Tobacco Settlement Funds Sprinklers, Golf Carts and a Grease Trap
27th October 2014
A central tenet of government finance is that money borrowed over the long term should be spent on projects that will outlast the debt – things like buildings, bridges or other essential infrastructure.
That’s not what upstate New York’s Niagara County did with much of its money from tobacco bonds.
Golf carts. Computers. Defibrillators. Portable radios. Even a grease trap for the jail’s kitchen. The list of goods or projects with just a few years’ useful life goes on – all paid for with debt that will last decades.
Nor did the money go toward the health care costs of smoking – as hoped by framers of the 1998 legal settlement with tobacco companies that has paid billions to states, counties and other governments.
Since then, Niagara County repeatedly borrowed against its share of the settlement, about $3.5 million a year. For some of this debt, it borrowed at nearly 8 percent interest and used the proceeds to pay down debts charging half as much.
Niagara’s experience shows how “securitizing” the tobacco money – and the windfall of upfront cash it puts at politicians’ disposal – creates pressure to spend quickly and with less regard to long-term costs.
It also highlights a weakness in IRS rules, which are meant to rein in the use of long-term, tax-exempt debt for items with a short, useful life but still allow many to slip through.
My, what a surprise! Aren’t you surprised? I’m sure surprised.