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Friday, 17 April 2015 10:03
Louisiana Tobacco Settlement funds going down in smoke
Written by 

tobacco-settlementby Treasurer John Kennedy

You probably hear the words "tobacco settlement" and wonder what the heck that even means. Allow me to boil it down for you: It translates into hundreds of millions of dollars for legislators struggling to balance the state budget, and that's definitely not a good thing. Even worse, it means saddling our children and our grandchildren with a staggering $1.2 billion in debt.

 

We sued the major tobacco companies years ago over our smoking-related health care costs. Smoking is terrible for your health, but it's certainly legal to smoke if you choose to. However, smoking is also terrible for states' health care budgets. Tobacco companies were asked to pay for the added expense to the taxpayer-funded Medicaid program. All states, including Louisiana, joined in the litigation.

In the end the tobacco companies settled and agreed to pay billions of dollars over several decades. We didn't get the money in a lump sum. We got a recurring revenue stream.
During my first term as Louisiana's state treasurer, I helped oversee the sale of part of that revenue stream to investors. We wanted to hedge against the possibility of tobacco companies declaring bankruptcy.

Now we didn't just slap a "for sale" sticker on part of our tobacco settlement and start taking bids. We did our homework. We did enough homework to qualify for a graduate degree at Harvard. We looked at every single pro and con. We sat down with experts. We took our time. We treated this revenue stream like the valuable asset it is. In other words, we didn't cart the family heirloom down to the pawn shop so we could take a trip to Walt Disney World.

We only sold part of the revenue stream, and we locked up the proceeds. They're safely tucked away into a trust fund that earns money for health care, education and TOPS.
Now we're looking at selling the rest of the revenue stream in a fire sale because we're facing a $1.6 billion state budget hole. The Division of Administration will tell you that we can generate $751 million.

Basically, we'll take on debt by selling $1.2 billion in bonds to investors for an upfront cash payment of $751 million. Those bonds must be repaid by 2054. The interest on the bonds will run $475 million. Within three years, the $751 million will be spent. All that will remain are the bills that must be repaid by our children and grandchildren. This amounts to draining their college fund to buy a bass boat and then telling them to saddle themselves with high interest student loans.

Here's what I know. This sounds like the same bad budget policy that drained the Medicaid Trust Fund for the Elderly, raided the Artificial Reef Fund, just about bankrupted the state employee health insurance program and declared a tax amnesty every single year. We're pouring sand into holes and then acting surprised when the wind blows out the granules.

Even worse, we're not going about this the right way. This is the state's last savings account. We've depleted our other reserves because we spend more as a state than we take in.

Do you know how the Division of Administration is picking the financial advisers and other professionals for this nearly $1 billion transaction? They're pumping smoke into a room and making selections. They're not bidding this out to get the best price. They're not bringing the hiring before the State Bond Commission, where this can be decided in front of the public. They're handpicking someone in a smoke-filled room.

Now I don't think the Division of Administration is flouting the law because the officials over there are corrupt. I think they're in too big of a hurry. I think they're trying to tide the state over for six months, and then they're out of here.

Do we need to sell the rest of the tobacco settlement? I have no idea. We haven't gathered data on smoking trends or tobacco companies' financial stability. Are we going to protect the money that we generate? I can't answer that question either because the Division of Administration just wants you to trust that it will be protected. They want you to believe the money will be used for TOPS. Don't buy into that wink and promise.

Legislators have a hefty task before them. They have to balance the budget, and the governor hasn't provided enough money. The proceeds from selling the rest of the tobacco settlement are going to be more alluring than Bathsheba bathing on that roof.

We need to do right by taxpayers. We need to do our due diligence before we sell this income stream. Then, if we do sell it, we need to lock it up in a trust fund. Dedicate the earnings to TOPS. Dedicate them to roads. Just don't waste them.

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