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There are two new analyses of the multi-state tobacco settlement agreement and some of its consequences.

S&P releases report on tobacco settlement

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 legal fees.

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 its distribution.

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 of funds.

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 says.

"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.

For a more comprehensive analysis from an antismoking point of view, click here: THE MULTISTATE MASTER SETTLEMENT AGREEMENT AND THE FUTURE OF STATE AND LOCAL TOBACCO CONTROL

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