County goes for Big Tobacco gold Legislature securitizes settlement income to overcome '09 shortfall
By Joe Darrow	write the author
August 14, 2008 | 12:03 PM It's pouring in Suffolk. At least, that's the financial forecast from the county Legislature, which voted July 31 to securitize its tobacco settlement money, an option Suffolk officials said they had been holding in reserve for a rainy day. The transaction trades the long-term income for up-front cash to battle next year's projected $126 million revenue shortfall. The Legislature decided 14-2, with one abstention, to entrust securitization of its tobacco income to the Suffolk Tobacco Asset Securitization Corp., a development corporation chaired by Chief Deputy County Executive Jim Morgo. The STASC plan involves selling the majority of Suffolk's yearly income from the 2001 settlement between 46 states and Big Tobacco for $185 million spread out over the next five years, with $60 million available toward the 2009 shortfall. The deal has Suffolk trading off 36 percent of its settlement income through 2012, and then 75 percent through 2032, while receiving slightly less than 52 cents on the dollar total — a number that could fluctuate depending on market factors, according to county financial advisers. County lawmakers called a last-minute meeting July 31 to authorize the securitization, despite having a general meeting scheduled five days later. The haste was in response to pressure from STASC as well as the four banks underwriting the transaction to bring Suffolk's tobacco bonds to the market before three of the nation's largest tobacco firms released their earnings reports. County financial adviser Rich Tortora warned that indications of reduced tobacco consumption "could dramatically affect the interest we have to pay on these bonds." Opponents of the plan said it mortgages the county's future too cheaply. While she ultimately voted for the measure, Legislator Vivian Viloria-Fisher (D-Setauket) had championed an alternative plan devised by the Legislature's Budget Review Office, which would securitize only enough of the tobacco settlement to net Suffolk about $120 million over the next five years, including the same initial $60 million to fight next year's shortfall. The BRO alternative would supplement that by raising Suffolk's sales tax by an eighth of a cent to 8.75 percent, as well as by increasing the county property tax levy by 3.33 percent. That relatively modest increase to the county's relatively tiny property tax rate would only have brought in an anticipated $1.7 million and cost the average Suffolk household an extra $1.80 a year, according to Viloria-Fisher. But the increased rate would satisfy the legal requirement for tapping into Suffolk's tax stabilization reserve fund. Viloria-Fisher's plan would have used $50 million of the $131 million reserve. But the legislator said she could not generate support for raising taxes among her fellows. "Unfortunately, the people who serve the public don't have the political courage to do what needs to be done," she said. Advocates of the STASC plan say critics unjustifiably assume the tobacco settlement revenue stream will keep flowing decades into the future. But tobacco consumption has dropped 10 percent in the past decade, and the county's settlement receipts are tied to nationwide consumption figures, according to Legislator Steve Stern (D-Dix Hills). With increased health awareness and a growing market for medications to help addicts quit, tobacco sales could slow further — and with them, Suffolk's income. And that's assuming the settlement scheme itself survives. "There is significant anti-trust legislation out there," Morgo said. "If the plaintiffs were successful, the whole [master settlement agreement] could be in trouble." So, tobacco securitization not only bolsters the 2009 budget, but reduces Suffolk's future financial risk by selling it to investors, Stern argued. Legislator John Kennedy Jr. (R-Nesconset) cast one of the two votes against tobacco securitization. He said the transaction had been introduced "under the guise of an imminent budgetary issue," but now legislators were trading off a significant portion of future revenue to fund a "multiyear debt restructuring plan." Kennedy said more weight should have been given to the option of securitizing tax liens. But according to Tortora, that would require trading variable-rate debt at a time when, due to the subprime mortgage collapse, "variable rate is being looked down on." Even with other cost-saving measures the county has adopted — including incentivizing early retirements from positions that won't be refilled and cutting expenditures on vehicles and equipment — the $60 million from securitization means Suffolk still faces 2009 shortfalls of $34.6 million in the general fund and $21 million for its police. To close the gap, the county executive has proposed privatizing the county's John J. Foley Skilled Nursing Facility in Yaphank and reducing police expenses by pulling Suffolk cops off state highway patrol, which together would net the county a $27 million per year savings. But these options have met with staunch opposition from some legislators. Levy, in turn, remains against raising taxes to counter the shortfall.