Called to Order
Chair Mink called the adjourned meeting to order at 4:06 p.m.
Addition of Resolution(s) to the Agenda
It was MOVED by Mr. Joseph, seconded by Mr. Totman, and unanimously
adopted by voice vote by members present, to add the following resolutions
to the agenda:
WHEREAS, Tompkins County is a participant in the Master Settlement Agreement negotiated between the Participant Tobacco Manufacturers and the Attorneys General of Fifty-two States and Territories, and
WHEREAS, it is estimated, but not guaranteed, that the County will receive approximately $55 million over the next thirty years from this settlement, and
WHEREAS, in order to secure to present generations a portion of the benefits intended to be conferred by the MSA, it may be desirable for the County to sell all a portion of its rights, title, and interest in, to, and under the Decree to a local development corporation to be created by the County pursuant to the Not-For-Profit Corporation Laws of the State of New York, now therefore be it
RESOLVED, on recommendation of the Budget and Fiscal Policy Committee, That a public hearing be held before the Board of Representatives in Board Chambers of the Tompkins County Courthouse, 320 North Tioga Street, Ithaca, New York, on Tuesday, August 1, 2000, at 5:30 o’clock in the evening thereof concerning proposed Local Law No. g of 2000 – A Local Law Authorizing the Sale of its Rights, Title, and Interest In, To, and Under the Settlement Agreement With the Various Tobacco Companies, Including in Particular the Monies Payable to Tompkins County There Under,
RESOLVED, further, That the Clerk of the Board is hereby authorized and directed to place proper notice of such public hearing in the official newspaper of the County.
SEQR ACTION: TYPE II-20
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RESOLVED, on recommendation of the Budget and Fiscal Policy Committee, That a public hearing be held before the Board of Representatives at Board Chambers of the Tompkins County Courthouse, 320 North Tioga Street, Ithaca, New York, on Tuesday, August 1, 2000 at 5:30 o’clock in the evening thereof concerning proposed Local Law No. 6 of 2000, Electing a Retirement Incentive Program as Authorized by Chapter 86, Laws of 2000, for the Eligible Employees of the County of Tompkins. At such time and place all persons interested in the subject matter will be heard concerning the same,
RESOLVED, further, That the Clerk of the Board is hereby authorized and directed to place proper notice of such public hearing in the official newspaper of the County.
SEQR ACTION: TYPE II-20
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Special Presentation on Tobacco Settlement
Mr. Erb, County Administrator, introduced Steve Acquario, Legislative Director for New York State Association of Counties (NYSAC). He said he is the person most involved with putting together the Coalition of counties who have expressed an interest in securitization. He stated NYSAC is not here to advocate for or against securitization, but to facilitate this discussion.
Mr. Acquario commented that there is only one Board of Representatives in New York State and that is Tompkins County. He also stated NYSAC directories will be available very soon. In addition, he announced September 9-11 is the Association of Counties Conference and it will be held in Ulster County. The two Senate candidates, First Lady Hillary Clinton and Rick Lazio, will be present.
Mr. Acquario said prior to the meeting a reporter asked him what the benefits or disadvantages or securitization are. He stated the NYSAC is not a proponent of securitization; however, it is involved with the securitization effort should counties wish to securitize. NYSAC’s role with tobacco proceeds is to represent counties and act as a broker during the lawsuit phase. Since that phase other things have developed that have led to discussions concerning securitization. From the beginning NYSAC had three goals: (1) to ensure the funds from the tobacco lawsuit flow directly to counties, (2) that funds be unfettered and have no restrictions on them, and (3) the settlement be distributed between the State and the counties on a 50/50 basis. He stated all of these goals have been met.
He reported that since the lawsuit there have been some State actions that have taken place. In 1999 there were Federal disallowances and State cost shifts.
He stated at this time three counties have voted to securitize their tobacco revenues: Nassau, New York City, and Westchester. Nassau County and New York City securitized all of their revenues and Westchester County securitized future revenues.
The word "securitization" is not uncommon in the financial community. It is used for credit card debt and mortgage transactions. Some counties use securitization to recover delinquent property taxes. In this case, counties are considering whether or not to sell their right to a judgement. This is a judgement that has been entered in Supreme Court in Manhattan that counties are entitled to receive 0.170 percent of New York State’s proceeds from the Tobacco Master Settlement Agreement. Each year there is a payment made to the 46 states and of that payment Tompkins County is entitled to that percentage. The payments are scheduled to flow to Tompkins County in perpetuity. The reason why Nassau County chose to securitize is because of a very serious deficit problem and needing the cash immediately, New York City securitized because of a massive school construction shortfall, and Westchester County securitized to use its proceeds to offset debt for their Medical Center.
Mr. Acquario said there are three counties moving forward to securitize in the next month: Monroe, Erie, and Chautauqua.
He said the issue of securitization has come about because of State actions that have been taken with cost shifts and the available revenue stream that is ongoing to the counties. The main concern over securitization is the disbelief that the tobacco corporations will continue to make payments in perpetuity. Should a county securitize, it is selling its right to a judgement or receive proceeds for a certain number of years.
