Legislators to hear tobacco money options
LOCKPORT - Pitchmen from Wall Street investment firms are expected to address the County Legislature on Tuesday about their proposals to underwrite the county's planned sale of its share of the national tobacco settlement.
A special tobacco committee met Tuesday to discuss whether the county should join a pool with other counties interested in selling the settlement for up-front cash instead of taking 25 annual payments, or whether Niagara should act on its own.
But after an hour of discussion of four bids with County Treasurer David S. Broderick, the panel decided that the item should be added to the agenda for a special Legislature meeting already called for next week.
Broderick said under terms of a local law passed earlier this month, Legislature Chairman Clyde L. Burmaster has the power to make whatever decision he wants on how to sell the bonds, but he has asked for a recommendation from the committee.
On the face of it, the most attractive bid was from Morgan Stanley Dean Witter, which offered the county almost $40.3 million in net proceeds. It offered the largest income of the four bidders and the smallest fees.
But Broderick said Morgan Stanley is saving money by not providing a $125,000 economic study projecting the tobacco companies' 40-year revenues. The bonds are being sold for 40-year terms.
Broderick said it's unknown how investors might react to seeing only a 25-year projection by an accounting firm charging Morgan Stanley only one-fifth as much as the $125,000 Wharton Econometrics is charging other underwriters.
The Legislature is still considering joining a pool set up by the state Association of Counties. The association's fee for its underwriter, First Albany Corp., was expected to be less than any Wall Street firm offering to sell the county's bonds alone.
But the Association of Counties is adding its own fee of $1.25 for every $1,000 of bonds, added to an $11.21 per $1,000 fee charged by First Albany. That made its total fee 11 cents per $1,000 higher than Morgan Stanley's $12.35 per $1,000.
Also, the association's net proceeds for the county were about $1 million less than Morgan Stanley's. Other bidders, Bear Stearns and Salomon Smith Barney, offered higher fees and did not project a net payment to the county because they did not include an amount for a "liquidity reserve."
Broderick said an escrow agent will hold that amount, roughly $4 million, and dip into it to make payments to bondholders if the tobacco revenue isn't enough to make the annual interest payments the bondholders will be counting on. If the escrow fund runs out, the bondholders are out of luck, Broderick said. The county wouldn't have to pay them.
On the other hand, if the tobacco companies do better than expected in sales, their revenue may be greater than the amount due the bondholders. If that happens, the excess, called a residual, goes to the county.
Broderick said Niagara can wait until Sept. 11 or 12, when Chautauqua County's tobacco settlement will be sold through Morgan Stanley, and see how the market reacts. The Association of Counties won't go to market with the pool bonds until Oct. 25.