Less smoking is bad news for the budget of California. The major rating agency due sounded the alarm this month, arguing that the state could have taken more than $ 4 billion settlement against the money that might never materialize.

A little more than a decade ago, 46 state attorneys general reached an agreement with four major tobacco companies. Company agreed to pay an estimated $ 246 billion over 25 years to compensate states for tobacco-related health care costs. But there is one feature: the calculation of the payments are not fixed, but are related to the sale of tobacco products.

Instead of waiting for annual payments, state and local authorities have decided to take money from their future expected income. All say they were given $ 16 billion in bonds since 2001.

Major rating agencies have communication and some municipal financial experts warn that for many years, the number of smokers decreases more rapidly than expected.

In December, California had to dip into its reserves to cover the bond payments. Dick Larkin, head of credit analysis at Herbert J. Sims & Co, said it was for two reasons: fewer smokers and a dispute with the tobacco companies that led to the delay in payments.

As state finances deteriorated, officials returned to the investors. In 2007, California issued $ 4.4 billion in tobacco bonds. In order to repay investors in 2047, he assumes that cigarette consumption will decline by 1.8 percent per year, depending on the relations filings. But in tax increases and tobacco control laws, sales fell faster than expected. As a result of the fall and continuing conflict with the tobacco companies, the annual payments were less than expected, since the settlement was signed in 1998, according to Larkin.

If the default of bonds, it would not be bad for investors. California is one of the few states to guarantee a portion of their total income from the bond fund. If the tobacco settlement money will not cover the debt, the government will have to pick up some of the tab. There are currently 2.9 billion in bonds outstanding, which are supported by government guarantees, in accordance with the position of the State Treasurer.

Despite the fact that the payment will depend on legislative approval, it is unlikely he will not be approved.

“Nobody trusts the California anymore,” said Larkin. “Their names would be mud on the market.”

Unlike most other states, California to share his revenue settlement between the state and local governments – counties and four largest cities, including Los Angeles, San Diego, San Jose and San Francisco. Local governments receive about half of the state settlement payments.

Some local officials have decided to borrow from expected future payments, but is not guaranteed to cover their debts to total revenue fund. While this may be bad news for investors, it might actually be good news for the community.

“The investor really has a slightly different perspective on everything,” said Peter Bianchini, senior municipal strategist at Mesirow Financial. Local governments are not on the hook if the tobacco settlement revenues are not coming through, so that they may have been able to borrow more than they would if they waited for the annual payments, he said.

Tags: hook for the bonds, smoking

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