Issued To: County Chief Fiscal Officers
Purpose of Bulletin
The purpose of this bulletin is to provide accounting and reporting guidance for payments made to counties pursuant to the Master Settlement Agreement (MSA) with the tobacco industry. The agreement provides that counties will receive annual payments to compensate them for medical costs incurred as a result of illness resulting from use of tobacco products. Many counties have elected to accelerate receipt of future payments by securitizing these payments. This bulletin provides accounting and reporting guidance for receipt of annual payments, proceeds of securitization, and residual payments.
Payments are due counties on April 15 of each year in perpetuity. In addition to these payments, “initial payments” are also due January 10, 2000-2003. Payments of these amounts should be recorded in the general fund as received using revenue account A2690-Other Compensation for Loss.
Proceeds of Securitization
Many counties have elected to securitize the tobacco settlement payments. In order to securitize payments counties have created single purpose Local Development Corporations, which are referred to as Tobacco Asset Securitization Corporations (TACS). The counties sell their right to receive future payments to the Corporations in exchange for proceeds of debt issued by the Corporations. The debt issued by Corporations is not debt of the counties and is secured only by future tobacco payments.
Counties should record receipts representing proceeds of the securitization in general fund revenue account A2655-Sales, Other.
TACS are not considered component units of the counties because there is no ongoing financial accountability. Consequently, the only reporting requirement is that there be footnote disclosure.
In many instances, the annual payments will exceed the amount necessary to pay debt service. These excess amounts referred to as residual payments will be paid to the county and should be recorded in the same manner as annual payments, i.e A2690-Other Compensation for Loss.
Sample Journal Entries
|To record the annual tobacco settlement payment:|
|A980 Revenues and Other Financing Sources||xxx|
|2690 Other Compensation for Loss||xxx|
|NOTE: The same entry would be made to record residual payments to counties who have securitized.|
|To record proceeds of securitization:|
|A980 Revenues and Other Financial Sources||xxx|
|A2655 Sales, Other||xxx|
In January 1997, the State of New York filed a lawsuit against the tobacco industry, seeking to recover the costs that the State and local governments had incurred in treating smoking related illnesses. Under an agreement reached with the tobacco industry referred to as the Master Settlement Agreement (MSA), the State and counties are entitled to receive annual payments. Payments received under the agreement in 2000 totaled xxx and are recorded in General Fund Account A2690-Other Compensation for Loss.
During 2000 the County sold its right to receive payments under the MSA to the Tobacco Asset Securitization Corporation (TACS) for xxx. Proceeds of the sale are recorded in General Fund Account A2655 Sales, Other. The TACS is a related organization as described in GASB Statement 14, because while the County appoints the governing board of the TACS, the County is not responsible for the operations of the Corporation.