LePage’s hospital debt plan depends on more liquor revenue

LePage Jobs
Clarke Canfield

Maine Gov. Paul LePage outlines his plan to have the state repay nearly $500 million in hospital debt and release $105 million in voter-approved bonds on Tuesday, Jan. 15, 2013, in Portland, Maine. (AP Photo/Clarke Canfield)

AUGUSTA — 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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Comments

Noel Foss's picture

Actually reading the article would have really helped

....With the goal of getting your facts straight.
All that's happening here is that the contract with Maine Beverage will get renegotiated, and that the revenues from that contract will be channeled into paying back the state's outstanding balance with hospitals.
Any change in price will be done as a means of getting people to buy their liquor in Maine rather than in NH. The state's not having a "fire sale" on alcohol; they're simply making the taxes on it slightly less ridiculous compared to our neighboring state.
Personally, I'd consider the fact that he's floating a plan for paying the debt down rather than just letting it accumulate (like our last governor) to be a good step.
As somebody who works 50+ hours a week, the fact that it would be accomplished without actually introducing any NEW taxes (or raising the existing ones) is even better.
Governor Footinmouth and I disagree on many points, but I fully support the idea of Governor Baldy's pet project paying its bills.

FRANK EARLEY's picture

He's not paying anything.....

Your paying the bills, Gov. LePage just redirects the money. By putting the burden on cities and towns by reducing funding for needed services. He knows that people need these services, so the property taxes go up to pay for them. Now it's not his tax increase, it's the towns. We now have a Governor who hoodwinked most of the population out of more money, without raising taxes. He gets to keep his promise......

Noel Foss's picture

Governors pay taxes too,

Even the ones we don't like (since I've been old enough to vote, that's both of them)
Perhaps if less state funding was going towards entitlement programs then more of it could go towards maintaining the roads and funding the towns. I agree that the state shouldn't have cut funding to the towns so drastically, but the state received less revenue than was expected. Add into that a cut in overall federal funds and there's a real problem. Add on top of that the millions of dollars that the state already owed (courtesy of another entitlement program), and it's a triple threat.
Money has to come from somewhere. I'd rather see the state pay its debts than watch it rack up new ones. Spending more than you earn is never a long term plan, plain and simple. If I have balance my budget, I don't see why the state shouldn't have to do the same thing.
Now if the Federal government could just get on that wagon...

Tony Morin's picture

Bonds and Income Tax Increases??

I feel like I don't even know you anymore, Mr. Governor. Next you'll probably start monitoring what you say publicly and having dinner with democrats.

FRANK EARLEY's picture

This is to good to pass up.......

"LePage's hospital debt plan depends on more Liquor sales". Does anyone else see any resemblance to a Jay Leno monolog opening? I mean just think of what a room full of comedy writers could do with this story. First I will need to get the facts strait myself. In order to pay down the debt owed to hospitals, Gov. Lepage wants to keep a good portion of folks in the State, "hammered". Just to make sure more people are able to take part in this "State Fund Raiser", the prices will be lowered so even more liquor must be sold.
With all this in mind will the Governor be opening centers around the state to accommodate all these merry people, maybe offering "Live Entertainment" and some light snacks? I'll tell ya what, I picked the wrong decade to quit drinking. Maybe the good Governor could swing a bigger chunk of the tobacco sales, then maybe everyone could be drinking and smoking to lower the debt to hospitals.
There's still something thats not right here. It almost sounds like the good Governor wants to use a huge "source" of the medical debt, to pay for the medical debt. I mean on a typical weekend, a majority of emergency medical calls for fire and ambulance are alcohol related.
Sure, they don't always, actually say a call is alcohol related, but from years of careful training in the art of listening to the scanner. I have become an expert in decoding emergency calls. When I hear a call for medical help for an injury caused by someone falling out the cellar window, I immediately peg that one as "Alcohol Related". Actually, a lot of what these folks get themselves into is pretty funny, some of it also sounds kind of painful, but alas, a lot of these folks feel no pain. Now we can rest assured that all these medical calls for help aren't for not, these are people helping cut down the "Debt to our Hospitals". Let the party begin......

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