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August, 2014:

Hawaii Bill would raise tobacco buying age to 21

By Kristine Uyeno Published: July 24, 2014

Some Honolulu City Councilmembers are trying to raise the age of those who can buy tobacco products on Oahu.

Councilmember Stanley Chang and Chair Ernie Martin introduced a bill Thursday that would raise the minimum age from 18 to 21.

Similar moves have been made in other parts in the United States including the Big Island.

“Why are you proposing this?” KHON2 asked.

“Tobacco is one of the leading killers in the United States and 95% of all smokers become addicted when they’re under the age of 21,” Chang said.

Chang believes raising the legal age to buy tobacco products would save lives. It would also follow in the footsteps of the Big Island, where a similar law just began three weeks ago.

“It’s a growing trend nationwide, so we think the City and County of Honolulu should be at the cutting edge of that trend too,” Chang said.

The bill that was introduced on Thursday, would also raise the age for those buying electronic smoking devices including e-cigarette products that don’t contain nicotine.

Volcano E-cigs is one company that sells electronic cigarettes in Hawaii. A company official told me this move would not affect their business.

“The majority of customers are first off, long-term former tobacco smokers,” said Scott Rasak with Volcano E-Cigs.

Rasak says the company does have customers under the age of 21 and if this bill beomes law, it would limit their options.

“We believe strongly in a different alternative, a smarter alternative, giving people options and what this bill does is it specifically limits their ability to explore their options,” Rasak said.

“Do you agree with this move or not?” KHON2 asked.

“Well I think probably if you’re an adult at 18, you got to be able to make your own decisions,” a Honolulu resident said.

“I think that it should be raised because I’m just against smoking overall,” another said.

First reading of this bill is scheduled for next moth. If passed, the bill would become law in January.

Nine facts about tobacco company lobbying

The tobacco industry has often been accused of using underhand tactics to oppose regulations that threaten its profits. Karen Evans-Reeves, research officer for the Tobacco Control Research Group at the University of Bath, with input from colleagues Silvy Peeters and Rachel Rose Jackson, outlines some of the key moments in the struggle to break a deadly addiction.

1. In England, tobacco kills over 79,000 people every year.
Deaths from tobacco exceed the total killed by obesity, alcohol and illegal drugs in England, in addition to road traffic accidents and HIV infection in Great Britain, combined. Tobacco is addictive and most of its users become hooked in childhood.

2. Under oath in 1994, tobacco company chief executives denied nicotine was addictive but their own documents showed they had known otherwise since the 1960s.

Thirty years before the testimony, the vice-president of US tobacco company Brown & Williamson wrote: ‘We are, then, in the business of selling nicotine, an addictive drug.’ By the 1970s tobacco companies were deliberately manipulating other cigarette ingredients to enhance the addictive effect of nicotine. In carefully worded testimonies each chief executive stated only that they did not believe that nicotine was addictive and therefore escaped prosecution for perjury.

3. For decades after the link between smoking and lung cancer was scientifically proven, the tobacco industry deliberately caused public confusion about the health impacts of tobacco.

In 1953, following advice from public relations firm Hill and Knowlton, tobacco companies created the Tobacco Industry Research Committee promising smokers that they would get to the bottom of the smoking and health issue. However, it rarely focused its research on smoking, focusing instead on every other conceivable cause of cancer. In 1998, Judge Gladys Kessler ordered the dissolution of the Committee stating that it was little more than ‘a sophisticated public relations vehicle based on the premise of conducting independent scientific research – to deny the harms of smoking and reassure the public’.

4. The marketing of nicotine addiction is lucrative.

Despite declining smoking rates, the tobacco companies’ profits are still climbing each year and their profit margin, an indicator of a company’s profitability, is higher than most other consumer product companies. In 2011, the UK tobacco market leader Imperial Tobacco had a profit margin of 39.5 per cent, compared to Diageo’s 31.8 per cent and Unilever’s 15.1 per cent.

5. Tobacco companies use tobacco packaging as a marketing tool – the pack is important.

Tobacco companies have vehemently opposed the introduction of plain packaging for cigarettes, claiming that the policy will not deter children from starting to smoke. However, in Philip Morris’s own words: ‘In the absence of any other marketing messages, our packaging … is the sole communicator of our brand essence. Put another way, when you don’t have anything else, our packaging is our marketing.’

6. Some tobacco companies pay third parties to promote their messages while hiding their involvement.

To enhance the credibility of their arguments and give the impression that others support their position, tobacco companies use a range of third-party techniques. They hire scientists, create, finance and manage front groups, fund think tanks (such as the Institute of Economic Affairs) and numerous business associations, which then act as the tobacco industry’s spokespersons.

7. Some tobacco companies have been involved in smuggling their own cigarettes on a global basis and are still subject to investigation for ongoing involvement in this trade.

Internal company documents reveal that smuggling was an integral part of tobacco companies’ business strategies. They make profit when they sell to the distributor regardless of whether the cigarettes are subsequently sold in legal or illegal channels. Smuggling can benefit tobacco companies because it keeps cigarettes affordable to smokers who may otherwise quit. Simultaneously, companies can also argue that illicit trade is worsening because tax is too high, lobbying the government to reduce tax and therefore cigarette price.

8. Some people doubt that tobacco companies would market e-cigarettes and other nicotine products in a way that would benefit public health.

Lessons from the past have shown that tobacco companies’ interest in reduced risk products was mostly driven by the threat of regulation driving down cigarette sales. For example, when British American Tobacco was considering investing in smokeless tobacco in the 1970s and 1980s, it said it had ‘no wish to aid or hasten any decline in cigarette smoking’. Internal documents reveal that at this time harm reduction was considered a ‘reputation management initiative’ to rehabilitate their image and allow them to be seen as ‘policy partners’ with access to policy makers in the UK and abroad.

