Copyright
(c) 2001 Alabama Law Review
Alabama
Law Review
Winter,
2001
52 Ala. L. Rev. 705
Reaping the Tobacco
Settlement Windfall:
The Viability of Future
Settlement Payment Securitization as an Option for State Legislatures
Walter Henry Clay McKay
I. Introduction
From the perspective of the casual observer,
the recent settlement agreements n1 between the tobacco industry and the
states' attorneys general represent an unprecedented opportunity for state governments n2 to advance the interests of their respective
citizenry. In historical terms, the tobacco settlement itself stands in a
category of its own and represents a unique situation in which an incredibly
large sum of money is expected to flow into the coffers of state governments. Upon
close examination of both the agreement terms and the future of the tobacco
industry as a whole, however, it is evident that reaping the windfall of the
settlement may be more difficult than previously imagined. This Comment seeks
to uncover the problems with payment under the agreement and evaluate the
validity of securitization of settlement income as an innovative solution to be
considered by state lawmakers in crafting plans for future use of their
settlement proceeds. [*706]
II. The Problems with Conventional Recovery Under the Settlement Agreements
Though the settlement agreements were intended
to appease the states by giving them an unprecedented sum of money as
compensation for the costs associated with the past and future tobacco related
health problems of their citizenry, n3 a world of difference exists between
merely signing the agreement and actually receiving the proceeds from the
agreement. Indeed, had the attorneys general merely walked into a bank vault
and each filled a suitcase with their respective share of the settlement
proceeds upon signing the agreement, there would likely be no controversy. If
such were the case, the key question for state legislatures would concentrate
on how best to spend the settlement proceeds rather than the more fundamental
question of how best to secure the proceeds from the agreement. n4 However,
from an examination both of the particular provisions in the Master Settlement
Agreement ("MSA") itself and the weak financial condition of the
tobacco industry as a whole, both as a result of declining sales and pending
litigation, it is evident that an infinite number of contingencies arise to
potentially prevent payment under the agreement.
A. The MSA Terms
The often used maxim "the devil is in the
details" could not be more true for the terms of
the MSA, which binds forty-six states to its massive framework. The most
important aspect of the agreement concerns the volume adjustment to be made
over the course of payment in relation to the amount of domestic tobacco
shipped in the United States. n5 In its simplest form,
this provision mandates an "upward or downward adjustment" of payment
in accordance with its accompanying [*707] formula. n6 The
effect of the provision, however, is likely to significantly decrease the
amount paid under the agreement over the entirety of the scheduled payments. n7
There are two main considerations that provide
support for this conclusion. First, several factors serve to expose the
likelihood of a decrease in domestic tobacco consumption in the United States
in the coming years. The MSA itself not only limits the ability of the tobacco
industry to advertise in certain areas and target the youth smoking market, n8
but it also requires that the industry itself spend a significant amount of its
resources to establish a national foundation for smoking prevention. n9 Additionally, a recent economic study suggests that the
volume of domestic tobacco consumption is likely to significantly decrease in
the coming years. n10
Another important consideration influencing
the future of domestic tobacco sales is the fact that the tobacco companies
themselves are merely subsidiaries of larger corporate entities, which have
diverse corporate portfolios composed of a multitude of consumer products. n11 The agreement itself does not prevent these leviathan
companies from changing their corporation's emphasis away from tobacco and into
safer consumer products with substantially less potential for tort liability. Likewise,
there is nothing to prohibit the industry itself from exploiting extremely
lucrative foreign markets and abandoning the domestic [*708]
market altogether. n12
The potential for federal regulation of the
tobacco industry is also factored into the settlement terms. The MSA provides
that any future federal regulation of the tobacco industry will offset the
amount to be received by the participating states. n13 Thus, if the federal
government decides to regulate tobacco products, the monetary amount of such
regulation will proportionally decrease each state's share of the MSA "dollar
for dollar." n14 When combined with the volume adjustments identified
above, the effect of this provision is to provide yet another means through
which the tobacco industry can potentially decrease future payment under the
settlement agreement.
B. The Minefield of Pending Litigation Against the Tobacco Industry
In addition to the various provisions in the
MSA itself which may allow the tobacco companies to decrease their future
payments, the massive amount of pending litigation against the industry may
also significantly affect the tobacco industry's ability to pay under the
agreement. Indeed, the threat of liability under such suits has led to
corporate restructuring among industry members n15 and the increasingly
realistic possibility of the tobacco companies seeking bankruptcy protection. n16
To further complicate this picture of financial distress, there is [*709]
evidence to suggest that jury opinions have recently begun to shift
against the tobacco industry, n17 which could potentially impact the outcome of
myriad pending claims against the industry. For example, while the most
successful tobacco industry defense in past tobacco lawsuits has focused on the
smoker's assumption of risk, this strategy has been recently undermined with
the discovery of internal industry documents revealing the tobacco companies'
knowledge of both the ill effects of smoking and the addictive nature of
nicotine. n18
Though the terms of the MSA demand that the
cigarette manufacturers will assume a proportional share of the liability of
any fellow bankrupt tobacco company, n19 this provision may create more
problems than it attempts to solve, because it puts even more pressure on an
already financially strapped industry. The use of bankruptcy in past industry-wide,
class action tort settings has led to significant delay in the receipt of
payment to product liability victims. n20 Thus,
despite the fact that suits against the tobacco industry remain a lucrative
undertaking for members of the plaintiffs' bar, the use of such suits to drive
the industry into the arms of bankruptcy protection would delay payment to all
tort claimants, including the states under the settlement agreements. [*710]
1. The Variety of Pending Litigation Against the Tobacco Industry
The suits themselves can broadly be classified
into four categories: foreign government suits seeking to recover for the cost
of treatment of tobacco-related illnesses, suits by private individuals to
recover for illnesses, suits by the federal government seeking both to regulate
tobacco and recover for the expenses of treating smoking-related illnesses, and
suits by union trust funds to recover for the smoking-related medical expenses
of their members. In a broad sense, these suits are similar to those of the
states' attorneys general in that a particular entity is attempting to recover
funds spent in the treatment of tobaccorelated
medical problems.
a. Individual Lawsuits
The terms of the MSA itself do not preclude
individuals from suing the tobacco companies under personal injury tort
theories. n21 Probably the most publicized and potentially threatening class
action suit to the industry is Engle v. R.J. Reynolds, in which a Florida
plaintiff sued on behalf of herself and other similarly situated Florida
smokers who have suffered ailments due to tobacco-related illnesses. The jury
in the trial court found the tobacco companies liable, n22 and the Florida
Civil Court of Appeals subsequently affirmed the class certification but
limited the class to Florida rather than United States residents in order to
maintain efficiency in the judicial process. n23
Furthermore, the trial court jury recently determined the amount of punitive
damages to be $ 145 billion. n24 Other recent
successful individual suits also illustrate the danger posed to the tobacco
industry by individual suits brought to recover medical expenses. n25 Thus, the industry is threatened by the ability of [*711]
individual plaintiffs to sue on behalf of themselves and others to
recover for tobacco-related illnesses.