At this time, Mr. Acquario addressed questions that have been raised by other counties. He said the deadline to adopt a law creating a local development corporation is September 5th. It is his opinion that because there is no obligation by doing so, Tompkins County should adopt this law. There are about 10-20 counties in New York State likely to securitize this fall. Most of those counties are the typical size of Tompkins County.
Mr. Acquario stated there were two reasons NYSAC got involved with securitization: (1) to help reduce costs significantly for counties, and (2) to make securitization affordable for smaller counties. He said New York and California are the only two States in the Union that have counties that are directly receiving proceeds and are handling the process in a similar manner. He noted the Statewide Association in California is taking a much more active role than NYSAC; California is actually issuing the bonds on behalf of the counties.
In continuing discussion on New York State, Mr. Acquario said Monroe County is likely the next County to go to market and will be followed by Erie and Chautauqua Counties. NYSAC has structured banking and transaction fees on a sliding scale depending on the amount a county wishes to securitize. It is anticipated that $200-300 million dollars will go to market in New York State..
Mr. Acquario reported on the jury verdict that took place in the
State of Florida that was brought on by a class action by a handful of
individuals. The Master Settlement Agreement was for States and counties
to receive $25 billion dollars from tobacco companies with any right to
sue them in the future to be relinquished. One thing that was not prohibited
in the settlement was the right for individuals to pursue their own lawsuits.
Since the master settlement there have been a couple of decisions in favor
of individual smokers in California and Oregon. However, the jury verdict
in Florida was a unique case representing a class of individuals where
a jury verdict awarded compensatory damages of $12 million dollars for
three smokers and assessed $145 billion dollars against the tobacco companies
for punitive damages. He said if the verdict is upheld on appeal, tobacco
companies will have to raise their prices. He stated the class action verdict
sets the stage for multiple class action suits and could result in tobacco
companies filing for bankruptcy. Mr. Acquario reported the Federal Government
is also suing the tobacco companies in a similar manner as the States.
They are seeking costs for Medicare, veterans, and federal employees. They
are likely to reach a settlement as the states did. Estimates of the lawsuit
are similar to the Florida class action suit.
Mr. Acquario stated some counties are considering securitizing a portion of the proceeds and at this time Westchester County in the only county securing future revenue. In his opinion, it is not in a county’s best interest to do that, because of the higher discount rate – about one-third, for future revenues.
Although the terms of securitization are not final, the preliminary numbers of the cost of the transaction is less than three percent. He said NYSAC continues to work on getting a date specific for a county to be told what it should receive if it proceeds. NYSAC wants a window developed so when a county does sign off on going to market, it will be the amount promised by the banks.
Mr. Acquario reported on trapping events. He said they are a series of triggers built into the Master Settlement Agreement that are protections for tobacco companies to make adjustments to their payments. One in particular that relates to securitization is volume adjustments. Should volume dip to a certain level or market share is eaten by other generic type cigarette companies, these events will enable the participating manufacturers to readjust what they are required to distribute to the states or counties. The major trapping event is the downgrading of the credit rating of RJR Reynolds. NYSAC is watching that closely. Should the tobacco credit of RJR drop two notches it will disrupt payments they are required to make to the states. This will effect the proceeds and should counties securitize, that trapping event will eat into a residual payment. There are two forms of payments that flow to a county: (1) a lump sum payment, and (2) a residual payment. The way this transaction would work is a corporation issues bonds and the proceeds flow to the county, the following year the tobacco companies make a payment and that payment is given to the corporation who then makes a payment to the bond holders. If that payment is less than the scheduled amortization amount the residual is used. Once that residual is depleted, a second form of protection is put there for the bond holders which is called a liquidity reserve account that is then used. Once that account is depleted the corporation will become bankrupt. The liquidity account is the net of what the banks said the up-front proceeds are (lump sum and residual). This amount comes from the cost of the sale.
Mr. Acquario said there will be other information given to the participants regarding securitization, the trust adventure, terms of sale, etc. Tompkins County will need at some point to be specific on the use of proceeds and include that information in the local law. He explained the rules of a local development corporation. He said because a corporation is issuing the bonds and not the county, there are Internal Revenue Service regulations. When private-sector dollars are being used and flowing into a governmental entity and because of the tax-xempt property of government, the IRS requires counties and states to use it in a tax-exempt manner. That is why it must be used for capital projects only or to defease debt.
Ms. Davis arrived at this time.
Ms. Mink asked if there is a time period within which the lump-sum must be used. Mr. Acquario said within two years, through it can be extended to five years, and must use certain percentage each year, with 100 percent used by five years.
Mr. Proto spoke about the element of risk for counties if tobacco companies were to experience poor sales. Mr. Acquario said the master settlement is driven by consumption, although the goal of the lawsuit is to reduce smoking. If the level of consumption is drastically reduced, he feels the tobacco companies can get out of it alltogether pursuant to the agreement. He said a one to two percent decline annually in tobacco sales has already been forecasted. In answering Mr. Proto’s first question, he said tobacco companies cannot renegotiate what is paid.
