PROVIDENCE -- Rhode Island yesterday joined the handful of states that have traded decades of anticipated settlement payments from the big tobacco companies for cash up front to pay their bills.
By the time the stock market closed yesterday, the newly created Rhode Island Tobacco Settlement Financing Corporation had sold, to private investors, the right to collect $1.2 billion over the next two decades in exchange for $685.4 million now.
It marked the largest single transaction in the state's history; and with the close of the state's deficit-wracked budget year now only nine days away, it went down just in time.
"We are very happy with the way the transaction went, and that we will have the proceeds prior to June 30 in order to have our constitutionally required balanced budget and the ability to pay our tax-anticipation notes when due," said a relieved state budget director, Rosemary Gallogly, by telephone as she returned by train last night from two days in New York.
Rhode Island is now the eighth state to "securitize" its share of the November 1998 settlement with the Philip Morris, R. J. Reynolds, Brown & Williamson and the Lorillard tobacco companies of the litigation launched by the attorneys general in 46 states to recover the costs of smoking-related illnesses.
At $685.4 million, the tobacco-bond sale was bigger than the governor and lawmakers suggested when the plan was still winding its way through the legislature.
And it will be gone soon.
It will be all gone as a source of cash for road repairs, education, health-care subsidies, soaring state employee pension costs and any other expense of government after June 30, 2004, though there will still be residual debt-savings after that.
So there was a mix of relief and regret in government ranks that Rhode Island had scraped up enough money to cover an immediate problem: a $135-million shortfall in the current-budget year that ends in nine days.
"I don't think it is the best government can do," said Governor Almond's department of administration director, Robert L. Carl, of the tobacco-bond deal that Almond himself initiated to plug holes next year and beyond and which the lawmakers turned into a current-year bailout.
"I think it is clear there could have been other decisions," said Carl, reiterating Almond's disappointment that the legislature did not lop more out of the the aid program that reimburses cities and towns for cutting their local car taxes; and grab more of the video-gambling revenue going to Newport Grand Jai Alai, Lincoln Park and the owners of the greyhounds that race there.
But "when that was said and done," Carl said, the plunge in state tax collections that continued well into this spring still would have forced them "to dip into the tobacco funds on a larger scale than Governor Almond first proposed."
It was touch-and-go for a while, after Republican Almond vetoed the budget legislation that would have created the new "Tobacco Settlement Financing Corporation."
Lawyers had advised the state it needed to create an "independent" entity to sell the tobacco bonds to insulate taxpayers from any future liability in the event the settlement payments by the cigarette companies dwindle or dry up. The legislature demanded a three-member board, dominated two-to-one by appointees of the House speaker and Senate majority leader. The governor said the state's lawyers would never sign off on the constitutionality of the deal, under those terms.
The lawmakers eventually backed down.
When they returned to the State House on Wednesday last week to override Almond's budget veto, they also voted for legislation creating a five-member board -- made up of two legislative appointees and three gubernatorial appointees -- to make sure Rhode Island holds up its end of the deal.
With time running short, Almond quietly made his appointments -- and posted notice of the first meeting of the new Tobacco Settlement Financing Corporation -- before the legislature convened on Wednesday to create it. A day later, the board created less than 24 hours earlier met, for the first time, in a Department of Administration conference room to dot the i's and cross the t's.
The members included Almond appointees Gallogly, former deputy state treasurer James Thorsen and Robert E. Cusack; Senate fiscal adviser Russell C. Dannecker and House fiscal adviser Michael O'Keefe.
In the days before yesterday's tobacco-revenue sale, a 108-page offering statement was printed and circulated to underwriters and potential investors nationwide.
Bottom line: $543.2 million of the $685.4 million the state raised -- which equates to about 80 cents of every dollar -- will be used to pay state government expenses.
The first $247.9 million will be used to cover actual and projected shortfalls of $135 million in the current budget-year that ends June 30; $77.3 million in the year that begins on July 1; and $35.6 million the year after that.
The next big chunk -- $295.3 million -- will be used to erase state debt.
Another $600,000 will be set aside to cover the expenses of the Tobacco Settlement Financing Corporation itself over the next two years, including annual audits by an accounting firm yet to be chosen.
Yesterday's deal will also provide $6.3 million in fees to the lawyers, brokerage houses, rating agencies, financial advisers, printers and the like, who were given roles in the deal.
The underwriters, led by UBS PaineWebber Inc. -- and their own lawyers at Tillinghast Licht Perkins Smith & Cohen, in Providence, and Hiscock & Barclay, in New York -- will split the first $4.75 million, in amounts that were still being calculated last night.
The other $1.593 million in fees will be divvied up among the other behind-the-scenes players, including: Hawkins, Delafield & Hunt, the Wall Street law firm the state hired as its bond counsel ($375,000); Nixon Peabody LLC in Providence, as disclosure counsel ($100,000); First Southwest Co., as financial adviser ($125,000); and Citizens Bank as the escrow trustee ($20,500).
The state will need $55.6 million of the $135.9 million that remains to pay the investors their due, over the next 12 months, because all of the tobacco settlement money the state expects during that period has already been built into the legislature's spending plans. (In future years, the settlement payments will go directly to the investors.)
Another $79.6 million will cover reserves and "discounts" for the purchasers, who bought the bonds at rates ranging from 5.98 percent for the taxable series to 6.65 percent for the tax-exempt series. (Like a damage deposit on an apartment, a portion of that could come back to the state in the year 2023 if there are no interruptions in payments to bond-buyers between now and then.)
Altogether, the numbers fall short of what the House Finance Committee expected to raise to plug future budget holes, but Gallogly said the debt-savings will make up for all but about $6 million of what the legislature expected.
