Ohio enjoys a $5 billion payday

The event received little fanfare, but the state of Ohio received a big budget boost this past week – a wire transfer of $5.05 billion into its accounts. Make that “transfers.” The state’s take from the recent sale of its future tobacco settlement payments was so huge it had to be divided into pieces of less than $1 billion each to comply with Federal Reserve regulations. This is serious cash, folks. Already invested, it’s earning the state $650,000 a day in interest. But government being government, they’ll soon spend it down.

The so-called “securititization” of funds due Ohio from the states’ 1998 agreement with tobacco firms is long overdue. State Treasurer Richard Cordray suggested it early this year, and the idea was eagerly embraced by Gov. Ted Strickland, looking for ways to pay for programs he wanted in the state’s biennial budget. But the concept had been floating around for a long time. Most notably, then-Treasurer Joe Deters argued for it in 1999, but his fellow GOP leaders shot it down.

It’s difficult to see why they would oppose securitization. Although the $5 billion is less than the state would have gotten cumulatively from the $380 million a year it was scheduled receive over the coming decades, it removes the risk that some tobacco firms won’t be operating – at least in the United States – in 20 or 30 years to keep paying up. And that risk is considerable: In 2003, for example, Ohio almost lost out on an $80 million payment until an Illinois judge reduced the amount Philip Morris had to post as bond in a class-action lawsuit. A number of other states sold their interests in the settlement years ago.

Who buys them? Investors who are in a better position to speculate on the future of U.S. tobacco companies than a state government. And there’s no scarcity of those investors. So many placed orders that Ohio could have sold three times as much as it had available. And when the bonds are fully repaid, the state will begin receiving tobacco payments again – possibly in 2031.

What will Ohio do with the money? Strickland wants to put most of it into school construction; much of the rest would go to offset property taxes the state is foregoing with its Homestead Exemption program for seniors. Strickland argues that the construction boom will create jobs. Possibly. At least the unions, which already are helping Strickland write his executive orders, will be happy. But you’d think Ohio would get more bang for the billion by putting it into Third Frontier-type initiatives to develop a 21st century economy – alternative fuel technologies, biomedical and more. Still, Strickland got it done, so it’s his call.