Tobacco Bond Plan Raises Questions Among Children’s Advocates

Feb 10, 2017

Dana Stanton drove hours from Hays to a Friday meeting in Topeka hoping to learn what the governor’s budget proposal would mean for the children’s programs she oversees.

After the Kansas Children’s Cabinet meeting adjourned, she didn’t know much more than she did before.

Kansas Budget Director Shawn Sullivan spoke to the Children’s Cabinet about Gov. Sam Brownback’s proposal to securitize the state’s share of a settlement with major tobacco companies. Selling bonds backed by the tobacco money would mean that some or all of it would go to investors in exchange for a large upfront payment.

Kansas currently uses the tobacco money to fund children’s programs, such as the Early Head Start classrooms and home-visiting programs Stanton oversees in four western Kansas counties.

Dana Stanton of Hays worries that the governor’s plan for tobacco settlement money could threaten state funding for the children’s programs she oversees.
Credit Meg Wingerter / Kansas News Service

Sullivan sought to reassure children’s advocates in the room that programs would be paid for through the general fund even if the state sells bonds backed by the tobacco money.

Shifting the risk of declining tobacco revenues to investors would protect the state from financial losses if fewer people smoke, he said.

“If the (children’s) programs are important, they should be funded, however they’re funded,” he said.

But Stanton isn’t sure if lawmakers will come up with the money if they sell they tobacco funds. If lawmakers didn’t appropriate any funding, her programs would serve about 200 fewer children next year, she said.

“He mentioned several times that this would be a one-time fix,” she said. “This would come at the expense of our most vulnerable citizens.”

Many questions remain unresolved about tobacco securitization. Here’s a look at the issue:

What is the governor proposing Kansas do? The state would sell the rights to future payments from tobacco companies to investors. The state would receive a large upfront check but would pay investors back in the long run by giving up future tobacco payments.

Where do the tobacco funds come from? Major tobacco companies reached a settlement with most states in the 1990s. They agreed to pay states indefinitely so they could end lawsuits related to the health costs of smoking. Kansas decided to put the money into the Children’s Initiatives Fund to pay for early education programs.

Why is the state looking at selling tobacco bonds? The state is facing a budget shortfall of about $580 million in the next fiscal year, which starts in July. Sullivan described one-time payments from securitization as a bridge to a structurally balanced budget.

How much would the state get? That would depend on what options it chooses. Sullivan said it could range from $500 million to $800 million. If Kansas decides to receive less upfront, it could get some of the tobacco payments in the future. If the state chooses a higher payout, it could give up all its tobacco money for decades.

How much would it give up? Kansas has received about $50 million annually in recent years. Officials with the Kansas Development Finance Authority said they expect that amount to stay about the same in the future because the settlement guaranteed that payments would adjust for inflation.

What would happen to the children’s programs if the state sells its settlement rights? They most likely would be moved to the state general fund. Lawmakers would have to decide whether to fully fund the programs, give them less money or cut them altogether. The Children’s Initiatives Fund programs appear to have widespread support, but lawmakers would have to weigh them against other priorities, like serving people with disabilities.

How likely is this to happen? Sullivan acknowledged “there hasn’t been much appetite” to securitize the tobacco money. But lawmakers face a large budget gap and unattractive options, such as cutting funding to schools or raising taxes. The tobacco fund could look more appealing if they can’t reach an agreement soon.

Meg Wingerter is a reporter for KCUR’s Kansas News Service, a collaboration of KCUR, Kansas Public Radio and KMUW covering health, education and politics in Kansas. You can reach her on Twitter @MegWingerter. Kansas News Service stories and photos may be republished at no cost with proper attribution and a link back to kcur.org.