TOBACCO FUNDS GOING WHERE
THEY SHOULD BE
Almost $6 billion went to states last year as part of the tobacco
settlement agreement. And what are they doing with the cash?
Just what they're supposed to be doing, which is, ultimately, good
news for tobacco bondholders.
According to a Government Accountability Office (GAO) study cited
by Bloomberg, the 46 states that were part of the agreement received
$5.8 billion from tobacco companies in 2005. The largest portion
of the money (32%) was used for health-related programs, while the
next largest share (24%) went to fund debt service on securitized
proceeds.
After the stock market nose dived in 2001 and 2002 and tax revenues
declined, states also used a chunk of the funds to plug budget shortfalls.
After steadily increasing the previous three years, the portion
of funds used by all states to cover deficits last year fell to
4 percent from 44 percent in 2004.
In 2006, states are expected to receive about $5.4 billion in tobacco
proceeds. They expect health programs to account for the same proportion
of funds, while debt service will likely increase to 29%, according
to the GAO. Most of the rest is expected to be devoted to general
funds.
Though unpopular among professional prognosticators, individual
investors flocked to the tax-free bonds backed by states' share
of the settlement. In fact, since 2000, 15 states have issued tobacco-backed
bonds and raised about $16 billion.
The settlement agreement reached in 1998 provided that the tobacco
companies make annual payments to the states in perpetuity as reimbursement
for past tobacco-related health care costs. And according to the
GAO, that is indeed where most of the money is going, despite some
predictions to the contrary.
Unfounded fears
As we remarked in a commentary more than three years ago ("Strange
Bedfellows, Good Allies"), the companies and their once-fierce
critics have strong common interests. The fact that states are using
the funds for their originally intended purpose is good for all
taxpayers, fortifies the link between the companies and states and,
ultimately, bodes well for tobacco bondholders.
As a public official once remarked, efforts to force tobacco companies
into bankruptcy wouldn't cut down on cigarette smoking. At this
point, it would only choke state governments.
05/23/06
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