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Document shows state discussing tobacco securitization, children’s advocate says

State budget director says there's no deal but it remains an option

By Jim McLean | March 11, 2016

Document shows state discussing tobacco securitization, children’s advocate says
Photo by Dave Ranney Shannon Cotsoradis, president and CEO of Kansas Action for Children, says a presentation state officials received in October about trading ongoing payments from a legal settlement against tobacco companies for a lump sum.

Editor's note: This story was updated at 3:55 p.m. to include comments from Kansas Budget Director Shawn Sullivan.

A leading child advocate has obtained a document that she says confirms state officials are considering a deal to securitize the state’s tobacco settlement payments.

Shannon Cotsoradis, president of the nonprofit advocacy group Kansas Action for Children, raised concerns about a possible securitization deal earlier in the week in testimony to a Senate committee. At the time, she said a reliable source had told her that officials in Gov. Sam Brownback’s administration had discussed bonding future settlement payments in exchange for a one-time cash payment.

Eileen Hawley, Brownback’s spokesperson, said that administration officials had listened to a presentation on securitization, nothing more. She didn’t respond to requests made by the KHI News Service for more information about when the presentation was made and who participated in the discussion.

Cotsoradis obtained a copy of the presentation Thursday from a reporter who writes for Debtwire, an online publication for investors. The pitch was made in October of last year by representatives of Citigroup’s municipal securities division. Officials from the Kansas Development Finance Authority participated in the discussion, along with State Budget Director Shawn Sullivan. 

“This document underscores that there is an active conversation and there is the potential for this deal to be struck at any time,” Cotsoradis said.

Photo by KHI News Service Money for programs under the Children's Initiative Fund flows from a legal settlement against major tobacco companies.

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Cotsoradis and others are concerned that bonding the tobacco settlement payments for money to address the state’s current budget problems could jeopardize future funding for children’s programs. Annual payments received since the settlement was reached in 1998 have been used to fund children’s education programs. In recent years those payments have averaged just above $50 million.

In their presentation, the Citigroup representatives touted their experience in the tobacco bond market, claiming that the company had orchestrated “59 tobacco bond transactions totaling over $28 billion in par (value), more than any other firm.” They estimated Kansas could bond its remaining settlement payments for $474 million to $782 million, depending on the amount of risk state officials were willing to assume.

During a Friday taping of the KCUR podcast "Statehouse Blend," Sullivan said the state hasn't agreed to a securitization deal with Citigroup or any other firm. But he said it remained an option if tax receipts continue to fall short of projections and the state needs an infusion of cash.

"I'm not going to deny it's an option," Sullivan said, explaining any agreement would require legislative approval.

"If anything, I think there is an option of keeping the funding we have in place now (for children's programs) and securitizing the revenue above that," he said. 

The discussion of securitization surfaced during a debate on a controversial Senate bill that would redirect money that now flows into several special revenue funds into the state general fund. The proposed shift would affect sales tax receipts that now flow into the state highway fund and the tobacco payments that are deposited in the Kansas Endowment for Youth trust fund and then appropriated to the Children’s Initiative Fund.

Supporters of the measure – Senate Bill 463 – say it would increase transparency and promote accountability. But critics say it would put money intended for specific purposes at risk, particularly if the state’s budget problems continue.

The bill is in the Senate Ways and Means Committee, which could act on it at any time.

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