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RI’s Tobacco Settlement Refinance is Now Toxic Debt


Very interesting piece from GOLOCALProv News. ZERO dollars devoted to tobacco cessation & prevention, and now RI faces $2.8 billion in debt on capital appreciation tobacco bonds due in 2052. Tobacco Free RI weighs in on the latest development in this shameful saga…





RI’s Tobacco Settlement Refinance is Now Toxic Debt

Tuesday, August 12, 2014

Kate Nagle, GoLocal Contributor

Rhode Island's effort to balance the state budget in 2002 and 2007 from tobacco settlement money may be blowing up into toxic debt to the state.

In a report issued by ProPublica -- "How Wall Street Tobacco Deals Left States With Billions in Toxic Debt" -- Rhode Island is now facing $2.8 billion in debt on capital appreciation tobacco bonds due in 2052, a revelation that comes nearly sixteen years following the landmark United States tobacco settlement intended to combat the adverse impacts of smoking.

Rhode Island recently announced a plan to buy out some holders of $197 million of the capital appreciation bonds (CABs) it sold in 2007, which would take $700 million off the $2.8 billion and allow for the refinancing of older tobacco bonds, but Oppenheimer is suing to stop the deal, as reported in Bloomberg and multiple news outlets on August 5.

Moreover, of the $51 million in settlement money Rhode Island received in 2014 (100% of which is pledged to repay the bonds), the state spent less than 1% of that amount on smoking prevention programs, according to the same ProPublica report.

"We're investing just $388,000 in the state smoking prevention program in 2014.  The CDC recommended we spend $15 million," said Karina Holyoak Wood, Director of Tobacco Free Rhode Island.  "Smoking costs Rhode Island close to $870 million in economic costs each year, and every year 1,600 Rhode islanders die from tobacco use, and thousands more suffer expensive and debilitating illnesses."

"We had that money," Holyoak Wood of the landmark tobacco settlement. "I would say it's shameful that the General Assembly and the Governors back then plugged deficits as one time fixes -- now there are even greater consequences than we realized."

Margaret Kane, who was with the Rhode Island chapter of the American Lung Association at the time of the settlement and opposed the state tobacco bonds, and is now with Operation Clean Government, said she was shocked at the level of the state's refinanced debt.

"I would have though of something like that could happen, but not to this extent," said Kane. "Holy crap."

States' New Realities

Cezary Podkul, author of Pro-Publica's state-by-state report, shows that a number of other states find themselves in the same predicament as Rhode Island, having utilized capital appreciation bonds -- "high-risk debt that squeezed out a few extra dollars for the governments but promised massive balloon payments, some in the billions, down the road."

"They amount to only a $3 billion sliver of the approximately $36 billion in tobacco bonds outstanding, according to a review of bond documents and Thomson Reuters data. But the nine states, three territories, District of Columbia and several counties that issued them have promised a whopping $64 billion to pay them off," writes Podkul.

"Just as mortgage lenders bet that home prices would keep rising, the tobacco deals relied on optimistic predictions of how much Americans would smoke," Podkul continued.  "Forecasters rightly saw that cigarette sales would continue to decline, but now the yearly drop — about 3 to 3.5 percent — is nearly double what was cooked into the deals."

URI Distinguished Professor of Business Edward Mazze offered a historical perspective of how Rhode Island came to this juncture.

"Rhode Island took its share of the tobacco settlement upfront in cash to balance the state's budget. Capital Appreciation Bonds (also known as tobacco bonds in this situation) were then issued by the state to private investors so that taxpayers would not be affected if and when tobacco money fell short in the future because of a decline in cigarette sales. Investors were promised huge payouts. This is a high-risk debt with a large balloon payment in the future to be repaid with settlement dollars and not tax dollars," said Mazze.  "These bonds are difficult and costly to sell.  One out of every three dollars coming in under the settlement goes to investors. Rhode Island recently presented a plan, which will not happen because of a lawsuit, to buy out some bond holders and refinance older tobacco bonds at better interest rates."

Mazze continued, "Even though most of the payments are not due for many years into the future, if past history is an indication of the future, Rhode Island will have a difficult time filling the gap between what it expects to continue to collect under the settlement and what it owes investors. What ever is collected in the future will have to be used to pay off the bonds. This means less tobacco funds available to support other government programs in the budget. This has a significant impact on balancing future state budgets. An example of poor governmental leadership when it comes to fiscal matters - spend now and don't worry about tomorrow."

Rhode Island's Failing Grade

In January, Rhode Island received an "F" from the American Lung Association in its "State of Tobacco Control 2014" report card.

"The good news is that Rhode Island earned an “A” grade for our smoke free air and our high cigarette tax, which prevents youth smoking and motivates adults to quit," said Holyoak Wood. "The bad news is that Rhode Island earned an “F” for being one of the bottom ten states in the country for tobacco control and prevention spending."

"When tobacco companies agreed to turn over this money to compensate the victims who were mislead about the deadly effects of smoking, that's what the states should have spent the money on," said Holyoak Wood.  "Now we're living with the legacy today of leaders who didn't use that money to help people with their battles against lung cancer, or provide cheaper coverage -- we were meant to put that money into prevention, which is the best strategy.

"It's broken promises -- that's how I see it as well.  Broken promises of political leaders to the people.  This money was so hard fought, it was such an enormous victory -- the biggest settlement ever from corporations to the people of the country, it was a wonderful thing that the states' Attorney Generals managed to win.  And Wall Street came along and made them great offers, and look what's happened."

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