NCPA - National Center for Policy Analysis

Securitization Puts Tobacco Settlement Money at Risk

March 11, 2003

Faced with unprecedented budget gaps, many states have sold or are thinking about selling years of future tobacco payments to pay this year's bills. Wisconsin, where four in 10 high school seniors smoke, cashed in its "chance of a lifetime," selling off 25 years of tobacco payments ($5.9 billion) for $1.3 billion upfront to balance a single year's budget.

It's called securitization: By issuing bonds backed by future tobacco settlement payments, a state can effectively act like the lottery winner who chooses to take a lesser, lump sum now instead of an annuity spread over 20 years.

Although Wisconsin is the only state to sell the rights to its entire tobacco settlement, an additional half-dozen states have borrowed against a portion to help close budget gaps. Among them:

  • California, traditionally a leader in the fight against smoking, is selling about 10 years' worth of settlement payments to raise $4.5 billion.
  • New Jersey, where then-governor Christie Whitman said in 1998 that "every penny" from the settlement should be put in trust for public health, instead used it to raise $1.1 billion last year for its operating budget -- it could tap up to $2 billion more this year.
  • Washington sold more than a quarter of its tobacco settlement last year to raise $450 million.

At least eight other states are thinking about using their future tobacco payments to balance budgets.

In Wisconsin, however, tobacco securitization is no longer an issue; despite the protests of then-attorney general James Doyle, the money's gone. As one legislator put it, "We reached into the cookie jar."

Source: Rick Hampson, "States squander chance to fight smoking," USA Today, March 11, 2003.

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