b. Federal Government Lawsuits
Though an agency of the federal government
recently lost its widely publicized court battle to regulate tobacco as a drug,
n26 the Department of Justice has also sued the tobacco industry in an attempt
to recover the federal government's share of Medicaid and Medicare expenses
resulting from treatment of tobaccorelated illnesses.
n27 While the basis of this suit in theory sounds
similar to that of the states' attorneys general, which culminated in the MSA,
the federal government is using a number of innovative and untried theories to
support its claim to recovery, n28 some of which have been dismissed by the trial
court. n29 If the federal government were to prevail
in its action, the damages would most likely be extraordinary and the tobacco
industry [*712] would be significantly crippled in its
ability to meet its preexisting financial obligations, including those under
the MSA.
c. Foreign Government Lawsuits
In similar fashion to the suits initiated by
American governmental entities to recover health care costs due to tobaccorelated illnesses, many foreign governments have
initiated similar suits in various U.S. federal courts. n30
Such suits seemingly represent a far-fetched attempt to recover from the
tobacco industry. However, these suits serve to illustrate the truly immense
litigation burden currently facing the tobacco industry in the wake of the
successful settlement agreements with the states. Despite a recent federal
court decision casting doubt on the jurisdictional validity of such foreign
government claims, n31 the success of other suits against the industry,
including those culminating in the MSA, has effectively given foreign
governments the green light to pursue their own lawsuits in an effort to
recover the expenses associated with the immense cost of treating smokers'
health problems. n32
d. Union-Sponsored Lawsuits
Various union pension plans have also
initiated litigation against the tobacco industry for recovery of the expenses
associated with treating the tobacco-related illnesses of union members. Indeed,
more than eighty suits have been filed by union funds to recover such expenses,
which total in the tens of billions of dollars. n33
While these cases have had mixed results in the courts, n34 they nevertheless
represent yet another cause of action in the arsenal of weapons currently being
used by [*713] the plaintiffs' bar to attack the tobacco
industry.
2. The Cumulative Effect of Present and Future
Litigation
From the variety of pending actions against
the tobacco industry detailed above, it is evident that the settlement
agreements reached between the tobacco industry and the states' attorneys
general have by no means precluded further legal attacks against the industry. Furthermore,
there is nothing to suggest that the continuing stream of litigation will cease
at any point in the near future. With the widespread publication of damaging
tobacco documents on the Internet, n35 the discovery process has been made much
simpler and sensitive documents are now within the reach of virtually any
attorney considering a lawsuit. Whether the tobacco industry wins or loses the
hundreds of claims currently asserted against it, there will be significant
attorneys' fees and administrative costs associated with the defense of the
industry. These costs alone will further cripple the financial power of the
industry. Thus, it is evident that the ability of the tobacco industry to
successfully pay under the MSA has been irrevocably altered by the current
state of pending litigation, in all its many forms.
III. Settlement Securitization as a Solution
to the Problems Associated with Future Payment Stability
From the problems associated with payment
under the settlement agreements outlined in Part II above, it is evident that
recovery of the well publicized $ 246 billion cumulative settlement amount may
be elusive by conventional means. n36 Indeed, an ill-informed
state or municipal government may find itself obtaining a fraction of its share
of the settlement proceeds unless affirmative action is taken to ensure payment
through means other than the agreements themselves. One of
the most promising and innovative solutions to these problems concerns
securitization of future settlement proceeds as a means to immediately receive
a large chunk of the settlement. Indeed, several governmental entities
have already securitized portions of their tobacco settlement proceeds in order
to obtain an immediate portion of their settlement [*714]
share. n37 Several other state governments have
proposed legislation to facilitate the issuance of tobacco bonds, n38 and
commentators expect that as many as fortythree state
legislatures will address the issue of securitization in the coming years. n39
A. What Is Securitization?
Broadly speaking, securitization is the act of
a governmental entity issuing bonds backed by future settlement proceeds in
exchange for an [*715] immediate portion of the settlement in a lump
sum. n40 The option to securitize tobacco settlement
proceeds is analogous to the decision faced by a lottery winner: take the
winnings up front, albeit a smaller portion, or take a larger portion of the
winnings over an extended time period. n41 While bonds
issued by municipal and state governments have been a mainstay of public
finance in the United States for centuries, n42 due recently in part to the
availability of the interest on such bonds being exempt from federal taxation,
n43 tobacco settlement securitization presents unique benefits and
disadvantages distinct from a typical public finance bond issue.
1. The Benefits of Securitization
There are several important reasons for a
state government to consider securitizing portions of their settlement proceeds.
Arguably the most important justification for securitization is that it passes
the risk associated with the present financial problems of the tobacco industry
onto bondholders rather than leaving the states to absorb such risks. n44 From the fundamental problems associated with settlement
recovery under the MSA outlined in Part II, it is evident that a myriad of
contingencies exist to potentially prevent full recovery under the agreement
terms. Furthermore, if even a handful of the many pending lawsuits against the
tobacco industry succeed, the companies themselves could be forced into seeking
bankruptcy protection, which would delay payment under the settlement for an
indeterminable time period. Considering [*716]
the inherent risks associated with recovery through conventional means,
securitization represents an important option to be considered by state
legislatures.
Another important advantage to securitization
is that it provides for an immediate infusion of cash that state governments
may use for ambitious public projects. States considering securitization have
expressed widely divergent ideas as to the manner in which their bond proceeds
may be spent. n45 Without the option of securitization,
however, these ambitious projects might never effectively come to fruition due
to budgetary concerns.
2. The Disadvantages of Securitization
Despite the apparent benefits that
securitization offers state governments in the use of their respective
settlement proceeds, there are also several important potential disadvantages
which must be taken into account before a fully informed decision can be made
regarding securitization. The most important concern with securitization of
tobacco proceeds is the risk to the state associated with default on interest
payments due to disruptions in settlement income. While theoretically the state
has isolated itself from liability by issuing revenue bonds through distinct
entities which are entirely separate from the state, n46 past municipal bond
defaults reveal that the issuing entity of defaulting bonds may be culpable in
the event of default. n47 Furthermore, revenue
bonds [*717] may carry with them the concept of a "moral
obligation" placed upon the state to ensure that the debt is repaid. n48 The conclusion to be reached from this discussion is
that the mere issuance of tobacco bonds does not completely absolve the state
entity of the risk associated with tobacco industry bankruptcy and subsequent
default on interest payments. Though theoretically the tobacco bondholders will
lose their investment in the transaction, as affirmed by judicial examination
of past revenue bond defaults, n49 the state issuer may face some negative
effects from default, such as increased issuance costs in the form of higher
interest rates in future bond issues.
