Municipal Bond Forum
How some tobacco bonds call upon California’s enhancement
Q
In your article, “MSA Clause Impacts State Tobacco Payments“, regarding Golden State Tobacco Securitization Corp. Series 2005 bonds, you state, “These bonds, however, are also backed by an appropriation pledge of the state of California.” Could you elaborate?
A
James A. Klotz responds:
Here is a summary of the process by which the 2005A Golden State Tobacco bonds can call upon the state of California’s enhancement:
Each year, during the annual appropriation process, the governor includes a line in his budget request equal to the debt service coming due in the following fiscal year.
If there’s a deficiency in revenues collected through the Master Settlement Agreement, the director of finance will draw the necessary amount from the state treasury to make up the shortfall.
This enhancement is subject to annual appropriation, the same as any other appropriated item, and requires the legislature to act each year. As such, it is not insurance nor is it a guarantee. However, California takes its appropriation pledges very seriously and a failure to honor this pledge would be very damaging to the state’s credit standing.
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