TOPEKA CAPITAL JOURNAL: Kansas Senate hearing points to secret deal to secure $400 million for state deficit

By Tim Carpenter
March 8, 2016

A Kansas early childhood education advocacy organization Tuesday alleged the administration of Gov. Sam Brownback was contemplating the sale of future state tobacco settlement receipts for a one-time payment of $400 million to help address state government budget problems.

The governor’s budget director responded by saying state officials attended presentations on the topic that didn’t result in an agreement with outside investors. It isn’t clear whether Brownback could unilaterally enter into such a contract or if he would need the Legislature’s consent to make use of $57 million in annual payments from tobacco companies.

The possibility was raised during debate on a Senate bill repealing barriers to moving into the state’s general treasury more than $500 million in annual sales tax revenue directly deposited at the Kansas Department of Transportation. The beleaguered state treasury also would swallow state revenue from casinos and funding earmarked for economic development. The bill would take into the general fund all tobacco settlement money allocated to the Children’s Initiatives Fund and Kansas Endowment for Youth, which finance statewide programs for preschoolers.

Legislation involving these adjustments doesn’t reference a strategy for following that accounting overhaul with a transaction for quick cash.

Shannon Cotsoradis, president and chief executive officer of Kansas Action for Children, first shared information about the prospect of behind-the-scenes maneuvering during testimony to the Senate Ways and Means Committee. She said advocates of Senate Bill 463 were marketing changes to the CIF and KEY accounts funded by tobacco revenue as a way to strengthen government transparency. However, she said, selling long-term revenue for short-term gain would place in jeopardy the state’s early childhood education system.

“I can’t imagine anything less transparent,” Cotsoradis said. “It’s really hard to throw babies and toddlers under the bus. I don’t think policymakers on either side of the aisle want to do that.”

Shawn Sullivan, budget director for the Brownback administration, said presentations were made to state officials about “securitization” of Kansas’ future tobacco settlement money. He said 20 states had taken a comparable financing step, but the governor’s office hadn’t made such a deal.

“There is no deal or pending legislation to sell tobacco settlement money,” said Eileen Hawley, the governor’s spokeswoman. “Several months ago, a presentation was made to state officials about securitization of future tobacco settlement money to Kansas.”

Sen. Ty Masterson, an Andover Republican who chairs the Senate budget committee, said no one had shared with him a proposed bill to sell off future payments from the tobacco settlement.

“I’ve just heard rumors,” Masterson said. “I’d have to learn about that myself.”

He said the intent of the Senate bill was to increase transparency of appropriations that have occurred outside the state general fund, which undergoes the greatest scrutiny during a legislative session.

Cotsoradis didn’t publicly identify who informed her of what were described as the administration’s negotiations with financial heavyweights and drafting of a proposal to accomplish the feat. Nor did she divulge other key elements of a deal, including length of the contractual agreement, how much outside investors would profit and what financial obligations the state might assume.

In other states, Wall Street bankers have sold bonds to investors that enabled lump-sum payments of cash to a state government. In return, investors received the state’s share of future tobacco revenue for a designated period.

At the Senate committee hearing, Cotsoradis said she objected to dismantling of a steady source of revenue dedicated to early-childhood programs statewide and opposed any strategy of securitizing revenue to cover tax collection shortfalls without dealing with the real structural deficit. State tax receipts have been below expectations since July, and February collections were $50 million below projections of state analysts.

“The legislation risks undermining the great results being produced by the existing infrastructure,” she said. “It doesn’t guarantee any revenue for childrens’ programs currently funded by the CIF.”

Under the Senate bill, no more than $50 million in tobacco settlement money would be allocated each year by lawmakers to Kansas early childhood programs. The legislation would set no minimum appropriation.

Opposition to the reform was shared by The American Cancer Society Action Network, which suggested more of tobacco proceeds should be used to weaken demand for cigarettes. Partnership for Early Success, a coalition of eight organizations, also opposed blending the special funds into one pot.

Travis Stryker, of the Kansas Society of Professional Engineers, said the bill would place $10.5 million set aside annually to increase engineering graduates from Kansas State University, the University of Kansas and Wichita State University within the general fund and make the money subject to annual appropriation debates. In addition, the organization questioned the wisdom of moving KDOT revenue away from the agency.

“We understand the budget concerns of our state and appreciate the innovative approaches to balance the budget,” he said. “However, our organization has enormous concerns.”

Brownback administration officials and Republican legislators have sought to pull cash from numerous sources into the general fund to counter back-to-back years of deficit. They have intensified reallocation of resources available to KDOT, prompting Republicans and Democrats to often refer to the agency as the “Bank of KDOT.”

“This is taxpayer money. It’s not KDOT’s money,” said Sullivan, the state budget director. “We need to get away from ‘Bank of KDOT’ language. We need to work to get rid of that particular language.”

He said shifting sales tax revenue off of KDOT’s ledger could negatively influence the agency’s bond ratings.

In 1998, a bruising national legal fight resulted in an agreement among 46 states, the District of Columbia and five U.S. territories and tobacco companies for the health-related costs of smoking. The settlement — the largest in legal history — was designed to provide states with $200 billion by 2025.

Kansas was included in the arrangement, and state lawmakers set up special funds to allocate the annual payments.

Some state governments, anxious the deal would bankrupt tobacco companies, worked out agreements with Wall Street to transform scheduled annual payments into up-front cash by selling bonds to investors. Some deals included a form of high-risk debt, capital appreciation bonds, which obligated governments to pay out billions of dollars in tobacco income in the future.

House Minority Leader Tom Burroughs, D-Kansas City, said entertaining the idea of dismantling early childhood education funding was a tragic mistake.

“If Sam Brownback is willing to double-cross toddlers and children, is there anything he won’t do?” he said.

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