| 3/23/2006 8:53:00 AM | Email this article • Print this article | Time to end ties with Big Tobacco
Guest Opinion
by State Treasurer Mark Hillman
When Colorado and 45 other states settled a lawsuit with the four largest cigarette manufacturers in 1998, many people believed the tobacco companies were finally paying the price for their ill-gotten gains.
What hardly anyone noticed was that the master settlement agreement really amounted to a protection racket between Big Tobacco and state governments.
Participating states agreed to adopt model legislation that obligated them to protect Big Tobacco’s market share against competition from small cigarette makers and others that didn’t exist when the deal was struck.
In exchange, the 46 states were promised $206 billion in “protection” money through 2025. Colorado’s share was initially estimated at almost $2.9 billion – although actual payments have consistently been less than originally estimated.
Payments fluctuate each year to reflect increasing or decreasing cigarette sales – putting states like Colorado in the awkward position of telling citizens to stop smoking while relying on smokers to pay for more than a dozen government programs.
Now, as cigarette consumption falls to an historic low and “non-participating manufacturers” account for 8 percent of U.S. cigarette sales – up from 0.4 percent before the settlement – Big Tobacco is crying foul.
Original signatories to the master settlement agreement were scheduled to pay $8 billion to the states this year, but that number was reduced by $1.4 billion because of inflation, declining sales volume and other factors.
Now, two participants – Philip Morris and R.J. Reynolds – want an additional reduction of $1.1 billion.
Colorado should receive $90 million this year, but the proposed reduction could subtract another $15 million. Worse still, resolving this dispute likely means more litigation as each state attempts to prove it has “diligently enforced” the agreement.
Now is the time for the Colorado legislature to end our partnership with Big Tobacco by voting to securitize our state’s share of master settlement agreement payments for the next 30 or 40 years.
It’s the right thing to do for several reasons.
Colorado government should no longer send the mixed message to citizens that “We want you to stop smoking” because it’s terrible for your health, but, “We need you to keep smoking” to pay for government programs. From a financial perspective, securitization is a win-win proposition.
Tobacco settlement bonds are structured using an over-collateralized cash flow. That’s because potential investors aren’t willing to bet cigarette manufacturers will continue to make their payments as scheduled, so the value of the bonds is discounted to compensate for that risk.
However, if consumers keep puffing away and cigarette manufacturers do make their payments, Colorado could pay off those 40-year bonds in just over 20 years. State officials then could re-evaluate the prospects for future master settlement agreement payments and decide whether to securitize again or place bets on yearly checks from Big Tobacco.
Conversely, if cigarette consumption continues to decline – or if regulation, litigation and competition erode tobacco profits – securitization insulates Colorado government from any adverse financial impact. That is, if Big Tobacco goes belly up, Colorado government would have no cause for remorse.
Finally, the market for tobacco settlement bonds is as strong now as it’s ever been. As recently as last spring, the glut of states selling tobacco bonds, plus the uncertainty of legal threats facing cigarette makers, reduced the value of Colorado’s bonds to just over $800 million.
Today, financial advisors suggest securitizing Colorado’s master settlement agreement payments could bring in $1.3 billion.
So long as lawmakers don’t indulge in a one-time spending spree, securitization proceeds could be used for a variety of wise investments – establishing a constitutional reserve fund, providing school construction grants for poor school districts and investing in transportation projects.
If we don’t securitize now, while the market is near its peak, our fiscal fate will remain linked to that of Big Tobacco. That’s not in the best interest of Colorado taxpayers.
Mark Hillman is Colorado State Treasurer. His e-mail address is mail@markhillman.com.
|
Article Comment Submission Form
|
