The proposal would let the state turn future proceeds from the settlement into immediate cash by selling bonds.
By JO BECKER
© St. Petersburg Times, published April 4, 2000
TALLAHASSEE -- If the tobacco industry goes belly-up, state lawmakers want to be sure that the multibillion-dollar settlement the state won from tobacco companies is protected. But a plan to hedge the state's bets is meeting with skepticism from Democrats and Republicans alike.
Following the lead of Gov. Jeb Bush, Rep. Carlos Lacasa, R-Miami, has filed a bill that would let the state turn some or all of the future proceeds from the state's windfall settlement into immediate cash by selling bonds. Investors would assume the state's risk, but the state stands to lose hundreds of millions in the deal.
In the first public hearing on the bill, Rep. Mark Flanagan, R-Bradenton, questioned pessimistic predictions that declining sales and lawsuits could lead tobacco companies to declare bankruptcy.
Lacasa said the risk is real: Florida is expected to get $17.4-billion from tobacco companies during the next 30 years as a result of a 1997 lawsuit settlement. But that figure is just an estimate; the payments are tied to the tobacco companies' domestic cigarette sales. Declining domestic sales could leave Florida with far less than originally estimated. And if the tobacco companies declared bankruptcy because of pending lawsuits, Lacasa said the state could wind up with nothing.
But according to a legislative analysis, trends suggest cigarette smoking may actually increase in the coming years. A legislative report quoted investment analysts at Salomon Smith Barney saying that a bankruptcy of a major manufacturer was "unlikely due to the significant domestic demand for the addictive product, the profitability of the industry and the ability of the industry to pass additional costs to consumers in the form of higher prices."
Despite unresolved questions, the House Financial Services committee signed off on the plan Monday. The plan still has several more stops, however, before the full House votes on it. Meanwhile, with the 60-day session nearing the halfway mark, Senate President Toni Jennings has yet to commit to the plan. Senators are expected to discuss Bush's proposal and other options today.
Here's how Lacasa's plan would work: Members of the state Cabinet would form a corporation. The corporation would decide how much of the state's future tobacco revenues to sell off to investors in return for immediate cash.
If, for instance, the state decides to sell $9-billion in future revenues, it is estimated that the state would receive $2.8-billion in up-front cash. Lacasa assumes that money could be invested at a rate of return of 9 percent.
But the deal will cost money, too, because of transaction costs. At the end of 30 years, legislative analysts estimate that the state could wind up with between $300-million and $700-million less than the $9-billion it could have gotten by doing nothing.
That's a price that Lacasa is willing to pay. He noted that the state uses money from the tobacco settlement to pay for important health care programs for the disabled, children and the elderly. At the same time, the state is funding programs to persuade people not to smoke. And while he acknowledged that the state cannot be guaranteed to make a 9 percent rate of return, he said putting the money in a broad range of investments is a safer bet.
Jean Gonzalez, a lobbyist for the American Heart Association, urged caution.
"Six other states have considered this. None have passed it," Gonzalez said. "We want the opportunity to study it further."
Meanwhile, jurors are expected to begin deliberating the nation's first class action suit by smokers later this week in Miami. But according to Jennings' spokeswoman, a proposal floated by some state lawmakers to limit or delay a huge punitive damage award doesn't appear to be getting much traction in the state Senate.