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Tobacco Bonds Issued by Public Authorities – Not A Sure Bet

May 8, 2012

The promise of perpetual money from tobacco companies may not be a sure bet. Recall the Tobacco Master Settlement Agreement entered into in 1998 between the four largest tobacco companies and 46 state attorney generals? The states brought lawsuits to capture the costs of the increased medical services necessary to address tobacco related ailments.  The tobacco companies settled and agreed to pay annual payments to the states (estimated in the aggregate to exceed 206 billion dollars). The money ostensibly was to be used for anti-smoking and health related initiatives. Faced with a challenging economy and reduced revenue, New York and many other states authorized counties and other political subdivisions to create public authorities or special entities to issue bonds backed by the promised tobacco company payments. In New York State, municipally-based tobacco public authorities were the preferred mechanism.  Despite the intended purpose, the bond proceeds nation-wide were typically used as revenue for the general fund to address budget gaps. The New York Times and Wall Street Journal now report that reduced payments by the tobacco companies have placed an increasing number of these tobacco authority bonds in distress, including Nassau County. Tobacco companies assert that reduced payments are, among other reasons, justified because of the decreasing number of smokers. Will states step in to forestall default by the tobacco authorities? Will the debt be renegotiated? These may be among the more significant municipal bond issues that need be addressed in the next few years.

http://www.nytimes.com/2012/05/04/business/state-bonds-backed-by-tobacco-payments-in-jeopardy-of-default.html?pagewanted=all

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