Legislature Made Right Decision to Stall Tobacco Settlement Sale and Refinancing

Kennedy Says Municipal Bond Market for Tobacco Bonds Continues to Deteriorate

BATON ROUGE, LA – The Louisiana Legislature made the right decision when it stalled the Administration’s efforts to sell the state’s remaining tobacco settlement revenue stream and refinance outstanding tobacco debt, according to State Treasurer John Kennedy.

“It’s a good thing the Legislature didn’t approve these transactions, especially because the municipal bond market for tobacco bonds continues to deteriorate,” said Treasurer Kennedy. “There’s now talk that the Administration could bring a tobacco proposal up for a legislative vote by mail ballot in the near future. This is a bad deal for Louisiana, and we need to put the brakes on these transactions once and for all.”

The Administration wants to refinance the debt from the original sale of 60 percent of the state’s tobacco settlement revenue stream, which would in effect extend the use of this revenue stream for debt service on additional debt for at least another 12 years. The Administration also wants to sell the remaining 40 percent tobacco settlement revenue stream to finance debt for a period of up to 40 years.

In order to do this, the state would have to issue tobacco bonds and pay around 5.5 percent interest for a period that could be as long as 40 years. Nearly all of the proceeds from these bonds would be placed in the Millennium Trust Fund. However, because of IRS regulations, Louisiana could only invest these proceeds in trust in tax-exempt securities that yield around 4 percent. As a result, the state could lose in excess of $30 million a year for many years.

In addition, the municipal bond market for tobacco bonds has deteriorated substantially since the Administration originally proposed a tobacco sale and refinancing. Interest rates have risen, and sophisticated institutional investors who are buying tobacco bonds are demanding a higher yield. As a result, the state would have to pay more money to issue bonds (i.e. pay a higher interest rate) that would necessarily yield a lower amount of proceeds.

In fact, Louisiana would receive at least $240 million less in bond proceeds now if the Administration moved forward with these transactions than what was originally proposed. This loss would be in addition to giving up an income stream estimated to be worth $3.5 billion over the period the bonds would be outstanding.

“The tobacco settlement revenue stream is one of the state’s most valuable assets,” said Treasurer Kennedy. “If we move forward with the Administration’s proposed tobacco sale, however, it would be committed and untouchable for as long as up to 40 years. If we hold off, we quite possibly would be in a position to obtain a greater value from this asset in the future.”

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