The latest Securities and Exchange Commission examination of credit rating firms found problems similar to those documented in ProPublica's investigation of tobacco bonds.
When New Jersey decided to bail out some of its tobacco bonds, the state gave up $400 million in future revenues to pocket $92 million immediately, an arrangement that also helped one savvy investor cash in on a big bet.
Wall Street pressed S&P, Moody’s and Fitch to assign more favorable credit ratings to their deals and bragged that the raters complied. Now many of the bonds are headed for default.
Chautauqua County, N.Y. helped a bondholder get nearly $6 million for bottom-of-the-barrel debt – the bondholder let the county keep $600,000.
In Niagara County, N.Y., leaders took on 40-year debt to pay for short-term stuff, a case study in the perverse incentives tobacco bonds create.
In 1999, New York counties had a choice to make. They had just been promised annual payments from tobacco companies as part of a national settlement to reimburse them for smoking-related health care costs. Like winning the lottery, they could either get small payments indefinitely -- or take a lump sum immediately by entering into "securitization" deals. Counties knew that these deals would mean less money in the long run, but bankers said they offered protection in case the payments shrank or went away. Now the cost is clear: millions pledged to investors that counties could have kept for themselves.
A refinance of Niagara County’s tobacco bonds was good news — but for investors, not taxpayers.
Users can see how interest rates and declining cigarette sales affect the bottom line for counties that borrowed against income from the landmark tobacco settlement.
An updated tally by ProPublica shows that tobacco bondholders are due $2.6 billion of the $6 billion in this year’s payouts to state and local governments from Big Tobacco.
States and localities got cash up front but may end up paying back a lot more than they expected.
Even when taxpayers aren't explicitly on the hook, tobacco bonds can cost states and local governments money. Here's how.
After a bruising legal fight, tobacco companies agreed in 1998 to compensate 46 states, the District of Columbia and five U.S. territories for the health-related costs of smoking. Wall Street helped turn their annual payments into upfront cash by selling bonds to investors. Some of the deals included a form of high-risk debt, capital appreciation bonds, which obligated governments to pay out billions of their tobacco income in the future.
Politicians wanted upfront cash from a legal victory over Big Tobacco, and bankers happily obliged. The price? A handful of states promised to repay $64 billion on just $3 billion advanced.