New York City inhaled deeply and issued the first-ever tobacco bond in November. The $709 million bond, part of a $2.8 billion debt the city will sell in the next four years, sold out immediately.

Neighboring Nassau County followed the city a week later with a $302 million bond. It did not meet with the same market enthusiasm, suggesting to some Wall Street analysts that the Big Apple's issue had the glamour of being first, but the county's debt was a more accurate picture of investor response to bonds backed by tobacco-litigation- settlement funds.

Other states and localities are studying tobacco bonds as a way to convert annual tobacco-company payments that stretch out over 25 years to upfront cash in hand. Virginia has a $600 million tobacco- settlement bond awaiting authorization by the General Assembly. The bond would securitize 40 percent of Virginia's expected tobacco payments. Indiana's legislature also has tobacco bonds on its agenda.

Ohio and Oregon, however, have opted out of the tobacco-bond approach. There are, after all, considerable risks in using as bond collateral payments that could fizzle out over time. Since tobacco money owed to the states is pegged to the amount of cigarettes sold, the payments could decline if cigarette consumption dips--a not- unlikely scenario since states are supposed to use some tobacco money to educate citizens about smoking's risks.