County Eyes Private Investors To Secure Payments Of Tobacco Settlement
Instead of "betting" the tobacco industry succeeds enough over 25 years to pay out all of San Diego County's $945 million share of the tobacco settlement, the Board of Supervisors unanimously decided Tuesday to take half that up front by securitizing the
In settling for $460 million, board members said they will steer clear of the risks associated with relying on a single, embattled industry for money. They added the vote allows them to skirt a Catch-22 pointed out to them by Chief Administrative Officer Walter Ekard.
"If the county and other health organizations are successful in reducing the rate of smoking, we could potentially see a reduction in our payments under the settlement," Ekard wrote. "However, if the tobacco industry continued to thrive, and the county received all projected payments, then the efforts of the county and other health organizations to reduce smoking would most likely not be considered a success."
He added, "The factors that could negatively impact future payments include continued litigation and adverse monetary judgments against the tobacco industry, potential bankruptcy of one or more major firms involved in the settlement, population changes in San Diego County in comparison to the state overall, and a decline in domestic tobacco consumption."
Securitization is a process by which the county will sell its rights to future tobacco settlement payments to a third investor and receive sales proceeds equal to the present value of the future payments through a bond issuance. The county expects the bonds to be sold off after 21 years, at which point it would resume getting its annual settlement payments.
Tuesday's board vote capped off a two-year review of the securitization process by county staff. That review began after 46 states agreed to the Nov. 23, 1998, $206 billion tobacco settlement with Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown and Williamson Tobacco Corp. and Lorillard Tobacco Co. Four other states -- Florida, Minnesota, Mississippi and Texas -- reached earlier settlements totaling $40 billion.
Only Puerto Rico and a handful of states including New York, Alaska and California have taken steps to securitize their tobacco settlement proceeds, according to Bill Kelly, San Diego County's chief financial officer.
Unlike San Diego, the first two places in the country to securitize their tobacco funds, New York's Nassau County and New York City, took the step to balance their budgets, he said.
San Diego and Sacramento counties will be the first to securitize their tobacco money here, Kelly said, adding that 23 other California counties are exploring a similar way to sell the pooled rights to their tobacco settlement payments for advances.
"It kind of cleans our hands," Supervisor Greg Cox said. "We don't have to be worried about what happens in the future in terms of tobacco sales."
"You have a bird in hand rather than two in a bush," Supervisor Bill Horn added. "I'd rather take a bird in the hand and lock it in a safe. We're going to invest it. We're going to get a return over time."
Kelly said the decision works out for both the county and the potential investor. The county receives its money up front in the first week of December, and the investor who doesn't mind the tobacco risk can spread it across four companies through these bonds rather than gamble on the stock of a single corporation.
Also, he said, the county can more easily secure its advance payment now because San Diego's tobacco proceeds are projected to be so large, and this securitization market is still in its infancy with little competition from other counties.
Chief Deputy Treasurer Neil Rossi added that inflation could reduce the current value of the county's 25-year share of the tobacco settlement revenue to $377 million, so "We're actually getting more on a present-level basis by doing the securitization."
As a result of the board's vote, the county will be restricted to spending the tobacco money only on items that qualify under the tax code, and be subject to an audit of the Internal Revenue Service. Several recently completed tobacco securitizations have already been the focus of IRS audits, according to county staff.
Failing to comply with the tax laws would mean the loss of the tax-exempt status of the bonds and possible payment of settlement costs to the IRS.
Prior to the vote, supervisors discussed the need to protect the money from future boards with differing agendas. While leaving the issue to be reviewed by staff, supervisors hinted that one possibility should be tying future boards' tobacco settlement expenses to a vote of the people.
"We're being prudent with the securitization," Horn said. "We should be prudent with how we spend it."
"The one issue that we would like to have a higher level of comfort on is that those funds will be committed for (health-related) purposes and not be a convenient target in a down-turned economy," Cox said.
San Diego County received $11.5 million from the tobacco settlement last year, and $30.7 million this year. Based on 1999 projections from the California Legislative Analyst's office, the county would have received $33.3 million next year, $40 million in 2002-2003 and $40.4 million in 2003-2004.
Through the securitization, the supervisors will be able to spend between $27 million and $33 million each year through 2025, according to Chairwoman Dianne Jacob. The money is earmarked for a variety of health-related uses, such as cancer research, community clinics and county medical services.
"We're all hoping the money outlives us and will continue to be spent on health care," Jacob said.