9. Not only have tobacco companies influenced tobacco regulation, they have influenced how policy is made.

British American Tobacco, working together with other corporations whose products have been accused of being damaging to health, managed to secure changes to the EU regulatory framework that makes stakeholder consultation mandatory and requires a detailed business impact assessment of each policy. BAT anticipated these changes would make it much harder to pass public health policies in the future and this appears to be the case as a second public consultation has just taken place on the potential impacts of plain packaging in the UK.

Smoking kills 3 out of 4 smokers?–A 10-year follow-up study in Hong Kong, China


World Health Organization states “Tobacco kills up to one in every two users”. This absolute risk of 1/2 was based on a relative risk (RR) of 2 and the attributable fraction (AF) in the exposed of 50% ((RR-1)/RR)) for total mortality due to smoking. Recent large UK and US cohort studies have shown an RR of 3, meaning 2 out of 3 smokers will be killed by smoking. RRs could be under-estimated partly because few studies examined oldest old smokers separately. We examined RR and AF of total mortality due to smoking in the older (65-84y) and oldest old (85+y) people in Hong Kong, China.


Multivariable Cox regression was used to assess the risks of total mortality from smoking using a population-based prospective cohort of 65,510 Chinese aged 65+ years enrolled from 1998 to 2001 and followed until May 2012.


For participants aged 65-84 years, after adjustment for sex, age, education, social security assistance, housing type, monthly expenditure, alcohol use and health status, the RR was 1.93 (95% confidence interval (CI) 1.84-2.03), corresponding to an AF of about 50%. For 85+ years, the adjusted RR was 1.29 (1.05-1.58), corresponding to an AF of about 25%. Therefore for every 12 smokers who start smoking at young age, 4 will be killed by smoking at middle age, 4 at old age, leaving 1/4 oldest old surviving smokers to die from smoking later.


Our study has shown that smoking kills one out of four oldest old smokers, and together with existing evidence, we conclude that the total mortality risk due to smoking starting at young age is greater than 1/2, should be at least 2/3, and could be up to 3/4. Global disease burden estimates due to smoking based on an RR of 2 may need to be revised upwards.

Systematic review of the effect of pictorial warnings on cigarette packages in smoking behavior


We used a structured approach to assess whether active smokers presented with pictorial warnings on cigarette packages (PWCP) had a higher probability of quitting, reducing, and attempting to quit smoking than did unexposed smokers. We identified 21 articles from among nearly 2500 published between 1993 and 2013, prioritizing coverage over relevance or quality because we expected to find only a few studies with behavioral outcomes. We found very large heterogeneity across studies, poor or very poor methodological quality, and generally null or conflicting findings for any explored outcome. The evidence for or against the use of PWCP is insufficient, suggesting that any effect of PWCP on behavior would be modest. Determining the single impact of PWCP on behavior requires studies with strong methodological designs and longer follow-up periods.

“Pictures don’t lie, seeing is believing”: exploring attitudes to the introduction of pictorial warnings on cigarette packs in Ghana



To compare perceptions of text and pictorial warning labels on cigarette packs among Ghanaian smokers and nonsmokers and to explore their views on the introduction of pictorial warnings in Ghana.


Qualitative study involving 12 focus group discussions with 50 smokers and 35 nonsmokers aged 15 years and older in Kumasi, Ghana. Semistructured discussion guides along with visual discussant aids were used to explore the perception, acceptance, and potential use of pictorial warning labels in Ghana.


Health warnings combining text and a picture were perceived by both smokers and nonsmokers to communicate health messages more effectively than text-only or picture-only warnings. The effect of text-only warnings was considered limited by low levels of literacy and by the common practice of single stick sales rather than sales of packs. Of the 6 health warnings tested, lung cancer, blindness, stroke, and throat/mouth cancer messages were perceived to have the most impact on smoking behavior, including uptake and quit attempts.


Warning labels combining pictures and text have the potential to reduce smoking uptake, increase quit attempts, and reduce smoking appeal among smokers and nonsmokers in Ghana. Measures to prevent single stick sales, or to promote health messages to purchasers of single sticks, are required.

Plain packs for tobacco would save £500m in first year, says PHE

Caroline White

Thursday, 7 August 2014

Standardised packaging for cigarettes and hand rolling tobacco could not only prevent countless smoking related deaths, but also chalk up £500 million in savings in the first year of its introduction, Public Health England has calculated.

The calculations have been submitted as part of PHE’s response to the Government’s consultation on whether to introduce mandatory plain packs for tobacco. The consultation closes today. It builds on PHE’s submission to Sir Cyril Chantler’s review on standardised packaging in January 2014.

In June 2014, the Department of Health published draft regulations for proposed requirements for the packaging of tobacco, to include policies on the colour of the packet, allowed text and typeface, and requirements for the appearance of individual cigarettes.

Recent official data from Australia, where standardised packaging has been in force since December 2012, show a 3.4% fall in tobacco sales by volume in the first year following the introduction of the measure.

If that was mirrored here, PHE predicts that total savings across England would be around £500 million, based on the estimated number of smokers in each local authority and unitary authority and the total spend on tobacco in the UK for 2012-13.

As tobacco is a major cause of health inequalities, the benefits would be most felt in areas of greater social deprivation, says PHE. This is because plain packs would not only reduce the ill health caused by smoking, but also increase families’ disposable income, and enable the money to be spent on other things in local economies.

Retailers have argued that the measure would hit their profits, but PHE says that they make relatively little profit from tobacco sales. On average, only 7-9% of the cost of tobacco is retained by the retailer, compared with 20-30% for food and drink products.