Another important concern with securitization
is the fact that the state issuing tobacco bonds will spend a large sum of
money in order to complete the transaction. Commentators have recognized that
the investment banking firms pushing for tobacco bond securitization will
themselves reap a tremendous financial windfall in the transaction fees charged
to complete each deal. n50 Furthermore, attorneys
acting as bond counsel will also demand adequate compensation for their work in
providing legal advice on behalf of the issuing governmental entity. Each state
government considering securitization should carefully consider the transaction
costs to determine whether issuance of such bonds is in the best interest of
the state. [*718]
The available discount rate on tobacco revenue
bonds is another significant concern involved in the decision by state
governments to securitize tobacco settlement proceeds. The risk characteristics
of the underlying transaction are an intrinsic part of all bond issues, and
investment banks underwriting bond transactions assign an interest rate to the
bond according to its calculation of the likelihood that the debt will
eventually be repaid. n51 In terms of tobacco bonds,
analysts use the "weakest link" approach to allocate risk, which
emphasizes the financial ratings given to the tobacco companies themselves when
assigning a risk factor to the underlying bond offering. n52
The fact that the State of Florida was recently offered twenty-nine cents on
the dollar in preliminary discussions with investment banks concerning the
issuance of tobacco bonds illustrates the risk inherent in such bonds and the
manner in which this risk affects issuance costs. n53
As the ebb and flow of tobacco related litigation progresses over time,
issuance costs will either increase or decrease depending on how the tobacco
industry weathers its litigation storm. However, it would be entirely
irresponsible for any state considering securitization to avoid discussing
issuance costs before committing to a plan to secure its settlement proceeds. [*719]
B. The Alabama Model
When the Alabama 21st Century Authority n54
("Authority") was signed into law by Governor Siegelman
on June 9, 1999, n55 Alabama became one of the first states to enact
legislation to facilitate the securitization of future tobacco settlement
proceeds. While the legislation itself was propagated upon a legislative
finding that "the State of Alabama has a great need from time-to-time to
have access to financing for economic development and industrial recruitment
that does not involve improvement to revenue-producing facilities," n56
there were distinctive constitutional issues which also necessitated the
creation of a separate entity to issue such debt. n57
The effect of the legislation is that Alabama is now in a position to issue
debt backed by future tobacco settlement proceeds upon future legislative
action. n58
Though future legislative action must be taken
to issue tobacco settlement bonds, the act creating the Authority provides
detail to elucidate the financial structure of potential bond offerings. n59
Under the [*720] act, the tobacco settlement bonds would be
revenue bonds backed solely by the future tobacco settlement proceeds and "shall
be solely and exclusively an obligation of the authority and shall not create
an obligation or debt of the state." n60 This distinction is crucial
because, given the intrinsic risk associated with issuance of tobacco
settlement bonds, it is fundamentally important that the state remove itself
from liability in the case of default. n61 Given the approximately $ 350
million allocated to the Alabama 21st Century Fund for purposes of bond
issuance, n62 structuring the bond transactions as revenue backed rather than
as a general obligation of the state will protect the state in the event of
default, leaving the bondholders to absorb the potential loss. n63
Another important aspect of the Alabama 21st
Century Authority legislation is the fact that it does not allocate all of its
resources to bond issuance. Indeed, the state has diversified its settlement
portfolio to include approximately $ 1.735 billion for the Children First Trust
Fund n64 and has also earmarked settlement proceeds for the Alabama Senior
Services Trust Fund and the State General Funds. n65
Thus, the Alabama legislation attempts to minimize the risk associated with
tobacco bond issuance by diversifying its settlement portfolio to accommodate
various public interests.
C. Alternatives to Securitization
Various states have displayed contempt for the
risk associated with tobacco bond securitization and are considering other
available legislative options to minimize the risks associated therewith. n66 Indeed, the legislative approach taken by the State of
Mississippi toward obtaining tobacco settlement proceeds exemplifies the
cautious attitude advocated [*721] by several states toward securitization. Under
its plan, the State of Mississippi established the Health Care Trust Fund n67
pursuant to the state's belief that "the funds received by the state of
Mississippi from tobacco companies in [the tobacco settlement] should be
applied toward improving the health and health care of the citizens and
residents of the state." n68 Rather than securitize the proceeds allocated
to its trust fund, the state plans to invest the proceeds as they become
available, an approach similar to that taken by the state in the administration
of its employee retirement trust fund. n69 The
advantageous nature of Mississippi's settlement with the tobacco industry,
however, elucidates the cautious tone taken by the state in the administration
of its settlement proceeds. n70 Thus, the Mississippi
plan may not necessarily be a model for other states to use in deciding how to
secure their portions of the settlement agreements.
IV. Conclusion
The historic settlement agreements reached
between the tobacco industry and the states' attorneys general have the
potential to significantly enhance the ability of every state government to
provide for its citizenry. The signing of the agreements themselves, however,
merely represents the beginning of the multi-stage process associated with the
ultimate goal of securing the entirety of the settlement proceeds. Furthermore,
reliance on the lengthy time table established by the MSA for settlement
allocation may not be the best choice for state governments given the fact that
the days of considering the tobacco industry a cash cow with an iron-clad,
steady future income stream have arguably ended. The tobacco industry faces
myriad pending lawsuits from virtually [*722]
every conceivable angle and will probably continue to face such suits in
the near future. Ironically, the aggressiveness of the states' attorneys
general in pursuing the suits culminating in the MSA may have created the
present litigation which in turn threatens to preclude payment under the
settlement agreements negotiated by the states.
Securitization is an innovative concept
designed to more easily enable state governments to collect their share of the
settlement proceeds given the extensive problems associated with the
conventional means to achieve such a result. While the concept is not without
important disadvantages which must be thoroughly examined by the finance
officials of any state government considering the issuance of tobacco bonds,
there are definite benefits to securing settlement proceeds which may outweigh
such risks. As one of the first states to pass legislation in this area,
Alabama has effectively developed a financial strategy to deal with the
problems faced by virtually all states under the MSA. Any state considering
securitization should carefully examine this legislation when crafting their
own plans for securing tobacco settlement proceeds. As a counterweight to the
risk associated with the Alabama model, the Mississippi legislation
establishing that state's Health Care Trust Fund should also be examined by
state governments in their quest to more effectively reap the windfall of the
tobacco settlement agreements.
