(Sean Whaley/Nevada News Bureau) – Lt. Gov. Brian Krolicki says it is now clear the Nevada Legislature should have “securitized” the money the state was scheduled to receive as part of a settlement with the tobacco companies a decade ago to protect it from the current reality of lower than expected annual payments.
Securitization essentially would have sold off the future value of the annual tobacco payments projected to come to the state over 25 years to investors, projected at $1.2 billion, for a lesser upfront value, allowing the state to receive and invest about $500 million.
Krolicki, asked this week about the failed securitization effort in response to the current financial problems facing the Millennium Scholarship program, said the evidence is in.
“It is no longer opinion, it is reality,” he said. “After the passage of a decade, we now know the answer to the question. We should have securitized.”
Tobacco settlement revenue predictions a decade ago suggested the state would get nearly $52 million this year, but the state actually received just under $42 million, Krolicki said.
“We’re getting very roughly a 20 percent haircut from where we thought we would be 10 years ago,” he said.
Krolicki, who served as Nevada State Treasurer for two terms when the master settlement agreement with the tobacco companies was signed by Nevada and 45 other states, proposed the securitization concept to the 2001 Legislature. Using the process would have protected the money from the vagaries of the tobacco industry and the annual payment estimates that have now proven to be overly optimistic, he said.
The securitization effort, and another attempt in 2003, both failed to win legislative support.
Assembly Speaker Barbara Buckley, D-Las Vegas, who voiced concerns about the proposal in 2001, disagrees with Krolicki’s assessment that securitization was the right move.
“Securitization would have in my opinion caused us to run out of money a long time ago,” she said. “With securitization you get pennies on the dollar. It would have probably been used up the first time we were hit with a financial crisis.”
Securitization was essentially a bet that the tobacco companies were going to go out of business and so would have stopped sending annual payments to Nevada under the master settlement agreement negotiated more than a decade ago, Buckley said.
“That didn’t happen,” she said. “People are still smoking.”
Krolicki maintains that using securitization would have protected Nevada from the reality that payments from the tobacco companies are declining because people are smoking less.
From Fiscal Year 2001 through 2010, the state has received $416.1 million in tobacco settlement funds, according to information provided by the Treasurer’s Office. Projections used by Krolicki in 2001 showed the state anticipated receiving $469.1 million or nearly 13 percent more during the same period.
In part because of declining cigarette consumption, Nevada’s payment this year was about $5 million less than what the Treasurer’s Office had projected and has affected the solvency of the scholarship program.
Krolicki’s securitization proposal, contained in Senate Bill 488, passed the Senate by an 18-3 vote in 2001 but never emerged from the Assembly Judiciary Committee for a vote. Minutes from the committee hearings show there were concerns about the idea of giving up $1.2 billion worth of tobacco payments over 25 years in exchange for an estimated $500 million.
“I wish we would have done it,” Krolicki said. “If we had locked in the amount of money we thought we would receive, the programs funded with the money would still be very viable.”
The market has fluctuated since 2001 but the money today would be largely intact, he said.
A number of states went the securitization route with their tobacco funds a decade ago, including North Dakota, Alaska, Alabama and South Carolina. The value of the settlement money at the time had a higher credit rating than Nevada-backed bonds, he said. Today their status is junk and the securitization opportunity has been lost, Krolicki said.
Buckley said states that used securitization for their tobacco funds have long since spent the money.
Nevada is still receiving its annual payments, she said.
The issue isn’t securitization but the fact that the College Savings Plans board did not transfer $2 million to the scholarship in March as lawmakers anticipated, Buckley said. In addition, the scholarship is a victim of its own success with many students taking advantage of it, particularly during this economic downturn, she said.
The scholarship is provided to Nevada high school graduates who must earn a minimum GPA and who go on to college in state.
The Legislature in 1999 agreed to use 40 percent of the settlement funds for the scholarship program proposed by then-Gov. Kenny Guinn. The remainder goes to public health related programs except for a small amount that goes to the Nevada Attorney General’s office.
Buckley also noted that some Assembly Republicans, along with Krolicki, proposed securitizing the Unclaimed Property Fund managed by the state Treasurer’s Office as a way to help balance the budget in the special session held earlier this year.
Lawmakers chose not to move forward on the proposal after current Treasurer Kate Marshall said such a move could hurt the state’s credit rating.
Buckley, who will not be returning to the Legislature next year, said she believes the scholarship program should and will be continued. A temporary solution is needed to fund it through 2011, giving the Legislature time next year to consider ways to fit the program within the available funds, she said.
Giving the scholarship only to those in financial need is one likely topic for that discussion, Buckley said.
Krolicki, who is running for re-election as lieutenant governor, said he supports continuation of the scholarship. As chairman of the Commission on Economic Development in his current position, the scholarship is clearly helping generate the educated workforce Nevada needs for its economic development efforts, he said.
But he did criticize Marshall’s office for failing to properly project tobacco revenues for lawmakers so they could make informed judgments to maintain the program.
Lawmakers would not have eliminated transfers to the scholarship from the Unclaimed Property Fund, or transferred money out of the scholarship fund itself, if there was any suggestion doing so would have rendered it insolvent, Krolicki said.
Lawmakers approved taking $32.8 million in total from the scholarship at a special session earlier this year to help solve a more than $800 million shortfall in the state’s general fund budget.
“People need to take responsibility for their actions and projections,” Krolicki said.
Marshall said today the missed tobacco payment projection was a first for her office and has come at a time of unprecedented economic crisis.
Marshall reported to lawmakers this week the scholarship needs about $4.2 million to say solvent through next fiscal year. She has presented three alternatives to keep the program going that lawmakers will consider in June.
“During our global financial crisis there have been a lot of firsts,” she said. “Part of my job in a financial crisis is to find financial solutions I can present to the Legislature so they have options. I have provided leadership and I am proud of my record.”
In a letter to lawmakers sent Monday, the Treasurer’s Office said the record shows Marshall expressed concerns to lawmakers that the decision to use $32.8 million destined for the program to balance the general fund budget could put it at risk. Information was posted on the office website to keep parents and students informed as well.
Marshall also said the annual tobacco payment came in April, several weeks after the Legislature had made its decisions regarding the scholarship funding.
In a fact sheet posted on the treasurer’s website, the reason for the lower than expected tobacco payment received in April is because national tobacco sales were down about 9 percent.
“However, there is no present information that would clearly indicate that the lower-than-projected amount was an anomaly or a pattern for future payment amounts,” the fact sheet says.