March 18, 2013

Maine liquor chief: Up-front fee would cost us

Any bidder would be able to charge for the use of his $200 million, state legislators are told.

By Jessica Hall jhall@pressherald.com
Staff Writer

AUGUSTA — Requiring bidders for the state's liquor contract to pay the state a guaranteed $200 million -- either up front or in 10 annual installments -- could cost taxpayers over the long term, according to the head of Maine liquor operations.

In a work session before the Veterans and Legal Affairs committee, Gerry Reid, director of the Bureau of Alcoholic Beverages and Lottery Operations, said a contractor's cost of financing up-front fees would ultimately be paid by taxpayers in the form of reduced profit-sharing revenues.

Reid's comment came on a Democratic bill, L.D. 644, one of two competing proposals for farming out the state's liquor operations -- and paying the state's debt to Maine hospitals.

The other proposal, L.D. 239 -- put forward by Gov. Paul LePage -- would pay the successful bidder an annual fee to manage liquor operations for 10 years. Under the plan, the state would issue a bond to repay the hospital debt and pay off the bond with revenue from the liquor operations.

The bill sponsored by Senate Majority Leader Seth Goodall, D-Richmond, would use the up-front payment or payments to repay the hospital debt.

Reid told the committee that using up-front money "presents a philosophical problem."

"(A contractor) who does that has a right to charge for that," he said. "Money has a value. There's no need for that cost to be borne by taxpayers."

Currently, the state is winding up a 10-year contract with Maine Beverage Co., which agreed to run liquor operations in exchange for an up-front payment of $125 million that helped close a budget gap at the time. That contract guaranteed Maine Beverage a minimum profit margin, with the state sharing in profits above the minimum.

"L.D. 644 is conceptually very similar to the old deal," Reid said.

When the existing liquor contract was forged, "I don't believe many people had in their minds the up-front cost -- the cost of capital," he said.

Reid said a liquor contract could be awarded by fall, for implementation in mid-2014.

If a new vendor is chosen, Reid said, there is only a slight chance that service would be disrupted during the transition.

"There's always that risk, but in my judgment it would be very small," he said.

Goodall said after the work session that the costs of the governor's bill also are unknown.

"We agree that we need to know all of the costs. How much is the governor's proposal going to cost to issue a bond? Can he issue a truth in lending statement?" Goodall said.

"The key of my proposal is that it doesn't borrow money, it creates a competitive process and the value of the business is very well known, so it will be a very close bidding process."

Goodall said his bill puts the risk on the bidders rather than the state.

The existing contractor, Maine Beverage Co., does not support or oppose either liquor bill, said Maine Beverage President and Chief Executive Dean Williams. 

When asked if Maine Beverage would bid under the contract outlined by LePage's plan, Williams said would keep his options open but prefers the current model.

"A fee-for-services model is not where our strengths are. We are best at operating the business and investing in the future and looking long term," Williams said.

A fee-for-service model "dumbs things down and takes away the incentives to build and strengthen the business."

But Ford Reiche, president of Dirigo Spirit, which plans to bid for the contract, said the governor's plan makes more sense financially. "The state's going to make the most money if they do a fee-for-service arrangement," he said.

"The up-front fee in L.D. 644 sells off the (future) revenue stream. . . . You have to guarantee the person who wrote the up-front check a return," Reiche said.

One aspect of L.D. 239 calls for the state to reduce the price of certain spirits to be more competitive with New Hampshire.

Reid said the state could adjust prices every three months, if needed, to fine-tune its strategy of improving competition with New Hampshire.

Rep. Jeffery Gifford, R-Lincoln, a committee member, said he'd like the new liquor contract to add an education component about the dangers of substance abuse and to set aside money for that initiative. Reid said some educational programs are already in place, but more could be done.

Another committee member, Rep. Diane Russell, D-Portland, expressed concern about liquor companies marketing to children and said the state should have the right to pull products off the shelves if distillers target minors in any promotions or labeling.

The state already has the right to review brands, labels and promotions from spirits distillers and it takes that responsibility seriously, Reid said.

Another work session on the competing liquor proposals is scheduled for Friday.

Staff Writer Jessica Hall can be reached at: 791-6316

jhall@mainetoday.com

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