California has borrowed $4 billion against anticipated revenue from a tobacco lawsuit settlement, but the funds might not materialize because they are linked to shrinking state tobacco sales, according to bond rating agency Herbert J. Sims & Co., California Watch reports.
Background
Over 10 years ago, the four largest tobacco companies in the U.S. agreed to pay an estimated $246 billion settlement to 46 states over 25 years to compensate for health care costs related to tobacco use.
According to the agreement, payments are linked to tobacco sales in each state.
Instead of waiting for the payments, some local and state governments decided to borrow money against their anticipated revenue from the settlement.
California Borrowing
In 2007, California issued $4.4 billion in tobacco bonds -- which the state hoped to pay back to investors by 2047 -- to help balance the state budget.
However, the number of smokers in the state has decreased more quickly than expected, so annual payments from the settlement have been less than originally predicted.
Smoking rates in the state have fallen in part because of tobacco tax hikes and antismoking laws.
According to the state treasurer's office, there currently are $2.9 billion in outstanding bonds backed by a state guarantee.
If the tobacco settlement funds do not cover what the state borrowed, California officials will have to find other ways to cover the debt (Taggart, California Watch, 2/20).