FOOTNOTES:
n1 The term "settlement
agreements" refers to the various agreements which eventually led every
state to release the tobacco industry from its liability for each state's past
and future costs of treating tobacco related illnesses. Within this series of
settlements, the Master Settlement Agreement ("MSA") reached between
the tobacco companies and the state attorneys general of forty-six states, five
commonwealths and territories, and the District of Columbia on November 28, 1998,
for $ 206 billion stands out as the most publicized. However, four states--Florida,
Texas, Mississippi, and Minnesota--chose not to participate in the MSA but
reached individual settlements of their own totaling $ 40 billion. The combined
$ 246 billion in the overall settlement package represents the tobacco
companies collectively responsible for virtually the entire tobacco market and
is scheduled for disbursement to the states in perpetuity, with the bulk of
payments being made over a twenty-five year time frame beginning in 2000. Unless
otherwise noted, assume that any discussion of the terms of the MSA also
applies equally to the separate settlement agreements reached by Florida,
Texas, Mississippi, and Minnesota.
n2 Though I refer to the
states as the recipients of compensation under the MSA in this Comment, various
metropolitan entities, including New York, Chicago, San Francisco, and Los
Angeles, have successfully sued the tobacco industry for a proportionate share
of the settlement proceeds. The effect of such suits is that these governmental
entities have now locked in a proportionate share of the settlement award. Various
county governments have followed suit and have also succeeded in locking in a
portion of their settlement share from that of their respective state's
settlement proceeds. For purposes of this Comment, however, assume that the
state entity is the entity being discussed, unless it is otherwise noted.
n3 See Marc Galanter, Big Tobacco: Winning by Losing, Am. Law., Jan.-Feb.
1999, at 55.
n4 As would be expected,
the lion's share of the settlement proceeds has been earmarked for health care
related spending in most states. See Shailagh Murray,
Most States to Spend Tobacco Settlement On Improving Health Care, Survey Says,
Wall St. J., Mar. 8, 2000, at B6. However, the author assumes that receipt of
payment will not be problematic. This Comment argues that future payment is
extremely problematic by conventional means and examines securitization of
settlement proceeds as a possible solution to recovery of settlement proceeds.
n5 See Master Settlement
Agreement, ch. 2 ("Definitions"),
subsection (aaa) ("Volume Adjustment") available
in <http://www.naag.org/tobac/cigmsa.rtf> (hereinafter "MSA"). This
subsection provides the basic framework for adjusting the amount of money to be
received by the states over the coming years. Thus, it is evident that the
original $ 206 billion settlement figure most likely represents a grossly
disproportionate figure compared with the amount the states are in actuality
likely to receive over the course of the payment schedule.
n6 See id., exhibit E ("Formula
for Calculating Volume Adjustments").
n7 The supreme irony of
the volume provision is that it forces the states to take a position directly
contrary to their conceived motivation for suing the tobacco industry. The
fundamental concept behind the states' law suits concerned the actions of the
tobacco companies in producing a harmful and dangerous product which left the
states to absorb the tremendous cost of treating smoking related medical
problems. See Galanter, supra note 3. Though public
policy demands that the states bargain for provisions in the MSA to curb
tobacco consumption, the only effective way for the states to get full
compensation under the agreement is for consumption to either remain at present
levels or even increase in the coming years.
n8 See MSA, supra note 5, ch. 3 ("Permanent Relief").
n9 See id., ch. 6 ("Establishment of a National Foundation").
n10 See A Forecast of U.S. Cigarette
Consumption (1999-2042), WEFA (formerly "Wharton Econ. Forecasting Assocs."),
October, 1999. This study predicts that over the next forty years, U.S. cigarette
consumption will decline by 58% from 1998 levels. The study reveals that
cigarette consumption has seen consistent decline since its peak of 640 billion
cigarettes consumed in 1981. In 1998, for example, there were 470 billion
cigarettes consumed. Thus, the study concludes that there is an ongoing,
widespread decline in U.S. cigarette sales, which will continue into the future.
In terms of the MSA, the study's results indicate that state governments will
receive substantially less money from the settlement over time because the
volume of U.S. cigarette sales is expected to significantly decline.
n11
For example, Philip Morris, which dominates the cigarette market with 68% of
total sales, in large part due to its best selling brand Marlboro, is a
corporate conglomerate with subsidiaries producing a variety of consumer
products. If Philip Morris concludes in the future that its tobacco subsidiary
is not very profitable, it has the option of shifting emphasis to promote its
other extremely lucrative consumer products divisions, including Kraft Foods
and Miller Brewing Co.
n12 Foreign tobacco markets
are extremely lucrative and have not been fully exploited. See Robert Weissman,
Cancel the Marlboro Man's Passport: Tobacco Legislation Should Restrict the
Overseas Marketing of Cigarettes, Legal Times, May 18, 1998, at 27. For
example, the cigarette export market has risen more than 250% over the last
decade for Philip Morris and R.J. Reynolds, and the companies currently sell 66%
of their cigarettes overseas, which accounts for 50% of their overall profits. Id.
Under the MSA terms, the tobacco industry could dramatically increase its sales
to foreign markets and receive billions of dollars that would not serve to
increase payments under the MSA. Only an increase in domestic tobacco shipments
would trigger an increase of MSA payments to the states, which is unlikely. See
WEFA, supra note 10. However, if foreign governments are successful in their
pending suits against the industry, see Voris, infra
note 21, the tobacco companies may find foreign tobacco markets much less
appealing.
n13 See MSA, supra note 5, ch. 10 ("Effect of Federal Tobacco-Related Legislation").
Under the terms of the agreement, such legislation must be enacted before
November 30, 2002, for the offset to come into effect. This leaves roughly a
two-year time frame for congressional action on the matter. Regardless of
whether potential legislation comes into effect by the specified date, however,
the industry will be financially crippled by such legislation. If the
legislation occurs after the specified date, the lack of an offset will further
push the industry into financial demise.
n14
Id.
n15 See
Martha Hamilton, Union of RJR, Nabisco Dissolves; Tobacco's Troubles Had Hurt
Stock of Camel, Oreo Maker, Wash. Post, Mar. 10, 1999, at A01 (reporting
decision by major cigarette maker to spin off domestic tobacco business and
sell international tobacco holdings for $ 8 billion).
n16
See Jonathan Lipson, Corporate BriefBankruptcy-Tobacco
Companies, Nat'l L.J., Dec. 6, 1999, at B6 (advocating the use of Chapter 11
reorganization as a means for tobacco companies to handle pending litigation);
Andrew Bary, Strong Profit Reports Put Stocks Back on
Track, Barron's, Oct. 25, 1999, available in 1999 WL-BARRONS 29061603 (acknowledging
the possibility of Philip Morris bankruptcy from the litigation in Engle v. R.J.
