With fewer and fewer Americans smoking cigarettes, and the number falling much faster than originally projected, West Virginia officials are looking at refinancing or restructuring the $911 million in state tobacco settlement bonds sold in 2007.
The West Virginia Tobacco Settlement Finance Authority set up a working group Tuesday to look at the best way to move forward with the 25-year bonds, given the accelerating decline in smoking rates nationally.
“This might be the opportunity for them to look at what’s best with the markets the way they are now,” said Administration Secretary Allan McVey, chairman of the tobacco board.
The group will include experts from Citigroup, the Public Resources Advisory Group and bond rating agencies.
West Virginia’s 2019 payment as part of the national Tobacco Master Settlement Agreement was $59.6 million, down from a $61.26 million payment in 2018, as cigarette manufacturers saw a 4.7 percent drop in sales in 2018.
In November, Citigroup financial adviser Paul Creedon told the board that the decline in smoking rates was accelerating, with sales dropping 5.5 percent in the first three quarters of 2019, in part, because of the rising popularity of e-cigarettes, or vaping.
Since then, federal authorities have raised the minimum age to buy cigarettes from 18 to 21 years old. McVey said that might not have a huge impact on national cigarette sales, because many states already required tobacco buyers to be 21.
When major cigarette manufacturers entered into the master settlement of a multi-state tobacco liability lawsuit in 1998, projections were that smoking would decline at a rate of 3 percent a year nationally.
Authority members on Tuesday met in executive session for more than 2½ hours discussing the matter, as well as reviewing a termination agreement with DEPFA Bank, in New York, which manages the state’s $115 million debt service reserve fund on the bonds. Authority members approved that agreement in open meeting.
Under the agreement, the $115 million will be transferred to the authority.
McVey said the termination is at the bank’s request.
“They want to get out of the business, basically,” he said.
That fund was set up to make up the difference, in the event the annual tobacco settlement payment to the state falls below the $62 million minimum annual payment that the state makes to bondholders.
In 2007, West Virginia sold the rights to $1.5 billion in future settlement payments to the state in a bond sale that raised $911 million. The state used most of that money to bolster the then-severely underfunded Teachers’ Retirement System, ultimately reducing the annual payments needed to stabilize the pension fund by a total of $2.5 billion.
Although the bonds technically are for 25 years, financial advisers at the time indicated that the bonds could be paid off by 2029, at which time the tobacco settlement payments — which go on for perpetuity, as long as the cigarette manufacturers exist — would revert back to the state.
The state would not be liable, beyond the $115 million reserve fund, in the event of an outright collapse of cigarette sales nationally, since bondholders assumed that risk when they bought the bonds.