State Bonds in Jeopardy as Tobacco Cash Fades

New York Times ^ | 03 May 2012 | Mary Williams Walsh

[Lorianne]

Steady declines in smoking, a big win for public health, are creating problems for municipal bond investors.

A handful of bonds backed by yearly payments from tobacco companies under a landmark settlement with 46 states are in the earliest stages of default, and more distress is expected.

Dozens of states, counties and cities issued the bonds to receive billions of dollars upfront from the 1998 settlement. But now they are seeing smaller payments than expected from the companies as tobacco sales decline in America. There is also a renewed legal battle between the states and the tobacco companies, with the companies holding back nearly $8 billion in settlement payments, pending resolution.

So far, California, Ohio and Virginia, as well as Nassau County in New York, have resorted to tapping special tobacco-bond reserves to pay their bondholders, something analysts consider a technical default because it effectively means the bondholders are being paid with their own money.

[EDINVA]

I know you’re joking, or *think* you are .. but in NYC it’s already just shy of $12/pack.

[only1percent]

The bonds are non-recourse as a rule. The plaintiff states and municipalities sold off the payment stream leaving the bond-buyers are at risk for declining smoking, not the bond sellers. Indeed, as the states and municipalities created new taxes subsequently (which they keep) they directly entered into competition with the bondholders, as the higher total pack price cuts (non-bootleg) buying even further.

[elkfersupper]

I’m intimately familiar with revenue bonds. There are still going to be bondholder suits.

[Jack Hydrazine]

Yes, I was joking but I didn’t realize they were that expensive there already. I don’t smoke but from what I understand most places have cigarettes for around five to six dollars a pack.

[MasterGunner01]

Ah, ha! The Law of Unintended Consequences strikes again.

1. Smoking is bad. Therefore, raise taxes on cigarettes.

2, Smoking is bad. Demonize smokers and restrict where they can smoke.

3. Smoking is bad. Fund programs to get smokers to quit.

Add 1 through 3 together and you get DECREASED REVENUES to the taxing bodies of government.

Result: PANIC!

Smoking is good. Support your local Islamist cell or narco gang who are smuggling the smokes into the country. (Note: Tax revenue still still keeps going down and bond holders are about to be screwed. Scratch that . . . bond holders AND taxpayers are being lined up to get screwed.)