Falling tobacco sales could hurt state programs
Declining profits at the nationâ€™s four big tobacco
companies could spell trouble for Nevadaâ€™s health
programs and Millennium Scholarship recipients.
The master settlement agreement signed by the tobacco companies, Nevada and 45 other states would send $1.2 billion to Nevada bank accounts over the next 25 years. But with tobacco use in this country rapidly declining, Nevada Treasurer Brian Krolicki is concerned that money may not materialize.
In fact, the first tobacco settlement payment the
state received April 15, 2000, was only $21.4 million. Thatâ€™s $2.63 million or 11 percent below what the settlement stated. And future payments could continue to decline since the money is based on tobacco company profits. Nationally, U.S. cigarette shipments decreased 9 percent last year.
â€œWe have a $1.2 billion asset but that money is
subject to many risks,â€ Krolicki said.
Many state programs, including the scholarship fund, a prescription drug program for seniors and a grant fund for health programs across the state are funded from tobacco settlement money. This past year, programs to benefit from the fund were rural health care, youth smoking prevention efforts and health care for seniors.
Those programs could be in jeopardy or require money from the stateâ€™s general fund if the tobacco
settlement money dries up, Krolicki said. He wants to transfer that risk from citizens to investors.
Krolickiâ€™s plan, called tobacco securitization, would
sell the stateâ€™s asset now, allowing private investors
to purchase bonds. Those bonds would be paid off over the years by the tobacco settlement money should it come in. If it doesnâ€™t, investors would lose, not Nevada. Krolicki would take the bond sale proceeds, about $500 million, and invest it to generate the $1.2 billion.
â€œI would rather be in the business of managing money than managing the risks associated with the tobacco industry,â€ Krolicki said.
Krolickiâ€™s plan is outlined in Senate Bill 488. That
measure was approved by the Senate Government Affairs Committee last week and now goes to the floor for a vote of the full body. If approved it goes the Assembly for consideration.
While the Governorâ€™s Fundamental Review Committee supports Krolickiâ€™s plan, some lawmakers are not convinced. Assembly Minority Leader Barbara Buckley, D-Las Vegas, is a member of the task force that awards the grant money. She said lawmakers rejected a similar plan proposed by Krolicki during the 1999 session because it meant a significant cut in revenue.
â€œThese numbers sound much better than what I heard last session,â€ Buckley said. â€œBut my initial thought last time was that 55 percent of the money was a lot to lose.â€
Other lawmakers say the plan makes sense.
â€œIf everybody stops smoking cigarettes tomorrow, these companies go broke,â€ said Sen. Bill Oâ€™Donnell, R-Las Vegas. â€œItâ€™s a risk.â€
Krolicki said in addition to securing the stateâ€™s
investment, SB 488 would remove lawmakers from the moral dilemma of having to depend on tobacco money while at the same time trying to reduce smoking in the state.
Lawsuits by individuals against the tobacco companies also could put the stateâ€™s money at risk. A Florida jury last year awarded $146 billion to plaintiffs. Though that verdict will likely be reduced, it points to the fact that tobacco companies continue to be under siege.
Attorney General Frankie Sue Del Papa has said itâ€™s
also possible the tobacco companies will be forced or could elect to file for bankruptcy. Though the
association of attorneys general involved in the
national settlement are working to protect state
interests in the event of a bankruptcy filing, given
the number of creditors it could be difficult.
The national settlement includes the countryâ€™s four
largest tobacco companies, Philip Morris Inc., R.J.
Reynolds Tobacco Co., Brown & Williamson Tobacco Co.,
and Lorillard Tobacco Co.
Alaska is among the states that have approved tobacco
securitization plans. Florida, Virginia and Louisiana
are considering similar plans.
Krolicki said it wouldnâ€™t be hard to find bond buyers.
Individuals, insurance companies and trust departments
are among the types of investors expected to be
willing to take on the risk of reduced tobacco
payments in exchange for a good interest rate. Other
states havenâ€™t had trouble finding buyers.
â€œBut if we wait too long, other states could do this
and the market might dry up,â€ he said.