The estimated figures show potential knock-on local economic benefits of: £61.3 million in London; £9.2 million in Birmingham; £4.4 million in Hull; and £3.3 million in Plymouth.

Professor Kevin Fenton, National Director of Health and Wellbeing, Public Health England, said: “Smoking remains the biggest cause of premature mortality in England, accounting for 80,000 deaths every year. Standardised packaging is a powerful measure that would help to save lives.

“The evidence from Australia is adding to the substantial and irrefutable case that the absence of attractive packaging works to reduce the number of smokers, as well as encouraging others to cut down.”

He added: “Only last week we saw smoking levels among young people at an all-time low. The introduction of standardised packaging will be a major boost to our tobacco control efforts – helping move us closer towards achieving a tobacco free generation, which is now in our reach.”

John McClurey, an independent newsagent and member of Gateshead Council, said the PHE figures were “good news for local businesses.”

He continued: “Traders like me are well aware of the tiny profit from tobacco products – I make similar profit from a pack of chewing gum as a £6 pack of cigarettes. What my customers save by quitting or never starting to smoke, they can spend on other goods or services in the area – providing a real boost to the local economy.”

Plain packaging for tobacco an investment in kids’ health

Thursday, 7 August 2014, 10:01 am
Press Release: New Zealand Plunket Society

7 August 2014

Plain packaging for tobacco an investment in Kiwi kids’ health – Plunket

Plunket welcomes the Health Select Committee’s recommendation that the Bill to remove branding from tobacco products go ahead, saying the policy is ‘an important investment in the health of New Zealand children’. (The Select Committee’s report is here:

The Health Select Committee considered over 15,000 submissions on the Smoke-free Environments (Tobacco Plain Packaging) Amendment Bill and recommended it is passed, with the name of the proposed legislation altered to ‘standardised packaging’. Plunket was among organisations to make a submission to the Select Committee backing the Bill as a necessary measure to protect the health and well being of our current and future generations.

“Plunket strongly supports this Bill and we welcome the Select Committee’s recommendation that it be passed into law. The best Australian evidence shows it is effective at increasing attempts to quit smoking, as well as discouraging young people from starting,” said Clair Trainor, Plunket Senior Policy Analyst. “This represents a huge untapped health gain for New Zealand children. The sooner we get on and reduce children’s exposure to second-hand smoke and to tobacco advertising in the home, the quicker we’ll start to improve these children’s respiratory health – and that of future generations.”

She said children’s exposure to tobacco advertising from packaging was considerable: “The latest Census data indicates that as many as six out of ten New Zealand children live in households where tobacco is smoked by an adult who lives there. Our own data finds Māori and Pacific children living in highly deprived areas are up to three to four times more likely to live with a smoker than those in middle or low areas of deprivation. This Bill would mean that children of smokers are no longer exposed to tobacco branding on packs inside their homes, which would bring their tobacco advertising exposure into line with that of other Kiwi kids.”

Plunket supports the Government’s goal of halving tobacco consumption by 2015 and achieving a smoke-free New Zealand by 2025, and says the law change is essential if the Government is to achieve the goal it set itself in 2011.

Elaine Gordon, Plunket Clinical Advisor said the health risks to children from exposure to second-hand smoke were significant, and reducing the risks form a central part of Plunket’s work: “Second-hand smoke is a known risk factor in Sudden Unexpected Death of an Infant (SUDI – also known as SIDS or cot death) as well as coughs, colds, respiratory problems such as bronchiolitis, pneumonia, asthma and ear infections including glue ear. Children with asthma are especially sensitive to second hand smoke. It may cause more asthma attacks and the attacks may be more severe, requiring trips to the hospital.

“Plunket works in partnership with families and whānau to connect them with services that will support them to become smoke-free. During Plunket visits we have conversations and share information with families and whānau about the benefits of being smoke-free. All Plunket nurses are trained to deliver cessation support and in some cases Nicotine Replacement Therapy.”

She said that plain packaging was an important part of the range of policies and support services needed to protect children from the serious health impacts of second-hand smoke.


• Since introducing plain packaging in 2012, Australia’s Commonwealth Treasury reports tobacco clearances (including excise and customs duty) fell by 3.4% in 2013. The Australian Bureau of Statistics has reported that in the March quarter 2014 the consumption of tobacco was the lowest ever recorded.

• The Smokefree 2025 commitment was made by the Government in response to the Māori Affairs committee’s inquiry into the tobacco industry and the consequences of smoking for Māori.

• In August 2013 the New Zealand Medical Journal reported Māori children are at twice the risk of being exposed to second-hand smoke in the home.

• Smoke exposure assessment, cessation support, and the promotion of smoke-free environments is a part of Plunket’s everyday work to help give every child the best start in life. This includes advocating for plain packaging on tobacco products to prevent harmful advertising messages reaching the under fives.

• Along with more severe health impacts, children who are regularly exposed to second-hand smoke cough and wheeze more, have more difficulty getting over colds, and miss many more school days than children who aren’t exposed. Second hand smoke can cause other symptoms including stuffy nose, headache, sore throat, eye irritation, and hoarseness.

Boeing enters partnership to turn tobacco into jet fuel

by Blair Hanley Frank, Geekwire

It’s been a few decades since smoking was allowed on airplanes in the U.S., but Boeing is now turning to tobacco as a way to make flying a plane cleaner for the planet.

The company announced today that it has partnered with South African Airways and SkyNRG to turn a type of tobacco plant into a sustainable biofuel for aviation, rather than relying on traditional jet fuel to power engines. The program is supposed to be a win-win: the new fuel will be better for the environment, and maintain the livelihoods of South African tobacco growers without promoting smoking.

