Companies to pay Rhode Island approximately $50 million upfront for disputed years 2004 through 2014
Attorney General Peter F. Kilmartin today announced that his office and the State of Rhode Island have reached a settlement in principle with various tobacco companies over disputes relating to the Master Settlement Agreement (MSA) between the State and tobacco manufacturers for years 2004 through 2014. The settlement in principle results in projected profits to the State of approximately $10 million for this fiscal year, and projected payments of approximately $40 million to the State's tobacco bondholders in this fiscal year. In addition, the bondholders are also projected to receive an additional $20 million over five years. The settlement is also expected to reduce the expected final redemption date of certain bond series.
The MSA is the document entered into in 1998, when Rhode Island, along with fifty-one (51) other States and Territories, settled litigation with major tobacco companies. The MSA provides significant public health protections, such as limiting sponsorship of events by tobacco companies and prohibiting tobacco companies from marketing cigarettes to youth. In addition to these public health provisions, the MSA requires the tobacco companies to make payments to the States in perpetuity to offset a portion of the costs of smoking-related diseases incurred by the States. The Attorney General's Office is charged with enforcing certain provisions of the MSA, including the close monitoring of the tobacco companies' annual payment and defending the State over disputes in the enforcement of the MSA.
In 2002, the Rhode Island General Assembly passed the Tobacco Settlement Financing Corporation Act, R.I. Gen. Laws §42-133-1 et seq., which created the Corporation for the express purpose of issuing bonds payable from Rhode Island's future MSA payments. The Corporation issued bonds for upfront tobacco payments totaling $685 million with the money put in the General Fund. The last tobacco bonds are currently set to mature in 2052, at a cost to the State of approximately $2 billion in principal, interest, and fees.
"At the time of the settlement with the tobacco companies, the State believed it was in its best interest to issue bonds for future payments to fill a budget hole. It has been left to the Attorney General's Office to vigorously defend the State's enforcement actions to ensure the money would be there to pay back the bonds. Although I am confident we would have continued to defend the State with the same level of success as we have in past disputes with the tobacco companies, this settlement ensures access to monies that rightly belong to the State, allowing us to repay the bondholders as intended and, in certain instances, sooner than anticipated," said Attorney General Peter Kilmartin.
Because the MSA imposed strict regulations on those tobacco companies which had signed the agreement, the MSA contains a number of provisions ensuring that states guard against non-participating manufacturers from gaining an unfair competitive advantage over those companies which had signed the document.
Among those provisions, there are certain adjustments which may be made to the tobacco companies' annual payment to each state if a State is found by an arbitration panel to be "non-diligent" for purposes of enforcing certain provisions of the Tobacco Product Manufacturers' Escrow Funds Statute (R.I. Gen. Laws § 23-71-1 et seq.) relating to those tobacco companies that are not signatories to the MSA. Such disputes are challenged by year of the particular adjustment, called the non-participating manufacturer adjustment ("NPM Adjustment"). Half of the original State signatories to the MSA have already settled such disputes.
During the arbitration concerning the 2003 NPM Adjustment, the State spent close to half a million dollars over a year and one half defending its diligence in enforcing the agreement. Ultimately, the tobacco companies chose not to contest Rhode Island's diligence, and Rhode Island did not have to have a state-specific hearing before an arbitration panel. Prior to this settlement, the Attorney General's Office was preparing for the 2004 NPM Adjustment arbitration, and had already spent hundreds of thousands of dollars within just a few months.
If the State continued with these arbitrations year by year and was found non-diligent in any given year, the State would be at risk of losing its entire scheduled annual MSA payment for any given year, which is tens of millions of dollars. If there is no MSA payment, there is no payment to the bondholders, creating the prospect that the State would have to raise those funds from another source. For the NPM Adjustment for Years 2004 through 2014, the settlement eliminates this risk.
Attorney General Kilmartin applauded the efforts of Special Assistant Attorney General Maria Lenz and the Civil Division within his Office for successfully negotiating and entering into a settlement that is overall net positive to the bondholders and the State. "Not only does this settlement resolve significant risk for both the bond holders and the State, it also results in approximately ten million dollars for Rhode Island in this fiscal year. I am so proud of the work the attorneys did on behalf of the Office and the State on this case."