Debate and Issues Index

draft settlement


By Barry Meier

As state legislatures nationwide start new sessions, lawmakers are beginning to debate how to spend their biggest windfall in recent years: tens of billions of dollars from tobacco settlement deals.

While some elected officials are calling for the money to be spent on health care efforts and antismoking campaigns, others are urging that it be used on projects unrelated to tobacco, including new schools or jails, and even sidewalk repair. Still other lawmakers say the tobacco windfall should be used to eliminate state debts or be given to taxpayers as rebates.

Over the next 25 years, all 50 states and some cities will receive almost $246 billion from cigarette producers as a result of the lawsuits brought against the tobacco industry to recover Medicaid money spent treating smoking-related illnesses. But while public officials unified those actions under the theme of reducing the ranks of underage smokers, the question of how to spend settlement dollars has taken on a fractured look that reflects the financial and political peculiarities of each locality.

Lawmakers in Alabama have earmarked $85 million, the first installment of its tobacco payout, for a variety of youth-related programs, including the building of boot-camp-style detention centers, and will spend only $500,000 of that sum on antismoking efforts. Gov. Jane Hull of Arizona has proposed using her state's share for financing tobacco-reduction programs and rebuilding health facilities, including a psychiatric hospital. And Mayor Richard J. Riordan of Los Angeles wants to use the city's share to meet a Federal requirement that sidewalks be more accessible to the disabled.

Because most legislatures will treat the tobacco payments like any other revenue, interest groups varying from antismoking advocates to business associations to tobacco farmers are gearing up to lobby lawmakers on how to spend the money. "Right now, it is a free-for-all," said Dr. David A. Kessler, former Commissioner of the Food and Drug Administration. "It is a fight over money."

Only Florida, Minnesota, Mississippi and Texas -- the four states that resolved their lawsuits before the recent $206 billion tobacco settlement -- have received the first installments of their payments, which together will total $40 billion over 25 years. The other states expect to get their first payments next year.

The money will vary widely. California and New York, the two largest states, will each receive $25 billion over 25 years, and sparsely populated states like Alaska and Idaho less than $1 billion each. It is still unclear how much of that money the states will keep because the Federal Government, which contributes to each state's Medicaid bill, wants its share.

State officials have said they plan to fight any Federal move to recoup money or put conditions on its use. But Arturo Perez, a policy research specialist with the National Conference of State Legislatures in Denver, said the prospect of Federal action had caused some states to move cautiously because they did not know how much tobacco money they would have to spend.

Many state legislatures are expected to put the tobacco settlement issue high on their agendas. Mr. Perez estimated that for most states the tobacco settlement windfall would be a sum equivalent to 1.5 percent of revenues in 1997, the most recent year for which data are available. That figure is equal to the amount most states collected that year in tobacco excise taxes, he said.

Tobacco companies have already passed along the cost of the settlement to smokers by raising prices. All states will probably use at least a part of their settlement windfall to finance antitobacco measures like programs to encourage smokers to quit, advertising campaigns to reduce the number of young people who smoke and stepped-up efforts to prevent retailers from selling cigarettes to underage buyers.

But the states are free to do with money as they choose. And as a result, proposals have reflected not only each state's financial condition but local political and spending demands, as well.

Nebraska, for example, has created a tobacco settlement trust fund and will use interest from it to underwrite measures like converting nursing homes to assisted-living facilities. On the other end of the financial spectrum, Gov. Mike Foster of Louisiana has proposed raising cash to pay off the state's debt by selling off its tobacco settlement to the highest bidder. A spokesman for Governor Foster said the state could then use the $300 million it was now paying in interest to finance raises in teachers' salaries.

A number of tobacco-growing states, like North Carolina and Kentucky, are likely to use part of their settlements to help tobacco farmers. Several states are also expected to emphasize health coverage for uninsured children.

In New York State, Gov. George E. Pataki has not announced a position on the issue. Democratic legislative leaders are urging that tobacco money be used to provide health coverage for the uninsured, while Republicans are calling for a lowering of property taxes and a paying down of the state's debt.

In New Jersey, which will get $7.6 billion, Gov. Christine Todd Whitman has called for increased spending on antismoking efforts and public health programs, including charity care, which pays hospital bills for the uninsured. And in Connecticut, which will get $3.7 billion, legislative leaders have only just begun discussions about how to spend the money.

Dr. Kessler, who is dean of the Yale University Medical School, said that without significant reductions in smoking, the settlement would prove worthless because the costs of treating tobacco-related illnesses would not decrease. And antismoking groups are lobbying lawmakers to spend significant amounts.

Matthew Myers, a lawyer with the Campaign for Tobacco-Free Kids, an advocacy group in Washington, said his group believed that each state, depending on the scope of current anti-smoking programs, needed to earmark 25 percent to 45 percent of settlement proceeds to mount an effective effort.

Some states are expected to spend sizable sums on anti-tobacco programs, but the prospects that such spending will occur nationwide may prove unlikely. For example, even in Minnesota, which won the highest settlement on a per-capita basis, spending on antismoking measures is likely to fall far below initial expectations.

Under the $6.1 billion settlement reached last year by Minnesota, $202 million, or 3 percent of the proceeds, was set aside to finance programs over the next decade to help smokers quit and also to support research on ways to reduce underage smoking. The settlement also recommended that an additional $650 million be put into an endowment to finance added tobacco prevention campaigns, a move backed by Hubert H. Humphrey 3d, the state Attorney General who brought the suit against the industry.

But Mr. Humphrey lost his bid to become the state's Governor to Jesse Ventura, the Reform Party candidate. And now with Mr. Humphrey out of office local antismoking groups are without an important ally just as lawmakers begin to discuss how to spend the money.

In recent days, the Minnesota Smoke-Free Coalition has begun to run newspaper and radio advertisements urging the state's lawmakers to add the $650 million to anti-tobacco programs, said Judy Knapp, the group's executive director. And Dr. Richard D. Hurt, director of the nicotine dependence programs at the Mayo Clinic in Rochester, Minn., said the additional money was essential.

"The money right now is not enough to mount an aggressive marketing campaign" against tobacco use, said Dr. Hurt, who is also chairman of Minnesota Partnership for Action Against Tobacco, a foundation created by the settlement.

But such a move is facing opposition from business groups like the Minnesota Chamber of Commerce. It has contended that spending $202 million on tobacco programs is plenty for now and that settlement dollars should be used to reduce health insurance taxes paid by companies and others.

In addition, Governor Ventura, who has suggested using tobacco money to create an endowment that will finance medical research, does not plan to advocate added spending on antitobacco measures beyond the $202 million already earmarked, said Teresa McFarland, a spokeswoman for his office.

Most states will not decide how to spend their windfalls until the end of the current legislative sessions. But in recent decades, state legislatures have often used windfalls for purposes unrelated to the circumstances that produced them.

Hal Hovey, the editor of the State Budget and Tax News, a newsletter, said that in the early 1990's many states used Federal, rather than state, money to pay for Medicaid services. But rather than spending the money on added health care service, it was used by lawmakers to plug budget gaps and avoid politically damaging tax increases.

Mr. Hovey, who was previously a state budget director in Illinois and Ohio, said that in discussing the tobacco money with state officials, he had been advocating a go-slow approach. He said that unresolved claims on tobacco money by cities and hospitals might slow down payments, and that if the Federal Government recouped a share, state revenues would shrink.

"I have expressed the view," Mr. Hovey said, ''that in substance you should not count on this money until you can run your fingers through it."