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House magicians at work with Medicaid budget
By Andy Brack
SC Statehouse Report



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MARCH 16, 2003 - - Any successful magician will tell you the key to pulling off a magic trick is to divert someone's attention so you can do something else by sleight of hand.

That's what House leaders appear to have done this week with funding for Medicaid, the program that provides health care services to the elderly, poor and lots of the state's children.

Faced with a shortfall of $52 million to meet state's Medicaid needs, the House this week announced a last-minute plan to refinance tobacco bonds to generate about $45 million. House Speaker David Wilkins said the plan would take "care of the most needy among us …without placing that burden on the backs of taxpayers."

There wasn't a word about how the House plan actually worked. State Treasurer Grady Patterson, who has managed the tobacco bond securitization process, wasn't consulted. House staff members reportedly were asked to sign confidentiality agreements about details and weren't answering questions. An editorial writer called it "smoke and mirrors."

What does it all mean? It means House leaders wanted to do anything possible to avoid raising South Carolina's 7-cent per pack cigarette tax - - even though doctors, business leaders and consumers say increasing it to the national average (60 cents per pack) would generate $180 million.

Essentially, the House punted the tough decision on how to fund Medicaid to the Senate, which will start budget deliberations in April. By failing to outline details of the refinancing package during the budget debate, the House offered a gimmick to get over a hump and accomplish a political goal - - to balance the state budget without raising taxes.

Interestingly, in the end, it balanced its budget proposal by raising more than $37 million in fees by increasing the fee on traffic fines, doubling the state driver's license fee, boosting alcohol license fees, allowing state parks to charge more to visitors, and more.

To be fair, the House pledged to make more details of its tobacco bond refinancing available during a bill on Medicaid reform, which could come up on the floor in the next couple of weeks.

But while refinancing could provide short-term cash to the state, it is precarious. Why? First, tobacco bonds are inherently risky, according to state financial experts. If any of the tobacco companies go belly up in the next 20 years, for example, projected revenue streams from bonds could go sour.

Second, while refinancing may generate bigger payments on the front end, it could cause the overall costs of the bond package to increase. Third, some may argue refinancing tobacco bonds isn't fiscally smart because it represents a raid on restricted funds that aren't supposed to be touched.

While details of the now-secret House plan aren't public, a document by financial powerhouse Merrill Lynch outlines how the state could generate $44.8 million in the first year. An interesting - - and as yet undiscussed - - part of the deal is the fee to the bond issuer. It's estimated to be at least $2,883,836.

In the end, refinancing tobacco bonds might make sense, just as refinancing your house due to lower interest rates makes sense. But it smells fishy for House lawmakers to pass a $5.1 billion state budget without full details and scrutiny about the deal that got them out of a political hole.


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