if the Governor would sit down with him to discuss them. The Governor, according to Newman, said, “No problem, we’ll get together.” According to Governor Rendell, the conversation went very differently: Newman was accepting of the decision to appoint Conti. “I asked if he had a problem with that,” Rendell says, “and Jonathan’s response was, ‘No, Governor, I like Joe Conti, I can work with him, but please don’t make me irrelevant.’ I remember that distinctly, because of the word ‘irrelevant.’ It was almost a plaintive cry. I said, ‘Jonathan, you’re never going to be irrelevant, your leadership is very important to me. … ’ And Jonathan said, ‘Thank you, Governor, I understand,’ and that’s why I was so shocked when he went off the way he did.”

On the Wednesday vote appointing Conti, Newman dissented, arguing that it abrogated the board’s duties and was, in its haste and the lack of a national search, contrary to principles of good government. His arguments struck several colleagues as disingenuous. He wasn’t exactly the poster boy for meritocracy. He was the son of regionally famous plastic surgeon Julius “Dr. Nose” Newman, and family money had bankrolled his involvement in Republican politics — capped by a failed Congressional bid — and his cherished hobby of raising racehorses. He had a seat on the state’s lawyer disciplinary board, which is overseen by the Supreme Court, on which his mother was a justice. (She has since stepped down to work at Cozen O’Connor, where her brother is a partner.) And he first arrived at his seat on the LCB as a political appointee under Governor Ridge. “Look,” says a fellow appointee in the Rendell administration. “I didn’t get my job through the classifieds, and neither did Jonathan. I find the whole ‘good government’ thing a little over the top.”

As for Newman’s argument that the appointment would gut the board’s authority, “Joe Conti works for the board,” says an administration source. “The board assigns responsibilities to the CEO. The other board members clearly understood that.”

Despite accusations of “sour grapes” and “bellyaching” by Rendell spokeswoman Kate Phillips, the lion’s share of press sided with Newman, and Joe Conti was part of the reason. During the 2005 legislative pay-raise scandal, he had made an offhand quip that he couldn’t return his raise because he’d already spent it on a water heater. He was quickly dubbed “Senator Water Heater,” and became a symbol of an out-of-touch Harrisburg legislature. When it came time for reelection, he decided to retire from politics. The seemingly overnight announcement that he would become the $150,000-a-year CEO of the LCB smacked of a political payoff (it has been rumored that Conti was Rendell’s spy in the GOP caucus), and while Conti was very familiar with LCB issues from his work in the Senate, some of the arguments in support of his qualifications for the job were flimsy at best. (Citing the fact that he was a former restaurateur as evidence of his experience with “licensee issues” was equivalent to suggesting that the holder of a driver’s license is qualified to run a Department of Motor Vehicles.) Newman’s decisions to speak out against his political patrons and then to resign were almost invariably reported as courageous stands. The result was one of the greatest PR debacles of Rendell’s governorship. Newman says that in the months after he resigned, he received nearly 500 letters and e-mails from consumers, store employees and LCB staff, “absolutely outraged and supporting what I did.”

“I’m sorry about the way it ended up,” Rendell says, “but not because of bad publicity. I lost a friend and an ally. We did great things together. I love him, but Jonathan is not a good expense guy. I think a Newman/Conti team would have been a great team.”

IT SEEMS THAT Newman could have kept right on doing what he was doing. Joe Conti is adamant that his job is to implement the agenda set by the board, and at a recent board meeting, he barely spoke, while Stapleton ran the show. Conti sounds a democratic note in laying out the LCB’s near future. His focus, he says, will be on raising the 500 lesser state stores closer to the level of the Premium Collection stores. The Chairman’s Selections were a success, Conti acknowledges, but only in a limited number of stores. There are plans to modernize and renovate stores, change floor layouts to make them more customer-friendly, name individual stores to brand them, and overhaul the LCB’s computer systems. The new motto, Conti says, is “Team LCB.”

In February, P.J. Stapleton and Tom Goldsmith joined the LCB’s wine-buying team on a trip to Napa and Sonoma and made the largest Chairman’s Selection purchase ever — 68,000 cases, not just of the program’s usual California wines, but of wines from France and Spain as well. And post-Newman, the LCB has added two further price tiers of marked-down wines: one called Power Purchase (wines $9 and below), and the other the Sommelier Collection (wines $29.99 and over; these are “highly allocated, difficult-to-find wines from around the world, at competitive prices, that were not previously available in Pennsylvania,” according to Stapleton).

While the new leadership is clearly less focused on wine than was Newman, fears of a regression to the system’s Soviet era seem overblown. It’s too soon to know whether the “Team LCB” concept will do anything more than make the bureaucracy’s employees feel better, or how exactly the regime change will affect the customers who under Newman were king. But his replacement as chairman is unlikely to provoke such strong feelings, either positive or negative. When I went to see P.J. Stapleton at his law office in Center City in March, he responded to my greeting of “Chairman” with a dismissive wave of his hand. “Call me P.J.,” he said. “The ‘chairman’ shit isn’t my cup of tea.”

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