Wednesday, October 8, 2014

Can you imagine that politicians have mortgaged our future? Say it ain't so.

I am shocked do you hear, SHOCKED!

The New York Times wrote on October 6 that there is a problem with the Tobacco Master Settlement Agreement (November, 1998). If you remember that far back the deal was that 46 States had an agreement that exempted the tobacco industry from legal liability for any harm caused by tobacco use. For this exemption the tobacco companies agreed to make annual payments,forever, to fund anti-smoking and public health programs. The tobacco companies “guaranteed” a minimum of $206 billion during the first 25 years.

The only problem with the agreement was that the states were not required to use the money as intended. Of course we can trust government to do what it tells us it will do without a written agreement.

Can't we?

Maybe not since of the money that the tobacco companies gave the states only a very small part has gone to anti-smoking and public health programs.

In Alaska some $3.5 million was spent on shipping docks. In New York $700,000 went for a sprinkler system at a public golf course and $24 million went for a county jail and office building. Oh yes, in North Carolina $42 million went to tobacco farmers for modernization and marketing (huh?).

Now 12 governments (9 states - Alaska, California, Iowa, Michigan, New Jersey, New York, Ohio, Rhode Island and West Virginia, plus Washington, D.C., Puerto Rico and Guam to be exact) felt that they needed the money faster than the annual payments were scheduled to pay so they used the future payments, read mortgaged, as collateral for bonds. About these “capital appreciation” bonds...they defer all interest payments and repayments for about 50 years and there is no plans in place concerning how the bonds will be repaid (in a lump sum). Just so you will know most of the legislators who approved this use of the tobacco funds will be dead or retired by that time (we can only hope).

Just checking the numbers (thanks to Jim Estes who wrote the article) that the 12 governments issued $22.6 billion in bonds, receiving $573.2 million in cash (that low price is because who is going to buy something that is next to worthless). With the wonders of compound interest these 12 governments will have to repay $67.1 billion. One prime example is the state of Michigan that will have to repay 1,800 times the amount it borrowed.

You may ask who would buy these bonds if they knew they can't be repaid? The answer is that the majority of the bonds are held by banks and mutual funds. Remember the housing bubble/bust? These banks and mutual funds are betting that the state and/or federal government will bail out these bonds with more future settlement payment. Remember the forever part of the settlement, from the tobacco industry that includes a little help from our friends (the U.S. taxpayer). The problem is that the tobacco industry is in a state of decline and many analysts see that a big default in the settlement payments will happen in the future so it looks like the taxpayers will get stuck with the bill.

Who is going to make money of this deal? For the most part it will be the investment bankers who convinced the state politicians that some money in the treasury now is better than any future consequences. I wonder how much money was kicked back into political campaigns from the investment bankers?

BTW, a report shows that 1.9% of the states settlement payments and tobacco taxes was spent on prevention programs this year. I am surprised that it was that much.


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