October 16, 2018
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Maine loses $30M in liquor sales to NH every year — how much can it get back?

ERNIE ANDERSON | SUN JOURNAL GRAPHIC
ERNIE ANDERSON | SUN JOURNAL GRAPHIC

LEWISTON, Maine — A state effort to recapture revenue that Maine loses in alcohol sales to New Hampshire by lowering prices is underway, but some state officials and others worry the effort isn’t being implemented as aggressively as first intended. And they worry that Maine may never get the revenue first projected.

For Maine consumers — and tourists visiting the state — it means that picking up their favorite cocktail ingredients when they pass through New Hampshire may still be cheaper.

Some estimates peg Maine’s liquor losses to New Hampshire at more than 100,000 cases, or about $30 million per year. When Maine re-bid the state’s spirits contracts early this year, the intent was to claw back some of those sales by lowering prices in the state and keeping Maine liquor consumers home.

Nearly three months into the new spirits contract, Maine’s budget-writing lawmakers say they worry that if the new strategy falls short, taxpayers will be left to pick up any slack for programs the new revenue was meant to help fund, or that some programs may be scaled back, delayed or canceled.

Rep. Peggy Rotundo, D-Lewiston, House chairwoman of the Legislature’s Appropriations Committee, is concerned about the process that the Maine Department of Administration and Financial Services employed to solicit bids and select a vendor to do the marketing work intended to bolster Maine sales.

But Maine Finance Commissioner Richard Rosen, the top official in Financial Services, said fears that the state is backing away from its original plan to lower prices, or concerns over the fairness of the contract award, are unfounded or overblown.

Rosen said the new wholesale liquor contract is expected to produce the revenue the state needs to pay the debt service on a series of bonds the state issued to pay off more than $180 million in state Medicaid debt to hospitals.

That debt repayment was a key focus of Gov. Paul LePage’s administration in 2013, and his re-election campaign is highlighting hospital payments — which drew down $305 million in federal matching funds — as a major accomplishment.

“It was also a major goal of Gov. LePage to recoup hundreds of millions of profit for Maine, rather than sending it out of state, as the previous contract did,” said Peter Steele, the governor’s communications director.

Some of the new liquor revenue is earmarked for bonds to be made available to cities and towns for sewer and water infrastructure improvements.

In September 2012, former Bureau of Alcoholic Beverages and Lottery Operations Director Gerry Reid unveiled the new contract scheme as the state’s previous 10-year contract with Maine Beverage was set to expire.

It was widely accepted that the Maine Beverage contract was undervalued, and Reid was determined to make sure, through the new contract, that the state captured a bigger share of steadily growing liquor sales.

Under the previous contract, inked by the administration of former Gov. John Baldacci, the state was paid $125 million plus a small percentage of the annual profits between $7 million and $9 million per year over the contract’s 10-year span. The company doing the work, however, made about $36 million each year in profit.

The new arrangement split the liquor contract into two specialties: one covering the warehousing and distribution of alcohol in Maine; the other covering the trade marketing of those products.

Trade marketing includes pricing, selection, sales and display of products, as well as setting profit-sharing margins for the 300 or so licensed state agency liquor stores.

Maine, one of 18 states that control the sale of alcohol, sets uniform prices each month for all agency stores. The price of a specific brand and bottle of booze is the same in agency stores from Fort Kent to Kittery.

Key to Reid’s original plan was the idea that the trade marketing contract would guarantee Maine would become more competitive with New Hampshire, engaging in head-to-head competition for liquor sales.

In 2012 and 2013, Reid emphasized this point repeatedly to the Legislature and the public, eventually winning support for his proposal. He also argued for better contract terms for warehousing and distribution so Maine would gain more of the profit while the vendor would take a smaller share than before.

As the state moved toward this new arrangement, Reid became increasingly critical of Maine’s previous reluctance to out-price New Hampshire, arguing that dropping prices would result in a higher volume of sales and greater profits.

“Personally, it really makes me angry,” Reid told the Sun Journal in April 2013. “You’ve heard of ‘rope-a-dope’ in boxing? It’s when you cover up and let the other guy pound the hell out of you. That’s what they’re doing to us — punch, punch, punch — and we never punch back.”

But as the state inches toward that new pricing strategy, Maine’s agency liquor stores have largely remained more expensive than those in New Hampshire. The savings isn’t playing out.

The September sales flier for liquor in Maine, distributed by the Maine Bureau of Alcoholic Beverages and Lottery Operations in all of the state’s major weekend newspapers last weekend, features 24 bottles of hard liquor for all tastes, from vodka to coffee brandy.

A quick price check on the identical products in New Hampshire showed Maine’s special retail “sale” price is only lower on seven of the featured products. Maine matched New Hampshire’s price on five products and was more expensive — by as much as $6 a bottle — on 10 other products. New Hampshire’s prices do not include sales tax and Maine’s advertised prices are before sales tax.

On Thursday, Reid — who no longer works for the state — urged patience on discounted prices, noting full implementation of the state’s new alcohol strategy had been delayed.

In February, the governor’s office announced the marketing contract had been awarded to Pine State Trading, which had been awarded the contract for administration, warehousing and distribution in January.

Three bids were considered, the one from Pine State Trading in Gardiner, one from Dirigo Spirit in Cumberland and another from CD&M Communications in Portland. The contract was awarded to Pine State based on a system of points scored for marketing and business plans, financial incentives, economic impact and prior experience.

In June, Dirigo Spirit, headed by former Safe Handling owner Ford Reiche, appealed the administration’s decision to contract with Pine State for the marketing work, which equates to $750,000 in annual earnings.

