Tobacco settlement may fill budget gap Maine considers selling its rights for cash

AUGUSTA – At first it sounds like it may have to do with national defense, because the latest buzzword among legislative leaders is “securitization.” But it has nothing to do with homeland security. It does have a lot to do with money, as much as $625 million.

“It’s been estimated if we securitize the tobacco settlement money, we could get as much as $600 million or so,” said House Minority Leader Joe Bruno, R-Raymond. “And believe me, legislative leaders are being heavily lobbied on this, I mean heavily lobbied.”

The lobbying effort is by one of the nation’s largest state and municipal financial management firms, Public Financial Management of New York, and from firms that stand to make millions of dollars on the sale of the bonds to accomplish securitization. The company has made presentations to key officials in the King administration and to members of the Legislature’s Appropriations Committee, as well as to members of legislative leadership.

The proposal would have the state sell the right to its share of the tobacco settlement for an upfront cash payment. The usual method for generating the cash is the sale of bonds, which would be paid for by the revenues from the tobacco settlement.

In a preliminary presentation, PFM officials estimated if the state sold its full share of money from the settlement over the 25 years of the agreement, Maine would get an immediate payment of about $625 million.

“Yes, I think it’s fair to say we have been lobbied pretty heavily on this,” said House Majority Leader Pat Colwell, D-Gardiner. “But I don’t think anyone is ready to support anything yet. We are waiting on a report the [King] administration has commissioned and, believe me, there will be a lot of questions about how this might be structured.”

Gov. Angus King confirmed the discussions, but said he has not made any commitment to support the process.

“Is it an option, yes,” he said, “but is it among the top items we have under discussion to close the [budget] gap? No, it isn’t.”

King declined to discuss any other options under review. So far, he has taken administrative actions such as a hiring freeze, which will save less than $18 million in the budget year that ends next June. The revenue shortfall for the two-year budget cycle that ends June 30, 2003, is now estimated to be $248 million. And there will be additional expenditures above what was budgeted, with additional security costs alone expected to hit $20 million a year.

“We will have to use money from the Rainy Day Fund,” King said, “and we will have to make changes in the budget, but I am not prepared to discuss them right now.”

But some lawmakers believe the lure of all the cash that securitization can generate will prove too enticing to both King and the Legislature as part of the budget solution.

“It’s happened in other states,” said Sen. Peter Mills, R-Cornville. “This is a way to avoid some hard decisions and making cuts. And when all is said and done, and all the wailing and gnashing of teeth is over, this may be, if not the solution, at least a big part of a solution.”

So far, seven states and several counties in New York have used the process to generate upfront cash and are using the money for many purposes. Wisconsin, for example, is expected to receive about $5.9 billion over the first 25 years of the tobacco settlement. It got $1.3 billion upfront using securitization and used about a third of that to balance its current budget. Because only part of the tobacco settlement was securitized, Wisconsin will still have some cash left over each year after making the bond payments

Alaska has found the process so alluring, it has done it twice. In 2000 the state raised $116 million by securitizing 40 percent of its tobacco settlement. In 2001, another 40 percent was securitized, and in both cases local schools were the beneficiaries.

Other states have used the money for highway construction and school improvements. Several have used part of the cash to establish a trust fund for future health- or education-related programs.

“I think you will find us insisting that key programs from the Health Maine Fund be protected in some way,” Colwell said. “These are very important health prevention programs that will save the state money in the long run, and they will be protected.”

Mills said there are many other programs getting a portion of the tobacco money – among them, child care – that are not health-related. He said many Republicans believe too many new programs have been started with tobacco funds and too many program expansions have been paid for with those revenues.

“But like most things political, we won’t get all we want,” he said. “But neither will the Democrats and neither will the governor. There will be a lot of pain to go around. … That’s why I think this approach may gain some support.”