PROVIDENCE --
About $5.3 million in legal and underwriting fees are riding on one of the least understood, least explained -- but most costly -- items within the state budget racing toward a vote by the House early next week: the sale of Rhode Island's right to decades worth of tobacco-settlement payments.
One of the big questions was answered yesterday when the Almond administration announced the lawyers and brokerage houses it has chosen to handle what will be the single-largest financial transaction in the states's history, the sale of at least $600 million in tobacco bonds.
But many more questions remained unanswered.
Among them: the actual size of the "$600-million to $650-million" deal the lawmakers say they are contemplating to help plug a string of projected deficits, including the $135-million hole in the current-year budget; and the makeup of the "governing board" of the as-yet nonexistent corporation that will actually sell the bonds. The legislation headed for a vote doesn't say.
And top Almond aides continued to hammer the lawmakers for taking a "good idea," that Almond himself initiated, to what they say is an extreme, by squandering too much of the windfall, too soon.
Both plans -- the governor's and the House's -- begin at the same point. To raise $600 million or so in up-front cash, they would sell to private investors the rights to at least $1.2 billion of the $2.8 billion that Rhode Island might otherwise collect from the big tobacco companies over the next 40 years as its share of the 1998 national tobacco settlement.
Though it is not yet entirely clear, it would appear that both would use the first $272 million to wipe out a big chunk of state debt to save the state millions in future years.
The governor would have the state spend what was left from the tobacco-bond sale over six years. The House would spend it in four years, beginning with an immediate $135-million infusion to make up for the shortfall in the year that ends June 30; $83.8 million in the new budget year that begins on July 1; $45 million the year after, and $9 million the year after that.
Except for "debt savings," the state would not see any more of the tobacco-settlement money until 2022 or thereabouts because the bondholders would have first dibs on every dollar that came in until then.
"Their main mission here is to get as much money to throw at the state's budget this year and next year as possible . . . and that mission comes at some severe costs, in the administration's view, to prudent long-term state fiscal policy," said Almond Chief of Staff Joseph Larisa.
But House Finance Chairman Gordon D. Fox, D-Providence, gave this answer to colleagues who questioned these moves at a House budget briefing yesterday: "I haven't seen proposals to increase taxes or decrease services. I've heard people saying, 'don't cut.' "
There were these developments yesterday:
The Almond administration went public with the governor's choice earlier this week of Hawkins, Delafield & Wood to oversee the mega-sized deal in return for a $375,000 fixed fee. The Wall Street law firm bills itself as one of the leaders in tobacco-revenue financings, with a role in 20 such deals, including the first two by states (Alabama and Alaska).
On the recommendation of a review committee that included the state treasurer, Almond also gave a half-dozen brokerage houses -- some local, some not -- a shot at the "$4 million to $4.3 million" in fees that brokers alone stand to make on the election-year deal.
He named UBS PaineWebber as lead underwriter, and Salomon Smith Barney, Merrill Lynch, Morgan Stanley, Bear Stearns and First Albany as comanagers.
The review committee that recommended this team included Republican Almond's chief lawyer, Claire Richards, and his budget director, Rosemary Gallogly, and Democratic Gen. Treas. Paul Tavares's deputy treasurers Joan M. Caine and George Carvalho.
"You can look under the rocks and the caves [for] who's got the deal, who's connected to [House Speaker John] Harwood, where's [Senate Majority Leader William] Irons's guy in this deal . . . and lo and behold," Larisa said, "it's all on the merits."
Before all is said and done, the state anticipates bills totaling several hundred-thousand dollars more for verification letters, credit ratings, a tobacco-industry analysis, printing and other requirements for the deal.
Hawkins, Delafield & Wood has worked for the Rhode Island Housing and Mortgage Finance Corporation. More recently, it found itself tangled up in the messy aftermath of the Enron collapse.
Two months ago, the firm was named as one of the targets of a class-action lawsuit, initiated by the Town of West Hartford on behalf of about 70 Connecticut towns.
The towns are trying to recover millions from Hawkins, Delafield & Wood for the "negligent" advice, they allege, the law firm gave the Connecticut trash-disposal agency that led it into a failed deal with the now-bankrupt Enron that prompted the 31-percent hike they now face in trash-disposal fees.
In mid-March, a partner in the firm told the Hartford Courant: "We understand the frustration which the towns feel, but we believe the case has no merit."
In April, UBS PaineWebber agreed to pay $10.3 million to settle a two-year dispute with Nashville over the "excessive commissions" it allegedly received for managing the city's public-employees pension fund.
When asked last night, Larisa said he was unaware of either case and did not know if the review committee knew, but did not view either as a cause for concern.
While "unfortunate . . . it is probably safe to say when you are dealing with the top underwriters and bond counsel in the country, they all would have been sued at one point or another by plaintiffs' lawyers. PaineWebber has been the state's underwriter for six years . . . . I know the committee was very, very comfortable with the caliber of their work . . . and wealth of experience."
Calling Hawkins, Delafield & Wood one of "the Big Four in this industry," Larisa said: "We weren't interested in on-the-job training with a $600-million deal."
He said the same of the governor's choice of brokerage houses: "All of the 'subs' were picked professionally and without any type of lobbying . . . or demands by the General Assembly that they be picked."
Yesterday's budget briefing left some legislators concerned, among them Rep. David Caprio, D-Narragansett. Suggesting the state is using tobacco money to postpone tough budget choices, he said: "The problem is not going to go away. . . . The time is now to make hard decisions."
But Fox said his committee's budget proposal reflects difficult choices, including cuts in health-care services to immigrants. He said the tobacco revenue avoids more drastic cuts and a tax increase.
"If you don't move it up, you don't have RIte Care, you don't have school-based health centers because you don't have the resources to pay for it," he said.
But Rep. Edith H. Ajello, D-Providence, offered one alternative: closing corporate tax "loopholes." Rep. Timothy A. Williamson, D-West Warwick, suggested another: backing the derailed West Warwick casino proposal, and coin-drop slot machines in Newport and Lincoln.
Fox said that even if the state was not in a fiscal crisis, he would support the tobacco-revenue proposal because there is no guarantee that the money will be available to the state in future years.
With reports by Edward Fitzpatrick
