States’ tobacco settlement going up in smoke, critics charge

Associated Press

OLYMPIA — Less than four years ago, Washington Attorney General Christine Gregoire helped win billions in restitution from tobacco companies for 46 states, money she saw as a bonanza for smoking prevention and public health programs.

Now she’s watching in dismay as states around the country — including her own — borrow heavily against their shares of the settlement to fill short-term budget holes.

"This was the single biggest opportunity in the history of public health to address the most preventable cause of death in America," Gregoire said. "I sure hope I don’t look back and say it was the biggest lost opportunity."

Since the settlement dollars started flowing in, anti-tobacco forces have battled — and mostly lost — with lawmakers about how the money should be spent.

Only five states meet the Centers for Disease Control and Prevention’s recommendation that 20 percent to 25 percent of the settlement be spent to fight tobacco use, according to the Campaign for Tobacco-Free Kids.

Even in Washington state, where Gregoire’s influence had helped keep the money earmarked for tobacco and public health programs until now, anti-smoking spending didn’t meet the CDC benchmark.

Elsewhere, moral claims on the settlement ran up against the cold statehouse fact that money is just money when it’s time to balance the budget.

Now states aren’t just spending the yearly checks on something else, they’re spending decades of settlement payments all at once.

Washington will sell off the rights to about 20 percent of its settlement payments for the next 20 years to offset $450 million of its $1.6 billion budget hole.

In California, Gov. Gray Davis has proposed selling off 40 percent of his state’s settlement to raise $2.4 billion to feed a hungry $12.4 billion budget hole. Similar proposals are in play in other states, including New Jersey and Rhode Island.

In Wisconsin, Gov. Scott McCallum and lawmakers are set to go whole hog: the entire settlement for the next two decades will soon be sold for about $1.3 billion, compared to $5.9 billion the state figured to rake in from settlement payments over 25 years.

Wisconsin’s bond sale has been in the works since last year, but the state had planned to spend only $450 million in the current budget. The rest was bound for a fund that would earn more money than the state would have gotten by just taking the tobacco companies’ check every year.

But the recession derailed that plan, sending Wisconsin’s budget $1.1 billion in the red as tax revenue tanked. Now the rest of the tobacco bond sale money will likely go to balance the budget.

"What started off as an initiative that was just smart money management was transformed into something that helped manage budget shortfalls," said George Lightbourn, Wisconsin’s Secretary of Administration. "We would rather have had dollars in a rainy-day fund."

Critics — most vocally Gregoire and other anti-tobacco forces — liken the practice to taking out a second mortgage to buy groceries. Interest and fees paid to bond brokers will erode the settlement’s spending power, they argue, and debt payments will long outlive the balanced budgets they pay for.

In Wisconsin, the nonpartisan Legislative Fiscal Bureau figures the state stands to lose as much as $2.6 billion through 2032 if all the bond proceeds go to balance the budget.

But budget-writers say they have few choices. In Washington, Senate Ways and Means Chairwoman Lisa Brown turned to tobacco as the least offensive of three unpleasant options.

"You have to compare it to the alternatives," said Brown, D-Spokane. "In this case, the alternative is $500 million in additional cuts or in general tax increases."

The tight balance of the Washington Legislature — Democrats clinging to a one-vote majority in the Senate and a two-vote advantage in the House — effectively squelched any attempt to boost taxes this year.

And anti-tobacco forces worry lawmakers will go back to the same well next year when similar budget problems loom.

"It makes future budget holes deeper and harder to climb out of," said Astrid Berg, executive director of the American Lung Association of Washington.

Compared to the political liability of raising taxes or cutting spending, selling off the settlement — known by the ungainly moniker of "tobacco securitization" — is easy money. Because the bonds aren’t backed by states’ taxpayers, they’re exempt from strict restrictions on debt in many states.

At least 17 states or counties, including Alaska, Alabama, South Carolina, and counties in New York and California, have already sold off parts of their settlements.

At first, the bonds were mostly sold for capital construction — buildings that would outlast the bond payments — a widely accepted use of such borrowing.

Alaska was among the first, selling off part of its settlement money in 2000 to replace and repair crumbling schools. Anti-tobacco elements howled, but lawmakers were happy for a way to sell bonds without submitting them to a statewide vote, as the constitution requires for general obligation bonds.

But as budget problems worsened, said Jeffrey Hyman, a vice president with UBS PaineWebber, which has handled several of the tobacco bond sales, states began to see tobacco as a way to balance the books.

"What we have seen increasingly, very quickly, in the last few months, is the theme of budget relief," Hyman said.