Budget Packages Rely Heavily on Tobacco Securitization

Pat Osborne, HFO & Associates

Mar. 21, 2002

The Governor's Budget Adjustment Bill (SS AB 1), the Substitute Amendment adopted by the Joint Finance Committee, and the modifications adopted by the State Assembly all rely heavily on using one-time tobacco securitization proceeds to fill the $1.1 billion budget deficit facing Wisconsin.

Bond Proceeds Provide One-time Cash Influx
Under the 2001-03 Biennial Budget (Act 16), the State will sell its 30-year, $5.6 billion income stream from the tobacco settlement to receive a one-time present value payment. Bond proceeds to the state under this "securitization" transaction are estimated at $1.6 billion today compared to $1.26 billion at the time Act 16 was adopted.  The $340 million difference is a product of improved market conditions and maximizing initial proceeds by shifting to the sale of tax exempt rather than taxable bonds.

After accounting for transactional costs and the $450 million already transferred to the general fund to balance the biennial budget (Act 16), a total of $794 million in bond proceeds remains.  Under current law, net proceeds are to be used to capitalize a permanent endowment fund.

The Governor's plan transfers $594 to the general fund to make shared revenue payments (to partially offset proposed cuts in shared revenue) and uses $200 million to pay off debt service. The Joint Finance Committee version of the budget essentially transfers the entire $794 million to the general fund to help pay for the increase in shared revenue payments over the Governor's proposal.  The Assembly adopted the Joint Finance approach but restored $125 million to the permanent endowment fund on the last day of the biennium (June 30, 2003).

Tobacco Control Board Funding
Under Act 16, the Tobacco Control Board annually receives the lesser of $25 million or 8.5% of the market value of the investments in the permanent endowment fund.  The Board provides grants for various tobacco cessation activities.

Under the Governor and Joint Finance (JFC) versions of the budget, the Tobacco Control Board is guaranteed $25 million in base funding.  ($25 million General Purpose R less any amounts transferred to the Board by JFC based on 8.5% of the market value of the permanent endowment).  The permanent endowment receives zero funding under these proposals but the endowment is kept in place with the promise of restoration funding in future biennial budgets.

The Assembly version of the budget also guarantees $25 million in base funding but modifies the formula to be $25 million GPR less the transfer of earnings on the balance of the permanent endowment fund rather than 8.5% of the market value.  (The Assembly version does not limit Tobacco Control Board funding to the earnings in the endowment fund --- as was incorrectly reported in the March 15th Tidbits).  The Assembly plan also funds the endowment with a $125 million transfer from the general fund on the last day of the current biennium (June 30, 2003).