Reynolds Tobacco Co., 672 So. 2d 39 (Fla. Dist. Ct. App. 1996) and comparing
the circumstances surrounding the Engle suit to the 1987 Texaco bankruptcy,
where Texaco sought bankruptcy protection upon being ordered to pay a multi-billion
dollar award to Pennzoil). But see Ann Davis, Is Chapter 11 Just an Idle Threat
by Big Tobacco?, Wall St. J., Apr. 17, 1998, at B1 (commenting on the
disadvantages involved with filing for Chapter 11 and distinguishing the
present tobacco litigation from past class actions involving the now bankrupt
manufacturers of asbestos, breast implants, and female contraceptive devices). The
author argues that a manufacturer must take a tortious
product off the market before bankruptcy protection can provide effective
relief from product liability claims. Id. Unlike past industry-wide lawsuits,
such as those involving asbestos, breast implants, and female contraceptive
devices, however, the tobacco companies continue to market their product and
have not shown any willingness to voluntarily cease cigarette production. Indeed,
proceeds from the sale of cigarettes will presumably constitute the main source
of payment to prospective tort claimants.
n17 See Tucker Player,
After the Fall: The Cigarette Papers, The Global Settlement, and the Future of
Tobacco Litigation, 49 S.C. L. Rev. 311, 338 (1998).
n18
Id. The
uncovering of these documents served as the catalyst which began the series of
events that ultimately culminated in the tobacco industry's settlement with the
states' attorneys general. These documents led the tobacco companies to abandon
their historically successful trial strategy of taking each lawsuit to trial
rather than settling claims. Id. at 312. The
remarkable success of this strategy is evident in the fact that the industry
had never lost a single case nor paid a penny in damages before the advent of
these internal documents. Id.
n19 See MSA, supra note 5, ch. 18 ("Miscellaneous"), subsection (h) ("Obligations
Several, Not Joint").
n20 David Segal, Tobacco
Payout Questions: To Whom and How Much? Huge Liability Settlement Would Tread
New Ground, Raise Problems of Administration, Wash. Post, Apr. 25, 1997, at A22
(comparing possible tobacco settlement with other past industry-wide tort
claims, including asbestos and female contraceptive devices, and concluding
that bankruptcy in those settlements led to lengthy disruption of payment to
claimants).
n21
See Bob Van Voris, New Attack on Big Tobacco: Philip
Morris Verdict May Be Small Compared with Union Fund Liability, Nat'l L.J., Feb.
22, 1999, at A1. Interestingly, the article notes that while the MSA does not
preclude such suits, an aborted $ 368.5 billion global settlement during 1997
would have effectively shut the door on such suits, both individual tort
actions and union trust cases. See also Player, supra note 17. The 1997
settlement agreement, however, failed to win approval in the U.S. Congress. See
Adam Levy, Announced to Trounced: A Journalist's Comments on the Demise of the
Tobacco Settlement, 2 J. Health Care L. & Pol'y 1,
available in 2 WL-JHTHCLP 1 (1998).
n22 See Milo Geyelin, Florida Court Lessens Punitive Impact Tobacco
Companies Will Have to Face, Wall St. J., Sept. 7, 1999, at B8.
n23 See Engle v. R.J. Reynolds
Tobacco Co., 672 So. 2d 39, 42 (Fla. Dist. Ct. App. 1996).
n24
See Milo Geyelin & Gordon Fairclough,
Taking a Hit: Yes, $ 145 Billion Deals Tobacco a Huge Blow, But Not Killing
One, Wall St. J., July 17, 2000, at A1 (reporting record punitive damages
verdict but arguing that tobacco industry will survive the aftermath of the
Engle suit).
n25 See, e.g., Henley v. Philip
Morris Inc., No. 995172, 1999 WL 221076 (Cal. Super. Apr. 6, 1999) (reducing
trial court jury's punitive damages award to lung cancer victim from $ 50
million to $ 25 million but retaining $ 51.5 million in total damages and denying
defendant's motion for new trial and for judgment notwithstanding the verdict).
Another class action has been certified in Louisiana but has not gone to trial.
See Scott v. American Tobacco Co., 725 So. 2d 10 (La. Ct. App.
1998). For an analysis of the current state of class action tobacco
lawsuits, see Susan Kearns, Decertification of Statewide Tobacco Class Actions,
74 N.Y.U. L. Rev. 1336 (1999) (concluding that most recent statewide tobacco
class actions have had trouble obtaining class certification).
n26 See, e.g., Food &
Drug Admin. v. Brown & Williamson Tobacco Corp., 529
U.S. 120 (2000), aff'g Brown & Williamson Tobacco
Corp. v. Food & Drug Admin., 153 F.3d 155 (4th Cir. 1998). The decision of
the U.S. Supreme Court in this case is not entirely an outright victory for the
tobacco industry, because the Court's decision merely denied the FDA the right
to regulate tobacco under the Food & Cosmetics Act. The U.S. Congress could
effectively override the Court's decision if it were to pass legislation explicitly
giving the FDA such authority. The effect of such new federal legislation would
inevitably lead to a decrease in payments under the MSA, because the agreement
explicitly contains provisions to this effect. See MSA, supra note 5. In the
wake of the Court's decision, however, some commentators expect the states to
take the initiative in the regulation of tobacco. See Gordon Fairclough, States May Regulate Tobacco in FDA's Absence,
Wall St. J., Mar. 23, 2000, at B14. If state governments were to pass
legislation in this area, there would be no effect on MSA settlement payments,
and the lack of an offset would further cripple the tobacco industry. Thus, the
tobacco industry would prefer that the federal government take the lead in the
area of tobacco regulation.
n27 United States v. Philip
Morris, Inc., No. 1:99CV2496 (D.D.C. Oct. 14, 1999).
n28 See Bob Van Voris, DOJ Tobacco Suit a Long Shot: Government Using RICO
and Other Laws in Untried Ways, 22 Nat.'l L.J. 7, Oct.