“By using hybrid tobacco, we can leverage knowledge of tobacco growers in South Africa to grow a marketable biofuel crop without encouraging smoking,” South African Airways Group Environmental Affairs Specialist Ian Cruickshank said in a press release.

The hybrid tobacco plant that the companies plan to use for biofuels is known as Solaris, and is “effectively nicotine-free.” Right now, the plants are undergoing test farming in South Africa, and SkyNRG is ramping up production of the plants for a larger roll-out. At first, the company expects that the plants’ seeds will be used to make oil that can then be turned into a biofuel.

But in the future, Boeing said that it expects there to be a number of manufacturing processes that could take a whole Solaris plant and use it for fuel, rather than just the seeds.

6 Aug 2014

Young women smokers’ response to using plain cigarette packaging: qualitative findings from a naturalistic study



The aim of this study was to explore in-depth the response of young women smokers (18-35 years) to using dark brown ‘plain’ cigarette packs in naturalistic settings.


Participants were recruited in six towns and cities in Scotland to take part in a naturalistic study, where they used plain cigarette packs for a week. Participants completed a number of questionnaires during the study period (reported elsewhere), and a sub-sample participated in post-study telephone interviews to explore their experiences of using the plain packs. Of the 187 participants who completed the study, 23 were randomly selected to participate in the post-study interviews. Within the interviews a semi-structured topic guide was used to assess perceptions of the plain pack, feelings created by the pack, feelings about smoking, and avoidant and smoking behaviour.


The brown (plain) packs were perceived negatively due to the colour, the undesirable image the pack conveyed, and the reaction from others. The plain packs were also associated with negative feelings, such as embarrassment, discomfort and guilt. Some participants also commented that they felt differently about the product, considered to be less enjoyable or more harmful, when using the plain packs, and were less interested in, or felt more negatively about, smoking. A number of participants said that they had engaged in avoidant behavior with the plain packs, such as hiding it, due to their negative thoughts about the packs and the reaction of others. Some participants also mentioned cessation-related behaviours when using the plain packs, such as forgoing cigarettes, stubbing cigarettes out early and thinking about quitting, largely due to the decreased enjoyment of smoking.


The experience of using cigarettes in plain packs prompted a range of negative responses from young women smokers, who are a crucial target group for tobacco control interventions.

How Wall Street Tobacco Deals Left States With Billions in Toxic Debt

Politicians wanted upfront cash from a legal victory over Big Tobacco, and bankers happily obliged. The price? A handful of states promised to repay $64 billion on just $3 billion advanced.

In November 1998, attorneys general from across the country sealed a historic deal with the tobacco industry to pay for the health care costs of smoking. Going forward, nearly every cigarette sold would provide money to the states, territories and other governments involved — more than $200 billion in just the first 25 years of a legal settlement that required payments to be made in perpetuity.

Then, Wall Street came knocking with an offer many state and local politicians found irresistible: Cash upfront for those governments willing to trade investors the right to some or all of their tobacco payments. State after state struck deals that critics derided as “payday loans” but proponents deemed only prudent. As designed, private investors — not the taxpayers — would take the hit if people smoked less and the tobacco money fell short.

Things haven’t exactly worked out as planned.

A ProPublica analysis of more than 100 tobacco deals since the settlement found that they are creating new fiscal headaches for states, driving some into bailouts or threatening to increase the cost of borrowing in the future.

One source of the pain is a little-known feature found in many of the deals: high-risk debt that squeezed out a few extra dollars for the governments but promised massive balloon payments, some in the billions, down the road.

These securities, called capital appreciation bonds, or CABs, have since turned toxic. They amount to only a $3 billion sliver of the approximately $36 billion in tobacco bonds outstanding, according to a review of bond documents and Thomson Reuters data. But the nine states, three territories, District of Columbia and several counties that issued them have promised a whopping $64 billion to pay them off.

Under the deals, the debts must be repaid with settlement money and not tax dollars. Still, taxpayers lose out when tobacco income that could be spent on other government services is diverted to paying off CABs. And states can’t simply walk away from the debt — bondholders have a right to further tobacco payments even after a default.

“It’s going to cost taxpayers, either directly or indirectly,” said Craig Johnson, an associate professor of public finance at Indiana University in Bloomington who has studied tobacco bonds and CABs. “I don’t doubt that at all.”

ProPublica’s analysis is the first to measure the magnitude of the high-risk debt involved in the tobacco deals and to calculate how much Wall Street’s dealmakers earned. It also shows how much of the tobacco money has been securitized — that is, turned into payments that go to investors. As of this year, at least one out of every three dollars coming in under the settlement is pledged to investors, according to bond disclosures and payment data from the National Association of Attorneys General, which tracks the flow of funds.

The sure winners so far: Investment bankers from Citigroup, the now defunct Bear Stearns and others who, along with consultants and lawyers, have pocketed more than $500 million in fees for their financial engineering, ProPublica estimates. They now stand to make more as the governments look to rework old deals and try to get even more tobacco cash upfront.

In part, the troubles in the tobacco bonds arise from the same kind of miscalculation that led to the housing bubble.

Just as mortgage lenders bet that home prices would keep rising, the tobacco deals relied on optimistic predictions of how much Americans would smoke. Forecasters rightly saw that cigarette sales would continue to decline, but now the yearly drop — about 3 to 3.5 percent — is nearly double what was cooked into the deals.

Because the bonds sold to investors can stretch 40 years or more, the outdated estimates mean an ever-widening gap between what states expected to collect under the settlement and the payments they promised investors.

The CABs promise gigantic payouts — as high as 76 times what’s borrowed — because nothing is due on them for decades. Meantime, interest compounds on both the principal and accumulating balance.

