DALLAS – Louisiana’s planned refunding of $823.1 million of tax-exempt tobacco settlement bonds should be structured for long-term savings rather than a one-time cash payoff, Treasurer John N. Kennedy said Thursday.
The Louisiana Tobacco Settlement Financing Corp. is slated to meet Monday afternoon to select underwriters for the refunding. Corporation trustees, including Kennedy and Commissioner of Administration Kristy Nichols, met last week in a closed session to interview potential underwriters.
"Refinancing our tobacco bonds is a good idea given the current interest rate environment, but we need to choose an option that saves the most money for Louisianans," said Kennedy. "We shouldn't shortchange taxpayers just because it's convenient to plug our current budget hole with more one-time money.”
Gov. Bobby Jindal is relying on initial savings of $60 million from the refunding to fund a state college scholarship program in fiscal 2014.
"The Jindal administration is counting on $60 million from raiding this tobacco debt to plug our budget shortfall," said Kennedy. "If you grab this one-time savings up front and spend it now, it's gone forever."
Six of the eight responses from Wall Street financial firms to the request for solicitations clearly show that restructuring the debt for the long term yields the most savings under both net present value and actual cash flow scenarios, he said.
“Even when analyzing actual cash flow, only one firm proposes that taking cash upfront yields more savings,” Kennedy said. “The remaining companies demonstrate that other options including lower-level payments on the current term of the bonds or paying off the bonds early are the most fiscally prudent for the state.”
Nichols said the upfront savings approach is in the best interest of the state. She criticized Kennedy for releasing details of the underwriter proposals.
“It’s unfortunate that Treasurer Kennedy has decided to make public certain elements of bidder responses while the selection process is still not completed, but I also do not believe that his peculiar action will influence the outcome or undermine the integrity of the selection process,” she said.
Firms responding to the solicitation include Bank of America Merrill Lynch, Barclays Capital, Citi, Jefferies & Co. Inc., JPMorgan, Morgan Stanley & Co. Inc., Raymond James, and Williams Capital Group LLC.
Kennedy compared the tobacco bond refunding to the refinancing of a home mortgage to take advantage of low interest rates.
“The smart thing to do would be to take the money I saved and lower my monthly payments or reduce my 30-year mortgage to a 15-year mortgage,” Kennedy said. “The foolish thing would be to take all of the cash out early and spend it on a new bass boat.”
Louisiana created the Tobacco Settlement Financing Corp. in 2001 to securitize 60% of the revenues from the 1998 Master Settlement Agreement with tobacco firms.
The corporation in November 2001 issued $1.2 billion of bonds supported by the revenues from the settlement. The sale included $283 million of taxable bonds, which have matured, and $919.8 million of callable tax-exempt bonds, of which $823.1 million are outstanding.
The refunding must be approved by the State Bond Commission, which Kennedy chairs, and the Joint Legislative Committee on the Budget.