In 1994 the attorney general of the State of Mississippi filed a complaint against the tobacco industry, beginning the frontal legal assault by state attorneys general on the tobacco industry. Other state attorneys general quickly followed, suing the tobacco industry to stop tobacco companies from selling cigarettes to minors, and to recoup alleged cigarette-related Medicaid expenditures. After extensive negotiations, on November 23, 1998, the “Master Settlement Agreement” (MSA) was agreed to and signed between the major tobacco companies in the United States and forty-six state governments, the District of Columbia, and five United States territories.
We analyze the designs and choices of states in
securitizing their expected MSA payments by selling tobacco securitization bonds (TSBs), and we describe the nature of the securitization transactions from a risk and reward perspective. We also analyze the use of proceeds from securitizations and conduct an empirical analysis of the impact of securitization on tobacco control and prevention spending. Our analysis has important implications for evaluating the MSA, and implications for designing future negotiated settlements implemented through a public budgeting process. The most recent large settlement with substantial, long-term public budgeting implications was the April 2012 $2.5 billion mortgage and foreclosure settlement between state attorneys general and major banking institutions. We believe our analysis of the securitization of MSA payments will provide useful information to policy makers and other stakeholders involved in large, long-term negotiated settlements because they deal with many of the same fundamental public budgeting and finance issues presented by the MSA. We continue the paper with a discussion of the financial obligations in the MSA, and then we describe and analyze tobacco securitization bonds (TSBs).