Reiche’s appeal centered on the fact that the state’s original request for proposal included a requirement to disqualify any bidder that had too large of a conflict of interest because of trade marketing work in another state.

Pine State, Reiche argued, sold and marketed wine and liquor in New Hampshire, which was too big a conflict for it to market sales in Maine. That argument was heard during two full days of testimony in May before a three-person administrative review panel.

During the hearing, it was revealed that Pine State had, according to its lawyer, mistakenly misrepresented the amount of business it did in New Hampshire, a disclosure that was required as part of the original request for proposal.

Pine State’s lawyers suggested that misrepresentation was the result of a decimal-point error but maintained the company’s total volume of sales in New Hampshire was “de minimis,” or so small as to have no bearing on the work it would do to better market alcohol sales for Maine.

Reiche’s lawyers argued that Pine State should have been disqualified because its total sales in New Hampshire, including wine, amounted to millions of dollars in business competing with Maine and that the company couldn’t possibly be without conflict competing against itself in bordering states.

But, after the administrative hearing and while the panel was still deliberating its decision on whether the contract was valid, the state cancelled the contract award to Pine State and issued a new request for proposal that included substantial changes to previous language, redefining how much of a conflict a company could have in another state and still work in Maine. It also removed language that would have allowed bidders to offer incentive programs that would peg their profits to the success of their work.

Rosen, the finance commissioner, said he made the decision to pull the contract award and reissue the request for proposal with new language based on the advice of Deputy Attorney General William Laubenstein.

Laubenstein, via the spokesman for the attorney general’s office, declined to be interviewed for this report. A call to Pine State executives also was not returned.

According to Rosen, after the new request for proposal was issued, Pine State worked with one of the other unsuccessful bidders to make a joint proposal to the state, but Reiche’s company declined to make a new bid.

Rosen said the new request for proposal was an attempt to move the process forward and save the state from a protracted court battle. He said it became clear that regardless of how the administrative appeal panel ruled, the losing party was likely to bring the case to court, which could have resulted in a two-year delay in implementing the contract.

Reiche, who also declined to comment for this report, said at the time the new request for proposal was issued that it de-emphasized the original focus of trying to compete more aggressively with New Hampshire.

“We were interested in bidding on this when the state had a higher priority in recovering sales from New Hampshire,” Reiche told the Sun Journal in August.

He said his company’s original proposal hinged on an incentive program that would allow the company to take a profit only after it had accomplished the state’s revenue goals in clawing back sales from New Hampshire.

Rotundo said she was trying to understand why the appeal process was disrupted, why changes were made to the request for proposal and who actually made the decision to do that. She suspects the entire process was mishandled and that the state may not be getting the best deal, or that it won’t recapture the amount of sales it could from New Hampshire.

When the bonding package was being negotiated, with revenue from liquor sales being leveraged to pay down hospital debt, Rotundo said much of the deal hinged on the amount of money the state anticipated recovering in recaptured sales.

“For that reason, the conflict of interest was of critical importance because we knew if there were companies that had conflicts of interest with New Hampshire, it was going to be much more difficult for that claw-back to happen, and for us to realize the money we had hoped to recover,” Rotundo said.

She also said the silence from key officials around the decision-making process is troubling.

“Nobody has given us any public answers to the questions that we have raised,” Rotundo said. “They did not have to issue this at this point in time. They could have answered our questions about who did this and why if they want to have a fair and open process.”

But Rosen and Department of Administration and Financial Services spokeswoman Jennifer Smith said state officials do not want to discuss the details of a contract they are in the process of negotiating.

Smith defended the process, saying the new request for proposal was offered to all three bidders and only one bid materialized. She said the administration is preparing answers for the questions from Rotundo and other members of the Legislature’s Appropriations Committee and declined to answer some of the same questions from the Sun Journal.

Steele also defended the process.

“It’s sadly ironic that Rep. Rotundo would cry wolf over this process when it was on her watch that the Baldacci administration gave away the previous liquor contract at a major loss to Maine and liberals refused to pay the welfare debt to hospitals for over a decade,” Steele said.

“This process was carefully crafted and vetted to ensure transparency and full and fair competition among bidders,” he said. “The governor was disappointed that there was only one bidder but is confident his goals of getting the maximum benefits for Maine will be realized.”

Reid said he had no inside knowledge of what went into the second request for proposal because he had already left the state’s employment, but he was confident the plan as he originally intended it is moving forward.

He urged patience on behalf of the Legislature and on the part of Maine consumers who may have believed they were going to see lower liquor prices sooner.

Reid also emphasized that part of the plan was to return some of the increased revenue the state will receive from the warehouse and distribution side of the contract back to consumers in the form of lower prices, and those price reductions are not wholly dependent on recapturing sales from New Hampshire.

“If trade marketing never happened, if it all blew up, we would still get the bulk of our volume back,” Reid said. He said he wasn’t worried that the company that’s doing trade marketing for Maine may also have a sliver of work in New Hampshire.

As the state negotiates final contract terms, Reid said it can put requirements in place to help ensure its interests are protected and the goals outlined in the original plan are reached.

“There’s nothing nefarious here,” Reid said.

Rosen is scheduled to appear before the Appropriations Committee later this month to answer questions about the new liquor contracts and to give lawmakers a read on how things are progressing.

Rotundo said she was still disappointed because it seemed to her the state did not facilitate a process that pushed for the best financial results.

“If you believe in competition as a way of getting a good product, it seems to me you create a process where people want to compete and you get more than one bid for a contract,” Rotundo said.

“Anybody who cares about the economic state that we are in at this point should care about making sure we have contracts that bring in as much money into this state as possible,” she said.

 


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