1. Tobacco Securitization Rich Petrick Vice Chancellor for Finance The Ohio Board of Regents

2. Tobacco Master Settlement Agreement (MSA) • In November of 1998, 46 states and nation’s largest tobacco manufacturers entered into an agreement called the “Tobacco Master Settlement Agreement.” • Through the MSA, states settle all current and future claims against tobacco industry. • In exchange, states are to receive stream of annual payments, called Tobacco Settlement Receipts (TSRs), in perpetuity from the tobacco industry. • Ohio’s estimated annual payments range between $360 million to $612 million.

3. Tobacco Master Settlement Agreement (MSA) • WHAT IS SECURITIZATION? • Securitization involves the selling of rights to an expected stream of revenue to investors in return for receiving a lump sum payment now. • Securitization reduces or eliminates risk (of potential reduction of future MSA payments), and creates a pool of funds for more immediate use by the recipient of the funds.

4. Tobacco Master Settlement Agreement (MSA) • Eighteen states have already securitized all or parts of their MSA revenues • Alabama, Alaska, Arkansas, California, Iowa, Louisiana, Maryland, Michigan, Missouri, New Jersey, North Dakota, Oregon, Rhode Island, South Carolina, South Dakota, Virginia, Washington, Wisconsin, and the District of Columbia and Puerto Rico. New York City and some New York counties have also securitized some of their shares of New York State's tobacco settlement payments, as have some California counties. • A number of states have considered securitization and rejected it, including Illinois, Nevada, Vermont, West Virginia, and Colorado (twice). • (Source: Tobacco Public Policy Center at Capital University Law School)

5. Securitization Uses • Most common uses of securitized MSA revenues • Capital projects and debt service (44%) • Budget relief (25%) • Special programs (19%) • Endowments (12%) • (Source: Ohio Office of Budget and Management)

6. THE OHIO PLAN • Securitization is expected to generate a lump-sum of $5.04 billion for Ohio • Use of funds: • $2.2 billion to the Ohio School Facilities Commission (OSFC) in place of planned FY 2008 – 2025 tobacco distributions for K-12 facilities. • $1.92 billion to OSFC in place of planned FY 2008 -2010 GRF-backed bonds • $0.92 billion to Higher Education facilities in place of planned FY 2008 – FY 2010 GRF-backed bonds

7. THE OHIO PLAN • Advantages of using securitized funds instead of GRF bond-backed funds • Reduces GRF debt service by $257 million per year for twenty years • State to use the debt service savings for property tax relief for seniors and disabled home owners (Homestead Exemption) • Improves the state’s credit rating. • Relieves debt capacity issues. • Permits acceleration of OSFC planned capital projects for primary and secondary education.

8. THE OHIO PLAN • Advantages for higher education • Establishes an almost guaranteed stream of capital funding for higher education in FY 2009 and FY 2010. • Permits improved accelerated capital planning for the biennium.

9. Securitization: Final Observations • Securitization well-established by FY 2007 – little fundamental uncertainty about legality and procedures. • Ohio advance funded capital investments that had been planned over a longer time period.