Remember the landmark Big Tobacco settlement in 1998 that awarded state and local governments billions of dollars a year to reimburse them for the health-care costs of smoking? It seemed a boon then, but as Cezary Podkul tells ProPublica Editor in Chief Steve Engelberg in today’s podcast, things haven’t exactly turned out that way.

Podkul’s reporting shows that what many state and local governments did with the money – using bonds to trade away the tobacco income decades into the future in exchange for cash upfront – has meant growing debt: Tobacco bondholders are due an estimated $2.6 billion of the $6 billion in this year’s payouts to state and local governments from Big Tobacco.

Though Podkul ended up compiling and sorting masses of data, his investigation started with a surprisingly obvious revelation from a look at municipal debt: “I just sorted a column of data,” Podkul says, and “basically looked at who’s repaying the most on the debt that they borrowed.”

Those debts are piling up so drastically because many governments reached for capital appreciation bonds, or CABs, a type of high-risk debt that yields slightly more money upfront but requires big balloon payments later.

While taxpayers aren’t legally on the hook to investors in the case of a default, Podkul says, the unpaid debt would continue earning interest and “sucking up more of the tobacco revenue stream, however long it takes.”  

He continues, “The danger is that they’ve given up much more of the tobacco settlement money than they gambled for by looking to use capital appreciation bonds – which, by the way, goes against the very premise of these transactions, which were supposed to be done to transfer risk.”

In Puerto Rico, for instance, a $196 million tobacco bond sale in 2008 saddled it with an eventual $8.6 billion balloon payout due in 2057.

“It seems a little nutty to have a system where politicians are allowed to take essentially a small – relatively small – amount of money today and rack up an $8 billion bill,” Engelberg says. “Why is that even allowed?”

The short answer, Podkul says, is that state laws allow it, and human nature makes it seem like a good idea in times of need.

“If you put yourself in the shoes of the politician – probably going to be out of office then, you don’t have to repay it now – so it’s a big temptation for them for to go ahead and issue those bonds and take the money upfront and not really think 40 or 50 years into the future.”

Hear the full podcast on iTunes, SoundCloud and Stitcher, or read Podkul’s reporting on tobacco bonds: