BATON ROUGE – Commissioner of Administration Kristy Nichols lauded the passage, without objection, of a resolution today by the Joint Legislative Committee on the Budget (JLCB), providing approval for the refunding of outstanding tobacco settlement bonds, a move that is estimated to provide almost $143 million in funds for the TOPS program over the next three years.
Due to historically low interest rates, there is overwhelming agreement that now is a good time to take advantage of the savings for the state.
“Although the resolution before JLCB today dealt simply with approving the issuance of refunding bonds, it’s important to note that because of out-year risk associated with declining tobacco consumption trends, 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,” said Commissioner Nichols. “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.”
Following a previous motion that overwhelmingly backed using an upfront savings structure, last week the Tobacco Settlement Finance Corporation (TSFC) board for a second time voted to approve, by a 9-1 vote, a final bond structure for the refunding. Under the approved structure, the refinancing will realize the savings upfront in order to avoid future risks associated with declining tobacco consumption and other risks – a recommendation made by three of the four finalist underwriting firms who competed to conduct the transaction.
However, even under this structure, the savings will not be a one-time event but will be spread over three years, with $67.2 million in savings generated for the TOPS program in FY 14, $57.2 million in FY 15, and $18.3 million in FY 16, for an estimated total of $142.8 million over three years, based on current interest rates.
Despite objections to the refunding structure voiced by Treasurer John Kennedy, Commissioner Nichols has repeatedly commended his work on the state’s original sale of tobacco settlement proceeds in 2001, even quoting a column he wrote on January 31, 2002, in which he asked: “What would you do if you hit the jackpot, but your winnings were based on the tobacco industry’s ability to pay you each year for the next quarter of a century? Wouldn’t you want at least some of your money up front?” [emphasis added]
In a follow-up column on March 28, 2002, the Treasurer also wrote, among other reasons for the sale, that “We have no assurance that Big Tobacco will be able to meet its obligation to the state…. Moreover, cigarette consumption in the United States is down, and the state's annual payments are tied to consumption figures…. And, of course, there’s a moral dilemma of the state remaining financially dependent upon the tobacco industry’s success, while at the same time, state health officials are promoting anti-smoking campaigns…. It’s too big of a risk! We can’t afford to lose money that could be used for important programs in our state.” [emphasis added]
“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 added.
Refunding occurs when an entity has issued bonds that become callable and calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower interest rate. Since 2001, market interest rates have declined by approximately 2 percent. Because the bonds are currently callable, the TSFC decided to act now to capture as much savings as possible and before a potential rise in interest rates.
The TSFC owns 60 percent of the revenues that resulted from the Master Settlement Agreement. In November 2001, the TSFC issued $1.2 billion in bonds backed by this revenue. It issued $283 million taxable bonds and $919.8 million tax-exempt bonds. Since that time, some bonds have been redeemed, and today’s vote sets the stage for refunding the approximately $738.3 million in tax-exempt bonds that remain outstanding.
Under state law, any residual bond proceeds from a refunding go to the TOPS fund in the constitutionally-established Millennium Fund.