State looks at cashing in tobacco fund
A study panel learned Tuesday that Louisiana might be able to get as much as $2.3 billion in upfront cash by selling $4.4 billion in tobacco-settlement money the state expects to get over the next 25 years.
Top state leaders have resurrected the idea of selling Louisianaâ€™s share of a multistate settlement against tobacco companies for cash today.
State fiscal advisers have projected the state could get a little more than 50 cents on the dollar for selling its projected 25-year stream of tobacco settlement funds.
Sen. Jay Dardenne, R-Baton Rouge, said he wants details of how a sale would work in case lawmakers need to change state law next year to allow such a sale.
Dardenne said that, whatever the state does, he will insist the money be spent as voters indicated in a 1999 constitutional amendment that committed the tobacco money to education and health care.
Dardenne was emphatic that none of the cash help ease on-going state budget woes.
"This would not be in any way an effort for us to get our hands on some money as weâ€™re wrestling with all these other financial problems," Dardenne said.
"This is not a money grab," he said.
State Treasurer John Kennedy said current federal tax laws apparently would force the state to put all of the bond sale proceeds into trust funds and to spend only the earnings each year.
The stateâ€™s fiscal advisers outlined several scenarios for selling all or part of the tobacco money in a memo to the Tobacco Settlement Payment Options Task Force.
Government Finance Associates projected the sale of the stateâ€™s full $4.4 billion in tobacco settlement funds could bring the state as much as $2.3 billion.
But GFA recommended selling only 40 percent of the state total, or about $1.8 billion. GFA estimated that would bring the state $929 million in cash at once.
Hereâ€™s how the sale would work:
Louisiana is to receive more than $4.4 billion from tobacco companies as its share of a $246 billion deal between cigarette makers and 46 states to compensate states for medical expenses related to smoking.
The state is collecting about $150 million a year as its share and has received $184.6 million since settlement payments started in 1999.
Under a constitutional amendment approved last year, most of Louisianaâ€™s tobacco money goes into trust funds, with earnings spent on education and health care programs.
A smaller part of the annual tobacco payment is spent directly on health care and education.
The idea is to sell the expected yearly payments to investors at a discount. The deal would be done via the sale of tax-exempt bonds that would be paid off with Louisianaâ€™s annual tobacco settlement revenue.
Representatives of three large investment firms told the task force the state could get between $1.1 billion and $2.1 billion by selling its tobacco revenue, depending on how the deal is structured.
Projections by Merrill Lynch show the state would have more to spend right away and wouldnâ€™t have to wait as long for money to build in the trust funds.
Merrill Lynch projected the trust funds would spin off more than $100 million a year for health care and education projects beginning as soon as the tobacco money is sold.
If the money isnâ€™t sold and it flows in on schedule, it would take almost seven years for trust funds to get large enough to produce more than $100 million a year.
Merrill Lynch presented data to the task force indicating that, if nothing is done and tobacco companies make all of their payments as scheduled, the state would have $3.3 billion in trust funds by 2025.
However, if the state sells the tobacco settlement, the trust funds would total only $1.8 billion in 2025.
State Treasurer John Kennedy said itâ€™s a matter of state officials deciding if they have faith in the future of the tobacco companies or if they want to take a sure thing.
Kennedy said heâ€™s apprehensive about the future of tobacco companies and ran down a long list of lawsuits currently in the works against tobacco companies.
Kennedy said the idea is for the state to hedge against something that would abruptly cut off tobacco payments -- such as bankruptcy of major tobacco companies.
In that case, the bond holders would suffer the loss rather than the state.