Defaults by state and local governments are rare, but rating agencies have been warning that tobacco bonds in general could go under en masse. Moody’s said in May that up to 80 percent of the tobacco issues it tracks are likely to default.

For CABs, defaults appear certain.

“They’re doomed,” said Jim Estes, a finance professor at the California State University, San Bernardino, who helped ProPublica analyze the bond documents. “It’s not a question of whether or not, it’s a question of when.”

Wall Street firms are already pitching their services to help unwind deals they helped create.

The first state to act was financially strapped New Jersey. In March, it rescued two CABs that were part of a larger 2007 deal. The CABs promised to repay $1.3 billion in 2041. To pay off that giant tab before it comes due, the state agreed to hand over $406 million of its remaining tobacco proceeds beginning in 2017, money that otherwise would have gone into state coffers.

Barclays handled the transaction for New Jersey and earned $4.5 million. The state also got $92 million in upfront cash out of the deal to help Gov. Chris Christie and lawmakers plug a budget deficit. Still, rating agencies weren’t impressed: They downgraded the state anyway, making it costlier for New Jersey to borrow.

In late July, Rhode Island announced a plan to buy out some holders of $197 million of CABs it sold in 2007. The deal would shave $700 million off a $2.8 billion tab due on the bonds in 2052 and let the state refinance some of its older tobacco bonds at more attractive interest rates. Now, some bondholders are suing to block the deal.

Most of the deals involving CABs sold right before the 2008 financial crisis, ProPublica found. As the horizon darkened, the market for them began falling apart, with one lone buyer keeping Wall Street’s CAB machine going. Pitch documents show that bankers pressed the states to act fast before the window shut.

“We are confident that we can stimulate demand,” Bear Stearns bankers told Ohio prior to a $5.5 billion tobacco bond package championed in 2007 by then state Treasurer Richard Cordray, who these days heads the U.S. Consumer Financial Protection Bureau.

Ohio’s tobacco deal was the largest ever. It included CABs that brought in $319 million in return for an eventual $6.6 billion balloon payment — a nickel on the dollar. Bear Stearns, Citigroup and other Wall Street firms made about $23 million in fees on the transaction, according to the bond offering document.

Then there is Puerto Rico, a government with a long history of financial woes.

In April 2008, as Bear Stearns was collapsing, it closed a $196 million tobacco bond sale that saddled the Puerto Rico Children’s Trust, a fund set up to benefit island families, with an eventual $8.6 billion balloon payout. Bear Stearns and Citigroup made $1.4 million in fees.

This year, Puerto Rico’s tobacco settlement receipts fell 13 percent below what was forecast when the deal was done. The commonwealth is also struggling to prevent default on a mountain of other debt. Officials there did not respond to written questions, phone calls or interview requests.

Critics have repeatedly lambasted the states and other jurisdictions for violating the intent of the tobacco settlement by spending the money on uses other than anti-smoking programs and health care.

“The securitization scheme not only accelerated the expiration of the usefulness of that money, but basically guaranteed that it would never be used for its conceived purpose,” said Dave Dobbins, an executive with the American Legacy Foundation, a nonprofit created under the settlement to fund smoking-prevention programs.

“Now the money’s gone, the securitization scheme is sort of coming home to roost for some people … and the tobacco problem is still there: 480,000 people [are] expected to die this year due to tobacco-related disease,” Dobbins said.

“It’s a grim story.”

“Turbo” Tobacco Cash

Whenever governments get access to a stream of money, Wall Street bankers pitch deals to turn it into a one-time payment. Bonds are sold to investors, who give the governments cash in exchange for the income stream, similar to a loan. Bankers earn fees based on a deal’s size, giving them every incentive to maximize the value.

The 1998 tobacco settlement was no ordinary revenue stream: It was the biggest financial settlement in legal history, projected to net states and other governments $206 billion just through 2025. “The money is huge,” Iowa Attorney General Tom Miller said at the time.

A cottage industry immediately sprouted up on Wall Street. The goal: Convince states to pawn the revenues.

Citigroup, JPMorgan, UBS, Goldman Sachs, Morgan Stanley and now-defunct firms like Bear Stearns, Lehman Brothers and Merrill Lynch all dedicated bankers to the cause, pitch documents show. Bear Stearns even had its own, 21-strong “Tobacco Securitization Group” devoted to monetizing the settlement.

“The ink on the document was barely dry before these folks started coming at us, suggesting the idea of securitization,” said Christine Gregoire, who as Washington’s attorney general helped lead the tobacco settlement talks and later, as governor, opposed securitization.

“I was just like, ‘Wow, I can’t believe that they have immediately thought about how to get one-time money and be indebted to the revenue stream.’ And I remember from the very beginning being offended at the idea,” she said.

Part of Gregoire’s objection is the same reason it doesn’t make sense to buy groceries on credit: You end up spending more — and getting less — by paying interest over time on goods you quickly consume.

“It’s not good fiscal management of public money to give away 75 cents on a dollar of income,” she warned in 2002, when her state debated raising $450 million to fill a budget hole by cashing out tobacco income.

Washington lawmakers pushed ahead anyway. The plan securitized 29.2 percent of the state’s expected tobacco cash, the equivalent of $40 million to $50 million a year. Investors were promised that money until the debt was fully repaid, sometime around 2025.

Kym Arnone, Bear Stearns’ senior tobacco banker, advised the state against using CABs.

“At the present time, no market has emerged for tobacco CABs since investors are unwilling to defer all of their income until the final maturity of a bond when there is significant chance of payment interruption or payment delay,” a 2002 pitch document signed by Arnone states.

