STATE GOVERNMENT How much will Baldacci’s privatization of the wholesale liquor monopoly really cost the public? BY LANCE TAPLEY

Now that the state’s wholesale hard-liquor business has been privatized for over a year, how is the deal working out financially for state government? The answer: The dollar loss may be much larger than anticipated — likely between $175 million and $275 million.

When Democratic Governor John Baldacci proposed soon after his inauguration in 2003 that the state sell off its liquor-distribution monopoly, he said he did it so the state could obtain $125 million from a private company to throw into a $1-billion-plus budget hole.

Speaking at the time, finance and administration commissioner Rebecca Wyke said the idea of the sale had come from superlobbyist and Baldacci fundraiser Severin Beliveau, who promptly began angling to buy the business for a Wall Street client. Beliveau had even come up with the $125-million figure. After the Democrat-controlled Legislature approved the plan, the state didn’t even bother to auction off the business; it just set the price at $125 million, although it asked for a financial "sweetener" from prospective buyers.

In 2004 the administration got down to the nitty-gritty of the sale — in the end, for a 10-year term. Lee Umphrey, Baldacci’s chief public-relations aide, told the Bangor Daily News that the revenue-sharing sweetener proposed by the firm winning the bid (its name now is Maine Beverage Company) would make the deal financially "a wash" for the state over the 10 years.

But the state would forgo $26 million a year in wholesale-liquor profits going into the General Fund, the administration admitted. Why, then, was this such a good deal, some critics asked? Multiply $26 million by 10 years, and the money forgone by the state would amount to $260 million. This was the number commonly in the news in the debate over privatization.

Even after $125 million in the up-front payment is subtracted from $260 million, as well as $40 million the state said it might get as a maximum under the revenue-sharing formula, it appeared the state’s net loss over the 10 years would be, at least, in the neighborhood of $100 million. This number also was in the news. For some, the deal seemed to be a loss, not a wash.

But now $100 million looks small. For one thing, it didn’t recognize that for years the state-run business of distributing spirits and fortified wines to stores, restaurants, and bars had been steadily growing in sales and profitability.

In fact, as the state closed its own stores and allowed more agency stores to open, sales had grown handsomely. From 1998 to 2003, they had grown by 50 percent, says state controller Edward Karass, and profits in dollars — contributions to the General Fund — also had risen by 50 percent in that period.

Both sales and profitability have continued to grow since Maine Beverage took over the business in May of 2004. In its first audited financial report, which covers only the seven and a half months until the end of 2004, and which includes start-up costs, the company had close to $16 million in earnings once depreciation, amortization of its 10-year license, and interest expense on the money it borrowed are subtracted. (If they are not subtracted, the company’s profit was $6 million.)

The $16-million number would be "pretty much" parallel in an accounting sense, says Karass, to what a state-run business might be expected to report as profits under the same circumstances.

In its interim reports given to the state for this year, Maine Beverage has been doing even better. In the first eight months, sales are up seven percent, and for the month of August sales are up 15 percent. Its "gross profit," the money left over after purchases from liquor companies and payments to the state of a "premium" tax, is up $3.2 million over the similar period of 2004.

Maine Beverage enjoys the best of both capitalism and socialism. Under its monopoly contract, the state guarantees it a gross profit of 36.8 percent of sales. The state is required to set the price of liquor, which it still regulates, to produce this profit.

The company also enjoys small overhead. Operating and administrative costs are running about five percent of sales. It has only nine employees. It subcontracts liquor warehousing and distribution to Pine State Trading Co. of Augusta, where it has its offices. It looks like a money machine, just like liquor wholesaling looked when it was state-run.

Guess who owns Maine Beverage: Two-thirds ownership rests in an affiliate of Lindsay Goldberg & Bessemer, the Wall Street investment firm that lobbyist Severin Beliveau represented. The Martignetti liquor interests of Massachusetts owns the other one-third. Representing them in the lobbying prior to the state’s sale of the business was another man with a close tie to Baldacci, Larry Benoit, his former congressional chief of staff.

Maine Beverage’s sales have been greatly helped by a jump in the number of agency liquor stores licensed by the state. They have increased from 263 in 2004 to 336 so far this year, according to Dan Gwadosky, liquor bureau director. But Dean Williams, Maine Beverage’s chief executive, sees the possibility, he says, of 600 to 800 liquor outlets in Maine, and he believes sustained growth is possible.

"We’re doing very well," he says. He’s seen growth in the liquor business for the 25 years he’s been in it. He also feels his company’s private-industry (nonbureaucratic) approach has been helpful to profits in such matters as customer service (more shipments per week to stores, he says), advertising, and new products.

So, considering the growth factor, which was not publicly discussed in the debate over whether to sell the business, what would be the more accurate figure for the total amount of money to be forgone by the state over 10 years? That is, if the wholesale liquor business had continued under state ownership and been able to continue its growth in contributions to the General Fund? Especially, if it were able to profit, as Maine Beverage has, from the continued expansion of agency liquor stores?

If the state were able to grow profits at nine percent a year, which is what Maine Beverage is on track to do this year, it would realize, according to Phoenix calculations, approximately $440 million in profits — not $260 million — over 10 years. After subtracting the $125 million one-time, up-front payment and the maximum $40 million that the state predicts it could get from its revenue-sharing agreement with Maine Beverage, the state’s loss in giving up the business might be around $275 million.

Although Maine Beverage CEO Williams says nine-percent profit growth is "in the ballpark" for this year, "I wouldn’t be comfortable projecting that over 10 years," he says. "It is a little aggressive."

He sees three to four percent as "within the range of possibilities." But even a 3.5-percent profit growth would mean that the state’s loss in giving up the business would be in the neighborhood of $175 million.

"If I had to pick one reason why this guy should not be re-elected, that would be it," says state Senator Peter Mills of Governor Baldacci. After Peter Cianchette’s recent withdrawal from the race, Mills is the likely Republican Party nominee to challenge Baldacci for the governorship. "It’s so painful even to remember this."

Baldacci originally had proposed selling the liquor wholesaling business in perpetuity — forever — for that $125 million. But Mills, then a key member of the Appropriations Committee, balked. In a compromise with the administration, he wound up rewriting the privatization bill in the middle of the night before the budget’s passage to restrict the state’s sale of the liquor franchise to the 10-year license.

Mills was successful this year, by mounting an initiative petition drive, in killing the governor’s plan to sell off — through revenue bonds — the state’s lottery proceeds.

Lee Umphrey, Baldacci’s aide, comments on the possibility that the loss to the state from the sale of the wholesale liquor business may be higher than expected: "Being new in office and having a billion-dollar deficit, the governor wanted to manage the pain."