11, 1999. The article depicts the federal lawsuit as a longshot
because it employs parts of the Racketeer Influenced and Corrupt Organization
Act (RICO), the Medical Care Recovery Act, and Medicare Secondary Payer Act,
all of which were legislative acts originally created for purposes other than
those that the government is using them for in this case. However, at one time,
the suits which culminated in the MSA were considered longshots
and the tobacco industry as a whole seemed invincible. For a general history of
tobacco litigation in the United States, see, e.g., Player, supra note 17.
n29 See United States v. Philip
Morris, Inc., No. Civ. A. 99-2496 GK, 2000 WL 1477152,
at *2 (D.D.C. Sept. 28, 2000) (dismissing federal government claims against the
tobacco industry under the Medical Care Recovery Act and Medicare Secondary
Payer provisions but upholding validity of federal government claims under the
Racketeer Influenced and Corrupt Organizations Act). See also Gary Fields &
Gordon Fairclough, U.S. to Pursue Tobacco Case under
RICO, Wall St. J., Sept. 29, 2000, at A3.
n30 See Voris,
supra note 21. The article reports that the governments of Guatemala,
Nicaragua, Panama, Bolivia, and Venezuela have initiated such suits, with
several other countries considering the possibility of similar suits.
n31 See In re Tobacco/Governmental
Health Care Costs Litigation, 83 F. Supp. 2d 125 (D.D.C. 1999) (ruling that
claims by Republic of Guatemala against tobacco industry were barred by
doctrine of remoteness).
n32
See Carrie Johnson, Big Tobacco Still Has Litigation Woes Abroad: U.S. Settlement
May Spur Foreign Boom in Suits Against American Tobacco Sellers, Texas Law.,
Dec. 7, 1998, available in WL 12/7/1998 TEXLAW 6.
n33 See Voris,
supra note 21.
n34 See MSA Does Not Bar
Union Fund Claims, CA Judge Rules, Andrews Breast Implant Litig.
Rep. (Jan. 17, 2000), available in WL, 8 No. 21 ANBRIMLR 7.
This article discusses In re Tobacco Cases II, No. JCCP 4042
(Cal. Super. Ct. San Diego Cty.,
Dec. 15, 1999), a recent state court action brought by a union health fund to
recover for its members' medical expenses. Id. The court found that the
MSA did not prohibit the suit. Id. But see Statutory Interpretation-Second
Circuit Holds that Health Care Funds Lack Standing to Sue Tobacco Companies
Under RICO-Laborers Local 17 Health & Benefit Fund v. Philip Morris, Inc., 191
F.3d 229 (2d Cir. 1999), 113 Harv. L. Rev. 1063 (2000)
(reporting recent action by the Second Circuit Court of Appeals in denying RICO
claims of union health fund in litigation against the tobacco industry).
n35
See Mark Gottlieb, Finding the Smoking Guns in Tobacco Litigation, Trial, Nov. 1999,
available in WL, 35-NOV Trial 22.
n36 The term "conventional
means" refers to an approach to the settlement agreements which emphasizes
receipt of the settlement proceeds as mandated by the agreements themselves (i.e.,
payment of the $ 246 billion in annual allotments over an extended time period).
Securitization is the opposite of such an approach because it emphasizes
payment of the proceeds up front rather than over an extended time period. See
Kelly Nicholson, infra, note 40.
n37
The governmental entities which have already securitized portions of their
settlement proceeds include New York City, which secured $ 685 million for
school renovation and expansion; Nassau County, which secured $ 323 million for
general budgetary purposes; Westchester County, which secured $ 92 million for
construction of a medical care facility; Monroe County, which secured $ 160
million for undisclosed purposes; and Erie County, which secured $ 200 million
to establish a trust for payment of ongoing expenses, such as Medicaid costs. Each
of these entities is a part of the State of New York and receives a certain
portion of New York's MSA proceeds. However, other jurisdictions have recently
closed tobacco bond deals of their own. See Michael Stanton, Smoking Out
Investors: Dealers Look to Broaden Appeal of Tobacco Debt, Bond Buyer, July 25,
2000, at 1, available in 2000 WL 23696409 (reporting that the Alaska Housing
Finance Corp. secured $ 93 million to raise funds for capital projects in its
state educational institutions). See also Shelly Sigo,
Alabama Officials Stressing the Safety of Their Tobacco Deal, Bond Buyer, Aug. 31,
2000, at 44, available in 2000 WL 23697662 (reporting that the State of Alabama
expects shortly to secure $ 50 million as part of an economic incentive package
to facilitate the construction of an automotive manufacturing plant for Honda
Motor Corporation). The history of poor fiscal management within several of
these entities may be the leading factor influencing their decisions to secure
portions of their settlement proceeds. See Daniel Kruger, Will Nassau Trump NYC?, Bond Buyer, Oct. 4, 1999, at 1, available in 1999 WL 19926250.
The $ 323 million securitized by Nassau County represents the entirety of its
future settlement proceeds. See id. Though New York City is on better financial
footing than Nassau County, its also has a history of
poor fiscal management. See, e.g., Donna E. Shalala & Carol Bellamy, State
Saves a City: The New York Case, 1976 Duke L.J. 1119 (1976). The fundamental
point to be taken from these sales, however, is that they illustrate that a
substantial market exists for these bonds and that investment banks are willing
to take the inherent risks associated with marketing these bonds. Indeed, it is
estimated that the municipal bond market can support up to $ 15 billion in
tobacco bonds. See Daniel Kruger, State Finance Officials Push Tobacco Debt,
Bond Buyer, Mar. 10, 2000, at 1, available in 2000 WL 5810184.
n38
See, e.g., Darrell Preston, Colorado Advances Proposal to Securitize Tobacco
Money, Bond Buyer, Mar. 23, 2000, at 1, available in 2000 WL 5810532 (reporting
that Colorado is considering securitizing the entirety of its $ 2.9 billion
tobacco settlement package); Elizabeth Albanese, Kansas May Back Children's
Bonds With Tobacco Money, Bond Buyer, Mar. 15, 2000, at 1, available in 2000 WL
5810302 (reporting that Kansas is considering securitizing a portion of its $ 1.8
billion settlement package); Robert Whalen, Florida Mulls $ 3 Billion of
Tobacco Debt, Bond Buyer, Feb. 9, 2000, at 1, available in 2000 WL 5808870;
Robert Whalen, Southeast States Begin Making Plans for Tobacco Largesse, Bond
Buyer, Jan. 27, 2000, at 4, available in 2000 WL 5808508 (reporting that such
states as Alabama, Louisiana, Virginia, South Carolina, and Florida are
considering the securitization of settlement proceeds); Elizabeth Albanese
& Christopher McEntee, Southern Governors Flirt
with Tobacco Securitization, Bond Buyer, Dec. 30, 1999, at 44, available in 1999
WL 29982659 (reporting that Alabama is considering tobacco securitization to
further its economic incentives packages in order to attract big business to
the state).
n39
See Matthew Vadum, And the Party Goes On, Bond Buyer,
Dec. 23, 1999, at 1, available in 1999 WL 29982496. The article reports that
approximately one-third of states have yet to determine the manner in which to
spend their respective share of the tobacco windfall.
n40 In one sense, there is
nothing novel about the ability of state governments to obtain an immediate
cash infusion through securitizing portions of expected income streams. For
example, two recent federal legislative acts, the National Highway System
Designation Act of 1995 and the Transportation Equity Act for the 21st Century,
have authorized state governments to issue so called "GARVEE" bonds,
which are backed by revenue from future federal appropriations of state
transportation funds. See Kelly Nicholson, Securitization: An Option for State
Tobacco Settlement Funds (last modified Sept. 8,1999) <http://www.nga.org/Health/Tobacco.htm>.