The state followed that advice. By issuing traditional bonds that regularly pay interest and principal, Washington sold what turned out to be one of the less-costly deals crafted by Bear Stearns. Through last year, when the state was able to refinance on favorable terms, investors were paid $848 million from tobacco settlement money, a little under twice the $450 million the state got.

But Washington was one of the early deals. As the securitization trend continued — with Bear Stearns alone leading $23 billion of transactions from 2000 through 2007, according to Thomson Reuters data — bankers reached for ways to fatten the deals and their fees.

Chief among these was the CAB. By 2005, investment bankers had found willing buyers for this type of bond, thanks in part to a repayment structure first suggested by Goldman Sachs: the “turbo” bond.

With a turbo bond, governments agreed to make earlier payments if they had surplus cash from the tobacco settlement. The prepayments were not an ironclad promise — they could be skipped without triggering default. Turbos were already being built into regular bonds like those sold by Washington, and they appealed to CAB investors who might want some money before a final payoff decades away.

“That’s why they call them turbos — because they pay down faster,” said John Lampasona, an analyst at Standard & Poor’s who rates tobacco bonds.

Reassuring forecasts of cigarette sales also aided the market for CABs.

IHS Global Insight, a consulting firm, earned millions of dollars providing its forecast on almost every deal done in the sector. The projections persuaded investors there would be extra cash available to prepay CABs. Since then, smoking bans and hefty tax increases have nearly doubled IHS’s projected rate of decline in cigarette sales.

“I take all the credit and take all the blame,” James Diffley, IHS’s lead forecaster for cigarette sales told ProPublica. “It’s a forecasting exercise. The world will not turn out exactly like anybody imagined.”

A 2005 deal involving Puerto Rico was the first CAB sale, according to the bank that arranged it. That year, Merrill Lynch convinced the Puerto Rico Children’s Trust to issue $108 million of CABs that wouldn’t come due until 2045 and 2050 — when many of the officials deciding to sell the debt might well be dead and a $2.5 billion payment would be owed.

Merrill Lynch estimated that Puerto Rico could pay off the debt early, however, by shelling out some $372 million in turbo repayments from 2024 to 2028. That prediction, tucked inside the 2005 bond offering, was based on industry payments coming in line with IHS’s basic expectation of cigarette sales.

Mutual fund managers Oppenheimer Funds, BlackRock, Eaton Vance, Dreyfus, Nuveen and Goldman Sachs Asset Management all bought Puerto Rico’s turbo CABs, according to a Merrill Lynch pitch document. A spokesman for Merrill Lynch, now part of Bank of America, declined comment for this article.

After that deal, bankers started layering CABs into many tobacco issues. In all, ProPublica identified 92 CABs that incorporated turbo repayments, raising nearly $3 billion between 2005 and 2008.

The $64 billion payoff for these bonds is about 21 times the amount borrowed. Even in the unlikely scenario that all of them get repaid early, the payoff would be about five times, ProPublica estimates. By comparison, traditional bonds like those Washington sold typically repay about three times what’s borrowed, said Estes, the finance professor.

Steep repayment terms have made CABs controversial in other arenas. In the mid-1990s, for instance, Michigan limited the ability of school districts to sell CABs precisely because they can create giant debt burdens far into the future.

Nevertheless, in 2006, Michigan sold a $55 million CAB that Bear Stearns tucked into a larger, $490 million tobacco issue. The CAB promised to repay $1.5 billion, or 27 times the amount borrowed, in 40 years.

Asked about the transaction, Michigan treasury spokesman Terry Stanton said, “CABs can be a useful structuring tool when the risks and costs are properly understood and analyzed.” The state sold the bonds, he said, because there were investors interested in buying them.

As Wall Street manufactured more turbo CABs, a dominant buyer emerged: Oppenheimer Funds, the Rochester, New York, mutual fund manager. The firm gobbled up hundreds of millions of dollars in CABs, sometimes buying entire issues in one gulp and sprinkling the debt throughout at least 17 of its municipal bond funds, according to data from Lipper, which tracks mutual fund holdings.

Oppenheimer Funds declined to comment for this story. But in May, Michael Camarella, senior portfolio manager for the firm’s municipal team, told Bloomberg News the tobacco sector presented a buying opportunity for investors willing to hold on to the debt. “We’ve been willing to take those risks,” he said. “Tobacco and Puerto Rico are the two cheapest sectors right now.”

Oppenheimer Funds declined to make Camarella available for an interview.

As of May, the firm was the largest owner of turbo CABs, according to Lipper data. The holdings were large enough that, were they all to pay off in full at maturity, Oppenheimer Funds would collect some $40 billion. With the 1998 settlement proceeds declining, however, that appears highly unlikely. In May, the firm valued these CABs at only about $700 million, or about 1.8 cents on the dollar, according to Lipper.

“I have yet to see a capital appreciation bond that I think is going to get paid,” said Dick Larkin, credit analyst at brokerage firm Herbert J. Sims & Co. in Florida, who has been warning for a decade that tobacco bonds are headed for trouble.

Some of the early investors have come to the same conclusion.

“We don’t want to have any bonds in this sector overall,” said Tom Metzold, senior portfolio adviser for Eaton Vance, one of the mutual funds to buy into the Puerto Rico CABs sold by Merrill Lynch. A $6.6 million chunk of that 2005 deal was the last CAB standing in one of the firm’s funds as of May, according to Lipper.

But as investors like Metzold cut their losses, hedge funds are stepping in. By scooping up the debt at distressed prices, they may still be able to make money. Tobacco bonds of all stripes have been a favorite playground for speculators this year, returning 10.83 percent and making it one of the top performing sectors of the municipal bond market, according to S&P Dow Jones Indices.

