Up in smoke.

Byline: The Register-Guard

Once again, Oregon lawmakers are scrambling to fill a shortfall in the state's budget without cutting programs or raising taxes. This time, one of the proposals is to spend the state's share of funds from the settlement of a lawsuit against the tobacco industry.

It's a bad idea, particularly if the money is used to patch a temporary budget hole rather than invested to yield interest that would pay for continuing programs.

Oregon will receive about $90 million a year as a result of the settlement, or an estimated $2.2 billion over the next 25 years. The state could take the money in a lump sum. Oregon would do this by selling bonds backed by future tobacco settlement income.

This is called "securitization." Eight states, the District of Columbia, Puerto Rico and several counties have securitized their tobacco settlement income.

The National Association of Governors and several states have analyzed securitization, and they found several benefits. It provides a one-time infusion of funds that can be useful for endowing a trust fund or making a large capital investment. Securitization insulates states from the risk that payments from the settlement will decline over time. And because future payments depend to some extent on tobacco sales, securitization reduces states' interest in tobacco consumption.

All of these are important benefits. None of them applies in Oregon's case.

The one-time infusion of funds that Oregon would obtain from securitization would not be invested. Kevin Mannix, the Republican candidate for governor, proposes balancing the budget with $400 million in securitized tobacco settlement money. Other proposals are along the same lines. The funds would be spent in the current biennium, and would be gone by next July. After that, neither the regular settlement payments nor the income from a trust fund endowed with funds from securitization would be available for any public purpose.

Nor does securitization offer protection against the risk that future settlement payments may decline. To the extent that such protection is available, the state would pay for it by accepting a steeply discounted up-front payment. On average, states have received 38 cents for ever dollar of settlement revenue. The trend is toward even steeper discounts - for $1 billion in future settlement income, Oregon might expect only $250 million to $300 million.

What's more, bond underwriters are demanding that states shoulder an increasing part of the risk by securitizing no more than 75 percent of their settlement income. Bondholders reserve the right to claim the state's remaining share if settlement payments decline below a certain threshold. Such arrangements leave states more exposed than ever to the risk of declining payments, and increases their interest in keeping tobacco sales at a level high enough to keep the payments flowing.

The Tobacco Free Coalition of Oregon opposes securitization, mainly because it believes part of the settlement funds should fund smoking prevention and cessation programs. Clearly, spending the money all at once would deprive the state of one source of support for such programs.

But the flaw is deeper than that. The tobacco settlement provides Oregon with a substantial and relatively permanent source of funds; the state will always be able to find good uses for the money. Cashing the future tobacco checks for pennies on the dollar and spending the proceeds would cheat future generations of Oregonians of their share of the money.

Big lottery jackpots are paid in yearly installments over 20 years, or in a single payment discounted to net present value. Either can be a responsible choice - unless the winner opts to take all the money up front and spend it right away. That's what Oregon would be doing if it used securitized tobacco funds to balance its current budget.