Issue link: http://read.dmtmag.com/i/550331
20 tobaccoasia Times, which highlights in its own analysis that, "By the time these bonds come due, the legisla- tors who approved them will be retired or dead." It will be our grandchildren's generation who are held accountable. But how will the debts be paid? No one knows, because there is no plan, and predictions of how much money would be forthcoming from the TMS are going up in smoke. The payments were based on a "per cigarette" percentage of what was sold in each state. But the payments are falling because people are smoking less. When the bond deals were made, forecasters predicted that cigarette sales would fall, but the current annual decline of around 3.5% is almost double that on which the deal was formulated. The states are already receiving less money than expected, and by the time the repayments become due the gap between what was forecast the states would receive and what they have to pay bondholders will be wider still. "The current $64 billion payoff is around 21 times the amount borrowed" Moody's predicted in May 2014 that a possible 80% of the tobacco issues are likely to default. The banks and mutual funds, who in the main own the bonds, are betting on the states not defaulting be- cause of the stigma involved and to avoid souring relationships with investors. This is where the tax- payer comes in. ProPublica spoke to Craig Johnson, associate professor of public finance at Indiana University, who has studied tobacco bonds and CABs. "It's going to cost taxpayers, either directly or indirect- ly," he said. "I don't doubt that at all." Even in the event of a default, bondholders can continue to claim the tobacco installments. And, while the bond deals dictate that repayments must come from the tobacco settlement money, not from tax dollars, with such heavy losses on the deals, tobacco money that could have been spent on government services to the public will not hap- pen. Either way, the taxpayer suffers. Consequently, some states are already trying to lessen the impact by making early repayments on the bonds. These include Rhode Island, which an- nounced in July 2014 that it would buy out $197 million of CABs it sold in 2007. The state could also then refinance older tobacco bonds at better interest rates, using the promise of all its future tobacco settlement payments as collateral. As a result, the mutual fund manager Oppenheimer, of Rochester, New York, is suing to prevent the reis- sue, saying Rhode Island intends to divert around US$20 million from existing bondholders such as themselves. In another example, the New York Times re- ports that "as a result of New Jersey's guarantee of its bonds, with its implications for the future, its credit rating has been downgraded by Wall Street twice this year, from stable to negative." ProPublica predicts that, although early repay- ments will reduce the current $64 billion payoff (around 21 times the amount borrowed), even if all of them are repaid early (which is highly unlikely), the total payoff would still be around five times what was borrowed. The final sting in the tail is that the compen- sation originally agreed by the tobacco companies was intended for research, education, and other measures to fight the health issues surrounding tobacco use. But when the final settlement was drawn up in 1998 it actually contained no provi- sion for that to happen. General Tom Miller, the Iowa Attorney who helped lead the settlement negotiations, said, "That was a mistake." Michael Moore, the Mississippi at- torney general who filed the initial 1998 lawsuit that led to the settlement, went further, calling the diversion of the payments away from their in- tended purpose a "sucker bet". "The people mak- ing the decisions think that this money fell out of heaven," he said. "No. This money was related to a public health battle." As a result, funds that should have gone towards tobacco prevention measures have instead financed projects as various as dockyards in Alaska; a county jail and a golf course sprinkler system in Niagara County, NY; and, in what the New York Times calls "the ultimate irony", the mod- ernization and marketing of tobacco farmers in North Carolina. The Centers for Disease Control and Preven- tion advises that to make an effective difference towards tobacco prevention, US states between them should spend US$3.3 billion a year. What do they actually spend? According to the Campaign for Tobacco Free Kids, just US$481 million. In issuing the CABs the monetary benefits paid by big tobacco have clearly been mismanaged by several states. And ideas for solving the problem are thin on the ground. According to the New York Times, "The only possible solution seems to be direct action by the voters." This scenario would see them "call for and pass a referendum prohib- iting the issue of new tobacco settlement bonds and stopping the restructuring of existing bonds without voter approval." Don't hold your breath on that.