Las Vegas Sun

March 28, 2024

Gibbons weighs selling tobacco payments to plug budget gaps

Caught between the prospect of drastic 14 percent statewide budget cuts and his no-new-taxes pledge, Gov. Jim Gibbons is considering tobacco as a solution.

The governor’s administration has been studying a proposal to sell off future payments from big tobacco companies for a one-time payment to offset budget shortages forecast for fiscal 2010 and 2011, the budget years the state is preparing for now.

The proposal, which could be brought up in a special session this summer or in the 2009 Legislature, would be only a short-term solution, Gibbons’ aides admitted.

“It would be a bridge between our current fiscal difficulties and our brighter future, which everyone believes is out there,” said Ben Kieckefer, the governor’s spokesman. “It’s essentially another stopgap.”

He said the plan being considered would use the one-time payout, which sources estimate at between $500 million and $700 million, for the ongoing cost of state government.

However, that money would come at the expense of hundreds of millions of dollars down the road. Over the past nine fiscal years a massive nationwide legal settlement from tobacco companies in a case over the health dangers of smoking, has produced annual payments to Nevada ranging from $28 million to $50 billion. That money — tied to cigarette sales — otherwise would flow to the state yearly in perpetuity.

In that sense, what the state is considering is similar to a lottery winner’s deciding to accept a smaller immediate payout in lieu of a much bigger jackpot that would be paid over 20 years.

“It has its problems, but there are programs that everyone wants to continue funding,” Kieckefer said. “It’s an opportunity to keep some of those budgets whole.”

Details of the plan are still being considered and no final decision has been made.

Lt. Gov. Brian Krolicki, the state’s former treasurer, said his office is preparing a report on the subject for the governor that is expected to be finished this week. Krolicki late last month first proposed selling the state’s future tobacco settlement money, an idea now gaining traction with Gibbons and others.

Krolicki, who has pushed for “securitizing” the tobacco settlement money since 2001, admitted that using a one-time payout to cover ongoing expenses is a drastic step, one he would not have advocated a few years ago. But with a revenue shortfall approaching $1 billion in the current budget cycle and revenues projected to be $800 million below expenses in fiscal 2010 and 2011, the state is in a dire situation.

“Nevada is about to enter a holy fiscal war,” Krolicki said. “I’m not sure that’s where we want to be.”

In January, Gibbons ordered departments to cut 4.5 percent in operating expenses. Later, he met with legislators and they agreed to additional cuts.

These fixes, critics argued, put off tough decisions that would reconcile the state’s needs and size of government with the amount of money available.

State department heads are preparing for the next legislative session, when legislators will consider budgets for fiscal 2010 and 2011. Gibbons has instructed state agencies to prepare for a 14 percent cut.

That call set off a round of warnings, particularly in education circles, of the potential effects.

Selling off the tobacco settlement money would require legislative approval.

Krolicki’s past attempts to sell future tobacco settlement payments passed the Republican-controlled Senate but failed to make it out of the Assembly.

Speaker Barbara Buckley, D-Las Vegas, said Monday she has not seen any details of the plan. But past proposals didn’t make financial sense, she said.

“Our fiscal analysts said those proposals would bring in pennies on the dollar,” she said. “We’ll have to weigh whether it’s worth it.”

State Treasurer Kate Marshall said her office, which collects and administers the tobacco settlement money, has not been contacted about any proposal.

Under a 1998 settlement between the major tobacco companies and most states, Nevada has received annual payments totaling more than $367 million since 2000. Forty percent of the money has gone toward funding the state’s Millennium Scholarship, with the rest divided among programs for children’s health services, prescription drugs for seniors, tobacco cessation and other health-related causes.

A senior adviser to Gibbons, speaking on the condition of anonymity because the deal is still not final, said the governor is seriously weighing the proposal.

“The governor wants to make sure any deal ensures the stability of the Millennium Scholarship for the next decade,” the source said.

It’s unclear whether that will be enough to get Higher Education Chancellor Jim Rogers onboard.

In a blunt six-page memo last week, Rogers ripped into Gibbons for his proposal to cut education funding. He didn’t completely dismiss the idea of selling future tobacco revenue to cover the current shortfall.

“I applaud the creative thinking but caution that there is a cost to this plan,” Rogers wrote. He worried about the effect of taking money from the Millennium Scholarship and other programs. “This short-term plan can only work if there is a concurrent study and restructure of the state’s tax structure,” he said. “Such a study must be authorized by the 2009 Legislature. Otherwise, the state is quite possibly doing nothing more than postponing a problem for two years.”

Krolicki said he supported taking a comprehensive look at the state’s tax structure, similar to what Senate Majority Leader Bill Raggio, R-Reno, has proposed.

Carole Vilardo, president of the Nevada Taxpayers Association, said selling off future revenues is “a short-term solution to take care of an immediate problem.

“At some point, state spending is going to have to align with revenue,” she said.

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