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Washington State Proposal to Securitize Tobacco Settlement Funds is a Raw Deal for Taxpayers and Kids

Statement of Matthew L. Myers, President, Campaign for Tobacco-Free Kids
March 05, 2002

Washington, DC — The Washington State legislative proposal to securitize a portion of the state's tobacco settlement income is a raw deal for kids and taxpayers. This proposal would leave Washington with just a fraction of its tobacco settlement money, and it would make it virtually impossible for the state to adequately fund a comprehensive tobacco prevention program in the future, which Washington voters have said is their priority. It is a nearsighted approach to the state's budget crunch that will cost taxpayers more in the end.

Selling enormous amounts of future tobacco settlement income to investors for a much smaller one-time lump-sum payment is not only unfair to future generations but a bad deal for current taxpayers. Washington taxpayers should be skeptical of claims that selling just a quarter of the state's settlement proceeds could raise $525 million now – a return of as much as 50 cents on the dollar. Based on the experience of other states that have recently securitized their settlement payments, Washington would receive as little as 25 cents on the dollar. Like Enron shareholders, Washington taxpayers would get only pennies on the dollar. This proposal's only winners would be Wall Street bond brokers.

Securitization also makes it far less likely that any of the tobacco settlement money will be used as intended — to fund tobacco prevention programs that reduce youth smoking and save money for taxpayers by reducing smoking-caused health care costs. When they overwhelmingly approved Initiative 773 in November, Washington voters sent a loud and clear message that they want their state's leaders to fund a comprehensive tobacco prevention program based on the recommendations of the U.S. Centers for Disease Control and Prevention. By endangering future funding for tobacco prevention, this securitization proposal breaks faith with the voters.

Instead, Washington lawmakers want to use the money to alleviate this year's budget crunch. That quick fix is a near-sighted solution that only delays the hard decisions until the next budget debate. Because it's a one time payment, the securitization money will not be there next year, meaning the state will be forced to raise taxes or cut programs more drastically in the future.

If Washington lawmakers truly want to reduce state expenses, they would invest a portion of their tobacco settlement money in tobacco prevention programs proven to reduce health care costs. Recent studies have found that states are saving about $3 dollars in health costs for every dollar invested in effective tobacco prevention programs.

Unfortunately, Wall Street brokers have been pressuring states to sell their settlement funds by raising worries about tobacco company bankruptcy and declining cigarette consumption. But these same bond brokers are getting A or even A+ ratings on tobacco-settlement bonds, which are among the very highest ratings. That means Wall Street firmly believes in the long-term profitability of the tobacco industry.

The issue of declining cigarette consumption is another red herring. While the state's settlement payments will be reduced as national cigarette sales decline, no one expects that will amount to more than a one or two percent reduction per year. In addition, the state's tobacco settlement payments are automatically adjusted upward each year for inflation, which will more than offset any future reductions caused by U.S. smoking declines.

The Washington State proposal is little more than a budgetary gimmick that will end up hurting taxpayers and kids vulnerable to the lure of tobacco addiction. We urge the Legislature and Governor Gary Locke to reject this proposal.