Law Suits: MSA Update 3

Where Has the MSA Money Gone? Find out what is being done with MSA funds in your state. Contact the attorney general’s office in your state and your state’s elected officials to find out where the money is going.

Read More at MSA Update 4

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Health coalition seeks more revenue for smoking prevention
By Bob Glissmann, WORLD-HERALD STAFF WRITER
December 8th, 2012

Every year, state governments get millions of dollars in tobacco-related revenues that they spend on many things besides anti-smoking ads or assistance for smokers trying to quit.
In fact, less than 2 percent of the nearly $26 billion that states will get this year from tobacco taxes and a 1998 tobacco settlement will be spent on tobacco cessation or prevention efforts.

That’s according to a report released this week from a coalition of public health groups.

The settlement money comes with no strings attached, so lawmakers can use it to plug holes in their budgets, said Peter Fisher of the Campaign for Tobacco-Free Kids, one of the groups that produced the report.

Of the $107 million Nebraska gets in tobacco-related funds, the state will spend $2.4 million on prevention, the coalition notes. Of the $293 million Iowa received, it will spend $3.1 million on prevention.

Funding levels matter, the coalition said, because efforts that target tobacco use have helped reduce smoking rates, save lives and lower health care costs.
A study published last year by the American Journal of Public Health found that Washington state saved more than $5 in tobacco-related hospitalization costs for every $1 it spent during the first 10 years of its anti-smoking program.

In addition, the study found that Washington’s smoke-free workplace law and cigarette tax increases also contributed to smoking declines and health care savings.
“The more smokers we convince to stop smoking and the more kids we prevent from ever starting not only saves future dollars but improves the overall health of our nation,” said Nancy Brown, CEO of the American Heart Association, another group behind the new report.

Tobacco costs the U.S. more than $96 billion in health care expenditures and $97 billion in lost productivity each year, according to the U.S. Centers for Disease Control and Prevention.
In Nebraska, the CDC says, the annual health care costs directly caused by smoking total $537 million. In Iowa, that figure is $1 billion.

Tobacco use kills more than 400,000 Americans each year. And it’s the No. 1 cause of preventable death in the United States, the CDC says. More deaths are caused each year by tobacco use than by human immunodeficiency virus, illegal drug use, alcohol use, motor vehicle injuries, suicides and homicides combined.

The CDC offers annual recommendations on what states should spend for anti-tobacco efforts. The agency recommends that Nebraska spend more than $21 million a year and Iowa spend almost $37 million on tobacco prevention and cessation. If the states funded tobacco prevention programs at CDC-recommended levels, the coalition said, they could achieve “larger and faster reductions in smoking and associated death and disease.”

The states’ failure to use more of their tobacco money to fight the tobacco problem is especially troubling, according to a separate Campaign for Tobacco-Free Kids report, in light of recent national surveys indicating that smoking declines in the United States have slowed and even stalled.
In both Nebraska and Iowa, an estimated 20 percent of adults smoke.

In Nebraska, tobacco settlement money goes into the Health Care Cash Fund, said Liz Hruska, a legislative fiscal analyst. Money from the fund goes to many different health-related areas, such as behavioral health programs, respite care, health clinics that serve mostly minorities, the Children’s Health Insurance Program, public health programs, a Parkinson’s disease registry and biomedical research.

In Iowa, 78 percent of tobacco settlement funds are used to pay debt service on bonds and 22 percent is deposited in the Rebuild Iowa Infrastructure Fund.

The money that goes toward tobacco cessation in Nebraska targets such areas as tobacco use among the young, helping adult users quit and reducing exposure to secondhand smoke, said Judy Martin of the Health Promotion Unit in the Nebraska Department of Health and Human Services. The Tobacco Free Nebraska Quitline, 1-800-QUIT-NOW, also is funded with that money and by the CDC.

If more anti-smoking money became available, Martin said, officials would “look where our problem areas are, consult with our partners and the CDC and figure out how to make best use of those dollars.”

State Sen. Mike Gloor of Grand Island, a retired hospital administrator, said he plans to introduce a bill in the next legislative session that would increase the tax on tobacco. The state charges 64 cents for a 20-cigarette pack, 38th among the 50 states and the District of Columbia. (Iowa, which charges $1.36 per pack, ranks 26th.)

Last year, Gloor introduced a bill that would have increased the tax to $1.99 per pack. Retailers said it would drive smokers across the state’s borders to buy cigarettes. Some members of the Legislature’s Revenue Committee questioned whether lawmakers should be engineering social behavior via tax policy. It didn’t pass.

Gloor said he hasn’t decided on the size of the increase under his new proposal, but “a big enough increase can result in pretty dramatic decreases in the number of smokers,” he said. The largest decrease could be among the young, he said, who are most sensitive to prices.

Gloor’s experience as a hospital administrator showed him the effects of tobacco-related illnesses. “There’s just no denying it,” he said. “It’s a huge, huge, huge impact on our health care costs statewide and nationwide.”

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Sheila Martin responded:

When is the public going to catch on that all this is about is a money grab by “nannies”.? First of all, Mr Gloor, a hospital administrator, hasn’t a CLUE about medicine! And Ms. Judy Martin would say anything to get a nickel! Just last month, the entire state of Missouri voted down a tax increase because they knew it was going to fund more busybody bull! Last year, California voted down an increase!

