Tobacco Securitization

1
Tobacco Securitization

• Rich Petrick
• Vice Chancellor for Finance
• The Ohio Board of Regents

2
Tobacco Master Settlement Agreement (MSA)

• In November of 1998, 46 states and nations
  largest tobacco manufacturers entered into an
  agreement called the Tobacco Master Settlement
  Agreement.
• Through the MSA, states settle all current and
  future claims against tobacco industry.
• In exchange, states are to receive stream of
  annual payments, called Tobacco Settlement
  Receipts (TSRs), in perpetuity from the tobacco
  industry.
• Ohios estimated annual payments range between
  360 million to 612 million.

3
Tobacco Master Settlement Agreement (MSA)

• WHAT IS SECURITIZATION?
• Securitization involves the selling of rights to
  an expected stream of revenue to investors in
  return for receiving a lump sum payment now.
• Securitization reduces or eliminates risk (of
  potential reduction of future MSA payments), and
  creates a pool of funds for more immediate use by
  the recipient of the funds.

4
Tobacco Master Settlement Agreement (MSA)

• Eighteen states have already securitized all or
  parts of their MSA revenues
• Alabama, Alaska, Arkansas, California, Iowa,
  Louisiana, Maryland, Michigan, Missouri, New
  Jersey, North Dakota, Oregon, Rhode Island, South
  Carolina, South Dakota, Virginia, Washington,
  Wisconsin, and the District of Columbia and
  Puerto Rico. New York City and some New York
  counties have also securitized some of their
  shares of New York State's tobacco settlement
  payments, as have some California counties.
• A number of states have considered securitization
  and rejected it, including Illinois, Nevada,
  Vermont, West Virginia, and Colorado (twice).
• (Source Tobacco Public Policy Center at Capital
  University Law School)

5
Securitization Uses

• Most common uses of securitized MSA revenues
• Capital projects and debt service (44)
• Budget relief (25)
• Special programs (19)
• Endowments (12)
• (Source Ohio Office of Budget and Management)

6
THE OHIO PLAN

• Securitization is expected to generate a lump-sum
  of 5.04 billion for Ohio
• Use of funds
• 2.2 billion to the Ohio School Facilities
  Commission (OSFC) in place of planned FY 2008
  2025 tobacco distributions for K-12 facilities.
• 1.92 billion to OSFC in place of planned FY 2008
  -2010 GRF-backed bonds
• 0.92 billion to Higher Education facilities in
  place of planned FY 2008 FY 2010 GRF-backed
  bonds

7
THE OHIO PLAN

• Advantages of using securitized funds instead of
  GRF bond-backed funds
• Reduces GRF debt service by 257 million per year
  for twenty years
• State to use the debt service savings for
  property tax relief for seniors and disabled home
  owners (Homestead Exemption)
• Improves the states credit rating.
• Relieves debt capacity issues.
• Permits acceleration of OSFC planned capital
  projects for primary and secondary education.

8
THE OHIO PLAN

• Advantages for higher education
• Establishes an almost guaranteed stream of
  capital funding for higher education in FY 2009
  and FY 2010.
• Permits improved accelerated capital planning for
  the biennium.

9
Securitization Final Observations

• Securitization well-established by FY 2007
  little fundamental uncertainty about legality and
  procedures.
• Ohio advance funded capital investments that had
  been planned over a longer time period.