A landmark 1998 settlement with Big Tobacco awarded states billions of dollars a year to offset health-care costs of smoking. In many cases, the income became a debt trap when state and local governments traded it years in advance for upfront cash.
Kym Arnone handled more than $40 billion in deals in which states and other governments borrowed against income from the landmark tobacco legal settlement of 1998.
Facing a giant budget deficit, Louisiana Gov. Bobby Jindal plans to borrow $750 million against future income from a landmark legal settlement with cigarette makers.
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.
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.
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.