President Obama is expected to soon sign into law a bill approved by the Senate late Thursday that would expand the State Children's Health Insurance Program and raise tobacco taxes, prompting concern in the muni market about debt service payments on tobacco bonds nationwide.

When enacted, the S-CHIP legislation will raise the tax on cigarettes by 61 cents, to a total of $1 per pack, and increase the per-unit tax on other tobacco products. This may bring about a precipitous decline in the cigarette revenue that tobacco manufacturers collect, in turn reducing the amount of settlement payments that companies make to 46 states and six territories under the 1998 Master Settlement Agreement. Municipal issuers have sold tobacco bonds securitized by those annual settlement payments since 1999.

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