Article published March 17, 2007
Bond plan called breach of tobacco-settlement promise
Critics fear Strickland proposal would defund anti-smoking effort
By JIM PROVANCE
BLADE COLUMBUS BUREAU
COLUMBUS - Ohio and other states cited health-care costs and the industry's marketing to youths when they sued major tobacco companies nearly a decade ago, but funding previously promised for both is in doubt under Gov. Ted Strickland's proposed sale of future settlement payments.
"The governor's proposal breaks the promise Ohio leaders made at the time of the 1998 state tobacco settlement to invest a significant portion of the state's settlement money in programs to reduce tobacco use, especially among kids," said Jan Friedman, spokesman for the Campaign for Tobacco-Free Kids, in Washington.
The state hopes to get $5 billion by selling off the next 40 years of settlement payments from Philip Morris, R.J. Reynolds, and other cigarette manufacturers. Of that, $2.2 billion would be used to accelerate the state's long-term school construction program and avoid $2.8 billion in future debt that would have been incurred for future projects.
Money saved in interest would be used to underwrite a huge property tax exemption for 775,000 seniors and the disabled.
The Strickland administration has proposed expansion of other heath-care programs in his budget. And it has earmarked other state funds through 2009 to continue funding other programs dependent on tobacco settlement dollars, including assistance for southern Ohio tobacco-farming communities, a number of other health initiatives, and biomedical research.
But the various boards overseeing them would be put on notice that they will have two years to secure other funding or phase out their activities.None of the $5 billion would be reserved to replace future payments that would have gone to the state board behind the "stand" ad campaign, encouraging youths to remain smoke-free, and other smoking cessation and education programs.
The foundation was supposed to resume receiving payments in 2012 under the state's long-term plan for spending settlement dollars, just two years of which are locked into law at any one time.
The Strickland administration does not plan to make good on $352 million in legally unenforceable IOUs that lawmakers inserted into the tobacco settlement budget to replace some of the $568 million total they diverted over the years to other purposes.
Pari Sabety. Mr. Strickland's budget director, said the administration will work with the foundation board. But she noted the panel is sitting on an endowment and has a 10-year spend-down plan.
The foundation's endowment is roughly $300 million. The original plan was for it to have banked nearly $1 billion by now so it could operate solely off investment earnings. With an annual $40 million operating budget, the foundation expects to run out of money in about eight years.
Executive Director Mike Renner said the board hoped it could come back later, armed with data showing improved health of Ohioans and lower health-care costs to convince lawmakers to provide more settlement dollars.
"Based on how government has responded to this program, we can't count on ever seeing any more dollars," he said. "There aren't going to be any more additional dollars from the master settlement agreement."
Rep. Bill Seitz (R., Cincinnati), who likes the idea of what's called securitization, questioned whether the state has waited too long to get the best results.
"We have more than tripled the tax on cigarettes and passed a statewide law that says you can't smoke them anywhere," he said. "The revenue stream is going to go down, not up."
Ohio would be the 19th state to lock in its share of the national settlement.
Kurt Kauffman, Ohio's debt manager, said the state would sell bonds worth $5 billion to private investors. The revenue stream coming from the tobacco companies over the next 40 years would then be redirected to bondholders.
Should settlement dollars come in at a rate greater than expected, the bonds would be paid off more quickly and the settlement dollars would again flow to Ohio.
"California just did $4.5 billion earlier this month," said Mr. Kauffman. "They went out 40 years." The state expects to pay interest of up to 5.5 percent.
Joe Deters, former state treasurer and now Hamilton County prosecutor, pitched the concept of securitization to Gov. Bob Taft's administration soon after the settlement was reached. He was rebuffed.
"The state treasurer can't invest in tobacco companies because they're too risky," Mr. Deters said. "But here we have a major asset of the state with a risk profile that falls well outside acceptability.
"Ohio is one bad lawsuit away from these companies going bankrupt, and if they go bankrupt, then the state would get nothing," he said.
Contact Jim Provance at:
jprovance@theblade.com
or 614-221-0496.
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