THIS is a test. This is a test of the Maryland fiscal responsibility system.
Here's a tax-free, politically painless way of fixing the state's growing budget deficit without resorting to casinos in Baltimore, slot machines at the racetracks or highway robbers on Interstate 95.
You get up to $1.3 billion in extra cold cash by next summer, and if you call now you avoid many difficult choices and unpleasant arguments when the General Assembly convenes next month.
That's not all you get. Besides plugging next year's billion-dollar budget hole without raiding the "rainy day" reserve fund, you'll have extra money for roads, education or Medicaid. Should Maryland sign up?
Wisconsin, Alaska, Alabama and Louisiana are already with the program, and other states are becoming more interested by the day as the bad economy corrodes their revenue.
"This is a no-brainer," top Wisconsin budget official George Lightbourn told the Associated Press last month. Wisconsin expects to gather its own $1.3 billion from heaven very soon.
What Wisconsin and the other states are doing is banking lump sums on tobacco-litigation settlements instead of waiting for the money to dribble in from cigarette companies over the next couple of decades.
Wisconsin had expected to collect $160 million a year between now and 2026 in penalties paid by Big Tobacco for killing and injuring state residents. But when a $450 million budget gap materialized, Wisconsin's governor decided he preferred $1.3 billion up front instead of $4 billion over time.
Wall Street and David Bowie
This is made possible by Wall Street, which is always ready to pluck money out of the future for the indulgence of the present. For an appropriate fee, of course.
Wall Street is the industry, after all, that invented David Bowie bonds.
Bowie bonds look and act like General Electric bonds or Treasury notes. But, instead of being backed by corporate income or the faith of the U.S. government, Bowie bonds are supported by royalty payments from a 1970s glam-rock star.
Like Wisconsin Gov. Scott McCallum, Bowie decided he would rather eat his pie now, in one big gulp, instead of in yearly bites. So in 1997 he borrowed $55 million through a bond placement, pledging future music-royalty streams as collateral. Bowie bond owners get a nice, 7.9 percent annual interest payment plus the sound of "ka-ching" in their heads every time they hear "Suffragette City."
Now states are selling tobacco bonds on the same plan. States issue bonds, collect the proceeds, fill budget cavities and cover payments on the debt with continuing streams of tobacco-award money.
There is a price, of course, and it goes beyond the fat fees paid to investment bankers.
Money in the misty future is worth less than money in the hot here and now, so if you're borrowing for today don't expect to collect fully on the face value of tomorrow.
As noted, Wisconsin's $4 billion in future tobacco revenue is expected to produce only about $1.3 billion in a bond sale, and part of that must go into a reserve fund in case tobacco sales flag.
But a billion dollars is still enough money to turn a politician's head.
Maryland, whose tobacco award is about the same size as Wisconsin's, could expect a similarly tempting arrangement, which will become more tempting as tax collections dwindle. A disputed claim on some of Maryland's tobacco money by lawyer Peter G. Angelos, who handled the state's tobacco lawsuit, might limit the size of the bond issue. But there is still plenty of uncontested revenue to sell to the capitalists.
In addition to the raw political high of swiping funds from future governors, tobacco bonds offer bird-in-the-hand certainty regarding a somewhat uncertain source of money, supporters say.
Tobacco-litigation payments come from Philip Morris, R.J. Reynolds and other cigarette companies, and if for some reason those outfits falter or fold, the money shrinks or dries up.
By issuing bonds, states share part of that risk with outside investors.
Some states also claim they can invest tobacco-bond proceeds well enough to earn more money over time than year-by-year installments would generate.
Don't believe it. Bowie spent part of his bond haul on a five-bedroom London mansion that he didn't even end up living in. True, state governments have more financial discipline than rock stars, but sometimes it's hard to tell.
Nature's way
Recessions are nature's way of telling governments they're too big. Maryland should adjust to its new revenue reality without temporary gimmicks.
Tapping cash reserves could halve a potential $1 billion deficit next fiscal year. The rest will have to be dealt with the old-fashioned way.
Democratic Sen. Barbara A. Hoffman of Baltimore, powerful chairman of the Senate Budget and Taxation Committee, says she opposes a tobacco-bond budget bailout and would like tobacco payments to fund health care initiatives for years to come.
"We're not going to do any of that," she says. "We're committed to spending the money the way we said we would, and that's important to me."
Good answer. Now let's see if her colleagues agree.