Perhaps Nebraska has lost its collective reasoning to this second hand smoke hype? Follow the money, kids, and it will take you right back to the pharma company who invented the “war” on smokers, Johnson and Johnson. Sellers of the patches and gums!

and

Michael McFadden responded:

I notice the source for the figures in the graphic accompanying the article: The Center For Tobacco Free Kids.? If my memory is serving me correctly, didn’t they get roughly FIVE THOUSAND MILLION dollars from the smokers’ MSA tax to spend “on programs to prevent kids from smoking and help smokers quit”?

Meanwhile, I thought kids were going to quit smoking when all their favorite TV and movie characters stopped smoking? Did that happen? Or they were going to quit when taxes went from about 25 cents per pack to $2 to $7 per pack? Did that happen? Or when ten minutes of ads every day was put on MTV and who knows how many other hundreds of TV stations? Did that happen? Or when the age 18 law was enforced? Did that happen? Or when smoking was banned in restaurants? Did that happen? Or when mail order cigarettes and wine were banned? Did that happen? (Oh, wait, the kids are still able to mail order wine. My mistake.) Or when clove cigarettes were banned? Did that happen? Or when the States gave close to *NINE* HUNDRED MILLION dollars a year back in earlier 2000s on these tobacco control people? Did that happen? Or when smoking areas at high schools were shut and smokers were forced to run back and forth across streets and highways to smoke? Did that happen? Or when smoking was banned in bars and strip clubs? Did that happen? (And no, please don’t ask me how banning smoking in strip clubs protects the children… I have NO idea.) Or when… when… I dunno, any of about a dozen other things that the Antismokers have justified over the years by abusing our natural instincts to love and care for our children in order to get our money and our votes for the things they wanted.

The Tobacco Controllers like to put on the white hats and play the role of the selfless and charitable Crusaders. Now they’re screaming because they’re only getting $459,500,000.00 a year for their efforts. I vote that they should continue doing their “good work” — and do it out of the goodness of their hearts rather than out of the pockets of the taxpayers. Maybe then I’d have a bit more respect for them, and maybe then their various claims and their research would have a bit more honesty at their core.

Michael J. McFadden,
Author of “Dissecting Antismokers’ Brains”

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States Near Tobacco Deal
Cigarette Makers, Arguing ’98 Pact Favors Small Rivals, Could Recoup $2 Billion
June 22, 2011
By DAVID KESMODEL
Big cigarette makers could recoup $2 billion under a proposed deal with state attorneys general to resolve a long-running dispute over payments required by the landmark 1998 tobacco settlement.
Negotiators for Altria Group Inc.’s Philip Morris USA and other tobacco companies have reached a tentative deal with officials representing the 46 states that signed the 1998 Master Settlement Agreement, say people familiar with the matter.
Native American brands, such as Seneca at the Tonawanda Seneca reservation in New York, account for as much as 4% of U.S. volume.
The accord would allow big tobacco companies to keep part of the money they have withheld from states or otherwise disputed under the 1998 pact, under which they agreed to pay more than $200 billion to help states recover the costs of treating sick smokers.
States and the companies have battled over $7.1 billion that the companies argue they shouldn’t have to pay on sales from 2003 through 2010. The dispute revolves around the companies’ contention that they have lost business because states haven’t adequately sought payments from smaller competitors not party to the 1998 pact.
The bigger companies say some of those rivals enjoy cost advantages that allow them to sell cigarettes at lower prices, luring more customers in a sluggish economy. The states maintain that their authorities have done what is required under the 1998 pact.
Under the new deal, cash-strapped states would collect several billion of the disputed dollars. The deal also would rewrite rules related to how states collect fees and taxes from smaller companies that haven’t joined the 1998 settlement.
It’s not clear whether the new deal will pass muster. The parties won’t start drafting a final deal unless a “critical mass” of states and firms sign a memorandum of understanding detailing terms, according to a copy of the memorandum reviewed by The Wall Street Journal.
If it goes through, the biggest loser could be Native American cigarette companies, which have become strong competitors with their low-priced brands. The deal would require states to adopt rules forcing these companies to start paying state excise taxes and fees for sales on tribal lands, which could force them to boost prices. Lawyers representing Indian cigarette interests are threatening legal challenges.
What the states and companies “are doing is wrong by any sort of definition of fair play,” said Lance Morgan, chief executive of Ho-Chunk Inc., the economic-development arm of the Winnebago tribe in Nebraska, which distributes cigarettes on tribal lands. He argues the states, under the deal, would be attacking tribal economies to protect big companies’ market shares.
Native American brands, which include such names as Seneca, King Mountain and Mohawk, may account for as much as 4% of U.S. cigarette volumes, Morgan Stanley analyst David Adelman estimates.
Any sizable payback to companies could contribute to potential defaults by states that issued bonds backed by the flow of tobacco-settlement dollars, said Richard P. Larkin, a senior vice president atNew Jersey-based Herbert J. Sims & Co. who tracks state and municipal bonds backed by tobacco-company payments.
Altria, Reynolds American Inc. and Lorillard Inc. declined to comment. Brad Phelps, chief deputy attorney general in Arkansas and a key negotiator, said states involved in the talks “have no comment.”
The talks highlight how recession-wracked states have grown more dependent on the revenue stream from the 1998 pact and are trying to reach compromises to mollify tobacco makers, whose industry is grappling with steady declines in cigarette consumption.
Many states rely on the revenue for general-operating expenses and health-care programs. At least a dozen states, including California, New York and Ohio, have issued billions of dollars in bonds backed by the flow of tobacco-settlement dollars. More than $55 billion in such bonds are outstanding, according to Thomson Reuters.
Since 1998, the three largest tobacco companies and about 50 other companies that later signed the master accord have paid about $81 billion to states.
The current negotiations center on an “adjustment” provision in the 1998 settlement. That provision lets tobacco companies reduce their annual payments to states if their collective market share drops below certain thresholds and if they can show that states failed to create a level competitive playing field.
The companies inserted the provision because of concerns that smaller cigarette makers not subject to the costs of the agreement would grab sales.
States have enacted laws requiring the nonparticipating companies to set aside payments in escrow accounts. Last year, the U.S. market share of nonparticipating companies rose to 6.5%, the highest mark since 2004, when it stood at 8.27%, according to the National Association of Attorneys General.
To reduce their annual payment, the big tobacco companies must show that their market-share loss is significantly attributable to the agreement. They consistently have met that condition, according to rulings by independent consultants. An arbitration panel of three retired federal judges has begun reviewing the issue in deciding what to do about $1.1 billion in disputed 2003 payments.
How much the companies would receive through the new agreement depends on how many states sign and when. If all of the states and U.S. territories in the 1998 agreement sign on, the tobacco companies would receive at least $2 billion, according to a formula described in the memorandum of understanding.

