Tobacco in the News
Securitization of Nevada’s Tobacco Settlement Payments
Recently, there has been some discussion at the state executive level about securitizing Nevada’s tobacco Master Settlement Agreement (MSA) payments in order to shore up some of the state budget shortfall.
This proposal was initially introduced prior to the Special Session in June 2008 by Lt. Governor Brian Krolicki and reinforced as a viable option by Governor Jim Gibbons the day before the session began. However, the Legislature disagreed with the Governor and thus did not propose securitization in the Special Session, further indicating that they would be unlikely to support the proposal during the 2009 Legislative Session.
However, the Governor has signaled his intent to keep this proposal on the table and Lt. Governor Brian Krolicki has introduced the measure as a Bill Draft Request (BDR) to be heard during the 2009 legislative session, which ran from February - June 2009.
Although the Lt. Governor’s proposal never met the legislative deadline to become a bill, the Governor again proposed securitization as an option near the end of the session.
However, in the end, the Legislature declined to move the proposal forward, and the MSA payments will continue to come to the state as scheduled.
What is the Master Settlement Agreement?
In 1998, the Attorneys General of 46 states signed the Master Settlement Agreement (MSA) with the four largest tobacco companies in the United States to settle individual state suits to recover billions of dollars in costs associated with treating smoking-related illnesses. Four states - Florida, Minnesota, Mississippi and Texas - settled their tobacco cases separately from the MSA states.
The MSA created a broad array of restrictions on the advertising, marketing and promotion of cigarettes. For example, it prohibited the targeting of youth and the use of cartoons in cigarette advertising. It also includes prohibitions on outdoor and public transit facility advertising, the use of cigarette brand names on merchandise, as well as a host of other restrictions.
The central purpose of the MSA was to reduce smoking, and particularly youth smoking in the United States.
Since 1997, when the first state settlement was announced, cigarette sales in the United States have fallen by more than 21 percent. Cigarette sales in 2005 declined by 4.2 percent from 2004 levels, marking the largest one-year percentage decrease in cigarette sales since 1999.
The 378 billion cigarettes sold in the United States in 2005 represented the lowest number of cigarettes sold in the United States since 1951, when the U.S. population was less than half of what it was in 2005 (NAAG, 2008).
While the MSA was a step in the right direction, the agreement itself says nothing about how that money should be spent – and many states are failing to invest adequate amounts of their settlement funding to prevent and reduce tobacco use among kids and adults.
Nevada has received at least $35 million a year since 2000 (and as much as $46 million in 2008), and only a small portion, about 10 percent of the total, goes to fund tobacco prevention, control and cessation programs in the state. The rest of the state’s allocation funds the Millennium Scholarship program (about 40 percent) and a host of other health and social service related programs, including Senior Rx and Disability programs.
What does securitization of these funds mean?
Securitization of MSA funds, as proposed by Lt. Governor Brian Krolicki, would mean selling all future payments to the state to investment firms in exchange for a one-time lump-sum payment to the state now. The investment firms would then receive the future payments from the tobacco companies with Nevada no longer receiving any money.
If Nevada would lose money, why would the state consider securitization?
Securitization is an attractive option for a state with a large budget shortfall and in need of an immediate boost of money, like Nevada. Because it provides such a big chunk of money more-or-less immediately, many states have securitized all or part of their settlement funds to shore up budget shortfalls during times of economic downturn.
However, this is only a short-term solution because it doesn’t address any of the state’s underlying budget issues, and it actually worsens the deficit because it eliminates future state revenue for decades to come (CTFK, 2002).
What are the potential consequences of securitization?
One of the biggest consequences of securitizing is the huge financial loss of future settlement payments. In fact, the amount that the state would receive as a one-time payment would be pennies on the dollar to what the state would receive if it continues to receive its scheduled payments for the duration of the agreement.
In many of the states and counties who’ve securitized their settlement funds, the money the state receives is minimal. For example, in Washington State, projections used by proponents of securitization showed that the state would receive, at best, less than 38 cents on the dollars-- with returns of only 25 to 30 cents per dollar more likely, according to the state’s director of financial management (CTFK, 2002).
Even more troubling is what occurs to states that securitize in order to address budget deficits. At least five of the eight states that have done so have had their credit ratings lowered as a result, which forces the state to pay higher interest rates on borrowed money and makes it harder for the state to borrow money or issue other types of bonds to make money. Wisconsin, for example, has had their credit ratings lowered as result of securitization, and now faces increased state costs across the board.
What should be done?
There are more fiscally responsible ways to use Nevada’s settlement payments and to address state budget shortfalls without securitization of MSA funds.
Some states have opted to direct their tobacco settlement payments (or part of them) into a dedicated trust fund, with the interest used to pay for health and social service programs. Nevada already does this with a small portion of the total payments.
Nevada should also continue to invest in programs focused on preventing and reducing tobacco use, which will help drive down future state expenditures and make the state both healthier and fiscally stronger.