Stateline Story

States Vary On How To Spend Tobacco Settlement Billions

With forty-six states and five U.S. territories preparing to collect initial payments of the $206 billion tobacco settlement, proposals ranging from establishing scholarships in Nevada to auctioning off Louisiana's full settlement have emerged.

Governors and legislators are being warned to temper their plans, however, because of federal threats to take as much as fifty percent of the settlement through the Medicare Secondary Payer Act. Even in the wake of President Clinton's State of the Union announcement of a Justice Department suit to recover Medicare costs, administration officials remain steadfast in their claim to a big chunk of the states' settlement funds.

At a recent conference of state legislators in Washington, D.C., Congressional Budget Office Deputy Director James Blum made clear that states should not count on keeping the full amount.

"That is a very legitimate concern for you all to have," Blum said when a Mississippi legislator asked if the federal government would subtract settlement funds from next year's federal disbursements.

Unwilling to wait for the dispute to be settled either through litigation or legislation, some governors have gone ahead with plans for the entire amount of their states' settlements.

Governor Kenny Guinn of Nevada, a Republican, offered a State of the State speech surprise by proposing to fund a college scholarship program with half of the expected $48 million in annual tobacco money. The "Millennium Scholarship" program would provide up to $2,500 a year for every Nevada high school graduate with a B average or better.

Guinn's plan was immediately attacked by Nevada Attorney General Frankie Sue Del Papa, who had advised the governor not to appropriate any funds until the situation with the federal government was resolved. In addition, she said, the intent of the state's lawsuit and subsequent settlement was to use the money for public health needs.

"Everybody supports education and I'm proud of the Governor's commitment to education," Del Papa said in a letter to Guinn and Nevada legislators. "But there are very strong and real health needs in this state. I don't think that the settlement can translate into scholarship money."

In Louisiana, meanwhile, Republican Governor Mike Foster has proposed selling off the state's tobacco $4.4 billion settlement to the highest bidder. The cash raised would then allow Louisiana to pay off state debt now and finance raises in teacher salaries.

On the opposite end of the savings spectrum is Nebraska, which has created a tobacco settlement trust fund and will use the interest to finance such public health programs as converting nursing homes to assisted-living facilities.

In Alabama, the Legislature has already approved using $85 million of their $3.2 billion settlement for youth programs varying from health coverage to detention centers and probation officers. An additional $500,000 has been set aside for tobacco control and teen smoking prevention efforts.

All forty-six states are likely to use at least a portion of the funding for health related costs, according to Joy Wilson of the National Conference of State Legislatures.

Florida, Minnesota, Mississippi, and Texas previously settled their lawsuits for a total of $40 billion.

A major concern for the large tobacco producing states is how to use the settlement not only for public health programs, but also to help tobacco growers who have been adversely affected by the settlement economically.

The governors of six tobacco states closed ranks in negotiations Wednesday and Thursday with cigarette companies in Durham, North Carolina. Governors Jim Hunt of North Carolina (D), Paul Patton of Kentucky (D), Jim Gilmore of Virginia (R), Jim Hodges of South Carolina (D), Roy Barnes of Georgia (D), and Don Sundquist of Tennessee (R) joined with officials from Ohio, Alabama, Florida, Indiana, and West Virginia to reach an agreement late Thursday with four cigarette manufacturers.

"We all leave here today winners with a positive outlook for a measure of financial assistance for our tobacco farmers," Hunt said.

While cigarette manufacturer R.J. Reynolds has originally led opposition to the deal, the company relented and agreed to contribute to a $5.15 billion trust for tobacco growers. Phillip Morris, Brown & Williamson, and Lorillard also agreed to contribute to the trust for 12 years.

Tennessee's Sundquist faces a fairly common situation as he tries to decide what to do with the state's $4.8 billion share of the tobacco money. Groups ranging from health advocates to disability pensioners have all begun lobbying for a portion of the funds.

Following the advice of the state Finance Commissioner, Sundquist plans to use only $21.7 million of Tennessee's $58.6 million initial payment in any budget appropriation. Based on a federal cost-sharing formula, up to 63% of Tennessee's settlement could be claimed by Washington, according to the Finance Commissioner's office. That figure represents the percentage the federal Health Care Financing Administration pays of TennCare, the state health insurance program for the poor and uninsured.

The National Governor's Association is working with the National Association of Attorneys General to prevent any federal seizure of the funds, and Senator George V. Voinovich, former Governor of Ohio, introduced a bill on Tuesday to forbid the federal government from taking such action.

"The settlement was won by the states without any assistance from Congress or the Administration. These lawsuits were brought by the states based on violations by the industry of state laws," said Washington Attorney General Christine Gregoire. "As far as we're concerned the states did all of the work and are entitled to every dollar of their allocated share. State attorneys general are prepared to fight any attempts by the federal government or anyone else to raid the states' settlement dollars."