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Importers’ Attack on $25 Billion Tobacco Settlement Is Dismissed

Daniel Wise, New York Law Journal
January 15, 2009

A federal judge on Monday rejected an antitrust attack on the $25 billion settlement reached in 1998 between the nation’s major cigarette manufacturers and 46 states as it has been implemented in New York.

Southern District of New York Judge Alvin Hellerstein in Freedom Holdings Inc. v. Cuomo, 02 Civ. 2939, also dissolved a preliminary injunction he had issued barring enforcement of a 2003 New York law aimed at leveling the playing field between manufacturers who participated in the settlement and those that did not.

The ruling throwing out all claims brought by two importers of foreign cigarettes came after nearly six years of litigation, two trips to the 2nd U.S. Circuit Court of Appeals and a three-day evidentiary, nonjury hearing.

David F. Dobbins, who represented the two importers, Freedom Holdings and International Tobacco Partners, said the ruling will be appealed because it requires payments from companies like his clients, which have not participated in the settlement, that are so onerous as to “exclude them from competing in 45 states.”

The heart of the antitrust attack lies in a requirement under the settlement that nonparticipating manufacturers make payments into an escrow account to meet possible future liabilities for smoking-related illnesses which are roughly equivalent to the payments the participating manufacturers must make under the 1998 pact. The plaintiffs also claimed commerce clause violations.

Judge Hellerstein’s decision was foreshadowed in his 2004 ruling rejecting the importers’ request for a preliminary injunction against New York’s statute implementing the 1998 accord.

However, in that ruling, Hellerstein blocked New York from implementing a
2003 amendment to Public Health Law ?1399-pp, which ended the ability of nonparticipating manufacturers to claim a refund on escrow payments that exceeded the state’s annual share of funds received from participants in the settlement.

The importers also unsuccessfully sought to enjoin New York’s 2001 “contraband” statute, Tax Law ?480-b, which required nonparticipating manufacturers to certify that they were making required escrow payments.

Although the two importers were not manufacturers, Hellerstein ruled that they stood in the shoes of the foreign companies whose cigarettes they were importing. Those companies do not participate in the settlement.

EARLIER ORDER LIFTED

In dissolving his earlier injunction, Hellerstein found that, in blocking the 2003 law, the order had created “an incentive for cigarette manufacturers to disseminate their product and its ruinous consequences within the State while recompensing the State’s citizens only incompletely for the injury they sustain.”

In 2007, nonparticipating manufacturers deposited $946,452 into escrow in New York.

In rejecting the importers antitrust claims under the Sherman Act, Hellerstein concluded that market data since the 1998 accord belie any claim of an anti-competitive impact.

The importers have not shown any “competitive injury,” Hellerstein wrote, citing data that shows that the nonparticipating manufacturers have increased their national market share to 5.4 percent in 2007 from 0.4 percent in 1997. Meanwhile the market share of the four original signers of the agreement (now three) has slipped to 85.9 percent from 97.1 percent.

Moreover, he wrote, at $5.31 per carton, the payments that the original signers make to the settlement per carton of cigarettes is higher than the
$5.02 the nonparticipants must pay into escrow.

Dobbins, of Patterson, Belknap, Webb & Tyler, disputed Hellerstein’s analysis of the recent economic data. He claimed that the market share of nonparticipating companies actually had dropped in many states.

A second flaw in the importers’ antitrust claim, Hellerstein wrote, is the lack of evidence that the settlement was intended to create a scheme that gave market control to the original signers.

To the contrary, although it was anticipated that participating companies would raise their prices, he wrote, “the redeeming social purpose” was to deter the consumption and sale of cigarettes.

In fact, he added, the total volume of cigarettes has declined by 24.4 percent to 365.8 billion sold in 2007 from the 484.5 billion cigarettes sold in 1997, the year before the pact went into effect.

COMMERCE CLAUSE

In rejecting the Commerce Clause claim, Hellerstein found that “there has been no showing that the mandated escrow payments by the [nonparticipating manufacturers] in New York affect the retail price of cigarettes elsewhere in the nation.”

Instead, he wrote, the escrow payments are required “as security to satisfy future judgments or settlements in litigation” between New York and the nonparticipating manufacturers.

Dana Biberman, chief of the tobacco compliance bureau in the attorney general’s office and Assistant Attorney General Lewis Polishook represented the state.

