(In 9th paragraph, adds dropped surname, description, of
Arkansas deputy attorney-general)
By Lisa Lambert
WASHINGTON, Dec 20 (Reuters) – A recent deal with tobacco
companies will distribute money to 17 states that has been tied
up for years, but the funds may only provide short-term relief
to underfunded tobacco bonds.
Cigarette makers including Philip Morris USA and R.J.
Reynolds Tobacco Co announced this week a settlement
with the states in a long-running dispute over the amount of
payments they are required to make under the 1998 landmark
anti-smoking agreement. On Wednesday, prices for long tobacco
bonds rose following news of the settlement.
The settlement gives states a share of $4 billion in
disputed payments. The manufacturers will receive credits
against future payments.
The 1998 agreement, which involved almost all 50 states,
included a section designed to level the playing field between
companies that signed it and those that did not. It cut the
signing companies’ payments to the states by an amount
equivalent to the market share the companies lost to the firms
that did not sign the agreement.
Those reductions created a long-standing fight, with the
participating companies arguing that their sales are not big
enough to justify payments. They put the sums they dispute into
escrow, keeping states and the District of Columbia and Puerto
Rico from collecting the money.
“The settlement, if approved, will increase the amount of
money that the District receives,” said David Umansky, spokesman
for Washington D.C.’s chief financial officer. “In particular,
the settlement will limit the ability of tobacco companies to
withhold amounts from future payments to the District.”
Georgia will get $56 million in 2013 from the settlement,
said Attorney General Sam Olens, adding that the agreement saved
the state legal costs and ensures continued cash flows in the
future that are now mostly used for health programs.
“We did not securitize any of our tobacco funds. It will not
impact any of our outstanding debts,” said Susan Ridley,
director of Georgia’s Financing and Investment Division.
Arkansas only sold about $5 million bonds, and the $24.2
million it receives in 2013 from the settlement will mostly go
to the state’s public health programs dealing with cigarette
addiction, according to Brad Phelps, the state’s deputy
attorney-general, who helped craft the settlement.
States, counties and cities have sold nearly $40 billion of
bonds backed by the more than $200 billion in payments that U.S.
cigarette makers agreed to make to them over time.
Recently, rating agencies have raised red flags that
declining tobacco consumption could affect the future of those
bonds. The recent settlement will provide certainty and will
free up some cash, but it will likely not wipe out the risk of
defaults on the debt, said Richard Larkin, the senior vice
president of Herbert J. Sims & Co., Inc. who spent most of
Wednesday parsing the settlement.
“I know this is good for tobacco bonds but it’s not like it
completely solved the shortfall problems,” he said, noting the
companies’ credits will essentially mean states do not receive
the total sum they anticipated. “They’re not going to get as
much money as they originally thought but they’re going to get
more money than they were getting.”
“It’s just going to delay the year when they run out of
money and they don’t have enough to cover all their bonds. It’s
a major development, but it’s very complicated,” added Larkin,
who closely monitors tobacco bonds.
California, one of the largest issuers of tobacco bonds,
said the settelement would provide no new net benefit to its
bottom line. The bonds were sold by the Golden State Tobacco
Corporation, which in turn paid the state, according to the
state’s treasury department, and that corporation is entitlted
to any proceeds.
Attorneys general for other major tobacco bond issuers New
Jersey and Virginia did not respond to requests for comment.
According to Standard & Poor’s, Virginia has sold more than $1
billion tobacco bonds, and New Jersey more than $3.5 billion.
In 2011 Ohio, California and Virginia all had to tap
reserves to repay bondholders.
The other states in the settlement – Alabama, Arizona,
Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire,
New Jersey, North Carolina, Tennessee, West Virginia and
Wyoming – also could not be reached for comment. Puerto Rico is
part of the settlement, as well.
In July, Moody’s Investors Service warned that the majority
of tobacco bonds will default if cigarette consumption keeps
falling at a 3 percent to 4 percent pace. The debt, though,
often outperforms the rest of the $3.7 trillion U.S. municipal
bond market.
(Reporting by Lisa Lambert, Additional reporting by Michael
Connor in Miami; editing by Andrew Hay)
