Blowing Smoke

WARNING: Gov. Davis' plan to use tobacco lawsuit money to fill a budget gap is dangerous to our financial health

Comments (0) By Matt Smith Wednesday, Jun 26 2002

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"We're taking off a huge amount of the settlement money, and it's not available for health care access and tobacco prevention," says the American Lung Association's Paul Knepprath.

While the benefit of tobacco securitization may be questionable for governments, for Orrick it's as plain as a baseball-size carcinoma. For its Sacramento deal, in which the county sold off $200 million in tobacco revenues, Orrick earned $1 million, or around 18 times the amount the firm earns on less exotic government bond issues. The Sacramento transaction benefited from Orrick's role as Sacramento's longtime bond counsel; it may also have benefited from contributions to local political campaigns, according to the Recorderstory. The proposed California deal appears to be a similar situation writ large. These political dealings, more than the deal's bad fiscal effects, represent tobacco securitization's most carcinogenic side. Orrick, which serves as California's bond counsel, will likewise handle the securitization deal.

Fred Harper

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Big Tobacco lawsuit-revenue securitization doesn't necessarily fall within Orrick's duties as bond counsel, according to the Recorder. But it would coincide with Orrick's role as a major contributor to the three politicians who will oversee the transaction: Since the last governor's campaign, Orrick has given $132,250 to State Treasurer Phil Angelides, $58,000 to Gov. Davis, and $17,000 to Controller Kathleen Connell. The client list of Orrick's Sacramento-based lobbying arm, meanwhile, reads like an official roll call of entities that would have a keen interest in the flurry of underwriting, selling, and reselling of Davis' $4.5 billion in new tobacco bonds.

While unseemly, Gray Davis' $4.5 billion budget maneuver is not unusual: Like a movie of the week, it tells a story ripped from today's headlines -- "Rite Aid Execs Charged With Fraud," "Global Crossing Denies Shredding," "Tyco Sues Former Officials," "Enron Execs Reap $744 Million," "Arthur Andersen Self-Destructs."

Davis proposes to replicate the phony-accounting malaise that threatens America's financial system, then repackage it as a responsible approach to the California state budget crisis. To play the role of consultant with conflicts of interest, Davis has enlisted the services of a self-interested San Francisco law firm with a penchant for giving money to key state officials. In place of Enron's Cayman Islands-based balance sheet chicanery, Davis will push $4.5 billion worth of state budget shortfall "off book" and into the future, forcing future state governments to somehow make up for the $10 billion this borrowing would eventually cost.

Like his shifty peers in corporate America, our governor isn't reinventing the wheel. Davis' predecessor, Pete Wilson, seemed to make dubious budget accounting a sort of gubernatorial mission. In 1992 Californians passed a ballot proposition specifically aimed at keeping Wilson from continuing to raid state workers' pension funds. Courts in 1995 twice ruled to halt Wilson from improperly diverting special sales taxes collected on cigarettes.

In a year when Americans are looking to their government to repair a financial system ruined by corrupt conflicts of interest, shouldn't this sort of business-as-usual come to an end?