Nationwide, the settlement has been projected to yield $248 billion in payments to the states during the first 25 years the settlement is in force.
To date, New York state has received $7.7 billion.

The four major tobacco companies that signed the 1998 pact were Philip Morris, R.J. Reynolds, Brown & Williamson and Lorillard, though Brown & Williamson and Lorillard have since merged.

Fifty-six other cigarette makers have since agreed to be bound by the accord. In 2007, 28 nonparticipating manufacturers reported to New York that they had made sales in the state.

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New companies challenge deal
By Brandon Larrabee | Morris News Service
Sunday, November 30, 2008
ATLANTA — Any hope that the nation’s tobacco wars would end when the largest cigarette manufacturers and 46 states signed a landmark legal settlement 10 years ago this month has long since dissipated.
Yes, the largest legal battle has ended and smoking rates have declined in the wake of the massive deal, in which the tobacco companies agreed to pay the states billions in perpetuity to settle claims that smoking-related illnesses had caused huge health-care bills which strained state budgets.
Other fights rage on, however. Anti-smoking advocates are outraged that some states have used much of the proceeds to fund economic-development needs or plug budget holes rather than bankroll aggressive campaigns to persuade Americans to kick the habit.
Moreover, the tobacco companies and states have waged a battle to crack down on small manufacturers whose market share blossomed in the wake of the price increases caused by the settlement. Some of those smaller manufacturers are lashing back, attacking the agreement as unconstitutional and filing a federal lawsuit to have it thrown out.
The initial growth and the recent decline of those “nonparticipating manufacturers” provide a case study of how, in some cases, the master settlement agreement was only a tentative step toward ending the legal struggles over the role of tobacco in American life.
New players
David Redmond had sold low-cost cigarettes in Russia and other countries when the first effort to settle state claims against the companies was put before Congress, which needed to approve the first version of the agreement. When that measure failed, the states and companies retooled the agreement to bypass Congress.
By then, Mr. Redmond had prepared a business plan for the U.S. In 1999, he launched Carolina Tobacco Co. to take advantage of the price increases caused by the master settlement agreement.
Mr. Redmond decided not to sign the master settlement because the basis of the claims against the big tobacco companies — a pattern of public deception and efforts to market tobacco to young people — didn’t apply to Carolina Tobacco, which hadn’t been in the American market before the agreement was signed.
“Therefore, we felt and I felt very strong that it was an admission of guilty to sign the master settlement agreement,” Mr. Redmond said.
He didn’t, and he wasn’t alone. From 1998 to 2007, the market share of nonparticipating manufacturers surged from 0.5 percent to 5.7 percent, creating a new reality in the industry, said Bill Phelps, a spokesman for Altria, the parent company of Philip Morris USA.
“It’s more competitive now than it was in 1998,” he said.
Escrow statutes
Mr. Redmond was aware of a provision in the agreement that would affect his ability to compete in the U.S. market — “escrow statutes,” which require Carolina Tobacco and other nonparticipating manufacturers to pay into an escrow account roughly the same amount per pack as tobacco companies that did decide to join.
“The idea of an escrow for nonparticipating companies that were not involved in the tort action, not involved in misadvertising, I think is a travesty,” he said.
At first, companies such as his could recoup some money paid into the escrow accounts relatively quickly, but states then changed their laws, and the full payments now sit in escrow for 25 years unless a state decides to pursue a claim against the manufacturer.
That removes much of Mr. Redmond’s original advantage in keeping down costs; now, he chooses to keep his company lean.
“Why should a new company like ours, entering the market, have to pay the same penalty as a misbehaving company?” he said.
Controversy
Nonparticipating manufacturers say the only reason they are required to make the escrow payments is to artificially increase their prices, preventing them from undercutting the prices of manufacturers that signed on.
“Effectively, it’s a penalty for not agreeing to limit your lobbying, advocacy and advertising. You pay whether you join or you don’t join,” said Hans Bader, the counsel for special projects at the Competitive Enterprise Institute. He represents a nonparticipating manufacturer, a cigarette distributor, a retailer and a smoker in a federal suit challenging the pact.
Manufacturers that did sign onto the agreement say it’s not that simple. Mr. Phelps, of Altria, declined to answer questions about whether nonparticipating manufacturers have an unfair advantage over companies such as Philip Morris.
A briefing book distributed to reporters by the company says the reason for the escrow statutes is not necessarily to level the playing field. For one thing, nonparticipating manufacturers have to put in escrow only an amount equal to the portion of the settlement payments based on health-care cost, not any of the other claims settled by the agreement.
“The escrow funds were established to ensure that funds are available to satisfy state claims, such as for health-care costs, in the event a state obtains a judgment at some point against the NPM (nonparticipating manufacturers), which has not settled with the state and thus has not been released from such claims,” the book states.
A difference
Mr. Bader said those judgments will probably never happen. In most of the states involved, he said, the company would have to do something else wrong other than sell a product that can cause health problems. The nonparticipating manufacturer would have to be guilty of the kinds of fraud and abuse that caused the tobacco companies to face a lawsuit in the first place.
“In most states, there’s no general right to sue companies because their products raise health-care costs,” he said.
Mr. Redmond said his company is careful not to deceive anyone about the dangers of tobacco, making certain it avoids the ethical lapses he says laid the groundwork for the agreement in the first place.
“Whenever I’m asked, ‘Will cigarette smoking be harmful to your health?’ — I say, ‘yes,’ ” he said.
For now, at least, that makes no difference when it comes time to pay.
Reach Brandon Larrabee at (678) 977-3709 or brandon.larrabee@morris.com.

