Louisiana legislators agreed Wednesday to the governor’s plan of refinancing the state’s tobacco settlement and using the savings to plug holes in the state budget.
Commissioner of Administration Kristy Nichols testified before the Joint Legislative Committee on the Budget that interest rates have fallen, as has cigarette consumption, making refinancing a prudent option that will generate about $140 million, under the plan she proposed, that could be used for other expenditures.
“We strongly believe that the upfront savings approach is the smart financial plan that’s also in the best long-term interest of the state,” Nichols said.
State Treasurer John N. Kennedy agreed with the analysis and conclusions but opposed the particular plan being sought by Gov. Bobby Jindal and his financial advisors. He said the proposed method “leaves money on the table.”
“We support refinancing, but have a lot of concerns about administration structuring,” Kennedy testified. “If we’re dong this to balance the budget we ought to say so up front.”
The Joint Legislative Budget committee approved without objection the Jindal administration’s plan to refinance.
Big tobacco companies settled a lawsuit over medical costs state governments had to pay because of smoking-related diseases by paying states billions of dollars over time. In 2001, Louisiana chose to get some of its money as a lump sum to be repaid over time with a bond, or loan, that was repaid with 60 percent of the roughly $200 million cigarette manufacturers pay each year as part of the settlement.
In the current market, the cost of the 2013 bonds is about 3 percent versus 5.85 percent rate on the 2001 bonds, Nichols said.
The estimated savings should exceed $140 million over the next three years, including $67 million in 2014, $57 million in 2015, and $18 million in 2016, according to Nichols’ presentation.
The 2013 bonds will be repaid by 2023, the same year the 2001 bonds would have been repaid at current payment schedules, the administration argues.
“By law, tobacco bond proceeds are directed to support the TOPS program, and I’m pleased that today’s vote brings us one step closer to taking advantage of historically low interest rates to help fund TOPS scholarships for Louisiana young people,” Nichols said in a prepared statement released after the hearing. The Taylor Opportunity Program for Students is the fund that pays tuition and some fees for higher education students who meet set academic standards.
Kennedy argued that because the administration is using a lot of the proceeds to help pay TOPS, the Jindal administration essentially is using one-time borrowed money to pay for a recurring expense.
Additionally, the Jindal administration’s plan calls for making only the “minimum payment” to repay the bond, rather than using the savings to pay down the principal on the loan faster, he said.
“It’s a policy decision. It’s your call,” Kennedy told the committee members.
State Sen. Dan Claitor, R-Baton Rouge, said he was hearing, again, that Kennedy didn’t like the administration plans, but that the treasurer offered no alternative other than to do something different.
State Sen. Gerald Long, R-Winnfield, moved to accept the administration’s plan, which the committee accepted without objection.
In a prepared statement released after the committee’s vote, Nichols said Kennedy had made similar points before. “I think the Treasurer made good points back then, and I think they are still good points now, even if he himself has for some reason shifted his position,” Nichols said.
The refinancing still needs approval from the State Bond Commission, which Kennedy chairs.