BATON ROUGE – Commissioner of Administration Kristy Nichols lauded the passage of a motion today by the board of the Tobacco Settlement Finance Corporation (TSFC), providing approval of a bond structure to refund outstanding tobacco settlement bonds, a move that is estimated to save the state about $92 million.
By a vote of 10 to 1, the board approved structuring the refinancing to realize the savings up-front 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.
“Because of out-year risk associated with declining tobacco consumption trends, the upfront savings approach is a 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 happy that today’s action will take advantage of historically low interest rates to help fund TOPS scholarships for Louisiana young people.”
During today’s meeting, Commissioner Nichols commended Treasurer John Kennedy’s work on the state’s original sale of tobacco settlement proceeds in 2001, and quoted 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?”
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.”
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, all of the taxable bonds and $96.7 million of the non-taxable bonds have been redeemed. Today’s vote sets the stage for refunding the approximately $823.1 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.