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TEN YEARS LATER, TOBACCO DEAL GOING UP IN SMOKE

November 21, 2008

Consider this the next time you see a teenager take a drag on a cigarette:? Your state government likely has a financial stake in that kid continuing to smoke. And quite possibly, so does your retirement portfolio.

That was hardly the intention 10 years ago, when a collection of state attorneys general delivered a crushing blow to Big Tobacco. On Nov. 23, 1998, the nation’s four largest cigarette sellers agreed to pay $200 billion over 30 years in what seemed like a victory for David over Goliath. The money was supposed to help the states pay for health care and anti-smoking campaigns. Instead, much of it — even payments that aren’t due for 20 years
— has already been spent on politically popular tax breaks through complicated borrowing schemes initiated by Wall Street investment banks.

Because these states have essentially borrowed against future payments from the tobacco industry, they are now dependent on the continued vitality of cigarette sales. If Big Tobacco stumbles, states will be on the hook for these massive, billion-dollar loans. In other words, David and Goliath are now allies.

Where did those loans come from? Perhaps from you. When Wall Street talked
25 states into borrowing against future tobacco payments — a process known as “securitization” — it sold bonds to individual investors and mutual funds that buy municipal bonds. Now, they are betting on Big Tobacco, too.

Worse yet, anyone invested in tobacco bonds has been seeing their money go up in smoke. Some bond funds that are heavily invested in tobacco have lost nearly 40 percent of their value this year. The reason for the sharp drop is disputed, but some observers say it’s partly attributable to anti-smoking efforts. For the first time, fewer than 20 percent of American adults are smoking, new government statistics show. In other words, good news for the state health department is bad news for the revenue department — and for the portfolios of those who invested in tobacco bonds.

It’s a stunning reversal: The lawsuit designed to cut the legs out from under the tobacco industry has instead landed much of America — often unwittingly – in the industry’s corner. One such investor is Avivah Litan, of Potomac, Md., who two years ago purchased shares in one of Oppenheimer & Co.’s “Rochester” municipal bond funds.

Like many investors, she was attracted to municipal bonds by tax free returns and the relatively low risk. Governments rarely go bankrupt. Cities issue municipal bonds to pay for such infrastructure as firetrucks and schools, and bond funds pool hundreds of such securities together. Similar to stock funds, the value of a bond fund fluctuates with changes in investors’ perceptions of the ability of the issuer to repay the loan.
Because of governments’ solid record of paying off bonds, the funds have proven popular with investors. Americans have placed about $1.7 trillion in bond funds, according to the Investment Company Institute, compared with about $6.5 trillion in stock funds.

Litan was taken aback by the Rochester fund’s recent poor performance, and began looking into its holdings. What she saw was confusing: 4 percent invested in “Tobacco Settlement,” about 3 percent in “Golden St. Tob Securitization” and another 1 percent in the “Buckeye Ohio Tob Settlement.”
In fact, none of the fund’s top 10 holdings appeared to have anything to do with government infrastructure projects.

Here’s the explanation: Bond issues aren’t just for firetrucks and schools anymore. Bond funds can invest in complicated bonds issued by pseudo-government agencies that are ultimately backed by private ventures, such as housing developments. The largest segment of this pseudo-bond market is made up of tobacco bonds — bonds issued by states that have borrowed against their future tobacco settlement payments.
“I didn’t really understand that I would lose money every time a state passed an anti-smoking law,” Litan said. “I didn’t really understand what tobacco bonds were.”

What are tobacco bonds?

Oppenheimer’s Rochester family offers 18 different bond funds, some of which have as much as 20 percent of their assets invested in tobacco bonds, according to fund manager Daniel Loughran. The Rochester funds, while among the most aggressive investors in tobacco bonds, are hardly unique. A review of 660 leading bond funds covered by the investment research firm Morningstar Inc., conducted at msnbc.com’s request, showed that more than 260 are invested in tobacco bonds.

The rush to tap the revenue stream began soon after the tobacco settlement was signed 10 years ago. The cigarette companies agreed to make annual payments that would total $200 billion by 2025. The money was to be divided among the 46 participating states, with New York and California each getting about $700 million a year, Ohio about $300 million, Wisconsin just over $100 million and so on.

It didn’t take long for Wall Street to invent a way to take a cut. The creative minds at the now-defunct Bear Stearns investment bank traveled the country making this pitch to statehouses: Why wait for the money? Why not take a lump sum payment up front? Bear Stearns and other Wall Street firms eventually persuaded legislators in most states to “securitize” the payouts by issuing bonds and paying the bondholders back with the annual tobacco payments. The first tobacco bond issue hit in 1999. Soon, states around the country fell in line.

“Every time there are economic problems in a state, it happens,” said Eric Lindblom, director of Policy Research at Campaign for Tobacco-Free Kids.
“The governor says, ‘We’re in trouble, we need money. But we are not going to get it by raising taxes, we’re going to do this securitization gobbledygook.’ People think, ‘Well, either our taxes are going up or they will do this thing we don’t understand. So let’s do that.’ “

For years, tobacco bonds have been an easy sell. Because they are perceived as more risky than standard state-issued bonds, they offer slightly higher interest rates, making them popular with municipal bond fund managers seeking strong returns. The first tobacco bond and the 94 others that followed have raised a total of $55 billion, said Loughran, the Oppenheimer fund manager.

