33 states dependent on tobacco money helped shield cigarette
giant from bankruptcy
Rhode Island averted a landmark legal wrangle with cigarette maker Philip Morris USA when the tobacco giant met its deadline to pay the state $18 million for this year, as part of the 1998 settlement between states and tobacco companies.
Rhode Island Attorney General Patrick Lynch confirmed last week that Philip Morris did make its payment to Rhode Island after several weeks of uncertainty.
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“On April 15, Rhode Island was due practically $18 million from Philip Morris, and on April 14, the state of Rhode Island and the other states involved got word that they would be able to post the bond,” said Michael Healy, a spokesman for Rhode Island Attorney General Patrick Lynch.
Philip Morris and three other tobacco companies pay Rhode Island and 45 other states hundreds of millions of dollars a year. But for the past few weeks, Philip Morris, the world’s largest tobacco company, threatened it might have to file bankruptcy and skip its annual payment to the states on April 15 because of a recent court case in Illinois.
Last month, an Illinois state judge ordered the cigarette maker to pay $10.1 billion after ruling in favor of a class-action lawsuit alleging Philip Morris mislead smokers into believing its light cigarettes are less harmful than regular brands. More damaging to the tobacco maker, the judge ordered Philip Morris to post a $12-billion bond in order to appeal the verdict.
That put the 46 states that sued the tobacco industry in the landmark 1998 case in the unusual position of coming to the rescue of one of the “Big Four” tobacco companies, to ensure that settlement payments continued. Most of the states, including Rhode Island, have been using the tobacco money in recent years to stave off budget catastrophe.
On April 7, Rhode Island Attorney General Lynch was one of the 33 state attorneys general who signed a friend-of-the-court brief asking Illinois Judge Nicholas Byron to reduce the $12-billion bond that Philip Morris had to put in escrow in order to appeal its case in Illinois.
Lynch and the other attorneys general would have gone further, if necessary, to protect Philip Morris, the maker of Marlboro cigarettes, said Healy.
“Because Rhode Island relies so heavily on this money, the attorney general understands completely its extreme importance, and if necessary we would be ready to go to court,” said Healy. “The settling states, of which Rhode Island is one, have bankruptcy council and would definitely pursue their rights in a bankruptcy proceeding.”
Philip Morris was able to make the payments on April 15, including approximately $18 million to Rhode Island, one day after the judge cut in half the initial payment on the $12-billion bond to $6 billion. The company will make additional payments on the bond as its appeal in the case continues.
Philip Morris was accused in the lawsuit of misleading consumers by misrepresenting the safety of light cigarettes compared with full-flavor cigarettes. A similar suit has been filed against R.J. Reynolds in the same court that ruled against Philip Morris.
Rhode Island is one of several states that already has or is in the process of issuing bonds backed by expected tobacco settlement payments. Rhode Island securitized its tobacco payments for this fiscal year, issuing bonds in order to finance a budget deficit and reduce the size of future financial shortfalls.
“It’s difficult to say what could result if Philip Morris did declare bankruptcy. Those payments to Rhode Island are being used to pay the debt service. When people and institutions bought those bonds, they got a higher return because they were aware of risks involved in the tobacco industry – they could go broke. Should one of the major tobacco companies find itself in financial difficulty, it raises the question of whether those debt services could be paid,” said Peter Marino, director of policy for the Rhode Island Public Expenditure Council.
Several states that are in the process of doing the same thing were scrambling to come up with new ways of raising money to close budget deficits. Virginia, New York and California, for example, postponed plans to sell bonds backed by money from the tobacco settlement.
Philip Morris asked the Illinois judge to reconsider his $10.1-billion verdict,
asking him on April 21 to reverse his verdict or reduce the judgment amount.
The judge was expected to rule on the issue on Thursday, April 24.
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