The “Max Out” Strategy

Analysts say states agreed to the CABs’ steep repayment terms to squeeze the tobacco settlement money for all it was worth. “They were designed to milk every last dime,” said Dean Lewallen, a senior research analyst at investment manager AllianceBernstein in New York.

By layering in CABs, states got more upfront cash than they otherwise would. Once standard 30-year bonds were paid off, it would free up tobacco money to cover any CABs included in the package. They could then be prepaid before the big balloon payments came due at maturity.

The scenario assumed that settlement revenues would come in as predicted. But when many of the securitizations sold in 2007, the bankers and politicians were more concerned about another aspect of the deals: their size.

In February of that year, soon after he took office, Richard Cordray, Ohio’s newly elected treasurer, began trumpeting the idea of securitizing the state’s tobacco money, according to news reports from the time.

Ohio’s then-governor, Ted Strickland, backed the idea, and it sailed through the legislature that June. The plan was to sell all of Ohio’s tobacco money to finance new school buildings and cover tax cuts for the elderly.

By July, Cordray and then-Budget Director Pari Sabety had the sale process in full swing. In public statements promoting the deal, Cordray said it made sense because tobacco payments might shrink in the future.

“Five years from now, 10 years from now, smoking bans are kicking in, taxes may change, maybe court decisions. If the tobacco companies are not profitable, Ohio would be out its money. But if we cash in now, we will have our money and we will shed the risk,” Cordray was quoted saying in a July 2007 report by The Associated Press.

The state requested proposals from investment banks on how to generate $5.05 billion from a bond sale — including “CABs, subordinate CABs, or any other proposed element.”

“Bear Stearns is pleased to present its qualifications,” opened a letter from Arnone, who by then had done 26 tobacco deals worth $25.3 billion, according to the document.

Bear Stearns warned that it was getting pricier to sell CABs. The bank said Puerto Rico halted a CAB sale that Bear was leading because of “sticker shock” at the “dramatically higher” interest rates needed to get the deal done. But Bear put CABs into its recommended Ohio deal structure anyway.

“CABs are increasingly difficult and costly to sell,” JPMorgan chimed in. Yet it, too, proposed them as part of a “max out” strategy for Ohio to raise about $5.4 billion — and added that it now had a “leading tobacco bond résumé” because it had hired away executives from UBS, Goldman Sachs and Merrill Lynch to work on its team.

The major purchasers of CABs — including Oppenheimer Funds — had their portfolios “relatively full” of the debt, Morgan Stanley warned, but added that it could use its “unique insight” to sell the bonds anyway, a pitch document states.

Eventually, Ohio chose Bear Stearns and Citigroup to lead the sale. The firms packed $319 million of CABs into the overall $5.53 billion deal. The state received $5.05 billion after fees and setting aside reserves.

The CABs were costly. They accrue interest at even higher rates, 7.25 and 7.5 percent, than the “sticker shock” rate of 6.5 percent that had caused Puerto Rico to pull its CAB sale. At their respective maturities in 2047 and 2052, $6.6 billion will come due on them. Absent any turbo payments that might pay off the debt early, that’s a final repayment ratio of about 21 times the amount borrowed.

Interest rates on the other, less-risky, Ohio tobacco debt ranged from a low of 4 percent to 6.5 percent.

Just a few months after the deal closed, Bear Stearns went under, foreshadowing the financial crisis ahead. Shortly after, Arnone moved to Lehman, which filed for bankruptcy in September 2008 and had its North American operations bought out by Barclays Capital.

Two weeks later, Arnone was pitching another tobacco deal: “Individuals make the difference — not firms, which have unfortunately proven to be transient in this environment,” she wrote to Iowa officials on Barclays’ letterhead.

By then the run had finally stalled. Oppenheimer Funds — which had been the “sole source” of liquidity in the CAB market — was no longer buying in the wake of the Lehman collapse. Arnone recommended the state not use CABs. Unable to hit its target amount, Iowa pulled the deal.

Citigroup, Morgan Stanley and JPMorgan declined to comment for this story. Arnone and Barclays also did not respond to requests for comment or to a list of specific questions.

Asked about the wisdom of Ohio’s transaction, the state’s Office of Management and Budget said in a statement, “The decision to move forward with the transaction was made by Ohio’s leadership in 2007. We can’t speak to their thinking at the time.”

Strickland did not respond to a request for comment, but Cordray told ProPublica the state made the right decision. The decline in tobacco payments means they were riskier than believed, he said, and CABs helped the state maximize its proceeds. If payments decline further, he said, investors should pay the price, not Ohio.

“Obviously, they are always going to want to come back, cup in hand, saying to the state, ‘Put some money in it,’” Cordray said. “But it’s not necessary; it’s not legally required and in fact was the whole purpose of this deal.”

“We Basically Burned It All”

By using the tobacco bond money to build schools, Ohio didn’t have to sell general obligation bonds, which are repaid with taxes, to cover construction costs. But not all states used tobacco debt for such long-term investments.

New Jersey stands as the prime example. The state first issued tobacco bonds in 2002 and 2003, spackling holes in the state budget with the $3.5 billion they raised. “We basically burned it all in two years,” said David Rousseau, a deputy treasurer at the time who became state treasurer from 2008 to 2010. “It was not one of New Jersey’s better financial moves.”

In 2007, the state raised another $3.6 billion to repay those bonds. The deal, brokered by Arnone’s Bear Stearns team, had one silver lining: It let New Jersey keep about 24 percent of its tobacco payments, as opposed to the 100 percent it had given up in the earlier deal. That left up $50 million to $60 million a year in payments for the state instead of investors.

But not for long.

