Kean Tangles with Muoio’s Office Over Tobacco Settlement
Senate Minority Leader Tom Kean (R-21) sent a letter to Acting Treasurer Elizabeth Maher Muoio today to advise that he is exploring legal action to prevent the pending closing of a $3.2 billion sale of Tobacco Settlement Bonds, which prompted Muoio’s office to swat Kean.
In the letter, Kean said the transaction effectively extends the final payment date of tobacco bonds more than 40 years beyond their initial issuance in 2003 and 2004 — well beyond what is permitted under the New Jersey Constitution which requires principle and interest on all bonds to be paid within 35 years.
“The Murphy Administration is blatantly ignoring provisions in the New Jersey Constitution that are meant to protect taxpayers from irresponsible debt schemes like this tobacco bond refinancing,” said Kean. “The issuance of this debt will cost New Jersey taxpayers hundreds of millions of dollars in exchange for a one-shot $250 million budget grab. We are calling for the immediate cancellation of the refinancing, and are exploring our legal options to prevent the closing.”
Jennifer Sciortino, spokesperson for the treasurer, objected.
“These are bonds backed by tobacco settlement monies and the constitutional claims raised in the letter are totally without merit,” she said. “This is no different from the prior tobacco settlement debt issuances. This deal was properly procured and we were advised by bond counsel. After the last administration failed to act, we took swift steps to ensure that these bonds were properly issued. We are confident that this is a good deal that will save the taxpayers of New Jersey in excess of $100 million.”
Kean said Article 8, Section 2, Paragraph 3 of the New Jersey Constitution provides that all debt must provide for the payment of interest and the discharge the principal within thirty-five years from the time it is contracted. He noted that the debt being refunded by the Tobacco Settlement Financing Corporation was first issued in 2003 and the final maturity of the refunding is 2046 – 8 years beyond the New Jersey Constitution’s requirement that the interest and principle be paid and discharged within 35 years (2038).
Kean expressed further concern that that investors in the debt sale are already selling their bonds at a significant mark-up only days after the bond pricing, causing one Bloomberg Intelligence analyst to note: “It would suggest the State left some money on the table as they continue to struggle financially.”
“This tobacco bond scheme has hit the trifecta of being unconstitutional, costly for taxpayers, and so poorly structured that the Murphy Administration is effectively giving away money to investors while simultaneously demanding billions in new taxes from New Jersey residents,” added Kean. “Given the cost, this isn’t something that should be rushed as appears to be the case. While I’m hopeful that litigation won’t be necessary to prevent the closing from taking place, we’re exploring every option to protect New Jersey taxpayers.”
kean-muoio-tobacco-bonds-ltr
Senator Kean is on shaky legal ground with his argument, and I’m sure he knows it since he’s lived through this many times before. The proposed tobacco settlement bonds are refunding bonds which meet the constitutional requirement that they provide an overall debt service savings to the state compared to the bonds that are being refinanced. Refunding bonds are generally issued when interest rates have dropped and the opportunity exists for savings over the life of the debt, not unlike refinancing a mortgage at a lower rate. The New Jersey Constitution specifically provides for refinancing state debt if overall savings can be demonstrated. The older bonds that are being refunded (i.e., paid off) to the original bond holders in effect no longer exist, and the 35-year “clock” on those bonds ceases when they are paid off with the new refunding bond issuance. Then a new 35-year clock starts on the new series of debt. This can be done indefinitely so long as overall debt savings can be achieved with each refunding bond series, and if buyers can be found for each new issuance. When interest rates are rising, then this type of refunding becomes less feasible.
The senator may be on more solid ground in complaining that this bond issuance is poor public policy and a budget “gimmick.” This is because, invariably, the new refunding bond issue is structured so that the entire debt service savings is “captured” in the first year or two instead of being spread out over the life of the bonds (which would benefit future budgets and taxpayers). In fact, in the following years, the debt service requirements are remarkably similar to what they would have been under the old bonds that have now been retired. This is what enables the Murphy administration to “save” $250 million in next year’s budget instead of miniscule amounts over each of the next 35 years, which does Murphy no good. But governors of both parties have been doing this for many years and Kean is being disingenuous both in promoting the legal issue and in crying crocodile tears that the Democratic administration is receiving the “one-time” benefits of the bond refinancing. This may be good or bad public policy but in any case it has bipartisan roots depending on which party is in control of the Governor’s office.
Well stated!