Gov. Jeb Bush next week will propose selling roughly half of the revenue from Florida's estimated $17.4 billion tobacco settlement to investors and investing the proceeds in an endowment fund in an effort to assure a more predictable long-term payoff.

The plan is prompted by a shortfall in last year's projected payments by tobacco companies and fear that it's just the start of disappointing returns because of marketplace changes or litigation that could impair the industry's finances. The state learned last month that its 1999 proceeds, once expected to be $712.1 million, would tally only $640.9 million because U.S. tobacco companies shipped fewer U.S.-made cigarettes for domestic consumption than expected. Under the settlement, the industry's payments are computed based on these domestic sales. Legislative leaders are expected this month to begin discussing how to cope with the $71.2 million shortfall -- $29.5 million of which was scheduled to be spent in 1999-2000. Lawmakers may have to make cuts in programs the funds were earmarked for, such as in-home care for the elderly and developmental services for the disabled. To avoid such problems in the future, the governor has decided to include a plan in his proposed 2000-2001 budget that requires the state to sell $8.3 billion of the projected settlement to investors for a fraction of its value. Under the so-called securitizing strategy, investors would collect settlement payments from the tobacco companies for 30 years, but would assume the risk that the payments would actually be made. Meanwhile, the state would plow investors' money into a diversified portfolio of stocks and bonds that the governor's office expects to yield more stable revenue. "The value of knowing we have the money to serve vulnerable populations is more important to us than to gamble on the continued viability of tobacco companies and strong cigarette sales," says Donna Arduin, the governor's budget and policy director. Budget-office staff say consultants have told them that in the current invest ment market, investors would pay about $2.4 billion for the deal. The governor proposes investing that cash in the Lawton Chiles Tobacco Endowment for Children and Elders. By law, income from the endowment is earmarked for social and health services. The deposit would be on top of the $1.7 billion of tobacco-settlement money lawmakers already pledged to put in the endowment, named for the late governor. Gov. Chiles launched Florida's lawsuit against the tobacco industry, seeking compensation for smokers' state-paid medical care, and winning a settlement in 1997. To be sure, Gov. Bush's plan has its own risks. If analysts' original projections are right and 1999 was just an aberration, the annual income from the new endowment deposit -- an estimated $120 million -- could wind up as much as $100 million less than the state would have received under the original settlement payments. But for 1999, those projections were off nationwide, prompting many states to reassess their expectations for future payments. "The problem is we no longer believe the estimates" of how much tobacco revenue the state will get, says Ms. Arduin. Both anti-smoking campaigns and higher cigarette prices initiated by tobacco companies to cover settlement costs are believed to have contributed to the drop. But other causes are suspected as well. Some industry watchers say high cigarette prices have prompted an infusion of illegal cigarettes, foreign-manufactured products and "gray-market" cigarettes -- the label given to cheaper exported U.S.-made cigarettes that are bought by wholesalers and then returned for U.S. distribution. Both New York City and Nassau County, N.Y. -- recipients of tobacco settlements because of New York state's settlement -- have sold some of their awards. "For fiduciary reasons, I can see a number of states deciding to do this," says David Adelman, a tobacco-industry analyst for Morgan Stanley Dean Witter & Co. of New York. "I don't think the industry is going anywhere, but it's just good, basic, sound conservative judgment not to tie this windfall to a single source." The governor's staff is also concerned how the tobacco industry will fare under pending lawsuits, including a landmark class-action case in South Florida. The jury ruled last year in Engle vs. R.J. Reynolds Tobacco Co. that tobacco companies are liable for ailments caused by smoking. Damages haven't been set but are expected to eclipse $100 billion, though that could be lowered on appeal. Analysts warn that if such decisions multiply, they could hamper the industry's ability to make the payments to the states, or in the extreme, even bankrupt the industry. Other industry watchers believe the current settlements could prompt U.S. companies to turn to foreign cigarette production to reduce their liability. Ms. Arduin and her staff have compiled a half-dozen scenarios, based on assumptions of what could happen to Florida's tobacco-settlement income with or without securitizing. The scenarios range from an annual average 1.4% decrease in domestic sales between manufacturers and wholesalers -- the state's original projection for 2001-31 -- to tobacco companies going bankrupt in 10 or 15 years. The scenarios indicate that if U.S. manufacturers' domestic shipments decline at least 8.5%, then the original settlement would produce no more income than Gov. Bush's plan. (In 1999, the decline was about 10%.) But if the decline is less, the original settlement-payment schedule would be more lucrative over the 30-year period. If tobacco companies go bankrupt, of course, there would be no settlement payments, while the securitizing plan would provide income in perpetuity. And under every scenario, the governor's office says, the securitizing plan would improve the state's assets because of the endowment, which would grow to $10 billion over 30 years based on a projected 7.8% annual average investment return. Gov. Bush's plan already has attracted supporters. "I'm getting very concerned about the tobacco industry," says Sen. Jim Horne, chairman of the Senate Fiscal Resource Committee and an Orange Park Republican. He is one of the few lawmakers the governor's office has briefed on the plan. "Who says [tobacco companies] aren't just going to start manufacturing all their cigarettes out of the country? Then we'd have nothing." But the governor will have to convince many more lawmakers, including some who may rebel against earmarking the money for the endowment or who don't like that the plan could mean less money for them to spend each year in the short term. Gov. Bush will release his budget, which the Legislature must approve, on Jan. 19, and lawmakers could always decide to tinker with his plans. "Legislators like to have latitude," says House budget chief Ken Pruitt, a Port St. Lucie Republican. "We need as much flexibility as we can to deal with whatever problems may need to be addressed in any given time." Mr. Pruitt has been briefed on the plan, but says he needs more information before deciding if he likes it. Senate Minority Leader Buddy Dyer, an Orlando Democrat, says he's concerned that the Republican-controlled Legislature might sell off the settlement payments to finance tax cuts rather than making a long-term investment in the endowment. "There's a lot they'd have to convince me of before I'd sign on," Mr. Dyer says. "I want to make sure they won't give away future generations' money."

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