The 41-Cent Solution
In light of the Comptroller’s revenue estimate and in an effort to solve the state’s looming budget crisis, lawmakers have been scanning the horizon for perfect, painless solutions. The Texas Association of Business has suggested securitizing the state’s tobacco settlement funds as one possible solution to the budget shortfall, now projected at a minimum of $9.9 billion for the next biennium. So what is “securitization” and why is it a short-sighted approach that might help postpone increasing taxes for a while, but would jeopardize, in the short and long terms, a key source of funding for state health-care initiatives, especially those for children?
In January 1998, Texas won a multi-billion dollar settlement from the tobacco industry. The bulk of the money comes to the state in annual payments that may eventually total $14.2 billion, or approximately $1 billion per biennium. Morgan Stanley estimated that Texas could net $5.8 billion from the sale of 30 years’ worth of tobacco settlement receipts.
Securitization involves replacing Texas’ annual payouts from tobacco product manufacturers with an immediate, one-time lump sum of money raised through the sale of public bonds or other financial securities backed by future receipts. In other words, securitization would involve selling Texas’ rights to an expected revenue stream of $14.2 billion in return for a one-time, up-front influx of cash at a loss of $8.4 billion to the state. If this were your own money, would this make sense to you?
Last session, over $900 million from tobacco settlement receipts was appropriated for vital health and human services, including the Children’s Health Insurance Program (CHIP), simplified access to children’s Medic-aid, increased Medicaid provider rates, community-based care services for individuals with disabilities, childhood immunizations, and tobacco/ smoking education, enforcement, and prevention. If Texas received $5.8 billion next year through securitization and used it to help meet our anticipated budget shortfall, more than $900 million in general revenue would have to be identified to continue funding CHIP and other health-care programs for the 2004-2005 biennium and beyond. The need for generating these funds would recur every biennium!
With the help of the tobacco settlement funding stream, Texas has made considerable progress in providing health insurance to low-income, working families throughout the state, and over half a million children are now insured through the CHIP program. But our work is not done. Texas still has the highest percentage of uninsured people in the United States, and we rank number one in the percentage (35 percent) of low-income children without health insurance.
Significant funding is needed to maintain current health and human services levels, but we must remain mindful of future costs as well. CHIP caseload growth is expected to increase by one percent per year, and benefit cost increases are projected at about five percent per year. Many community-care programs that also depend on tobacco settlement receipts are ramping up and will require increased funding to continue services at the level appropriated for 2003. Additionally, current Medicaid reimbursement for health-care professionals is 33 percent lower than the rates paid by Medicare. Without consistent rate increases, Medicaid clients will be in jeopardy of losing this safety net and reverting to costly hospital emergency rooms.
In the throes of financial crisis, several states have securitized their tobacco settlement receipts, and others are considering it. But by securitizing, states are getting as little as 22 cents for each dollar in anticipated settlement payments. The best Texas could hope for is estimated at 41 cents per dollar. Other states, such as North Dakota and Massachusetts, considered securitization proposals, and ultimately chose not to sacrifice their future funding streams.
A recent New York Times article warned of another danger related to securitizing tobacco funds. Credit rating agencies have indicated that these one-time budget fixes could be signs of fiscal distress, and unless states can convince these agencies that more deficit-related long-term solutions are in the works, credit ratings could be lowered. Five states that have cashed in their settlements have either had their ratings lowered or been warned of the possibility.
However enticing an immediate cash payment may seem, we cannot ignore the fallout for future budget cycles. Once the projected budget hole is plugged–or at least partially plugged –with a one-time, lump sum of securitized revenue, how will we fund vital health and human services in the future? How will we tell half a million children enrolled in CHIP, and their parents, that we have cashed in their future? I do not believe we can afford to fill budget holes at the expense of the health and safety of Texas’ children and other vulnerable populations.
We have reached the moment when consideration of new revenue streams can no longer be put off. It is high time we consider restructuring the state’s antiquated tax system. Securitization of Texas’ tobacco settlement funds is a poor excuse to avoid that responsibility.
Elliott Naishtat is a State Representative from Austin.