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West Virginia's Proposal to Securitize Tobacco Settlement Funds is a Raw Deal for Taxpayers and Kids

Statement of William V. Corr, Executive Vice President, Campaign for Tobacco-Free Kids
March 06, 2002

Washington, DC — The West Virginia Senate's proposal to securitize all of the state's tobacco settlement income is a raw deal for kids and taxpayers. This proposal, which the House must now consider, would make it virtually impossible for the state to adequately fund a comprehensive tobacco prevention program in the future. It is a nearsighted approach to the state's budget crunch that will cost taxpayers more in the end.

Selling all 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. Based on the experience of other states that have recently securitized their settlement payments, West Virginia would receive as little as 25 cents on the dollar. Like Enron shareholders, West Virginia taxpayers would get only pennies on the dollar. This proposal's only winner 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.

West Virginia lawmakers want to use the money to pay off debts in the teacher's retirement fund. This is a near-sighted solution to the state's problem that only makes the state's budget harder to balance in future years. 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 West Virginia lawmakers truly want to reduce state expenses, they should invest a larger 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 West Virginia 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 House to reject this proposal.