Staring at another $800 million budget gap this year, state officials again turned to Arnone. The two CABs issued in 2007 and their $1.3 billion payoff were now a concern, too. The solution was to sign over the untapped tobacco money expected from 2017 to 2023 — an estimated $406 million— to repay the debt early and get some new cash from investors in exchange.

The state said it came out ahead in the deal, largely because it also brought in $92 million for the budget. Still, Standard & Poor’s downgraded New Jersey’s taxpayer-backed debt a notch, citing the state’s “reliance on one-time measures that are contributing to additional pressure on future budgets.” The Moody’s and Fitch rating agencies followed suit, citing the same concern.

The downgrade shows how CABs can do damage despite legalities designed to shield the state and taxpayers.

Like most states that sold tobacco bonds, New Jersey did so through a shell entity. The New Jersey Tobacco Settlement Financing Corp. exists “in, but not of” the state’s treasury, its authorizing legislation states. The corporation’s only assets are the tobacco revenues the state signed over to pay back its debts.

“It’s only those monies, and no other monies, that the bondholders have a claim on,” said David Narefsky, a municipal bond lawyer at law firm Mayer Brown in Chicago.

But if the CABs aren’t paid back in time, they don’t go away. Barclays told the state that in a default, the bondholders would still be in line ahead of taxpayers for subsequent tobacco income. The bonds would continue to earn interest and would have to be paid back at an even higher cost — $1.6 billion from 2041 through 2049.

In a statement explaining the March deal, New Jersey made clear the CAB bondholders couldn’t be ignored.

The statement said that while New Jersey is “not legally compelled” to prevent a default, it did not want the corporation’s financial troubles to flow onto its books — or upset its creditors: “The State sees an advantage in maintaining good relations with the tobacco bond investors, as they are likely to invest in other bonds of the State.”

Rhode Island also decided it couldn’t simply ignore its CABs. The state wants to refinance its 2002 tobacco settlement bonds to take advantage of lower interest rates. But the deal, which involves selling $594 million in new tobacco bonds to pay off the old ones, can’t go forward without the approval from the owners of its 2007 CABs.

As a result, Rhode Island proposes to spend more than $60 million to buy them out and get their permission. “All of the CAB bondholders are getting something,” according to a person familiar with the transaction.

Rhode Island had hoped to collect at least $20 million out of the transaction for its budget. But the deal is on hold after Oppenheimer Funds, which holds some of the tobacco debt, filed a lawsuit this week alleging that it would “siphon off” money from bondholders to the state.

Money ‘Out Of Heaven’

As CAB debt piles up on state balance sheets, hopes of repayment — turbo or otherwise — are fading.

Of the four jurisdictions with scheduled CAB turbo prepayments so far, only one has made them, ProPublica found: Placer County, California, which has a relatively small, $14.3 million issue promising a $68 million payoff. The other three, pooled tobacco CABs sold by New York counties, have not.

Even on traditional bonds, making those turbo prepayments has proven difficult. Ohio has fallen about $70 million behind on prepayments toward its regular tobacco bonds, which must be paid off before any money goes to the CABs. Kurt Kauffman, the state’s debt manager, said it’s too early to tell how Ohio’s CABs might be repaid.

“We just don’t know,” he said. “That’s going to be up to kind of the future leaders.”

Others are watching to see how their peers deal with the problem.

In California, which has promised to repay nearly $3.7 billion on $350.5 million of CABs sold by its Golden State Tobacco Securitization Corp. in 2007, the entity’s debts are a concern. The corporation is behind schedule on early turbo repayments for its 2007 bonds.

“Hopefully it doesn’t come to the point of default because this office would be concerned about a negative fallout in the market,” said Tom Dresslar, spokesman for Treasurer Bill Lockyer.

Lockyer in the past has referred to CABs used by school districts as the equivalent of “payday loans” because of their ability to pile up future debts. Asked why California sold tobacco CABs under his tenure, Dresslar said Lockyer had just entered office in 2007 and the bond deal already was in the works.

The debt is much easier to manage in states that avoided CABs. Last October, Washington refinanced the tobacco bonds it sold in 2002, selling $334.7 million of new, lower-cost debt. Arnone led that deal as well, which netted $2 million in fees for Barclays and other firms. As before, the state avoided CABs.

Washington now expects to repay its tobacco debt two years earlier, by 2023. At that point, 100 percent of its tobacco dollars will again flow to taxpayers instead of investors.

“The money from the tobacco settlement was supposed to go into research and education to prevent people from getting into smoking and, of course, we want that to happen,” said Kim Herman, who heads the state’s tobacco securitization authority.

Smoking’s toll, after all, was the reason states fought Big Tobacco for the money in the first place. But when the final legal settlement was signed in 1998, it did not require states to spend at least some money on smoking prevention.

“That was a mistake,” said Iowa Attorney General Tom Miller, who helped lead the settlement negotiations and is still in office. Miller said he did not oppose securitizing a large slice of Iowa’s proceeds, 78 percent, as long as it still left a portion remaining for tobacco prevention programs.

But Michael Moore, who as Mississippi’s attorney general filed the initial lawsuit that led to the settlement, says the states that securitized made a “sucker bet” that diverted the winnings of the fight away from their intended purpose.

“The people making the decisions think that this money fell out of heaven,” Moore said. “No. This money was related to a public health battle, probably the biggest public health battle in our nation’s history, trying to combat the No. 1 cause of death and disease.”

The Centers for Disease Control and Prevention estimates that to make a real dent in smoking states should collectively be spending $3.3 billion a year on anti-tobacco programs.

The Campaign for Tobacco Free Kids, a smoking-prevention group, said tobacco companies spend $8.8 billion a year on marketing. By comparison, states together spent $481 million on prevention in their most recent fiscal years, the campaign’s latest report said.

The state that spent the least?

New Jersey.