Nine years ago this month, four of the United States’ largest tobacco companies, 46 states, the District of Columbia, and five U.S. territories signed the historic pact known as the Master Settlement Agreement. It required Big Tobacco to pay out billions of dollars. And every April 15 since then, the tobacco firms have complied, basing their payments on a formula that reflects the population and tobacco-related Medicaid expenses of the states.

To date, about $52 billion has been doled out, in increments ranging from $200,000 to $913 million. Where has it gone? Not, as antismoking groups had hoped, to smoking prevention—or at least not entirely. Instead, the sums have been funneled into everything from debt reduction to school renovations, with less than 9 percent going to antismoking efforts, according to the Washington-based Campaign for Tobacco-Free Kids.

In the meantime, cash-strapped states have begun to borrow against their future settlement payments. So far, about 15 states have issued bonds backed by tobacco corporations’ future payouts. Because the securities are considered somewhat risky (Big Tobacco has been challenging the constitutionality of the settlement), states pay relatively high interest—in the 4 to 7 percent range.

Borrowing Against the Awards

Increasingly, states are setting up financing authorities to issue bonds.

California

Bonds issued: $13.2 billion 

California has been one of the group’s most creative spenders. The Golden State was one of the first to securitize (in 2003) and has refinanced those bonds twice. The move provided an extra $1.782 billion to its government coffers, much of which went to settle an unrelated lawsuit.

Ohio

Bonds issued: $5 billion

The Buckeye State is one of the more recent converts to securitization and will fatten its treasury with $5 billion from bonds that go on sale in late 2007. Its plan: to upgrade schools and colleges or build new ones. Antitobacco activists, dressed as Grim Reapers, protested the decision this past spring.

New York

Bonds issued: $4.2 billion

New York moved to securitize in 2003. Some legislators objected to the decision, which was designed mostly to make up for the drop in state revenues after September 11. Most of the proceeds from the 20-year bonds have gone to health care.

Pennsylvania

Bonds issued: $500 million

Pennsylvania has spent more than $500 million to fund a program providing health insurance to low-income adults. This past summer, Governor Ed Rendell proposed securitizing $500 million of the payments to bankroll academic medical research. State Republicans, reluctant to take on more debt, are promising a fight. 

Illinois

Bonds issued: No plans

Illinois has used its tobacco award as leverage to collect additional funds from the federal government. The trick: earmarking $1.7 billion for Medicaid spending, which qualifies the state for a Medicaid match. Thus far, Illinois has spent just $126 million on smoking-cessation programs.

---