Despite the allowance for such bonds, however, it is undeniable that tobacco
bonds are far more risky than "GARVEE" bonds, because the tobacco
income stream is subject to many contingencies, as examined supra in Part II.
n41 See Joni James &
David Milstead, States Mull Whether to Sell Stream of
Tobacco Dollars, Wall St. J., Aug. 2, 2000, at F1. See also Patricia Hill, Bond
Plan Speeds Tobacco Cash; Virginia Sees a Way to Get Money for Schools Right
Away, Wash. Times, Jan. 17, 2000, at A1.
n42 See, e.g., D. Roderick Kiewiet & Kristin Szakaly,
Constitutional Limitations on Borrowing: An Analysis of State Bonded
Indebtedness, 12 J.L. Econ. & Org. 62 (1996).
n43 See 26 U.S.C. § 103(a) (1994), which provides that:
"gross income does not include interest on any State or local bond." This
basic provision excludes tax-exempt treatment of certain non-qualified "private
activity bonds," see id. § 103(b)(1), but
otherwise acts to facilitate governmental entities in debt issuance for
financial undertakings which represent a "public purpose."
n44 For more detailed
analysis concerning the manner in which securitization transfers such risk, see
Nicholson, supra note 40.
n45
For example, Virginia plans to use its tobacco securitization proceeds to
repair its state highways, see Whalen, supra note 38, while Alabama plans to
use its money to attract large corporations into the state with economic
incentives packages. See Albanese & McEntee,
supra note 38. Meanwhile, Colorado expects to use its securitization proceeds
for the establishment of an investment trust fund, see Preston, supra note 38,
and Kansas plans to use its tobacco bond proceeds for the creation of childrens programs. See Albanese, supra note 38.
n46 The distinction between
"general obligation" bonds and "revenue" bonds provides the
background necessary to fully understand the underlying issues. Unlike revenue
bonds, which are backed solely by the revenue obtained from the project through
which the bonds were issued, general obligation bonds are backed by the "full
faith and credit" of the governmental entity issuing such bonds and are
analogous to commercial unsecured recourse debt. Robert S. Amdursky,
The 1988 Municipal Bankruptcy Amendments: History,
Purposes, and Effects, 22 Urb. Law.
1, 2 n.4 (1990). Thus, if an entity issues general
obligation bonds and the underlying project fails, bondholders have the right
to force the governmental entity to raise taxes in order to repay the debt
issued to initiate the project. Id. The riskiness of
tobacco bonds precludes the issuing entity from even considering general
obligation bonds, since default would entail grave budgetary problems. The
issuance of revenue bonds, however, only entitles bondholders to debt repayment
from the project revenue stream, and default on such bonds leaves the
bondholders at a loss, without recourse to the taxing power of the entity
issuing such debt. Id. Such bonds are analogous to commercial secured non-recourse
debt. Id. Due to the inability of bondholders to force the issuing governmental
entity to raise taxes in order to pay for defaulting bonds, revenue bonds are
deemed more risky than general obligation bonds and typically carry a
proportionally higher interest rate than general obligation bonds.
n47 The notion of
culpability carries with it many different forms. For example, while the State
of Washington was held not liable in the repayment of $ 2.2 billion of defaulted
revenue bonds resulting from the issuance of debt to finance two nuclear
reactors, as part of the grossly mismanaged Washington Public Power Supply
System ("WPPSS"), see, e.g., Chemical Bank v. WPPSS, 666 P.2d 329 (Wash.
1983), the state nevertheless incurred an increase in issuance costs in
subsequent bond deals, including an increase in available interest rates from
bond underwriters. Teresa Trissell, Note, Derivative
Use in TaxExempt Financing, 48 Tax Law. 1021, 1029 (1995). The key point to be taken from the
example of the WPPSS case, which was undoubtedly one of the greatest debacles
in the history of municipal bond finance, is that the distinction between
revenue and general obligation bonds cannot be understood in a vacuum. Though
state governments may use revenue bonds in the issuance of tobacco debt, it
must be understood that default on such bonds will economically impact the
state if the debt is not repaid. The short term effect of such a refusal to
repay tobacco revenue bonds would be a deterioration
in the state's relationship with underwriters, resulting in much higher costs
in future issues.
n48 See Trissell,
supra note 47, at 1028 n.62. The author argues that even though there is no
legally binding obligation placed upon the state government issuing revenue
bonds to repay the debt, there is nevertheless a "moral obligation" to
repay such bonds since the negative side effects of nonrepayment
will grossly outweigh the state's responsibility to keep bondholders'
expectations fulfilled.
n49 See generally Chemical
Bank, 666 P.2d 329. The court held the public issuance of $ 2.2 billion of
revenue bonds ultra vires and absolved the State of
Washington of its responsibility to repay the debt and satisfy its bondholders.
Id. Part III of Justice Dore's concurring opinion is
particularly instructive as to the distinction between revenue and general
obligation bonds. The justice concludes: "because the bonds were labeled
as revenue bonds . . . the risk of project failure should be on the investors
who bought the bonds knowing the sole source of payment was to be the revenues
from the sale of electricity which was expected to be generated." Id. at 346.
n50
See Mary Ellen Klas, Bush: Sell Tobacco Claim for
Lump-Sum Payment Deal Would Provide Risk-Free 29<cents> on Dollar, Palm
Beach Post, Jan. 22, 2000, at 1A, available in 2000 WL 7594710.
n51 See generally
Nicholson, supra note 40.
n52
Daniel Kruger, Step One: Bankruptcy with Tobacco, Worst-Case Scenario Comes
First, Bond Buyer, June 11, 1999, at 1, available in 1999 WL 19922803. The "weakest
link" approach examines the most troublesome link in the debt transaction
and rates the bonds according to this participant. See Nicholson, supra note 40.
In this case, the weakest link is the tobacco industry itself, which overall
has a low credit rating due to the concerns relating to pending litigation. See
supra Part II. Thus, analysts rate the likelihood of default on tobacco bonds
according to the credit rating of the tobacco companies themselves, because the
financial strength of the industry supplies the revenue necessary for the state
to make interest payments on the bonds. Nicholson, supra note 40. For example,
analysts in the previous tobacco bond deals rated the bonds in the single A category. See Daniel Kruger, New York City's Tobacco Debt
Ready to Price, Bond Buyer, Nov. 4, 1999, at 1, available in 1999 WL 19927273. According
to the S&P rating system for bonds, AAA is the most favorable rating
possible and, thus, carries the lowest rate of interest. Only the most well
managed corporations, such as Johnson & Johnson, Exxon, and G.E., receive
AAA ratings. S&P's Corporate Ratings, Global 'AAA' List (visited Jan. 25, 2001) <http://www.standardandpoors.com/ratings/highyield/AAAlist.htm>.
