In November 1998, as the war against big tobacco was raging and the tobacco industry was at the center of a legal onslaught due to widespread information about its associated risks, the attorney generals of 46 states entered into a settlement with the four biggest US tobacco companies (R. J. Reynolds, Lorillard, Brown & Williamson, and Philip Morris, Inc.). The lawsuit behind the settlement was intended to recover from these companies the health care costs their customers had imposed on the states’ public health systems due to their smoking; of course, the idea that smoking does not actually lead to increased health expenditures for the smoker has been disproved several times, though it has stubbornly held on to the point where, in most circles, it remains an incontrovertible truth.
Instead of taking the companies to court, the attorney generals of the 46 states involved (Florida, Mississippi, Minnesota, and Texas had all settled their lawsuits separately) and the four big tobacco companies arrived at a master settlement agreement (henceforth MSA). The terms of the MSA restricted the tobacco companies’ freedom to advertise to youth and organize in trade associations (because God knows that preventing a four-company-oligopoly from organizing into a trade association will do a lot of good, and won’t just prevent new companies from entering the market and maintain that oligopoly), and, more importantly, forced the companies to agree to dish out some $206 billion dollars over the following twenty years. Most of that money, $183.177 billion in all, was to be paid to the states in annual installments from 2000 to 2025. Each state would receive funds in accordance with the amount of damage the companies had done to its population, meaning that states with higher numbers of smokers would receive a larger share of the MSA cash than states where smoking was less widespread. In return, the companies were granted immunity from all future personal injury claims. Pretty good, right?
Things are not quite as simple as that. For one thing, the actual payment schedule is not as clear-cut as it seems. The amount big tobacco pays out from year to year under the terms of the MSA varies with cigarette sales volume, and is based on sales projections from 1998; needless to say, 1998 projections of future smoking revenue greatly underestimated the public’s rapidly declining interest in smoking. For another, the states rapidly hedged against the possibility of declining MSA revenues and began to sell tobacco bonds, transferring some of the risk of declining revenues to the bondholders. Many of the bonds, however, were nonetheless backed by secondary pledge of state revenues, meaning that if the tobacco companies failed to fulfill the terms of the MSA, the states would still have to reimburse their bondholders by drawing on state funds.
It is now 2015, and the rapidly accelerating decline in cigarette sales across the US, instead of causing public health officials to rejoice, has been a cause of alarm in many places. As of last year, more than $80 billion of the $183 billion promised to the states remained to be paid out. With tobacco companies rapidly losing ground, where can states get the money they were counting on?