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2/10/2009
Up in smoke: Sad saga of the tobacco settlement
From Senators Michael Ellis and Dale Schultz:
Last month the Legislative Fiscal Bureau issued its January revenue report for the current biennium and its revenue projections for the upcoming 2009-10 biennium.
The news was grim. According to the Fiscal Bureau, the state will end the current biennium on June 30 with a $593.8 million deficit.
With the economic downturn currently gripping the country, state government revenues continue to fall. The steady drop in revenues is expected to continue as we enter the next budget. In 2007-08, the state collected $13 billion in general fund taxes. In 2008-09, the current year, tax collections are expected to fall by more than $500 million to $12.49 billion. As we begin crafting the next budget, the Fiscal Bureau estimates state tax collections will continue to drop.
Unfortunately, the news is likely to get worse. Tucked away on page three of the Fiscal Bureau’s report are these troubling words: “It should be noted that funding for the MA program in 2008-09 assumes that $309 million from a tobacco securitization transaction will be placed in the MA trust fund. That transaction is anticipated in 2008-09 but has not yet occurred.”
In other words, if we can’t sell the tobacco bonds – and people aren’t exactly storming the barricades to buy bonds these days – the state deficit in this biennium will be $900 million.
Even if we are able to sell the bonds and fund this transaction as originally proposed, it’s a bad deal for Wisconsin. In exchange for $309 million today and another $50 million per year, the state will forgo $788 million in anticipated payments as a result of this restructuring. (See attached chart)
It is the epitome of the short-term-gain, long-term-pain bad budgeting the state has been carrying on since the year 2000.
Beginning in 1998, after Wisconsin and other states settled a lawsuit, the state began receiving payments from tobacco companies. The idea was that we would use these settlement funds to pay for health care costs resulting from tobacco-related illnesses.
Between 1998 and 2002, the state had received almost $500 million in settlement funds in annual payments ranging between $124 million and $167 million. Those payments were to continue in perpetuity.
In the 2001-03 state budget period, however, we “securitized” the tobacco settlement in the wake of the economic downturn after the terrorist attacks of September 11. We sold off years worth of a continuing revenue stream in exchange for a net $1.27 billion up front. Then we spent all the money by November 2002.
The economic downturn was blamed for the need to sell off our tobacco funds, and there’s no doubt it had an effect. But we have long maintained that the real problem in Wisconsin is bad budgeting that builds structural deficits in the future and leaves us especially vulnerable when the economy slows down.
Now, with the current recession choking off tax collections, it’s déjà vu all over again. In developing the 2007-09 state budget, the governor proposed, and the legislature approved, a “resecuritization” of our tobacco settlement, essentially a refinancing of the earlier transaction. Under the original transaction, Wisconsin was set to continue receiving annual tobacco settlement payments beginning in fiscal year 2017-18. Between 2017 and 2030, estimates are the state would have received $2.4 billion in average annual payments of $186 million. Under the new proposal, the state would receive $309 million up front and $50 million annually until 2028-29 – but it will cost us almost $800 million that we will never see again.
And that’s assuming that we can sell the bonds at all, much less at their original proposed price.
The lesson is clear. The state of Wisconsin simply has to stop budgeting only to get through the current budget at the expense of bigger deficits in future budgets. It is this bad budgeting, using one-term funds, raiding segregated funds and relying on costly financing schemes as we did with our tobacco revenues that is the rotten core of our state’s poor fiscal health. With the current recession the state would still face a tough economic challenge in building the next budget. But it is our fundamentally unsound budget that does not allow us to withstand slowdowns that is the root of today’s fiscal crisis.
Mike Ellis is a Republican and represents residents of the 19th Senate District. Dale Schultz is a Republican as well, and represents residents of the 17th Senate district.
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