The continuum continues to AA, A, and BBB, with any rating below BBB considered
non-investment grade debt (i.e. junk bonds). See R.J. Shook, Wall St. Dictionary
430 (Career Press 1999). Tobacco companies are generally rated in the A to BBB
range. See, e.g., Kruger supra. In terms of the
tobacco securitization phenomenon, the effect of the "weakest link" approach
is that it makes the cost of issuance higher than that which most state issuers
are usually accustomed, because state government credit ratings are generally
extremely high at AA to AAA.
n53 See Klas,
supra note 50. This effectively illustrates the lottery analogy discussed
earlier in the Comment, see text accompanying supra note 41. By securitizing
its settlement proceeds, Florida would receive approximately onethird of the amount it would receive if it were to wait
and receive the money piecemeal over the next twenty-five years. From this
example, it is evident that any state considering securitization will lose a
large chunk of its proceeds through exercising the option to receive money
immediately.
n54 Ala. Code § 41-10-621 (Supp. 1999) ("Alabama 21st
Century Authority"). In terms of the act itself, there is nothing novel in
the state's creation of an "authority" to handle the settlement
proceeds. Indeed, an examination of section 41 of the Alabama Code reveals that
the legislature has created numerous authorities to finance many diverse
governmental interests, ranging from industrial development, to historical site
preservation, to public entertainment. The rationale for the creation of such
entities is discussed more fully below.
n55
Id. § 41-10-620.
n56
Id. § 41-10-621(a)(1). Though the act itself
focuses on issuing bonds to promote economic development, it would be incorrect
to assume that the state has not allocated settlement proceeds for other
purposes. Indeed, the act also transfers a large portion of the settlement to
the Children First Trust Fund. See id. § 41-10-621(b). Additionally,
the remainder of annual settlement proceeds after disbursements into the
Alabama 21st Century Fund will be paid to the Alabama Senior Services Trust
Fund and the State General Fund. See id.
§ 41-10621(c).
Thus, the authority will disburse settlement proceeds to an array of projects.
n57 Ala. Const. art. XI, § 213, provides that:
"no new debt shall be created against, or incurred by this state, or its
authority." Thus, the State of Alabama itself is constitutionally
prohibited from issuing debt. The act creating the authority expressly
recognizes this constitutional limitation. See Ala. Code § 41-10-621(a)(2) (Supp. 1999). For a
general explanation of the origins of such prohibitions among state
governments, see Kiewiet & Szakaly, supra note 42, at 64-66.
Similar prohibitions are extremely common among state governments, and all but
five states have enacted partial or total restraints upon state debt issuance. Id. at 65. In order to get around this constitutional
restriction, however, Alabama courts have upheld the constitutionality of
legislatively created entities, such as the Alabama 21st Century Authority,
through which the state may issue debt. See Opinion of the Justices No. 359, 692
So. 2d 825 (Ala. 1997); Opinion of the Justices No. 346, 665
So. 2d 1357 (Ala. 1995); Opinion of the Justices No. 183,
178 So. 2d 76 (Ala. 1965).
n58 The need for future
legislative action is illustrative of the fact that the Authority itself is
merely a specialpurpose entity ("SPE"),
meaning that its existence consists solely of receiving the tobacco settlement
proceeds. For further explanation of SPEs, see
Nicholson, supra note 40. The Authority itself does not have the authority to
issue debt. The authority to do so is exclusively reserved by the Alabama
legislature, and the legislation creating the Authority explicitly recognizes
this inherent right. See Ala. Code § 41-10-621(a)(4) (Supp. 1999). Thus,
the actual issuance of tobacco settlement debt will be subject to further
congressional scrutiny before it comes into existence.
n59 See Ala. Code § 41-10-626(b) (Supp. 1999).
n60
Id.
n61 In terms of Alabama's
legislation, the issuance of revenue bonds by the Alabama 21st Century
Authority separates the state itself from default liability in two distinct
ways. The Authority, not the State of Alabama, is the issuer of such debt. Furthermore,
the Authority is explicitly authorized to issue revenue bonds rather than
general obligation bonds. If tobacco industry bankruptcy creates default on
such bonds, the state has theoretically isolated itself from liability.
n62 See Ala. Code § 41-10-629 (Supp. 1999). The money allocated
to the fund is to be given in annual allotments beginning at $ 7 million and
gradually increasing to $ 16 million. Thus, the $ 350 million figure represents
the maximum amount of principal, interest, and premium permitted for bond
issuance.
n63 But see supra note 47
and accompanying text. In an instance of default, the State of Alabama may find
it more beneficial to satisfy the demands of bondholders rather than face the
financial consequences of hanging them out to dry. The higher issuance costs of
future bond offerings associated with leaving the bondholders to absorb the
loss may force the state to cover the obligations of the Alabama 21st Century
Authority.
n64 Ala. Code § 41-10-621(b) (Supp. 1999).
n65 See id. § 41-10-621(c).
n66 See Michael Marois, Fearful of Getting Burned: Some States Oppose
Securitizing Tobacco Cash, Bond Buyer, Mar. 13, 2000, at 1, available in 2000
WL 5810224.
n67 See Miss. Code Ann. § 43-13-405(1) (Supp. 1999). For similar
health care trust fund legislation, see Colo. Rev. Stat. Ann. § 24-22-115 (West 1999) (establishing
the Tobacco Litigation Settlement Trust Fund to administer tobacco proceeds as
mandated by the state legislature).
n68 Miss. Code Ann. § 43-13-401 (Supp. 1999).
n69 See Marios,
supra note 66. The approach taken by Mississippi is often called a "pay as
you go" approach because the tobacco proceeds are invested only after they
have been received by the state. The key distinction between this approach and
an approach utilizing securitization is that securitization issues bonds backed
by expected future tobacco settlement income while Mississippi's more cautious
approach invests its settlement income only after the state has received it. Mississippi's
plan presents a very conservative approach to the tobacco settlement conundrum.
n70 Unlike most states,
Mississippi reached a separate settlement agreement with the tobacco industry,
which preceded the widely-publicized $ 206 billion MSA. Rather than receive small
annual allotments of its settlement proceeds, as the MSA mandates, Mississippi
has already received more than $ 280 million of its expected $ 3.5 billion
settlement proceeds. See The Tobacco Settlement: Practical
Implications and the Future of the Tort Law, 67 Miss. L.J. 847, 852 (1998). Thus,
the conservative tobacco settlement strategy advocated by the state is likely a
direct result of the fact that it does not face the same problems with
obtaining settlement proceeds over the long term, as do many other states.