Getting All the Tobacco Money Upfront

In the April 20, 2006 issue of the Philadelphia Inquirer, Monica Yant
Kinney rails on New Jersey politicians for securitizing and then
squandering their portion of the tobacco settlement. In her mind, the
tobacco settlement represents a steady income stream that can be spent
each year on things like prevention programs and other health causes.
She scolds Governor McGreevey and others for salivating over this
windfall and using it instead to plug budget deficits.

But while I may also disagree with New Jersey's profligate spending
ways, like Yant Kinney does, I don't necessarily disagree with their
securitization of the tobacco revenues. After all, the settlement
doesn't bind states to spend their take on health issues. Logically,
the revenue isn't for preventing future losses by states via
prevention programs, but for compensating for past expenses incurred
by states as a result of tobacco-related negative impacts.

By securitizing their portion of the tobacco settlement, New Jersey
shed the risk of a decline or even cessation in future tobacco
revenues. After all, if Big Tobacco goes out of business, that gravy
train to the states stops. Or if their market share dips, their
annual obligations to the states also goes down. So securitizing this
revenue stream means they're taking all the money upfront, and pushing
the risk off on the holders of the tobacco bonds the uncertainty of
future payments to the states by Big Tobacco.

Furthermore, they are now without conflict of interest in battling
tobacco use within the state, through actions such as their recent
legislative ban on smoking in public places. If they had not
securitized the tobacco revenues, they would be conflicted in working
to reduce smoking, for such reductions might lead to reductions in
future revenues from tobacco companies according to the terms of the
settlement.

Maybe the squandered the bond proceeds, and maybe they didn't. Even
if I agree with Yant Kinney that they did, I don't agree that their
mistake was in securitizing their portion of the tobacco settlement.