Settlement payments that back tobacco bonds would be cut by $160 million over a four-year period if the House approves a bill as early as this week, according to the Congressional Budget Office. But market participants think the legislation would not hurt, and possibly could even slightly benefit, tobacco bonds.
The House Oversight and Government Reform Committee approved the bill by a voice vote Wednesday after the Energy and Commerce Committee voted 39 to 13 to approve it on March 4. The measure now moves to the full House for consideration, with 166 members of Congress signed on as co-sponsors.
The bill, sponsored by Energy and Commerce chairman Henry A. Waxman, D-Calif., would allow the Food and Drug Administration to regulate tobacco products and to tax tobacco manufacturers and importers to fund those regulatory activities.
The bill's revenue and spending effects would, however, decrease federal budget deficits by $200 million over the next four years, and by $800 million through 2019, according to the CBO report, which was released March 16.
The CBO said that "the federal regulations authorized by this bill would result in lower consumption of tobacco products and thus would reduce the amount of tax revenue and Master Settlement Agreement funds collected by state and local governments."
It estimated revenue would drop by $1 billion between 2010 and 2014. The MSA payments are based on a portion of the revenue.
"Because ... this legislation would result in lower consumption of tobacco products ... the annual payments to states under the MSA also would decline by over $160 million over the 2010 to 2014 period," the report said.
Under the 1998 Master Settlement Agreement, tobacco companies make annual payments to 46 states, the District of Columbia, and five territories. Those payments, made in the spring of each year, are based on tobacco consumption and adjusted annually - so if consumption declines, the MSA payments to states and territories are lower the following year. Municipal issuers have issued tobacco bonds securitized by the payments since 1999.
The issuers received more than $8 billion of settlement payments in 2008, according to the CBO.
The report also said that state and local income from tobacco consumption would decrease if the bill is approved and signed into law.
According to the CBO, state and local governments collected about $19 billion of revenue from excise and general sales taxes levied on tobacco products. The bill would cut excise tax revenue in increments, from about $20 million in 2010 to more than $330 million in 2014, and would reduce sales tax revenues by about $170 million over the same time period, it said.
Some market participants worried last month when President Obama signed into a law a State Children's Health Insurance Program bill that provided about $33 billion of additional federal funding to the state-administered health insurance program through 2013.
The new revenues are to be generated from an increased tax on tobacco - to $1.01 from 62 cents per pack - and tobacco bond analysts said the extra cost might persuade a higher-than-average number of smokers to quit per year, taking a chunk out of the tobacco revenue that is used to repay tobacco bonds.
But while this piece of legislation would put a not-insignificant dent in tobacco revenue, market participants contend it would not have much effect on bonds backed by MSA payments.
"We see this thing as a non-event for tobacco bonds," said Michael Camarella, a portfolio manager at OppenheimerFunds Inc. "The amount of dollars that we're talking here are extremely small."
Camarella said the bill would add predictability to regulations.
Matt Fabian, managing director of Municipal Market Advisors, agreed, predicting that the bill could allow regulators to be tougher on tobacco manufacturers that do not participate in the settlement agreement, subjecting them to greater regulatory scrutiny while favoring the major tobacco players that signed on to the MSA.
"You have a good chance of states issuing tobacco bonds over the next year," Fabian said. "If states begin to issue new-money tobacco bonds at extremely high yields to extract that cash to patch budget gaps, that's going to hurt other outstanding tobacco bonds."
But litigation would continue to be a possibility throughout the life of tobacco deals, Fabian said.
The bill includes a provision that would allow federal regulations to preempt state and local laws, including misbranding and labeling laws. The U.S. Supreme Court ruled in December that "lights" cigarette lawsuits based on state deceptive practices laws could move forward, and that state statues are not automatically preempted by federal law.
