Gov. Sam Brownback’s budget proposal would sell the state’s future payments from tobacco companies to plug financial holes for the next two years.
The budget proposal — outlined Wednesday morning — calls for the state to receive $265 million from “securitizing” the tobacco payments in fiscal year 2018, which starts in July, and the same amount in the following year.
What the state actually would get is an open question, however. Budget Director Shawn Sullivan said Wednesday that the state could net anywhere from $480 million to $775 million, depending on how it issues the bonds and how the market moves.
Under a legal settlement, major tobacco companies have compensated states for the societal costs of smoking since the 1990s. Kansas has placed that money in the Children’s Initiatives Fund, which provides money for education and health programs targeting young children.
Lawmakers have repeatedly dipped into the fund over the years, and Sullivan’s budget proposes moving it completely into the state general fund in fiscal year 2019. That would free $35.2 million for other expenses but raise questions about how the state would pay for those children’s programs.
“The supposed protection of the CIF [Kansas Endowment for Youth] Fund hasn’t been able to prevent allotments,” he said.
Under a securitization deal, bonds backed by the state’s tobacco settlement revenue would be sold to generate an immediate infusion of cash. In exchange, the state would be required to give up some or all of its annual tobacco payments for a number of years to compensate the bond holders.
The settlement payments are based on cigarette sales and are expected to decline over time as fewer people smoke, however. Securitizing now will protect the state from lower payments in the future, Sullivan said.
“Securitization would fully offload the risk [of declining tobacco payments] to investors,” he said.
Lawmakers were cool to the securitization proposal after Wednesday’s budget briefing.
Rep. Dan Hawkins, a Wichita Republican, said he hasn’t heard much support among lawmakers for selling bonds based on the tobacco funds.
“I don’t know if it’s dead on arrival, but I think it really has a tough road,” he said.
Majority Leader Don Hineman, a Dighton Republican, said he wouldn’t give securitization “high odds” of success.
“I sense there is a great level of resistance among legislators to taking that step. We’re probably not going to go there,” he said.
Annie McKay, executive director of Kansas Action for Children, said the argument about declining revenues is intended to cause legislators to “panic.” The state can plan for a future when fewer people smoke, she said.
“I’m disappointed that the governor continues to pursue selling out little kids to plug the state’s budget hole,” she said. “We’ll be getting pennies on the dollar.”
The governor’s budget proposal also would increase the per-pack cigarette tax by $1 — which would make it $2.29 per pack — and the tax on other tobacco products from 10 percent to 20 percent.
Hilary Gee, Kansas government relations director for the American Cancer Society’s Cancer Action Network, said the group supports significant tobacco tax increases but a $1 increase may not be enough to discourage young people from starting to smoke. She said the state should raise the tax on cigarettes by $1.50 per pack and on other tobacco products to 65 percent.
“It’s really about sticker shock,” she said. “When prices change quickly, people really notice.”
Hawkins said not all legislators may be on board with increasing the tobacco tax by more than $1, but he expects hearings on the issue.
“That’s something that’s going to be looked at,” he said. “Now is it going to be an easy one? I don’t think so.”
Meg Wingerter is a reporter for KMUW’s Kansas News Service, a collaboration of KMUW, Kansas Public Radio and KCUR covering health, education and politics in Kansas. You can reach her on Twitter @MegWingerter.