Maine Booze-Bond Plan Buoys Hospitals Needing Cash: Muni CreditEsmé E. Deprez and Michelle Kaske
Maine Governor Paul LePage, a Republican who’s curbed borrowing since he took office two years ago with Tea Party backing, aims to take a page from Nevada and Ohio in a plan to sell bonds backed by booze revenue.
LePage wants to create debt paid out of proceeds from a new contract to operate Maine’s liquor-distribution system, using the money to pay what it owes hospitals in the state. The $186 million payment to 39 hospitals -- led by Eastern Maine Medical Center in Bangor, owed $72 million, and Maine Medical Center in Portland, owed $68 million -- would also trigger $298 million in federal funds.
Democrats, who control the legislature, oppose the plan as a burden for taxpayers. Yet John Flahive, director of fixed income at BNY Mellon Wealth Management, says it would strengthen the local health-care industry. Bonds sold by Maine hospitals have been gaining amid a rally in securities of the facilities nationwide. Eastern Maine Medical, the Bangor area’s primary health provider, has seen relative borrowing costs on some debt fall about 25 percent since January.
“You’re getting a positive benefit to the health-care institutions and you also have potentially another revenue bond from an issuer who doesn’t issue all that often,” Flahive said from Boston. His firm manages $22 billion of municipal securities, including Maine hospital debt.
LePage’s attempt follows similar moves in other states. The 2013-2015 budget proposal from Nevada Governor Brian Sandoval, a Republican, included $58 million in general-obligation bonds to repair state buildings. His administration has considered using booze levies to back the debt. In January, a private entity created by Ohio Governor John Kasich, a Republican, to spur job growth sold $1.5 billion in debt backed by profits from the state’s wholesale liquor-distribution system.
“Investors like revenue streams,” said John Mousseau, a portfolio manager in Vineland, New Jersey, at Cumberland Advisors. The firm manages about $2.2 billion, including Maine hospital debt.
“Securitizing liquor tax can be more measurable and consistent over a full faith and credit pledge,” he said.
Investors in the $3.7 trillion municipal market are already demanding less extra yield to hold Maine hospital borrowings.
Eastern Maine Medical bonds rated two levels above junk by Standard & Poor’s and due July 2043 traded March 13 with an average yield of 4.09 percent, or about one percentage point above AAA munis, data compiled by Bloomberg show. That spread has dropped from about 1.3 percentage points when the bonds sold at the end of January.
Hospital munis have earned 2.2 percent in the past six months, compared with 1.5 percent for the broader market, Barclays Plc data show.
The governor of the 10th-smallest state by population was elected in 2010. He faces opposition from Democrats, who won back control of both legislative chambers in November. The hospital debt issue has consumed lawmakers since LePage unveiled his plan in January.
His proposal marries two otherwise unrelated issues: the hospital payments and revenue the state expects to earn when it renegotiates a new liquor contract to replace the one expiring in 2014. LePage had vowed to veto all legislation -- even his own -- if Democrats didn’t go along with this plan. Assistant House Majority Leader Jeff McCabe, a Skowhegan Democrat, said the governor’s behavior was “irrational” and represented “do-nothing politics.”
Maine took private the operation of its wholesale liquor-distribution system in 2004, striking a 10-year deal with Maine Beverage Company for an upfront payment of $125 million and an annual revenue share that tallied $8.7 million last year, said Gerry Reid, director of the Bureau of Alcoholic Beverages and Lottery Operations.
Democrats introduced a plan this week to renew the contract for an upfront payment of $200 million, which would go toward the hospital tab, as well as a stream of annual payments and profit sharing.
LePage’s proposal, which Reid helped write, will net more money, Reid said. Reid said his “conservative” estimate is $458 million over 10 years, based on the $45.8 million in operating income that Maine Beverage earned last year. The plan would use some of that money to lower prices for consumers and help decrease the $30 million Mainers spend annually in New Hampshire on liquor. That annual stream would also back the bonds.
Democrats say that by not bonding, taxpayers wouldn’t be saddled with interest payments.
“Asking Wall Street to pay our hospitals only leaves us in debt to Wall Street,” Senate President Justin Alfond, a Portland Democrat, said in a January statement about the governor’s proposal.
Senate Majority Leader Seth Goodall, who sponsored the party’s proposal, said the governor’s plan may be against the state’s constitution, which he said prohibits using bonds to pay for current expenditures.
Maine’s debt to hospitals grew to $484 million over the past four years after it failed to fully pay for MaineCare, the local version of Medicaid that provides for the poor, elderly and disabled. The Maine Hospital Association worked with the governor on his proposal yet hasn’t come out against the Democratic version. It cites the program’s enrollment growth, to about 338,000 in a state of 1.3 million, from 220,000 a decade ago, as a primary cost driver.
“We need these payments,” said Jeffrey Austin, the Augusta-based association’s chief lobbyist. “The longer you wait, the bigger the piece of the pie you’re responsible for” as the federal government reimburses the state less each year.
Democrats, who began expanding MaineCare’s eligibility rules when they controlled the legislature in 1997, say the program provides a lifeline. They point to the $3.7 billion in payments to hospitals over the past decade and their passage of a pay-as-you-go system for the state’s hospital debt as proof of their commitment to paying the bills.
LePage’s initiative could “substantively” increase the state’s debt load, according to Fitch Ratings. In addition to creating the liquor-revenue bonds, it calls for issuing $100 million in debt for a new corrections facility. LePage has said he would also release $105 million in general-obligation bonds that he has refused to issue since voters approved them beginning in 2009.
In January, Fitch cut its rating on Maine’s approximately $472 million of general obligations to AA, the third-highest level, citing budget gaps and growing MaineCare costs.
Yields on benchmark munis due in 30 years climbed about 0.06 percentage point to 3.12 percent yesterday, the highest since Aug. 22, Bloomberg data show.
Following are pending sales:
NEW JERSEY TURNPIKE AUTHORITY is set to sell $1.4 billion of revenue bonds as soon as next week, data compiled by Bloomberg show. Bond proceeds will help finance road-widening projects and bridge upgrades. (Added March 15)
NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY plans to sell $1 billion of revenue debt as soon as next week, according to data compiled by Bloomberg. The bonds will be repaid with personal-income tax and sales-tax revenue, according to bond documents. Proceeds will help finance capital projects, school construction and refund debt. (Added March 15)