Mr. Proto said that if the County were to securitize and commit to capital projects that are normally funded for 20 years and the monies begin to be cut back, the county is still responsible for making payments on those capital projects. Mr. Acquario said the main reason counties are securitizing is to shift the risk of adjustments in tobacco proceeds over the years to the investors. He said the worst case scenario would be if Tompkins County securitized and the tobacco companies went bankrupt, Tompkins County will have already received the lump sum that is equal to the capital program. What the County will not have received is the residual payment. He said he feels the transaction costs are acceptable because with a present value analysis the capture rate is reasonable.
Mr. Penniman said Congress has been friendly to tobacco companies, and asked what their role would be. Mr. Acquario commented that he does not feel Congress will get involved with the Master Settlement Agreement or prohibit individuals from suing.
Mr. Winch questioned why tobacco companies would not just go overseas. Mr. Acquario said he could not answer that question; however, he does not see that happening because right now consumption in New York State is level, even with cigarettes costing approximately $5 per pack.
Mr. Joseph referred to the letter he wrote Mr. Acquario and said the point was not to show securitizing is a bad idea, but how it compares to not securitizing. Mr. Joseph said he agrees the reason to securitize is for insurance, but questions how much the County should pay for that insurance. For every $10 million it would cost $1 million. He also agrees with what Mr. Acquario said about present value. The present value of the payments for Tompkins County is only 90 percent of the $17 million, not 100 percent. That difference (10 percent) is what Tompkins County would be paying for the risk. He said he has been against securitization, but is now concerned because of the possible increase in sales of brands not included in the settlement. Mr. Acquario said there are provisions called model statue that sets up an escrow account that the nonparticipating manufactures (NPM) must pay into. This amount is based on market share. Mr. Acquario said predictions with the Master Settlement Agreement cannot be made, but there are assumptions and projections that can be looked at.
Mr. Lane asked if tobacco companies filed Chapter 11 under the agreement, is Tompkins County a secured creditor or unsecured general creditor. Mr. Acquario said he believes the County would be an unsecured general creditor. Mr. Lane also asked if New York State was securitizing its revenue. Mr. Acquario said New York pledged to defease debt. The State raised the price of cigarettes $.55, charged counties 25 percent of Family Health Plus, and pledged to use portions of the State's settlement for the next five years for tobacco prevention programs. He said New York State chose not to securitize, but the Controller does endorse the concept.
Mr. Lane asked why the financial market is going to buy these bonds. Mr. Acquario said they are being sold at 6.75 percent tax free. He said to date no retail investors or individuals have bought these bonds. They have only been purchased by institutional investors.
Mr. Acquario restated the three options for Tompkins County: (1) take the proceeds and spend them as you get it, (2) seek State legislature approval for a trust fund, or (3) securitize.
Ms. Kiefer asked if the State has done any anti-smoking ads as it is obliged to do. Mr. Acquario said they have embarked on a tobacco prevention program for youth and teens. He said the Department of Law has chosen to run ads on its own. Also, the Department of Health has launched a new program.
Ms. Kiefer asked what the bond rating is. Mr. Acquario said it is A rated and the duration of the bonds is structured for a 40-year transaction, but typically they are paid down in 30 years unless the County chooses to do an early pay down or a "turbo" scenario. Mr. Erb clarified that is the scenario where the County's residual will be used toward paying down its earliest debt. Mr. Acquario stated the counties in the pool do not have to be uniform. Counties can be different, but a decision on how it is to be structured needs to be made up front.
Ms. Kiefer does not feel the County should securitize. It is her opinion that the tobacco companies will not stop payment in the next decade and that the lawsuits will drag out. Mr. Acquario agrees and said that consumption will level itself out.
Mr. Acquario encouraged Tompkins County to hold its public hearing and adopt the law that enables a corporation to be formed. He said the County would not be voting to securitize at this time. He will express the concern when he returns to Albany that Tompkins County wants to see the terms of the transaction up front, their proceeds and residuals and the cost of transactions involved. He will also find out how much it costs to operate a local development corporation, although he feels the approximate cost of the corporation is $30,000. He explained what was involved with the corporation including adoption of bylaws, phone, fax, rent, accounting, auditing, liability insurance, etc. There will also need to be at least two members of the Board sitting on the corporation. Mr. Acquario said the tobacco payments will be made to the corporation who essentially is the County's bank.
Ms. Blanchard asked if a copy of his list of risks could be made available. Mr. Acquario said he would make them available through Mr. Erb.
Mr. Todd asked if the payment New York State receives is based on sales. Mr. Acquario said it is based on shipments, even if they end of on a reservation.
Mr. Joseph asked about the meaning of partial securitization. If the County chose to securitize 50 percent, what do we pledge to the corporation--50 percent of whatever comes in or a fixed dollar amount that is estimated at 50 percent. Mr. Acquario said he did not know and would have to look at the numbers for Tompkins County. He feels it would be 50 percent of the revenue stream.
Mr. Acquario said Tompkins County should make its decision to securitize by the end of September.
Adjournment
The meeting adjourned at 5:36 p.m.