30 cents on the dollar

Taking the early lump-sum payment has its price, however. Many states receive only 30 or 40 cents on the dollar. In a typical example, Wisconsin would have been entitled to about $5 billion in payments through 2025.
Instead, it settled on one payment of $1.6 billion in 2001.

“When you securitize on the municipal market, you lose a lot of money,” said Kevin Olson, who runs the independent Web site MunicipalBonds.com. “It’s not very efficient.”

Through the years, state officials have offered numerous rationales for the benefits of securitization. Five years ago, Don Benton, a Republican state senator in Washington, told USA Today that spending on smoking cessation programs was “a complete waste of money. You’d be hard-pressed to find any citizen who does not know smoking is hazardous to your health.” He wanted the money to go instead to infrastructure projects like new roads. “Sitting in traffic for two hours would make you want to smoke,” he told the newspaper.

States also say that they prefer the certainty of immediate payments to the uncertainty surrounding the tobacco industry’s long-term future.

But Lindblom, the Campaign for Tobacco-Free Kids official, said that line of thinking is foolish.
“The states have this horribly naive view that they will outsmart Wall Street,” he said. “Wall Street always gets the better deal.”

Investment banks, in particular, love tobacco bonds. Because they are more complex than standard debt offerings, they offer steeper commissions. In 2007, when Ohio traded its future payments for an immediate payout of about
$5 billion, it paid brokers $30 million. During the dot-com bust, when initial public offerings all but vanished from Wall Street, tobacco bond offerings filled the void for companies like Bear Stearns, nearly doubling from around $7 billion in 2002 to nearly $13 billion in 2003.

From the beginning, Bear Stearns was at the forefront of tobacco bond sales, and ultimately brokered about half of them before it was sold off to JPMorgan Chase.

The outcome for many states – including California, New York, Ohio and Wisconsin — is that the tobacco money destined for state coffers in 2010,
2015 and 2025 has already been spent.

‘An incentive not to put tobacco out of business’

The irony is that the states and some smaller governmental bodies need tobacco firms to make their payments every year because, to varying degrees, they are on the hook to pay off bondholders if the cigarette companies default. Some, including New York and California, have directly guaranteed their tobacco bond debt with general revenue in order to secure more favorable rates. Others have an implied obligation not to let their bonds default, lest their credit ratings be tarnished.

“They have created mass structural deficits,” said Hans Baden, a lawyer at the Competitive Enterprise Institute, a think tank that has filed a lawsuit claiming that the Master Settlement Agreement is unconstitutional. “They have sold the money they are getting in the future in exchange for money now, based on a gradually dwindling revenue stream. They have retained the risk while selling the money . and now they have an incentive not to put tobacco out of business.”

An interruption in tobacco industry payments would be catastrophic both to state budgets and individual investors. For example, when the tobacco industry threatened to exercise a loophole in the settlement in 2006 and withhold about $1.5 billion in payments, the value of tobacco bonds sank. It happened again in 2007. The price recovered even though the payments remain in dispute, but notice was served of the perilous relationship between governments and the smoking industry.

Critics of the arrangement contend that states that have issued tobacco bonds have no incentive to pass anti-smoking laws or launch advertising campaigns. Doing so could lead to fiscal ruin. So could any additional class-action lawsuit success against the tobacco industry.

Fears that new tobacco litigation could undermine the settlement run so high that 36 states filed briefs in 2003 in support of the tobacco industry after it was hit with a $10 billion judgment from a lawsuit for alleged false advertising.

David, in other words, was sticking up for Goliath.

In the briefs, state officials fretted that the judgment would impair the industry’s ability to make its annual payments and “directly impact important state programs.”

‘A real tragedy for our country’

Those state programs often have nothing to do with tobacco.

From the start, the tobacco settlement money was intended to help states pay for health care costs related to smoking illnesses and to fund smoking-cessation programs, though the agreement not bind the states to use it for those purposes.

But to date, only about 3 percent of the tobacco settlement money has gone to cessation efforts, such as “quit smoking” marketing campaigns. Meanwhile, 10 times that amount has been used by state legislatures to plug budget gaps, or by governors to offer tax relief.

“There is a horrible failure of the states to invest even a minuscule amount of the funds for tobacco control,” said Lindblom of the Campaign for Tobacco-Free Kids. “It’s a real tragedy for our country.”

Though smoking continues to decline in the U.S., it remains a major health problem. Every year, according to the federal Centers for Disease Control, smoking-related illnesses are responsible for $96 billion in health-care expenses. But states have invested only about $3 billion from the settlement fund in the past 10 years on anti-smoking campaigns.

Washington Gov. Christine Gregoire, who was the state’s attorney general at the time of the tobacco settlement and one its chief negotiators, said five years ago that tobacco securitization was her “wildest nightmare.” Over her objections, Washington state securitized part of its tobacco settlement in 2002, before she became governor.

“My hope was to see as much of the settlement money as possible go to improving health,” she told msnbc.com recently. “We’ve certainly done that in Washington state and the results have been tremendous – youth smoking is down by half and adult smoking is down 25 percent. I’m disappointed that other states haven’t done the same thing. Far too many have used the money for purposes other than it was intended.”

None of the states covered by the settlement spends the amount recommended by the Centers for Disease Control on tobacco-cessation programs. Only nine states pay even half that amount. Meanwhile, 13 states spend less than 10 percent of what the agency recommends. Ohio, for example, will spend $7.1 million on anti-smoking efforts in 2009, compared to the $266 million prescribed by the CDC.

Anti-smoking education can have a tremendous impact, the agency says. If every smoker on Medicare quit smoking today, Ohio would save more than $500 million annually.

