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Tapping tobacco payments gains support

April 18, 2002
By: Matt Williams
State Capital Bureau
Links: SB 1191

JEFFERSON CITY - Mortgaging Missouri's tobacco settlement has emerged as a solution to the state's budget crisis.

The Missouri Senate is expected to debate next week a proposal sponsored by Sen. Ken Jacob, D-Columbia, that would sell about a quarter of the state's share of payments from a settlement with tobacco companies in exchange for a lump sum of roughly $500 million. That money could then be used to avert cuts in state programs over the next two years.

Gov. Bob Holden said he supports the proposal, joining senators from both parties, although House leaders were initially cool to the idea.

In 1998, when states settled a lawsuit with tobacco companies, it was as if Missouri won the lottery. The state won more than $4.5 billion to be paid out in the next 25 years. Like real winners of the lottery, Missouri can agree to take a smaller amount up front by issuing bonds, known as "securitizing" the payments.

In a year when lawmakers are faced with slashing popular programs to balance the state's budget, many are looking for any available pool of money to stave off cuts. Much of the state's first settlement payments has been directed to cover budget shortfalls. This would be the first time the state would reach into future payments.

"It's going to reduce the financial stress that we face with next year's budget," Holden spokesman Jerry Nachtigal said.

Nachtigal said the tobacco money would help the state stay afloat until the economy improves and tax collections increase.

Opponents of the plan say the state would be breaking its promise to spend settlement money that was designed to compensate for smoking-related health care costs by using it to cover holes in the budget.

Sen. Marvin Singleton, R-Seneca, said the state should be spending the money to treat diseases, fund medical research and keep teen-agers from smoking. Singleton, who is a doctor, said it's hard for lawmakers to resist grabbing a "pot of gold."

"If it's sitting out there, the temptation is great," he said.

Nachtigal said Holden was still committed to spending the rest of the tobacco payments for health care and life sciences programs.

Missouri isn't the first state to consider borrowing from tobacco payments to cover budget shortfalls. Washington state lawmakers are considering selling off 20 percent of their settlement to fill a budget hole. Other states like Alaska, South Carolina and Alabama have already sold off portions of their settlements.

In Wisconsin, lawmakers are considering selling all future tobacco proceeds to cover a $1.1 billion shortfall. Dale Knapp, an analyst with the Wisconsin Taxpayers Alliance, said Wisconsin has had persistent budget problems and that legislators are taking the easy way out by tapping tobacco money.

The problem, Knapp said, is that using the money just delays a solution to the state's budget problems. Next year, he said, there won't be any money to tap into.

"We don't have any more one-time money," he said.

Wisconsin's bond rating, a measure of the state's financial stability, was downgraded after the proposed sale, meaning it will have to pay higher interest rates on the borrowed cash.

Backers of Missouri's plan said Wisconsin's experience is an extreme case but can be a guide for not digging the state into a deep financial hole. Sen. James Mathewson, D-Sedalia, said lawyers were drawing up plans and would avoid the mistakes Wisconsin made.

"Our bond counsel would review exactly what Wisconsin did, and we would not do that," he said.

While Jacob's proposal has gained the support of Holden and many senators, the idea has not been well received in the House. Both Democratic Speaker Jim Kreider and Republican leader Catherine Hanaway said borrowing from tobacco payments was a bad idea.

"I'm concerned that if we get a lump sum of cash right now, it's going to just fly out the door," Hanaway said. Kreider called the plan "fiscally irresponsible."

However, if the decision comes down to cutting popular programs or borrowing, Kreider said it would be hard not to go for it.

"I think the idea stinks, but in tough times, it takes tough decisions," he said.