In 2001, Louisiana wisely sold a portion of its tobacco settlement with the four major tobacco companies by issuing bonds to investors for around $1 billion. We put the $1 billion in a constitutionally-protected trust fund dedicated to health, education and the TOPS Scholarship Program.
Interest rates have dropped since 2001, and Louisiana now has the opportunity to refinance its tobacco bonds at a lower interest, which we should do to generate more money for TOPS. Unfortunately, despite the financial experts’ advice and against my objections, the current refinancing plan will leave money on the table–money we could use for TOPS–by taking the savings from the refinancing up front to plug the state’s budget shortfall.
Let’s say I decided to refinance my 6% home mortgage because interest rates have fallen to 3%. I could choose to take the savings in one of three ways: by lowering my monthly payments, by reducing my 30 year mortgage to a 15 year mortgage, or by taking the savings out up front in cash. I should choose the option that saves me the most money in the long term.
Unfortunately, the plan chosen by the state for our tobacco bonds refinancing–taking the savings up front–saves the least amount; the other two options–lowering our payments or paying the bonds off early–will save millions more.
An overwhelming majority of the investment bankers who bid on refinancing the state’s tobacco bonds recommended lowering our payments or paying our debt off earlier. Responses from these Wall Street financial firms clearly show that restructuring our debt for the long term yields the most savings under both net present value and actual cash flow scenarios. Only a handful of firms said taking the savings up front saved the most money.
Why then is there such a push to do what saves the least amount of money for taxpayers? It’s pretty simple. The upfront money is an easy fix to get the cash needed for this next year’s budget hole. Spending the savings next year for TOPS, instead of taking a larger amount of savings over time or to pay the debt sooner, frees up money to plug a budget hole in the General Fund for one year. What will we do in future years, when all the savings have been spent?
Refinancing our tobacco bonds is a good idea given the current interest rate environment. It’s unfortunate that TOPS and taxpayers will end up shortchanged by the refinancing method chosen in order to balance the budget with more one time money.