The Rush to Implement Ohio’s Largest Financial Transaction Ever

July 26, 2007

One of the problems that plague democracies is the divide between society’s interest over the long run and what is good for politicians in the short run. The latest example of this may be on display in Ohio where the state is considering exchanging the remaining funds it is due under the 1998 tobacco settlement for a lump-sum payment. If implemented, it would be the largest financial transaction in the state’s history.

The three-member Buckeye Tobacco Settlement Financing Authority is spearheading the securitization effort, arguing that if it doesn’t close the deal soon, the state is likely to get less money over the long run due, in part, to anti-smoking activities carried out by Ohio and other states.

“You have smoking bans going on around the country and many things that affect tobacco in the future,” authority member and state treasurer Richard Cordray told the Cleveland Plain Dealer. “For us to shed the risk and get a good price while the market is supportive of those prices would absolutely make sense for the state.”

Of course, the idea that the sophisticated financial institutions that Cordray is attempting to sell this deal to would somehow be ignorant of these risks is laughable. What does he think their armies of analysts do? Does he really think he can pull the wool over the eyes of people with billions at stake?

What the settlement authority is doing is essentially entering into a gamble with another party. The state will “win” if, after all is said and done, the value of the lump-sum payment does indeed exceed the value of the string of payments. It will lose if this is not the case. We will not know the outcome for many years. Right now, even under ideal conditions where we assume that politicians truly represent the long-term interests of their constituents, it is essentially a 50-50 call.

Why then is the state treasurer so intent on selling this scheme to the public and getting his hands on the funds today? A cynical view is that it is simply in his interest to do so. While we cannot claim to know his motivations, it is hard to ignore the fact that his legacy will largely be determined by the apparent fiscal condition of the state during his tenure—which would undoubtedly improve with a multi-billion dollar influx of funds. A decade from now, if the state is in the throes of a fiscal crisis, the tobacco settlement funds that would have been available to help balance the budget will be but a distant memory.


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