Plan to cash in on tobacco proceeds criticized
Gov. Scott McCallum's proposal to cash in 30 years worth of future payments from a tobacco settlement in exchange for a one-time $1.3 billion payoff drew immediate criticism from Democrats on Tuesday.
McCallum's plan, outlined in his budget address, proposed selling the tobacco payments for the $1.3 billion lump sum, likely to an investment group. Of that money, $350 million would go toward balancing the current budget and $650 million of it would be invested in an endowment fund.
The rest would go into a reserve fund.
Senate Majority Leader Chuck Chvala, D-Madison, said the proposal seemed like ``a fiscally irresponsible measure that should be carefully scrutinized.''
Wisconsin is currently expected to get about $5.9 billion over 25 years from the settlement. McCallum said his plan could yield the state $6.8 billion over the next 30 years.
``That really does sound like voodoo economics, doesn't it?'' Chvala said.
State Budget Director Rick Chandler, who has been appointed to become revenue secretary by McCallum, said the prediction was based on conservative estimates that the $650 million trust fund would yield an average interest rate between 8.5 percent and 10.5 percent over 30 years.
``It is not only possible, but likely, to yield $6.8 billion,'' said Administration Secretary George Lightbourn.
McCallum's plan would revert 8.5 percent of the endowment fund each year to the state's general fund to pay for various programs, including the Wisconsin Tobacco Control Board, which coordinates anti-tobacco efforts, Chandler said.
The governor said the plan's success depends on legislators being able to restrain themselves from dipping into the fund to pay for other projects.
Attorney General James Doyle said that is an unrealistic request.
``If you believe that you can sit on that money, without them plugging future holes in the budget with that money, people are really dreaming,'' Doyle said.
Doyle said investing the money as it comes in from the tobacco companies could eventually earn the state much more than $6.8 billion, if it was saved and invested rather than spent immediately.
The 1998 agreement between the tobacco industry and 46 states, including Wisconsin, requires cigarette makers to pay a total $306 billion to compensate for public health care expenses due to smoking.
The money currently goes into the state's general fund when the tobacco companies make payments. Under McCallum's proposal, the tobacco companies would still make the payments, but they would make them to a holding company created by the state to pass them onto investors.
The state guarantees investors a fixed payment each year. Should the state fall short of those guarantees, the reserve fund would be used to make up the difference, although state officials said they did not expect to need the money.
Alaska and Alabama have entered into agreements to sell their tobacco payments. South Carolina is in the process of doing so and 18 other states are considering it, Chandler said.
The $350 million is needed now to balance the upcoming budget because of previous spending commitments.
Other spending obligations and a slowing economy have created a particularly tight budget. But using the tobacco money will mean the state will not need to increase taxes or rely on drastic spending cuts to meet its needs, McCallum said.
He has included a total of $33 million in the two-year budget for the Tobacco Control Board.
Anti-smoking groups had requested between $30 million and $80 million each year for programs to prevent tobacco use, citing the levels recommended by the U.S. Centers for Disease Control and Prevention.
Carrie Sullivan, executive director of the statewide nonprofit organization Smoke Free Wisconsin, said she is withholding judgment on the plan. But her ultimate concern is making sure the state continues to pay for anti-tobacco efforts.
``If we're going to cash in the settlement, I hope we don't cash in on our commitment, too,'' she said.