In a novel financing plan described as "having your cake and eating it too," Louisiana State Treasurer Ken Duncan has developed a plan to securitize the state's share of tobacco settlement money on a piecemeal basis rather than all at once.

Using an initiative Duncan has called the Louisiana Investment For Tomorrow (LIFT), the state will price one securitization per year in the amount of $100 million over the next 25 years. The borrowings will be repaid from investment returns on the tobacco funds.

By securitizing on a piecemeal basis, Louisiana will be able to use the bulk of its share of the $206 billion settlement, which should total $4.6 billion over 25 years, to build an education trust that would grow into perpetual trust fund to support education and health care.

Duncan said J.P. Morgan advised on the plan and confirmed the financial assumptions of his proposal.

Under his plan, Duncan said the state could spend more than $6 billion on education and health care over the next 30 years and still end up with a trust fund of more than $10 billion.

The J.P. Morgan model assumed a 5.5% annual tax-exempt borrowing cost and a 10% average return on investment for the tobacco settlement funds, Duncan reported. However, he used a more conservative 7% borrowing cost figure in his own projections.

Duncan acknowledged that Louisiana legislators had initially been intent on major upfront borrowings against the settlement funds. So, to overcome political concerns, the future of the LIFT plan is being placed before state voters in the form of a constitutional amendment on the November ballot.

If approved, the state would begin an annual borrowing program, with J.P. Morgan as a possible candidate to underwrite the bond sales.

Duncan said he discussed his plan with Fitch/IBCA and Moody's Investors Service, which he said looked favorably on the LIFT plan. However, he said neither agency has yet provided ratings to any proposed tobacco bonds.

Standard & Poor's Ratings Group was not yet consulted by Louisiana, but the rating agency's managing director for securitized finance, Richard Gugliada said that S&P has no intention of rating tobacco settlement bonds until it has satisfactorily explored all the outstanding issues. - Dave Feldheim

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