By John Hanna
April 22, 2016

Kansas Gov. Sam Brownback is facing strong bipartisan criticism over his proposal to use bonds backed by tobacco settlement funds to help plug short-term budget gaps.

The Republican governor wants to sell off the rights to collect part of Kansas’ annual payments from a national legal settlement in the 1990s between states and tobacco companies. A Brownback aide says that such a deal would generate a one-time cash payment of $158 million to the state.

The governor outlined the plan this week as an alternative to delaying contributions to public employee pensions until July 2018 or making spending cuts that would include aid to public schools and health coverage for the poor and disabled. Shawn Sullivan, his budget director, described the tobacco-funds proposal as Brownback’s preferred option.

But legislators in both parties see the plan as using long-term debt to fix budget problems over two fiscal years. Also, children’s advocates believe the proposal endangers programs that are now financed with tobacco settlement funds.

“That’s a terrible idea,” said Sen. Dan Kerschen, a conservative Garden Plain Republican.

Legislators must close shortfalls totaling $290 million in the current and next state budgets. They return Wednesday from an annual spring break to tackle budget issues.

Sullivan said the governor prefers the tobacco-funds proposal to other alternatives because he views it as having the least detrimental effect on state programs. Sullivan also said the deal would be structured so that children’s programs would still receive the tobacco funds they’re getting now.

And while the chairmen of the House and Senate budget committees question whether the proposal can pass, they rejected criticism of it as risky or using debt to finance ongoing government programs. At least 18 states have used tobacco bonds, including California and New Jersey.

Senate committee chairman Ty Masterson compared the result of such a proposal to a lump-sum payment that lottery jackpot winners often claim instead of annual payments.

“There are a lot of those choices out there in the business world,” said Masterson, an Andover Republican. “It’s just a choice.”

Brownback’s administration has been contemplating such a proposal at least since last fall. But its interest didn’t become public until last month, when the nonprofit advocacy group Kansas Action for Children disclosed it and criticized the idea during a legislative hearing.

The group doesn’t trust Sullivan’s promises that funding for programs such as early childhood education from the tobacco settlement would be protected. The money is now deposited into a special, dedicated fund.

“There’s no way to do this without removing the statutory protections,” said Shannon Cotsoradis, the group’s CEO.

Kansas expects to receive $59 million in settlement funds during its current fiscal year and another $58 million during the next fiscal year, which begins in July.

Brownback is asking legislators to give him the legal authority to sell the rights to collect any of the annual payments above $42 million. Sullivan said the administration would set up a private corporation and sell the rights to collect the funds to “a banking-type entity.” The state would receive a lump-sum payment and the resulting bonds would not be a state debt, Sullivan said.

The purchaser of the rights to the revenues would receive a premium of between 10 percent and 15 percent, Sullivan told lawmakers.

The budget director said the purchaser would assume the risk that the annual payments would decline and not be enough to pay off the bonds. He and legislative researchers said they’re still working on the details of how the bonds would be issued.

House Appropriations Committee Chairman Ron Ryckman Jr., an Olathe Republican, said: “I see it as cashing out an annuity early and taking a lump-sum payment.”

But Rep. Mark Hutton, a Wichita Republican who serves on the House Appropriations Committee said the state shouldn’t “give away” a premium “just because we need the money now.”

“It sounds to me like a payday loan,” he said.

Read more from the Topeka Capital Journal.