LePage’s hospital debt plan depends on more liquor revenue for state

Posted Jan. 16, 2013, at 4:37 p.m.
Last modified Jan. 16, 2013, at 5:57 p.m.
Governor Paul LePage in Rockland on Saturday, March 3rd, 2012.
Governor Paul LePage in Rockland on Saturday, March 3rd, 2012. Buy Photo

AUGUSTA, Maine — Gov. Paul LePage’s plan to repay the $186 million Maine owes its hospitals for outstanding Medicaid bills relies largely on the state’s ability to renegotiate its wholesale liquor contract under terms that direct a larger portion of liquor profits to state coffers.

State officials estimate Maine can earn $30 million in profit annually from liquor sales under those more favorable terms. If LePage receives the two-thirds legislative support he needs for the plan, the state would direct the entire $30 million annual sum toward paying down the revenue bonds LePage hopes to issue this year to pay back the hospital debt.

Maine is one of 17 states that controls the distribution of hard liquor within its borders. The state’s Bureau of Alcoholic Beverages and Lottery Operations sets liquor prices and is the only entity allowed to bring hard liquor into the state for sale.

That wholesale liquor business offers the state a reliable revenue stream, Gerry Reid, the bureau’s director, said. “It’s stable. It’s predictable. It has attractive cash returns,” he said. “The current arrangement we have directs a majority of those cash returns to the wholesale service provider.”

In 2004, the state privatized its wholesale liquor business by leasing it for 10 years to Maine Beverage Co. in exchange for a $125 million upfront payment and an annual cut of sales revenue. The upfront payment helped plug a gap in the state budget.

Reid said Wednesday the state has earned about $8 million annually in recent years under the contract arrangement with Maine Beverage Co., compared to the $30 million he projects the state could earn under a new arrangement.

“The value created by the business goes primarily to [Maine Beverage Co.] over the 10 years of the contract,” Reid said. “The new way forward just stops doing that. It says, private sector entity, what do you want to charge the state to do these services?”

The state’s contract with Maine Beverage Co. expires in July 2014, and the current state budget requires the state to renegotiate the liquor contract by June of this year.

The Bureau of Alcoholic Beverages and Lottery Operations in the coming months plans to issue a request for bids — once legislation passes that allows it — seeking a company to handle the wholesale liquor operations Maine Beverage Co. has overseen for the past decade. Maine Beverage Co. currently handles order processing, accounts payable, and marketing and promotions. It subcontracts warehousing and shipping to Pine State Trading Co. in Augusta.

“The biggest change is simply on the financial arrangement side,” Reid said.

Since the state isn’t seeking an upfront payment this time, Reid said, it likely can extract more revenue from the contract annually over the course of another 10-year arrangement.

“The operations of wholesale and retail business will be almost completely unchanged, but the financial construction, the financial underpinning around how we do that is dramatically different,” Reid said. “The state will take that value back and deploy that in a number of places.”

The state’s plan for rebidding the wholesale liquor contract has a number of elements that Reid says will help Maine grow its spirits business and make Maine spirit prices more competitive with neighboring New Hampshire’s. Reid has said Maine loses about $10 million in liquor sales annually to New Hampshire.

For example, a 1.75-liter bottle of Allen’s Coffee Brandy, the top selling liquor in Maine, costs $19.99 in Maine while it costs $15.99 a bottle at New Hampshire’s state liquor outlet, according to current price lists from both states.

“Some of the value that we recover in the new contractual approach will be redeployed to giving our consumers better prices, which in and of itself, we believe, is a good thing,” he said. “If the product is consumed in Maine, we want it to be purchased in Maine. The reason it’s not all being purchased in Maine right now is, it’s too expensive in Maine.”

When the new contract takes effect in 2014, Reid said, the state’s alcoholic beverages bureau will set lower retail prices for spirits sold in the state as part of the state’s regular price-setting process. The state also plans to allow Maine’s liquor retailers — known as agency stores — to expand their profit margins, he said, “so they are more motivated and rewarded by helping us recover that business.”

Maine Beverage Co. President Dean Williams didn’t respond to a reporter’s request for comment Wednesday. In a September email to the Bangor Daily News, Williams declined to comment on the liquor contracting process but said, “we look forward to the opportunity to discuss extending our successful relationship with the state of Maine.”

Maine Beverage Co. is a partnership between the Martignetti Cos. of Norwood, Mass., and New York-based private equity group Lindsay Goldberg. Martignetti Cos. also supplies liquor to New Hampshire’s state-run retail outlets.

Ford Reiche, who formed Dirigo Spirits last year anticipating a bid on the state’s wholesale liquor contract, said Wednesday his company still plans to bid. The deal in 2014 might not be as lucrative as it was in 2004, Reiche said, “but I haven’t thought it should be. The deal in 2004, it’s impossible to understand how that benefited the state of Maine.”

Republican legislative leaders voiced support for LePage’s plan on Tuesday. House Republican Leader Ken Fredette called it “a responsible plan to repay a major debt, spur economic growth and send a strong message that Maine keeps its promises.”

But Democratic leaders, whose members hold majorities in both the House and Senate, were hesitant to embrace it. Senate President Justin Alfond, D-Portland, said Wednesday the plan to repay hospital debt using future liquor revenues was “thin on details” and seemed “very aggressive.”

Democrats want to explore additional alternatives to the state’s wholesale liquor contract, he said, in addition to the plan proposed by the LePage administration. One of those alternatives, he said, might be renewing the contract with Maine Beverage Co.

“There are many options,” Alfond said. “The governor’s option is one. If that’s the right approach, I’m sure Democrats will get behind it, because we want to pay back our hospitals.”

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