S&P Releases Evaluation Of Tobacco Settlement
(Press release provided by Standard & Poor's)
Date: Tuesday, 6/1/99
NEW YORK, June 1 - Standard & Poor's today released its
examination of the tobacco settlement and some of the possible
criteria used to rate structured state settlements and structured
The report examines the payment mechanics of the master
settlement agreement (MSA), municipal usage of the settlement
money, the potential for securitization, and related legal issues.
The report also includes an industry analysis which will be
instrumental in the securitization of the settlement.
"Federal recoupment and possible future litigation are two major
issues that still require resolution.
Therefore, any securitization of the revenues prior to such
resolution must contain sufficient safeguards to protect the
cash flow stream from these potential risks," the report says.
In addition to these obstacles, there are other issues regarding
state securitization of the settlement that must be addressed.
"The ability of a state and its local governments to come to
agreement on an intergovernmental revenue distribution schedule
will play a key role in minimizing the future risks to the flow of the
agreement's funds," the report says.
One key area of concern surrounding the distribution of the
agreement's revenue is the prospect of future litigation by an
MSA participant against the tobacco companies.
According to the agreement, states would have their share of the
settlement reduced by the amount awarded in any future lawsuits
filed by what could be defined as a releasing party. While this
would not impact the agreement revenue in total, it would impact
However, according to the report, ``The development and
enactment of an agreement by the settling states and their
respective governmental units, which prohibits this type of
litigation in return for an agreed-upon revenue distribution,
lessens the risk of this type to the settling states' revenue."
The agreement does not specifically spell out the utilization
However, plans for utilization enacted by the settling states
and governmental units potentially could lessen the federal
recoupment risk to the fund flow.
Standard & Poor's will continue to monitor the issue of federal
recoupment in light of the Hutchinson Amendment. The
Hutchinson Amendment seeks to prevent such recoupment.
"A careful consideration of fiscally prudent utilization of the
agreement's revenue flow needs to be undertaken," the report
"Governments should resist the temptation to use the revenue
from the agreement to support operating expenses, temporarily
correct fiscal imbalances, artificially reduce tax levels, or fund
capital facility construction or expansion that would require
significant ongoing operating costs.
These types of uses, while admittedly attractive for several
reasons, could lead to fiscal pressures in future years, placing
stress on recurring revenue sources," the report says.
The report also examines some of the considerations used to
securitize legal fees.
"According to the model fee agreement, any termination of the
MSA with respect to a particular state will require an outside
counsel to refund all amounts it may have received under a
state's fee payment agreement.
In order to insulate a potential securitization from this termination
risk, Standard & Poor's will require satisfactory legal opinions
that establish the irrevocability of a state's obligations under the
MSA," the report says.
NOTE: Provided by Bill
While the preceeding report by S&P must have been written
before the Hutchison amendment was signed by President
Clinton, its analysis of the MSA's release and offset provisions
is similar to the assessment by health advocates in
Pennsylvania, which was why our court challenge to the MSA
was filed, and why the judge's consent decree has been
The only difference is that health advocates opposed these
provisions in the MSA for the same reasons tobacco companies
(and S&P) love them.
Those release and offset provisions in the MSA have given
Governors and state legislatures huge financial incentives to
enact preemptions on all tobacco litigation that might be
included in the definition of "releasing parties" and "released
claims" in states like PA where the AG isn't empowered to
preempt those claims by those parties.
And with PM invoking the MSA's offset provision and Oregon's
punitive damage law in refusing to pay the state what it is owed
from the Williams verdict, tobacco companies (but not States)
have enormous incentives to enact similar punitive damage
laws in other states.