The end of Ohio’s tobacco-fighting foundation

Ohio had planned to spend much more on anti-smoking campaigns. Soon after the signing of the tobacco settlement , the state Legislature created the Ohio Tobacco Prevention Foundation and vowed to put $1 billion of the $10 billion it expected to receive over 25 years in a trust fund to generate $60 million a year for the foundation’s operating expenses.

Ohio’s smoking rate in 2001 was 28 percent, well above the national average.
But thanks in part to foundation-funded projects like the state’s toll-free Ohio Tobacco Quit Line, it had fallen to 22 percent by 2006.

But by that time, Ohio’s economy was reeling and the tobacco money was too tempting for new Gov. Ted Strickland. In 2007, Ohio traded in its future payments for a one-time sum of $5 billion – the largest tobacco bond issue to date. The money paid for a massive property tax relief program for senior citizens and helped build schools.

It did not, however, shore up the state’s economy. This year Strickland pushed through a $1.4 billion economic stimulus package funded in part by money from the Ohio Tobacco Prevention Foundation trust fund. The bill authorized seizure of most of the $300 million in the foundation’s accounts, leaving it with $40 million – less than one year’s operating expenses. The foundation rebelled and tried to shift the money to an anti-smoking nonprofit agency. In retaliation, the Legislature voted to close the foundation. Dozens of anti-smoking programs around the state were shut down.

After a 2003 lawsuit scare, the market for tobacco bonds went silent. This year’s credit crunch has similarly discouraged new tobacco bond issues.
Keith Daily, a spokesman for Strickland, said the money, which remains frozen pending resolution of a lawsuit over the state seizure, is critical to the effort to create more than 50,000 jobs by investing in infrastructure and boosting industries.

“We recognize the great importance of reducing tobacco use and making other healthy decisions,” he said. “The governor’s top priority is creating jobs here in Ohio — … $230 million from the former Ohio Tobacco Prevention Foundation’s endowment will be used to pay for the biomedical and bio-products portions of the jobs plan.”

Lindblom, the anti-smoking activist, said the decision of the Ohio legislature to close effective tobacco-fighting programs has been repeated around the country.

‘It’s in the prospectus’

“There was the full expectation that the money was going to be used to prevent and reduce tobacco use and to treat smoking-caused illnesses,” he said. “That’s gone out the window. There’s been a complete breaking of the promise of the settlement.”

Loughran, the Oppenheimer manager, said that the settlement money is “fungible” and states can use it for anything they choose.

While it’s “certainly possible” some people invest unknowingly in tobacco, Loughran said it should be obvious to anyone who researches Rochester funds that they are heavily tilted toward tobacco bonds. “It’s in the prospectus,”
he said.

“Some people, when they look at this sector, they think, ‘this is tobacco, so it’s evil.’ But remember, the settlement penalizes the industry,”
Loughran said. Buying one of his funds is more like investing in the penalty, he suggested. And plenty of consumers clearly have no moral issues with tobacco bonds, he said, noting that many individual investors buy them directly.

The future of tobacco bond issues

While a substantial amount of the tobacco settlement money has already been spent, some states have held out. But each year, Lindblom said, more dominoes fall.

Earlier this year, Nevada Lt. Gov. Brian Krolicki tried to persuade state legislators to trade in the state’s $50 million annual payment for a one-time $600 million windfall. While legislators argued, the bond market collapsed, effectively eliminating any opportunity for issuing tobacco bonds.

But with the bond market expected to recover before the overall economy does, pressure is certain to mount for states like Nevada to seek quick fiscal rescues courtesy of the tobacco industry.

“I expect more of this as our economic situation continues. From our perspective and a fiscal perspective it will be hard to beat it back,”
Lindblom said.

As for individual investors who are backing tobacco, Loughran – whose fund bought the very first tobacco bond in 1999 — makes a compelling case that the bonds will recover. Their yields are still higher than other state-issued bonds, he said, and in 10 years there hasn’t been any hint of a default.

“Every one has made their scheduled interest and principal payments on time, and many of them have made principal payments ahead of maturity,” he said.
While the smoking rate has been sinking about 2 percent every year, inflation adjustments built into the settlement make up for the loss, he said. He wouldn’t predict when tobacco bonds might turn around, but he asserted that their fundamental value remains strong.

“The main risk some people (worry about) is litigation,” he said. “We’ve identified it as a risk but a very slight risk. In fact the industry has a long winning streak . against class-action lawsuits” — a 57-case run dating to 1998.

Having state attorneys general filing amicus briefs on your behalf doesn’t hurt, he noted, adding, “They are in our corner.”

That, he suggested, indicates the smoking industry isn’t going anywhere for a long time.

But Baden, of the Competitive Enterprise Institute, isn’t so sure. He said the constitutional challenge filed by his organization or other legal challenges could undo the settlement. Or the declining smoking rate could at some point overtake the tobacco companies’ ability to pay, he said.

“It just seems weird the idea that the tobacco (settlement) is going to go on forever,” Baden said. “In the long run my suspicion is something will take out the settlement. The thing won’t last forever.”

