Tobacco-Backed Security Sales Mulled
LOS ANGELES (AP) -- A growing number of states and local governments are considering plans to issue bonds backed by tobacco settlement money in order to get the money faster and reduce risk that cigarette companies may not be able to pay up.
Los Angeles on Thursday became the 20th entity nationwide to consider such a plan when Mayor Richard Riordan recommended that the city use tobacco settlement money to pay the cost of lawsuits arising from a widening police corruption investigation.
New York City already has adopted a plan to issue $709 million in bonds to support schools. Nassau and Westchester counties in New York also have issued tobacco settlement bonds.
Similar proposals are under consideration in 14 states, Puerto Rico and the District of Columbia.
Officials worry that cigarette companies might escape their obligations through bankruptcy proceedings. Also, tobacco company profits could be cut by future lawsuits or declines in cigarette consumption.
``There's a lot of uncertainty,'' said Mark Drennen, Louisiana's chief financial officer. ``Part of it is nobody knows down the road what's going to happen with consumption. We've seen a huge drop-off already. There's also concern about legal loopholes.''
Similar concerns worry the bond industry. Last November bonds issued by Nassau County failed to get the most favorable rating from Standard and Poor's because of similar concerns.
In Los Angeles, a bond issue would reap at least $91 million and as much as $100 million, about one third of what the city would receive under the tobacco settlement.
Under terms of the settlement reached last year, big tobacco companies must shell out $8 billion per year over the next 25 years to compensate states and local governments for health costs related to smoking-related disease.
Los Angeles' share of the money is estimated at $300 million. The city would sacrifice more than two-thirds of that in exchange for collecting $91 million from investors, who would get a 6.75 percent annual rate of return for 30 years under a proposed deal outlined for the city by Morgan Stanley Dean Witter.
The deal requires City Council approval. If the council endorses the plan, Morgan Stanley and other investment banks would bid for rights to manage the bond issue.
Apart from giving the city a big chunk of cash early, the bond issue would take away risk that tobacco companies may not be able to meet their obligations, said Robert Larkins, a principal at Morgan Stanley.
``What investors are buying is a share in the settlement payments which are driven primarily by domestic cigarette consumption,'' said Larkin. ``The city is shifting a large measure of the risk with that transaction.''
Because the tobacco companies' revenue stream depends on cigarette consumption, officials in several states have expressed concern that declines in smoking could undermine the companies' ability to pay.
The bond plan also raised concern among anti-smoking activists who want the money used for health programs. The California branch of the American Lung Association has recommended that 15 percent of the state's share of tobacco settlement money be used to reduce smoking and 85 percent for general health programs.