State could gain $32M more in liquor revenue without upfront payment for hospital debt

Bottles of Mr. Boston Coffee Flavored Brandy displayed this past week at an Ellsworth supermarket were adorned with &quotSave $3" coupons while those of competing brand Gold Crown were not. Allen's Coffee Flavored Brandy, which is by far the most popular liquor sold in Maine, and Gold Crown both are owned by M.S. Walker of Somerville, Mass.
Bill Trotter | BDN
Bottles of Mr. Boston Coffee Flavored Brandy displayed this past week at an Ellsworth supermarket were adorned with "Save $3" coupons while those of competing brand Gold Crown were not. Allen's Coffee Flavored Brandy, which is by far the most popular liquor sold in Maine, and Gold Crown both are owned by M.S. Walker of Somerville, Mass. Buy Photo
By Matthew Stone, BDN Staff
Posted April 08, 2013, at 1:36 p.m.

AUGUSTA, Maine — The state could reap about $32 million more in revenue from its wholesale liquor business over the next decade if it issues a revenue bond to finance a payback of Maine’s $484 million hospital debt, rather than rely on an upfront payment from the company chosen to run the business.

That’s the conclusion of a new analysis from a nonpartisan legislative office that compares some of the scenarios lawmakers are considering as they sort out competing proposals from Republican Gov. Paul LePage and Democratic Senate Leader Seth Goodall of Richmond to renegotiate Maine’s wholesale liquor contract and pay back the debt the state owes to its 39 hospitals. LePage has included a revenue bond in his proposal while Goodall’s legislation would demand an upfront payment from the chosen vendor.

Grant Pennoyer, director of the Legislature’s Office of Fiscal and Program Review, presented his analysis Monday to lawmakers on two committees charged with determining the way forward for Maine’s wholesale liquor business and how to repay a debt Maine owes its hospitals for Medicaid services they provided but for which the state hasn’t yet paid.

The analysis projects Maine could increase its share of liquor revenue by $352.8 million over the next decade if it relies on a private operator for the business to supply a $181 million upfront payment to pay off the state’s share of the hospital debt.

If the state relies on a revenue bond, the Fiscal and Program Review analysis projects the state could see its share of liquor revenue grow by $384.8 million over the next decade.

One of the major differences is the cost of borrowing money. Pennoyer projects the state could borrow money at a lower cost through a revenue bond while investors supplying a private company with upfront capital would likely demand a higher return.

“There would be an overall improvement in state revenue with a state revenue bonding option,” Pennoyer told lawmakers on the Appropriations and Veterans and Legal Affairs committees. “The cost of capital is an important factor in there.”

The analysis also shows the state would sacrifice annual revenue down the road if it negotiated an upfront payment. With no upfront payment, the state would see about 66.5 percent of gross liquor profits, compared to 27 percent if it secured a $181 million upfront payment to pay down the state’s hospital debt.

Pennoyer’s analysis assumes that, under both scenarios, the state leases out the liquor business to a private operator that takes full control of wholesale liquor operations. It also assumes a flat, 2 percent annual growth rate of the state’s wholesale liquor business.

The analysis came about a month after the Legislature’s Veterans and Legal Affairs Committee heard testimony on LePage’s plan to negotiate a more favorable state liquor contract and use the proceeds to finance a bond used to pay down Maine’s hospital debt, which largely dates back to 2009. Under LePage’s plan, the state would likely pay a fixed cost to a private operator to run the marketing and distribution portions of the liquor business.

The committee also heard testimony on an alternative plan, presented by Goodall, to lease out the entire business — much as Maine did in 2004 with Maine Beverage Co. — and demand an upfront payment from the winning vendor along with guaranteed annual payments. Under Goodall’s plan, the state would use the upfront payment to pay back the hospital debt.

The committee is now preparing to develop its own legislation, combining elements of LePage’s and Goodall’s bills. On Monday, the Veterans and Legal Affairs Committee charged members of the Appropriations Committee with crafting the portion of the bill that addresses the hospital debt payback.

“We had talked about getting the politics out of it,” said Sen. John Tuttle, D-Sanford, co-chairman of the Veterans and Legal Affairs Committee. “The best way to do that was a committee bill.”

Democrats on Monday appeared more comfortable with the idea of issuing a revenue bond rather than relying on an upfront payment.

“We have to be looking for the best value for the state,” said Rep. Peggy Rotundo, D-Lewiston, co-chairwoman of the Appropriations Committee. “Once we had the nonpartisan figures, it became clear that the upfront payment doesn’t make sense.”

Goodall said he proposed the upfront payment as Democrats questioned whether it met constitutional muster to take out new debt in order to pay back an old debt.

“There is value to be gained by not having an upfront payment,” he said. “We need to make sure we get the best deal for the state and that we pay off the hospitals. The question still remains, though: Is it still good policy to be borrowing to pay off debt?”

Goodall said LePage addressed part of his constitutional concerns by amending his bill to charge the Maine Municipal Bond Bank, rather than the state treasurer’s office, with issuing the revenue bond. And Rotundo said Monday the Appropriations Committee will consult with Attorney General Janet Mills to resolve any remaining constitutional issues.

Gerry Reid, director of the state’s Bureau of Alcoholic Beverages and Lottery Operations, said he agreed with the overall conclusion of Pennoyer’s analysis — that a revenue bond represents a better deal for the state than an upfront vendor payment. However, Reid said it’s unlikely a company would settle for the scenario Pennoyer laid out, which offers the best revenue projection for the state.

Under that scenario — in which the state leases out the business but doesn’t demand an upfront payment — the Office of Fiscal and Program Review analysis assumes the company would cede an unlikely amount of the contract profit to the state. If the state demanded those terms, Reid said, it’s unlikely any business would want to submit a bid.

Reid said the analysis also overstated the operating costs for a third scenario — one most similar to LePage’s hospital debt bill — in which the state takes over the wholesale liquor business but pays a private operator to run marketing and distribution for the business.

The proposals surrounding the payback of the state’s hospital debt have become a prime political flashpoint of this legislative session.

LePage proposed his payback plan in January and Republicans have pushed it aggressively. At the start of March, LePage threatened to veto all legislation that arrived on his desk before his hospital debt bill.

Goodall and Democratic legislative leaders pitched an alternative liquor contract plan in February without addressing the hospital debt. They added a hospital payback plan of their own in March.

As part of LePage’s plan, Reid has discussed reducing some retail prices in an effort to recapture of a portion of liquor sales Maine loses to lower-priced, state-run outlets in New Hampshire. Reid has also proposed boosting the margins of agency liquor stores so they have an incentive to grow sales.

The analysis released by Pennoyer on Monday doesn’t take into account plans to lower prices and grow the wholesale liquor business. Rather, it assumes a 2 percent annual, baseline growth rate.

In addition, Pennoyer’s analysis assumes Maine will pay off its $484 million hospital debt by Sept. 30 of this year. Since Maine accrued the debt under its Medicaid program, the federal government will kick in a majority of funds when Maine the state pays it back.

Under the current federal funding rate, Maine would owe $181 million, and the federal government would kick in the remainder. On Oct. 1, however, the federal Medicaid funding rate for Maine is expected to drop another percentage point, meaning the state would have to pay $186 million to trigger a federal match of about $298 million.

http://bangordailynews.com/2013/04/08/politics/state-could-gain-32m-more-in-liquor-revenue-without-upfront-payment-for-hospital-debt/ printed on August 27, 2014