Building a Forecast Model for the Master Settlement Agreement

Forecasting one of the most complex nationwide revenue sources.

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Summary

The Master Settlement Agreement (MSA) is among the most unique and complex state revenue sources across the nation. It is a perpetual settlement payment from tobacco manufacturers to individual states. It is governed by a multi-variable legal formula, dependent on macroeconomic and microeconomic factors, and subject to continuous and ongoing litigation. 

No public sector entity is known to have developed a comprehensive and long-term forecast model. Nor was there one for Alaska designed around the state’s specific legal settlement terms. Arnav developed Alaska’s first long-term MSA forecast model by studying more than a decade of independent audit records and lawsuit settlement text. He isolated each forecast variable and applied statistical and econometric modeling techniques to develop independent projections. He reproduced the full accounting calculation and state-specific legal framework, back-tested against historical data, and released the projections to state stakeholders and the National Association of Attorneys General. The system is now used to forecast Alaska’s MSA revenues and delivered a forecast accurate within 2% for fiscal year 2026. 

Situation

In 1998, 46 states and several U.S. territories reached a landmark agreement with the major tobacco companies, requiring them to make annual payments to participating states in perpetuity. The payment formula is complex, incorporating changes in cigarette sales, the market share of various types of tobacco companies, new market entrants, individual states’ enforcement activities, and inflation. Subsequent litigation has further altered the formula for the majority of states, adding legal variables that vary by jurisdiction. 

Alaska’s MSA revenues are designated by statute: 20% is directed to designated health program funding, and 80% services payments on “tobacco bonds” issued against this revenue stream in the early 2000s. The forecast accuracy has direct implications for state program funding. 

No participating state is known to have a current nor comprehensive long-term forecast model. The multi-state organization administering the settlement maintains a basic projection tool, but it is neither comprehensive nor jurisdiction specific. The result has been a revenue source that 46 states rely on but have not been able to rigorously project. Alaska was no exception. 

Solution

Arnav developed Alaska’s first comprehensive long-term MSA forecast model. This was accomplished by reviewing more than a decade of PricewaterhouseCoopers’ independent audit documentation, along with the lawsuit settlement itself. Then, the additional legal settlement agreements pertaining to Alaska were studied and mapped. This provided a complete accounting of historical payment calculations and a breakdown of each variable driving future payments. 

From the review, the exact calculation framework was mapped with each forecasting variable identified.  Independent economic forecasts were obtained or custom-built for each variable, with several requiring econometric modeling to build a statistically defensible projection.  

With each variable forecasted, the settlement’s full accounting and legal calculation framework was reproduced in a single model. It replicated the formula as it applies to Alaska under current legal conditions. The output was back tested against historical payment data and confirmed to produce accurate results before it was released. The model was presented to state stakeholders and to the National Association of Attorneys General and published in the official revenue forecast. 

Results

The model delivered a forecast that was accurate within 2% for fiscal year 2026. This surpassed the estimates of previous forecasts and the settlement association’s projections. To the extent of the association’s knowledge, this is the most comprehensive forecasting framework developed among the 46 participating states.  

This also granted the state a permanent analytical asset. The MSA revenue is a binding agreement with cigarette manufacturers and perpetual for the foreseeable future. The model produces long-term forecasts calibrated to Alaska’s specific legal factors and accurately replicates the full settlement formula. With revenues tied to designated health program funding, this measurably improves budgeting for vital state programs.