Williams Proposes Bonds Backed by Tobacco Funds
D.C. Mayor Anthony A. Williams is proposing to sell bonds backed by the District's share of the national tobacco settlement that would bring in about $645 million to help slash the city's debt costs and pay for health, education and family programs for mo
If the mayor's proposal is blessed by the D.C. Council, financial control board and Congress, the District would join New York City as one of the first big-city governments to experiment with a novel financing plan that leverages the city's $1.2 billion share of the national settlement with major tobacco companies.
By selling bonds secured by tobacco settlement payments, the city receives a lump-sum payment of about $645 million upfront instead of waiting for smaller, annual payments invested over 25 years.
Like Maryland and Virginia, the District could invest each year's payment. But the mayor's advisers said those payments might be reduced, depending on inflation or if there is a drop in cigarette consumption that threatens the finances of the tobacco companies. The risk is thus shifted to the bondholders instead.
"This transaction will free up local funds committed to debt service and thereby provide a reliable and substantial funding stream to support health and education programs well into the future," Williams (D) said.
The District amassed high debt costs paying for a $331 million deficit during the financial crisis of the early 1990s. The mayor wants to use the tobacco settlement money to reduce that debt, pleasing Wall Street and Congress. Next year, he said, the bond sale would reduce debt service costs by about $73 million and by an average of $50 million each year after that.
Of the $73 million in savings, Williams is asking for about $11.3 million to finance anti-tobacco use programs. The rest would pay for some of the education, health and family initiatives in the mayor's 2001 budget, including insurance for immigrant children, school computers and senior citizen health centers. After 2001, the money would be distributed based on recommendations from a public-private commission and the mayor and D.C. Council. At least 10 percent would be set aside in an income-generating community endowment.
Williams found support for those priorities from community organizations yesterday during a council hearing.
Noting that the District's cancer rates are among the highest in the country, Walter Talbot of the American Cancer Society said the tobacco settlement funds give the District "the means to do something. While we would like to see funding at higher levels in future years, we do support the mayor's proposal as a good start."
But council members warned Williams that relying on the tobacco settlement to cover the cost of programs is risky, since the tobacco funds eventually will run out.
"Neither the reserve fund nor a large portion of the tobacco fund can be seen as sources for the funding of programs proposed by the mayor," said council member Charlene Drew Jarvis (D-Ward 4).
Most council members support Williams's proposal in principle but are divided on whether the city should adopt some combination of bond sales and the conventional payment from the tobacco companies.
Selling bonds "certainly does reduce the risk," said council Chairman Linda W. Cropp (D-At Large). "However, we also give up an awful lot of money. I would not be inclined to give up all of it."
The D.C. Coalition on the Tobacco Settlement, representing 100 organizations and individuals, said it is worried that payments from the bond sales might tempt D.C. officials to spend the money "in a willy-nilly manner" given the city's history of raiding funds.