Tuesday, May 08, 2012

Decrease in smoking puts squeeze on governments that borrowed against tobacco settlement money

Dozens of states, counties and cities issued municipal bonds to get up-front billions from states' 1998 tobacco settlement with tobacco companies, but many of those governments are in the "earliest stages of default" because people are smoking less and cigarette makers are making less money, Mary Williams Walsh of The New York Times reports. Also, $8 billion in settlement payments are in dispute.

At least three states and one county -- California, Ohio, Virginia and New York's Nassau County, on Long Island -- have been forced to use "special tobacco-bond reserves" to pay bondholders, Walsh reports. The squeeze has a broad impact on the tobacco-growing states of Kentucky, North Carolina and Virginia, which allocated up to half of their settlement money for developing their rural economies.

The $55 billion in outstanding tobacco bonds could creates the potential for "full-blown defaults more than a decade from now," an analyst told Walsh. The pending legal battles over settlement money could create bigger problems sooner, she reports.

The settlement payments "were supposed to run in perpetuity," Walsh reports, but "the prospect of eventual defaults among the hundreds of outstanding bonds underscores the risks inherent in forecasting tobacco payments decades down the road. In the rush to market, many overlooked a basic conflict: the states were banking on a certain level of payouts, even as they adopted anti-smoking measures that would reduce those amounts," she reports. (Read more)

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