House budget taps tobacco fund

By Susanna Ray

Herald Writer

OLYMPIA — The Sept. 11 terrorist attacks forced the state to turn to such drastic measures as raiding the tobacco settlement fund, House Democrats said Wednesday as they unveiled a budget proposal similar to the Senate one and prepared to pass a final version in the next few days.

"I think of it as the ‘Sept. 11 budget,’ because Sept. 11 has driven so many of the difficult decisions we’ve had to make," said Rep. Helen Sommers, D-Seattle, House budget writer.

The state was already expecting a drop-off in revenue last year because of tax cuts, natural disasters and a downturn in the national economy, but it wasn’t prepared for the magnitude of problems that followed the September events, Sommers said. Now, lawmakers have to deal with a $1.5 billion shortfall in the state’s $23 billion budget.

The House proposes filling that hole in part by cutting $686 million from state programs and agencies; using $251 million in reserves, which would leave $284 million in the rainy day fund in case the economy gets even worse; adding $205 million in new revenue, partly by expanding gambling and adding auditors to catch tax evaders; and borrowing $450 million against the state’ s share of the national tobacco settlement brokered in 1998.

Because it is a Sept. 11 budget, lawmakers agreed to continue about $12 million in state funding for local health districts, which would be the first defense against bioterrorism attacks. But that reasoning didn’t carry over to helping counties and cities with their law enforcement expenses, much to the dismay of local governments. Snohomish County stands to lose more than a million dollars, and Island County about half that much. Cities in the two counties would lose $4.1 million.

"It’s not going to shut down the police department if we don’t get it, but we will have to make adjustments," said Bill Cushman, Everett’s budget director.

Sommers said it will be easier for local governments to use their taxing authority to make up the money than for health districts to come up with replacement funds. In addition, she said, local law enforcement isn’t a core service for the state, whereas education and health care are.

The House budget does more for education, Sommers said, whereas the Senate budget gives more to social services. But she said there are more similarities between the two than differences — which is good, as lawmakers only have one week from today to negotiate a final plan before the session adjourns.

Both sides are agreed on the need to sell off part of the tobacco money. The House wants to sell 20 percent of the payments to get $450 million, whereas the Senate wants to sell 25 percent to get $525 million.

States started selling off or "securitizing" their tobacco income as bonds in 2000, said Lee Dixon with the National Conference of State Legislatures in Washington, D.C. The reason was concern that the huge payments required every year might eventually bankrupt America’s tobacco companies, so the states essentially wanted to get their money and run, passing the risk on to Wall Street.

Because of that high risk, however, they had to accept a huge discount, Dixon said, and most of them only received 25 to 30 cents for every dollar in the future.

With last year’s changing economic fortunes, states are now looking at the idea as a way to make up for lost tax revenues.

Dixon said he hasn’t checked in with all the states that securitized their tobacco money, but at least Alaska, Louisiana, South Carolina and Wisconsin seem happy with their decision to do so.

"They haven’t second-guessed their decision to securitize," he said. "They’re pleased with how it’s gone."

Wisconsin used the money to plug a budget hole, as Washington is now doing.

But financial analysts put Wisconsin on a credit watch earlier this year, according to news reports, and the state is facing a downgrade of its bond rating. That’s important because the lower the rating, the more taxpayers have to pay when the state issues general obligation bonds for construction projects.

"It’s a bad idea," said state Attorney General Christine Gregoire, because Washington would have to take a huge loss to get its hands on the money now, and it’s not renewable, so the same budget hole will need to be filled next year.

"If the facts don’t persuade them, I don’t know what else to do," Gregoire said in an interview.

But Washington’s financial gurus say it’s simplistic to look at the money’s face value rather than considering inflation. By their figures, the state would really get 90 cents for every dollar, because you can do more with a million dollars now than you could in 20 years.

Still, raiding the fund looks bad because the public expected it to go to health care, said Gregoire, who led the large group of state attorneys general in suing the tobacco companies.

"This income was to avoid making taxpayers pay for rising health care costs from tobacco-related problems," she said. "It’s very hard for me, because I was the national spokeswoman for this. It’s hard for me to say this is in any way consistent with what the lawsuit was about.

"I saw it happen elsewhere and just would never have guessed that we would do this in our state."

Representatives are sure to hear an earful about the tobacco plan and the proposed cuts at this morning’s public hearing on the budget. The tax increase proposals will also be unveiled today.

You can call Herald Writer Susanna Ray at 1-360-586-3803 or send e-mail to ray@heraldnet.com.

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