How's That Tobacco Settlement Coming?

(Blogger is broken again as far as linking images but here is a link for this article...)

In 1998 a landmark deal was struck between states and tobacco companies.  The tobacco companies agreed to pay $200 billion dollars (in 1998 dollars) to the states that are part of a "master agreement".

The purpose of this money is ostensibly to reimburse states for the cost of treating smokers.

However, things have worked out somewhat differently...

For one thing the agreement allows the tobacco companies to reduce their payments based on declining market conditions, i.e., the fewer cigarettes people buy the fewer dollars the tobacco companies have to pay.  This seems reasonable considering the purpose of the agreement, among other things, was to reduce the amount of smoking.

The longer the payments run the less value the states will receive because of inflation.

However, municipal greed and stupidity have created some additional difficulties here.

For one thing, many states, rather than take the payment stream from the tobacco companies, opted for securitizing these payments (see the TSA website as an example).  This means that the states sold bonds to investors.  The proceeds of the bond sales were immediate cash in the state's pockets (just think of J. G. Wentworth like you see on TV for a state government).  In return the states agreed to divert future tobacco settlement payments to pay the bond holders over time - at a premium of course.  (More information here.)

But declining tobacco revenue means that the states have less money today because cigarette sales are declining, tax free cigarette sources such as Indian Reservations have eaten into big tobacco sales, and E-cigarettes (see my posts in "Nicotine, Nazi's and Magical Thinking").

So now, as cigarette sales decline, states are faced with potential bond defaults.

The poorest are typically smokers.  And these municipal bonds, based on and sold to investors as investments in future "settlement payments", are merely shackles binding the smokers to investors.  Almost as a kind of slavery or indentured servitude.

According to most cigarette smoking is an addiction - a dirty, nasty one that many have worked decades on - both in terms of smoking as an addiction and in terms of making smoking "evil".  So how can states in good conscience, sell bonds to investors based on the poor continuing to do evil smoke?  Particularly when the poorest citizens pay the bulk of the cost (both in terms of cost and state taxes).

To me this is no different than a state funding brothels or heroin sales with bonds directly.

Greed by states, municipalities and others associated with the settlement seems to trump all forms of ethics - directly profiting from the misfortune (smoking) of others.

And another dirty little state secret is that the proceeds from selling the bonds is more than likely to be used as part of general funds rather than for anything related to smoking.  Certainly all involved would like you to think that settlement is in some way to benefit the health of former smokers - but this is not the case.

Things like cigarette sales for Indian Reservations will now be sucked into the vortex of panic created by the decline in cigarette sales revenue - who cares if the Reservations are sovereign nations with rights?  Damn! The cigarette settlement money is going south and someone needs to pay...

So why not screw the Indians again?

The same for E-cigarettes - something that appears to mitigate most of the issues created by smoking.  No doubt as the black hole of debt expands these too will be pulled in to help fund the difference.

So we can thank the government that what was just a direct health problem faced by the users of a specific product (cigarettes) has now expanded to include not only smokers but also bond holders, investors, state governments, investment companies, the poor, Indian Reservations, and God know who else.

How is this better?

Thanks, government, for making this worse.