Predatory lending, as most opposed advocates will tell you, is built on a simple premise: a person in desperate need of financial aid will agree to terms that would normally be unacceptable as a last ditch effort to stay afloat. Because of this, payday lenders can set fairly outrageous terms, make good money and the short term fix the borrower receives rarely lasts.
With March reporting due in a few days, the State of Kansas is definitely feeling the pinch. With state budget finances already in a state that there has already been talk of the state bonds becoming junk status.
While no one is quite sure yet how bad the upcoming tax report will be, the state is already considering “options” to bail out the debt — and it involves the government equivalent of a payday loan. According to KHI authors Megan Hart & Jim McLean, the state is considering restructuring the payments received from the tobacco settlement to receive an up front cash injection — financed against the future paydays of the normal tobacco settlement payments.
www.khi.org/...
Sen. Laura Kelly of Topeka, the ranking Democrat on the Senate Ways and Means Committee, said bonding years of steady payments for a lump-sum payment would be an act of desperation.
“I think it borders on fiscal malpractice,” Kelly said.
Citigroup offered Kansas a sweet heart deal: we can rescue you from current cashflow problems with a little up front money. The trade off? The next 30 years (or more) of cash payments from the agreed to tax settlement.
The CitiGroup Pitch
www.khi.org/...
Under a securitization deal, bonds backed by the state’s tobacco settlement revenue would be sold to generate an immediate infusion of cash. In exchange, the state would be required to give up some or all of its annual tobacco payments for about 30 years to compensate the bond holders. —
If no securitization deal was struck, Citigroup projected the state would receive settlement payments of between $60 million and $70 million a year.
Under the residual plan, the state would receive a lump sum payment of $474.3 million, but its annual payments would drop below $40 million until 2032. That’s because a substantial portion of the state’s annual payment would be diverted to pay bondholders a total of about $806.7 million, nearly double the amount the state would receive in up-front cash.
The state, in exchange for a portion of their tobacco settlement for as far as 30 years would receive a one time cash injection of $474M — significant money, certainly, but in receiving the settlement up front, the state agrees to finance away 30 years worth of steady revenue used for regular budget purposes.
With the tobacco settlement long in the past, you would assume that there would be a track record of how these kind of transactions worked out, and that there would be a reason for the state of Kansas to think seriously about making such a deal. Unfortunately, the past track record doesn’t bode well for a Governor who may need a loan to keep the lights on.
www.propublica.org/…
The sure winners so far: Investment bankers from Citigroup, the now defunct Bear Stearns and others who, along with consultants and lawyers, have pocketed more than $500 million in fees for their financial engineering, ProPublica estimates. They now stand to make more as the governments look to rework old deals and try to get even more tobacco cash upfront.
While other states are begging to unwind their deals and working for a way out of loans that turned unfavorable toward their taxpayers, Kansas may just be desperate enough to think about signing on the bottom line.
We sometimes forget that the tobacco settlement was meant to go to states to help get people off of tobacco, to encourage programs that would dissuade new users in hopes of lowering healthcare cost, increasing productivity and building a healthier society.
Instead, states like Kansas are looking to cash in — and the money originally designed to improve the health of residents? Instead, it will be used to pay uncovered bills and debt that has little, if anything, to do with the original intent.
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