Strange Economics, Professor Brown

by Lynn Harsh, Evergreen Freedom Foundation

The economically unsound tobacco “securitization” proposal forwarded by Senator Lisa Brown, Chairman of the Senate Ways and Means Committee, is startling considering she is an economics professor at Gonzaga University. Her deal means our state will lose $37.5 million in revenue per year for 25 years or longer.

Senator Brown proposes to raise $525 million for the current budget (2001-03) by borrowing against the future tobacco litigation settlement revenue. Under her proposal up to 25 percent of the annual future revenue will be sold to private investors.

In other words, the state would sell up to 25 percent of its interest in the substantial tobacco settlement payments for a discounted lump sum now. So, to help erase a current state deficit, Brown is willing for the state to get only 25-30 cents on the dollars that would have come in the future.

Of the $525 million projected to be raised with this scheme, Senator Brown puts $105 million in the Health Services Account and $420 million the general fund. This is bad policy.

First, a wise steward of public funds does not purposely agree to receive only 25-30 cents return on a dollar. Treasurer Mike Murphy said this is like citizens taking out mortgages on their homes because they are having trouble paying for groceries. In opposing this plan, Attorney General Gregoire told legislators: “Recent trends indicate we could lose anywhere from 70 to 75 cents on a dollar. Over 25 years Washington would lose more than a billion dollars in revenue.”

Second, this type of unwise policymaking is the stuff that negatively impacts our bond ratings. Washington state’s budget system is already being closely scrutinized by the bond investment firms of Moody’s, Standard & Poor and Fitch. If our bond rating is lowered even a little, the higher interest we will pay for bonds will cost taxpayers more over the life of the bonds than the $525 million raised by selling these bonds.

Third, selling future revenue for a one-time fix in the budget creates two problems:1) It creates a $525 million deficit in the next budget and legislators won’t have the $525 million to patch the hole, and 2) the revenue for the next biennium will be reduced by $75 million - the portion of the tobacco money that was sold (given away) in this deal. This $75 million reduction will occur each biennium for the next 25 years or longer.

Just as mortgaging our homes for groceries is a very bad idea, this unstable plan should be soundly rejected.

Lynn Harsh is executive director for the Olympia-based Evergreen Freedom Foundation.

Contact: Lynn Harsh, Executive Director, (360) 956-3482

Evergreen Freedom Foundation P.O. Box 552, Olympia, WA 98507 Phone: (360) 956-3482, Fax: (360) 352-1874 Email: effwa@effwa.org