This reliance of state fiscal solvency on tobacco sales is illustrated beautifully by a San Francisco Chronicle article from last Thursday, which reports that a number of states may default on their tobacco bonds if cigarette consumption continues to decline. At very least, these states may need to draw on reserve funds, which pushes them into a tighter budget situation.
According to the article: "The declining number of U.S. smokers is proving hazardous to the health of municipal bonds backed by payments from cigarette companies under a 1998 settlement with 46 U.S. states, Moody’s Investors Service said. The rating company projected that almost three-quarters of the $20.4 billion in tobacco bonds it grades will default if cigarette consumption declines 3 percent to 4 percent annually. ... Payments by Altria Group Inc.’s Philip Morris unit, Reynolds American Inc. and Lorillard Inc. to states under the settlement back $101.5 billion of bonds, according to data compiled by Bloomberg. ... Cigarette use fell 9.2 percent in 2009 and 6.4 percent in 2010, according to Janney Montgomery Scott LLC, a Philadelphia- based brokerage. ... Virginia, California and Nassau County, New York, may use reserve funds to pay debt service on three tobacco-bond issues from 2006 and 2007, Mesirow said in May. ... Moody’s projected that 33 percent of the tobacco bonds it rates can’t withstand annual consumption declines of 2 percent to 3 percent, while 41 percent of the debt couldn’t handle declines of 3 percent to 4 percent."
The Rest of the Story
Out of their greed for political and economic gain, the Attorneys General have done a tremendous service for the tobacco companies. They have created a financial partnership between their states and Big Tobacco, by which the fiscal solvency of the states depends on continued high levels of cigarette consumption. They have destroyed the incentive for states to take any action that might substantially reduce cigarette use.
This explains why so few states are running effective tobacco control programs, why so few states are allocating their MSA money to anti-tobacco programs, and why Congress (aiming to protect the states they represent) crafted tobacco legislation that does very little to actually make a dent in cigarette consumption, contrary to what the FDA Commissioner touted in her op-ed last week.
Not only is the Tobacco Act working perfectly, as I reported yesterday, to protect cigarette consumption, but the Master Settlement Agreement is also working - as intended - to protect cigarette sales.
Not only do these state and federal actions protect cigarette sales, but they discourage the promotion of safer alternatives to cigarettes, such as electronic cigarettes, which could potentially put a dent in cigarette sales. Thus, it is perhaps no surprise that policy makers have been so reluctant to embrace this potentially life-saving technology.