State Should Consider Securitizing Federal Oil and Gas Royalty Payments to Begin Restoring Coast Immediately

Treasurer Kennedy Says Process Would Be Similar to State’s 2001 Tobacco Settlement Sale

BATON ROUGE, LA – The state should aggressively look into securitizing future oil and gas royalty payments from the federal government in exchange for a lump sum cash settlement to begin coastal restoration work immediately, according to State Treasurer John Kennedy.

“This is something that we must look into right away, especially if we could get funds up front to begin working on the state’s coastal problems now,” Kennedy said. “The benefit would be that we would not have to do construction or repairs on a piecemeal basis as annual payments came in from the federal government. A lump sum of money would enable us to begin awarding contracts for construction now, thereby avoiding the risk of inflationary construction costs in the future.”

Congress recently passed legislation (the Gulf of Mexico Energy Security Act) that would give Louisiana $20 million in federal oil and gas royalty payments each year for the next 10 years and roughly $650 million a year from 2017 forward. Given the right level of assumptions, early estimates show that a securitization of this annual revenue stream for approximately 30 years could potentially generate $1.2 billion to $5.3 billion for the state immediately.

“The reason we can’t be more certain at this time in predicting the amount of money we would receive is because we need more time to analyze interest rates, credit spreads, coverage issues, payment volatility and estimates of future commodity prices,” Kennedy said. “We also need to talk with the credit rating agencies. All this takes time, so we need to get started now,” Kennedy added.

Selling the state’s oil and gas revenue stream would most likely require state legislative approval, and the process would be similar to Louisiana’s 2001 sale of 60 percent of its tobacco settlement income stream. The state would get a lump sum in advance by selling bonds to appropriate investors. The bonds would then be paid off by the state’s annual oil and gas royalty payments.

“Louisiana’s Congressional Delegation was able to pass meaningful legislation to give the state its fair share of oil and gas royalties to fix coastal erosion, and we must be good stewards of these funds,” Kennedy said. “Bonding out this revenue stream and dedicating the proceeds immediately to coastal restoration would show that we are handling the money responsibly. We could start working right away and would have tangible proof of our coastal restoration efforts.”

As a first step, Kennedy suggested that the Louisiana State Bond Commission should immediately seek a Request for Proposal from all investment banks interested in handling the bond sale, which would allow the state to choose the best and least expensive financing plan and in turn generate the most up front money.

Kennedy also said it is important to finalize the state’s omnibus restoration plan and prioritize the projects in the plan before the securitization goes forward.

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