State dodges bullet on tobacco payments

CHARLESTON, W.Va. — A recent sharper-than-expected decline in smoking has caused payments to West Virginia from a national tobacco settlement to plunge by more than $10 million a year.

However, the state sold its rights to the payments in an $807 million bond issue in 2007. So the dropping payments are an issue for the bondholders, not the state.

“We’re not liable, is the bottom line,” said Administration Secretary Robert Ferguson, who is chairman of the state Tobacco Settlement Finance Authority.

As part of a 1998 settlement of a multi-state lawsuit against major cigarette manufacturers, West Virginia gets annual settlement payments from the companies, based on U.S. sales figures for their major brands of cigarettes.

At its peak, West Virginia was getting close to $80 million a year in payments from the cigarette companies.

But for the 2009-10 budget year, the payments dropped to about $66 million — and for the current budget year, which ends June 30, the payments are just over $62 million, state Director of Finance Ross Taylor told the panel on Thursday.

The authority’s financial advisor, Paul Creedon of Citigroup, said national smoking rates are declining much faster than had been projected when the settlement agreement was adopted.

At the time, experts projected about a 3 percent annual decline in cigarette sales, anticipating that smoking prevention/cessation programs and the deaths of smokers due to tobacco-related illnesses would gradually reduce demand.

The agreement also imposed severe restrictions on cigarette advertising, including banning ads and promotional materials aimed at young people.

However, instead of the slow gradual decline, Creedon said cigarette consumption nationally has nose-dived, beginning in 2009.

“In 2009 and 2010, the two more recent years available, it declined much more precipitously,” he said.

He said cigarette sales dropped 9.3 percent in 2009, and fell another 6.5 percent in 2010.

Creedon said two factors are driving the sharp decline: steep increases in federal, state, and local tobacco excise taxes, and the rapid proliferation of strict smoking bans nationwide.

In 2009, the federal excise tax on cigarettes increased 62 cents a pack to $1.01 a pack, while many states and localities also hiked cigarette taxes.

“Today, a pack of cigarettes is nearly $11 in New York City,” Creedon noted.

Meanwhile, he said that at the time of the tobacco settlement, strict smoking bans were primarily limited to large cities on the East and West coasts, with lesser restrictions elsewhere, such as designated no-smoking areas in restaurants in some localities.

“It’s now become a much more national phenomenon, with much more rapid implementation, and it has become much more severe,” Creedon said of smoking bans.

In many localities, smoking bans are now extending beyond public areas of buildings to exterior locations, including parks, sidewalks, and other public areas, as well as bans around the perimeters of building entrances.

In the peak consumption year of 1981, 640 billion cigarettes were sold in the U.S., Creedon said. When the master settlement agreement was signed in 1998, that figure had dropped to 442 billion.

In 2009, 329 billion cigarettes were sold, and sales dropped to 304 billion in 2010, he said.

Creedon said experts are unsure whether the steep decline in smoking in 2009 and 2010 was an anomaly, caused by the one-two punch of increased taxes and implementation of strict smoking bans, or is the start of a long-term trend.

“The question is, will consumption return to the core decline of 3 percent a year?” he noted.

From the state’s perspective, the only impact from a sharp drop in tobacco settlements payments is that it could take longer than originally projected to pay off the tobacco securitization bonds. The bonds were originally slated to be retired in 2029.

Once the bonds are retired, any future tobacco settlement payments will go back into state coffers.

Proceeds from the $807 million bond sale were used to shore up the severely under-funded Teachers’ Retirement System.

Critics of the bond sale argued that the state was taking a lesser amount of cash right away, and giving up the possibility of much larger payouts in the future. Even with the recent drop in tobacco settlement payments, the payments would still be more than the state gained by selling the bonds.

Created in 2007 to oversee the bond sale, the Tobacco Settlement Finance Authority meets annually to update the status of the settlement funds and the bond issue.

By Reach Phil Kabler
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