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General Tobacco Sues 52 U.S. Attorneys General Over Restraint of Trade and Violation of the U.S. Constitution
October 28, 2008
Company Also Sues Competitors For More than $1 Billion
MAYODAN, N.C.–(BUSINESS WIRE)–North Carolina based manufacturer and distributor General Tobacco (GT) announced today it is suing 52 attorneys general of the United States and its territories and 19 tobacco companies. GT is asking for treble damages in excess of $1 billion from competitors for allegedly conspiring with the states to set up the Master Settlement Agreement (MSA) so that later market entrants, such as GT, have to pay the states substantially more than certain competitors pay. GT believes the effect of the MSA is to drastically limit future competitors from fair market competition.
GT has paid approximately $470 million to the MSA and an additional $36 million in escrow.
The complaint, filed in U.S. District Court in Louisville, Kentucky, charges the 52 states and territories’ attorneys general with violating the Sherman Anti-Trust Act, its constitutional rights under the Equal Protection and Due Process Clauses of the Fourteenth Amendment, the Compact Clause and the Commerce Clause of the U.S. Constitution as well as violation of the Civil Rights Act, Title 42 USC Section1983.
The MSA was created in 1998 by the 46 states, the District of Columbia and five U.S. island territories, along with the mega tobacco companies which then controlled more than 97% of the market. The MSA was structured so that certain companies in the market in 1998 would receive future preferential payment terms while “new members” such as GT would have to pay substantially more than the original preferred members.
J. Ronald Denman, Executive Vice President of General Tobacco compared the MSA’s unequal treatment to a cartel. “The structure for the MSA created an impossible business environment for future competitors especially small players such as GT. All we are asking for is a level playing field for everyone,” Denman said.
The complaint asks for treble damages under the Sherman Act as well as for an injunction, attorney fees and other relief.
General Tobacco, the sixth largest tobacco company in the nation with approximately $300 million in annual sales, is a full participating member of the Master Settlement Agreement. The company began its operation in 2000 distributing its own cigarette brand, GT One?. Because of the popularity of this value-priced, excellent quality product, the company now distributes Bronco?, Silver?, Vaquero Little Cigars?, and their new premium menthol cigarette, 32 Degrees?. As one of the largest tobacco companies in the country, General Tobacco continues to hold a leading position in the value-priced cigarette market. Its mission is to distribute superior quality tobacco products at competitive prices.
Contact:
For General Tobacco
Melisa Mendez Chantres
mmchantres@evclay.com
Yeleny Suarez
ysuarez@evclay.com
305-261-6222/toll free 877-261-6222

David W. Kuneman, Director of Research for The Smoker’s Club?said…” that’s not the only illegality of the MSA, we also feel it’s taxation without representation, because the funds are collected just like a tax, spent just like a tax… and in all ways resemble legal excise taxes on tobacco. But in this country, only voters, and elected public officials can enact legal taxes…The Attorneys General certainly were not acting in the interests of those state citizens who smoke when this agreement was reached, either.”

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Tobacco companies may withhold $600 million from states

I must ask: If so many smokers are so sick, why are the states putting the tobacco money to other uses?

Tobacco companies may withhold $600 million from states: study
Wed Apr 9, 2008

NEW YORK (Reuters) – U.S. tobacco companies might withhold around $600 million of annual payments they agreed to pay states to help cover medical bills for ailing smokers, according to a new report.
Many U.S. states, counties and cities securitized these payments, but smoking rates have fallen, partly due to higher taxes.
“The tobacco companies are challenging their payments for the third year in a row under the Non-Participating Manufacturer’ s (NPM) adjustment clause of the settlement, this time based on calendar year 2005,” said the report by Herbert J. Sims & Co, which is based in Iselin, New Jersey.

Free Enterprise, Free Choice & Signs are a WONDERFUL Invention. What a novel idea!
– A Newsletter Reader

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MI: More MSA money to fix budget.

MA: MSA 60 Million Dollar Fight.

USA: Big tobacco, AGs at odds.

MT: State files motion on tobacco deal.

USA: Senator Richard Durbin wants to delay consideration of President George W. Bush’s nominee to serve as the ambassador to Australia until his role in the U.S. government’s racketeering case against cigarette makers is thoroughly examined.

USA: National tobacco ‘taxes’ violate antitrust laws. “If the MSA is struck down and Congress wishes to replace it with a national tax on cigarettes, is there any doubt that it could do so?”

USA: General Tobacco Makes MSA Payment.

OH: State sues over MSA money.

MSA: States lose, trial attorneys don’t.

ME: Files suit to protect settlement funds.

CA: Sues Big Tobacco to pay in full.

NY: State to sue tobacco for disputed funds.

MO: AG Nixon decries use of MSA money.

Tobacco, States Payment Battle Intensifies
April 18, 2006 By NANCY ZUCKERBROD
Talks between the states and the tobacco industry have broken down over money owed this year under the 1998 landmark settlement agreement, according to No. 2 cigarette maker R.J. Reynolds Tobacco Co.
CA, NY, MA, NJ, OH filed suits.

Cigarette makers, states fight over money
Apr. 17, 2006 NANCY ZUCKERBROD
“We’re entitled to these adjustments,” Blixt said, adding that states have become too dependent on the tobacco money for budgeting purposes. “States should not be spending money that they’re not certain that they’re going to get.”
Read

R.J. Reynolds disappointed by states’ litigation
Apr 18, 2006
LOS ANGELES, April 18 R.J. Reynolds Tobacco Co., a subsidiary of Reynolds American Inc. (RAI.N: Quote, Profile, Research), said on Tuesday that it was disappointed by the decision by some states to begin court proceedings in light of a dispute over payments from a Master Settlement Agreement. Reynolds, which said it worked unsuccessfully with the states to reach an agreement, said approximately $647 million of its payment was put into a “disputed payments” account, to remain there until resolution of application of the credit.