Welcome to the Department of Justice, Iowa Attorney General Tom Miller

For immediate release - Wednesday, November 21, 2001. Contact Bob Brammer - 515-281-6699.

State Receives $434,000 in Tobacco Money - and Sells Tobacco Bonds Worth $644 Million

DES MOINES. Attorney General Tom Miller and State Treasurer Michael Fitzgerald today announced two developments regarding tobacco payments to the State of Iowa resulting from payments the tobacco industry is making in settlement of lawsuits filed by Miller and other state attorneys general. The industry is required to pay tens of millions of dollars each year to Iowa under the settlement and already has paid over $125 million to Iowa.

In one development, Miller said Iowa has just received $434,781.52 as a result of an IRS ruling that the State did not have to pay income tax on investment income earned while millions of dollars of tobacco settlement payments had been held in escrow. "We are pleased that the issue is resolved," Miller said. "Every penny helps when the State is in difficult financial shape."

Miller explained that tobacco industry payments accrued in escrow accounts when they first began under the Master Settlement Agreement that resolved the lawsuits of many states. The funds remained in escrow accounts, accruing interest, until the formal settlement documents and litigation were finalized in each state. The issue was whether the interest income was taxable under IRS rules. Now that the issue is resolved, Miller said, Iowa and other states are receiving both the taxes paid and interest on taxes paid on the funds.

Fitzgerald explained the details of a second major development in connection with Iowa's payments from the tobacco industry - conclusion of a bond sale worth over $644 million based on the future payments due to Iowa from the tobacco industry. In essence, the State sold bonds based on the stream of payments the tobacco industry is required to pay to Iowa in perpetuity. Bondholders will be paid from a portion of the payments the industry is paying Iowa under the "tobacco securitization" arrangement.

"This is a major accomplishment and excellent result for the State," Miller said. "It was a good arrangement authorized by the Governor and Legislature, and the Treasurer did an excellent job in marketing and issuing the bonds. The whole process and result reflects well on Iowa's financial management, reputation, and credit rating." Miller noted that at least 22 percent of the tobacco revenue stream directly to the state will continue because it was not needed for payments on the bonds. He also noted that when the bonds are paid, payments directly to Iowa by the tobacco industry would resume.

Miller said the "securitization" arrangement had several strong benefits. He said securitization transfers financial risk from the State to the bondholders, in the event that tobacco companies might go into bankruptcy or see a decline in tobacco consumption that would reduce their payment obligations. "We are working very hard precisely to reduce the enormous cost of tobacco in lives and money. Securitization removes any possible conflict of interest between that goal and the ongoing payments the industry owes to the State," he said.

"My greatest hope is that this will help us become a healthier state," Miller said. "We can go full-speed ahead with efforts to reduce tobacco use and addiction by children and all Iowans, and we can build up funds for many kinds of health programs for years to come."

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