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.
