California eyeing future tobacco cash to close deficit

By Alexa Haussler The Associated Press
Saturday January 12, 2002

SACRAMENTO — If Gov. Gray Davis has his way, California will become the largest state to borrow from future tobacco settlement revenues to fill gaps in its budget. 

Tapping into the promise of future tobacco settlement money to sell bonds is becoming more popular as states look for ways to close massive budget shortfalls for the first time in years. 

Advocates call it a smart way to secure a quick lump sum of cash, while others call it an expensive risk that is contrary to the settlement’s intent of paying for anti-smoking efforts. 

“It’s sort of seen as easy money,” said Jean Ross, executive director of the California Budget Project. 

Forty-six states sued tobacco companies in 1998 to recoup health-related expenses associated with tobacco use. The resulting $206 billion settlement provides payments of billions of dollars each year to states for at least the next 25 years, based on tobacco sales. 

Already, governments spend the yearly revenues on a variety of items, including closing shortfalls. 

It’s been more recently, however, that states have looked at selling bonds — called securitizing — to pocket more of the money up front. States nationwide are feeling the effects of a recession, the high-tech industry collapse and the fiscal fallout from the Sept. 11 attacks. 

Four states, dozens of cities and counties, the District of Columbia and Puerto Rico already have sold bonds backed by tobacco money. Wisconsin is now selling its bonds, and legislative experts expect several governors nationwide to follow suit as they pitch their deficit-closing budget plans in the next few weeks. 

“It comes down to a political decision that the governors and legislatures will have to make,” said Lee Dixon, director of the National Conference of State Legislatures’ Health Policy Tracking Service. 

States already have budgeted, or are considering using, the bond funds for purposes from filling out general funds to programs to lure new businesses. 

Alaska securitized 80 percent of its tobacco revenues for remodeling, expanding and building new schools, Dixon said. Wisconsin plans to use a portion of its bond revenues to fill a budget shortfall. A pool of 24 of California’s 56 counties is in the final stages of issuing bonds. 

Under Davis’ plan, the state would sell bonds, using a portion of its annual tobacco payments for a certain number of years to pay them off. The state would then receive a lump-sum payment from the sale of the bonds. 

The move would reap about $2.4 billion to help fill an expected $12.4 billion budget shortfall over the next 18 months. But it also would require the state to pay interest and would eat up in one lump sum about 40 percent of the state’s anticipated tobacco revenue for the next two decades. 

California expects to receive about $21.4 billion over 25 years from the settlement. Half of that will go to the state’s 58 counties and the cities of Los Angeles, San Diego and San Jose. 

For fiscal year 2001-2002, California will receive about $475 million, with an equal amount going to the counties. The state is investing $401 million in health and anti-tobacco programs, and putting the balance into the general fund. 

Even if it looks essential in the short term, Ross said, “securitizing is an expensive way to borrow money.” 

The bond plan is part of the $100 billion budget Davis proposed Thursday that would use spending cuts, accounting shifts and borrowing from the future to close the deficit. 

Securitization, Davis aides said, would salvage state programs in the face of tumbling revenues. 

Tobacco companies may go broke, fewer people will smoke and eventually the companies may fail to may make their future payments to states in the settlement, some officials fear. Bonding would shift the risk to investors who bought the bonds. 

Tim Gage, Davis’ finance director, compared the plan to taking out a mortgage. “It’s a resource available to the state.” 

Ross said, however, it’s more similar taking out a loan to pay for groceries. 

“You take out a debt to buy groceries and next year you still need to buy groceries,” Ross said. “It’s not borrowing to buy an asset.” 


On the Net: 

The governor’s budget plan can be found at http://www.dof.ca.gov. 

The National Conference on State Legislatures is based at http://www.ncsl.org