Moorlach Wary of Plans to Spend Tobacco Windfall
Orange County Treasurer John M.W. Moorlach, who raised questions about the county's investments before its historic bankruptcy, is urging public officials to slow down in their zeal to create a plan for managing $912 million in tobacco money heading into
"This is unique. This is new," Moorlach said last week about the money to be paid to the county over 25 years from the nationwide settlement with the tobacco industry. "And it's something we don't control."
Moorlach wants the county to consider spending the money as it receives it--in annual installments of $30 million to $38 million starting next year--or setting up an endowment fund to conserve the money and build up the cash value.
But Moorlach's cautionary effort could fall on deaf ears.
On Wednesday, county leaders will hold a workshop where staff members will provide details on an unusual method to leverage part of the funds through a nonprofit agency. The agency would ensure that the proceeds would help pay for jail expansion and reduce the huge debts the county incurred to get out of its 1994 bankruptcy.
At the same time, health care advocates are expected to argue Wednesday that the windfall from the tobacco settlement should not be spent on anything but health care. It will be their first chance to confront county supervisors publicly over the spending plan.
"In the past, the county has always said, 'We don't have the extra funds for health care.' Well, now they do," said Sam Roth, spokesman for the Orange County Medical Assn. "Here we have this once-in-a-lifetime opportunity to more than double what the county puts into health care. It's a no-brainer."
In the middle of the battle, Moorlach is pushing his take-it-slow approach.
He won't take sides on what the money should be used for, but he worries that from a financial standpoint, the tobacco industry's annual payment is not a sure bet. He fears that companies could run dry from the payments, the pending claims in a federal lawsuit and potential foreign claims for damages.
"What is the saturation point where there may be too much stress to meet all the litigation-proceeds commitments?" Moorlach asked.
He said he is against "rushing into anything."
At the workshop meeting this Wednesday, the county's chief financial officer, Gary Burton, will explain a plan to create a nonprofit agency that would take in the proceeds, ensure funding for the county's top priority--jail expansion--and reserve the rest for paying off nearly $560 million in bankruptcy debts.
Essentially, the county would be selling a slice of future tobacco payments for a large lump sum now.
The nonprofit agency, meanwhile, would be responsible for repaying the bonds it sells, keeping the debt off the county's books.
The complex plan also would free up $23 million to $28 million a year in county general funds to operate expanded jails, said Jan Mittermeier, the county's executive officer.
Under the proposal, the county would transfer the annual payment from the tobacco settlement to the nonprofit agency. Once the transfer is made for specific purposes, she said, no one but the board could change the agency's mission.
The agency would use nearly all of the cash in the next three or four years and part of it in future years to pay off principal owed on bankruptcy debts, thus freeing up general fund money for other purposes.
It would use the rest of the money expected over the years to create an annual income stream, which would be used as the basis for selling $120 million to $175 million in bonds. Proceeds from the bond sale would pay for jail expansion, Mittermeier said.
"We'll get a lot of health care advocates Wednesday who will present to the board their position that because the settlement funds are related to diseases caused by tobacco, the money should be dedicated to health care," she said.
"But that's kind of a special interest group [because it's] paying for people who don't have insurance," she asserted. "But the county has to be concerned about the health of the community in general."
If the county's obligations to repay debts are so high that its ability to fund other programs, including those for health care, is restricted, she said, then the county should reduce those debts and free up money for other programs.
At the moment, she said, the county is fulfilling all of its legal obligations toward health care but is not meeting its duty to provide housing for inmates, a festering problem for the last 20 years.
Moorlach, though, said he is concerned about the risk involved in the county staff's plan. The possibility of future financial problems in the tobacco industry makes the county's proposal to sell securities based on annual payments a risky venture, he said.
But Burton discounted Moorlach's fears.
"The tobacco industry is very profitable--it's selling an addictive product," Burton said. "If one company goes bankrupt, smokers don't quit. They turn to another company. I don't think it affects consumption of cigarettes. It's a pretty solid revenue source."
Besides, he pointed out, Orange County would not be the first municipality to raise large lump sums by selling bonds based on future annual revenue. New York City and Nassau County, N.Y., already are planning similar programs.
The county board isn't sold on any proposal yet. Supervisors Cynthia Coad and Todd Spitzer said they need to hear more about Burton's proposal before making any commitments.
Coad, though, noted that one potential use of bond revenue would be to create a rehabilitation center for jailed alcohol and drug addicts. Such a program, she said, would constitute spending money on health care.