State lawmakers in Maine are feuding with the governor over bond issuance in a standoff that will affect the fate of the state’s hospitals, infrastructure, prisoners and its alcohol consumers.

Since taking office in Feb. 2011, Gov. Paul LePage, a Republican, has declined to permit the issuance of $104 million of bonds approved by voters in November 2010 and November 2012.

The voter-approved bonds have become a pawn in a major policy dispute between the governor and Democrats who took control of the Legislature in the 2012 election.

The issue revolves around $484 million of unpaid Medicaid bills owed to Maine’s hospitals.

Without this money the hospitals are feeling the financial pressure. As a consequence of the state’s debt to its hospitals, over the last 10 years hospitals have eliminated services, laid off more than 300 employees, and froze wages and cut benefits for employees, according to the Maine Hospital Association.

Both LePage and legislative Democrats say they want to pay the debt, but are far apart on how to do so.

In January LePage introduced a plan to pay the $484 million in unpaid Medicaid bills, financing the payments in part with bonds backed by liquor revenue.

A 10-year private contract for the wholesale sale of liquor in state is expiring in summer of 2014. The state would take over the wholesale sales operation while still leaving the distribution to a private contractor.

Based on this anticipated revenue flow, the governor’s plan calls for the state to sell a $186 million revenue bond. Maine would pay this amount to hospitals for Medicaid payments owed back to 2009, which would trigger federal government matching payments of $298 million to the hospitals. The hospitals would get the money by June.

If his plan is enacted, LePage said he would be willing to issue the voter approved bonds.

In January, LePage also proposed the sale of a $100 million bond to build a new prison, saying the state could service the debt out of savings generated by more efficient prison operations.

On March 11 the Democratic leadership in the state Legislature unveiled a counter proposal to pay the state’s debt to its hospitals. They said LePage’s plan was constitutionally dubious.

In their plan, the contract to supply the state with liquor would be put up to bid. The proceeds from the bid would be used to pay what Maine owes for Medicaid, triggering the federal government’s $298 million match.

The Democratic bill has other health care planks, including accepting federal dollars to expand Medicaid access under the Affordable Care Act.

LePage has objected to the Democrats’ bill.

“Requiring the upfront payment of $200 million inhibits competition by limiting bidders to those who can afford to finance such a large amount,” LePage’s communications staff said. “Such a massive payment to the state would require financing from somewhere — probably a Wall Street firm.”

The private sector financing required by the Democrats’ plan would also require a higher interest rate than a state revenue bond, costing Maine money, LePage’s staff said.

Whether Maine should join the Affordable Health Care Act by expanding Medicaid is a separate question from how to pay the state’s debts to its hospitals, LePage added.

On March 21 LePage proposed an additional $100 million transportation bond bill. However, LePage is insisting that he will not approve or release any bonds, including the transportation bond, until the state’s debt is paid to its hospitals. Indeed, in early March LePage threatened to veto all bills coming to him until legislation to pay the $486 million hospital debt was passed.

He has not followed through, but he has refused to sign several bills. Following Maine law, some of these have become law a week or two after the Legislature passed them.

The dispute prompted two Republican legislators to file a bill shifting responsibility for releasing bonds from the governor to the treasurer.

“In this situation, I think the governor has overstepped and I think it may make sense to take the governor out of the equation,” said House assistant majority leader Jeff McCabe, D-Skowhegan.

“I’m still very much in favor of issuing the bonds approved to date,” said Maine Treasurer Neria Douglass, a Democrat. “I think it’s a very good environment for issuing bonds.” Interest rates are attractively low, she added.

Maine is rated AA by Fitch Ratings and Standard & Poor’s and Aa2 by Moody’s.

The voter approved bonds would be for various purposes including downtown redevelopment projects, transportation projects, higher education, and the Land for Maine’s Future Program that funds conservation land easements and purchases.

Tom Abello, senior policy advisor for the Nature Conservancy, is working to get the bonds for the Land for Maine’s Future Program released. “This program is one of the most popular in the state,” he said. Voters have approved the program’s bonds six times going back to 1987, usually by more than 60%.

The bond proceeds help to protect responsible economic and recreation uses of the environment as well as wildlife habitat, Abello said. With the bonds not having been sold, some of the projects have been delayed. Others have found alternate sources of funding or have used remaining money from past approved bonds.

If the bonds continue to be unsold it will be a problem for the program, Abello said.

Gov. LePage’s liquor bond proposal has precedent in other states.

“Money from liquor stores has proven to be pretty resilient,” said Howard Cure, director of municipal research at Evercore Wealth Management. “Even in recessions people are drinking.” However, New Hampshire liquor is cheaper than that of Maine and many of Maine’s residents live near New Hampshire, Cure said.

Maine’s failure to pay its debt to the state’s hospitals is a credit challenge to the two Maine hospitals that Moody’s Investors Service rates, according to Moody’s assistant vice president Sarah Vennekotter.

Moody’s rates Eastern Maine Medical Center Baa1 and MaineGeneral Health Baa3. The former hospital has $148 million in rated debt. MaineGeneral Health had $270 million in 2012 but has just issued debt to build a new hospital, Vennekotter said.

Eastern Maine has $112 million in receivables from the state. Both hospitals have a higher than national average portion of their patients who use Medicaid for payment, Vennekotter said.

The state owes MaineGeneral Health $38 million, the equivalent of 35 days cash on hand, said MaineGeneral Health chief financial officer Michael Koziol. Not having this money, “puts pressure on any opportunity to borrow short or long-term,” he said. “It puts pressure on our bond covenants.”

Fitch Ratings rates MaineGeneral Health BBB-minus. Failure to receive the Medicaid money due to hospital system has not yet affected MaineGeneral Health’s operating profitability, said Fitch Ratings associate director Emily Wadhwani. However, if the problem persists, it would be affected, she said.

“We have had selective layoffs, deferred hiring people, frozen wages and delayed needed capital projects due in part to our tenuous cash situation,” said R. David Frum, president of Rumford and Bridgton hospitals. “Our lack of cash is the direct result of this enormous MaineCare receivable. Payment of the MaineCare debt is the single most effective way to improve the stability of our organization.”

In another major bond policy shift, LePage, after taking office reversed decades of practice and said he would not place the state’s moral obligation behind bonds issued by the state’s nonprofits. Since the start of new policy such nonprofits have issued without state backing and paid higher interest rates.

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