A New Crop of Tobacco Money Coming to States

States that already raided their tobacco settlement money to balance their books will find some additional funds waiting for them later this month. A major cigarette firm is giving states $1.7 billion over the next decade in exchange for promises not to sue to recover health-care costs related to smoking.

The decision by Vibo Corp. of Miami to join the 46-state tobacco settlement is significant because the company represents the largest tobacco product manufacturer outside of the original 1998 agreement, said Brett DeLange, deputy attorney general of Idaho, which along with Iowa took the lead in negotiating the Vibo deal.

"This is important for public health, and it means additional payments to the states," Iowa Attorney General Tom Miller said in a statement.

By month's end, Vibo will pay out $78 million as the first installment of the 10-year agreement to the 46 states that are part of the original master tobacco settlement. Four states Florida, Minnesota, Mississippi and Texas aren't part of the original settlement and will have to negotiate their own deals with Vibo. Florida, Mississippi and Texas are not involved in talks with Vibo, state officials said. Officials from Minnesota and the company declined to comment on whether they were involved in their own talks.

Vibo does business as General Tobacco and sells a number of cigarette brands, such as Bronco, GT One, Silver and Champion.

The amount that the 46 states are to get each year from the original tobacco settlement takes into account how many cigarettes are sold in each state by the tobacco companies that signed the agreement. States will use the same formula to figure out how much money they will get from the Vibo settlement. Idaho, for example, is slated to get up to $6 million over the next 10 years from the Vibo deal, Kentucky up to $30 million and Georgia $41 million. California and New York each will take in $215 million over the next decade from the Vibo agreement.

Having Vibo on board helps states recapture some of the money states were losing because more smokers were buying cigarettes from off-brand manufacturers and online retailers that don't pay into the settlement fund, said Arturo Perez, a fiscal expert at the National Conference of State Legislatures, a bipartisan group of state lawmakers.

The original 1998 tobacco settlement involved four major tobacco companies R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco Corp., Lorillard, and Philip Morris USA, whose parent company recently changed it name to Altria Group. Now more than 40 smaller tobacco firms participate. The settlement led 46 states to drop a massive lawsuit against cigarette companies in exchange for sharing $206 billion over 25 years.

States' windfall from the master tobacco settlement is pegged at $48.2 billion for fiscal 2000 through 2004, according to a 2004 report from the U.S. Government Accountability Office (GAO), the congressional watchdog agency of Congress that until July was known as the Government Accounting Office. GAO is required by law to report each year to Congress how much states get from the settlement and how states use the money.

While many expected states to use the money to fund anti-smoking and health care programs, the master settlement doesn't require it. So instead, many cash-strapped states have used their tobacco money to balance their budgets.

In fiscal 2003, for example, GAO said that states allocated about 36 percent of tobacco settlement funds to budget shortfalls. Since then, however, a July NCSL report found that "the use of tobacco settlement funds to help offset budget gaps has declined dramatically." Six states used tobacco settlement funds to close budget gaps for fiscal 2005, which for most states started July 1. Last year, 13 states used these funds for budget relief, compared to 21 states the previous year, NCSL said.

Fewer states have tapped their installment of tobacco money this year in part because the economy is rebounding, but also because the balances in those funds have declined, making less money available for the general fund, NCSL's Perez explained.

In addition to the money, the Vibo deal also promises important new marketing and advertising rules that prohibit the company from targeting young people, Vermont Attorney General William H. Sorrell, who is president of the National Association of Attorneys General, said in a statement. Vibo is the exclusive U.S. importer of cigarettes from Protabaco, S.A., of Bogota, Colombia.

Aside from the tobacco settlement, cigarettes and other tobacco products continue to be a cash cow to states through higher taxes. For example, Alabama, Alaska, New Jersey and Virginia are among the states that increased taxes on cigarettes or other tobacco products in 2004, generating a net increase of $330.4 million, according to NCSL. Michigan expects to avoid cutting health care services by raising cigarette taxes to $2 a pack and netting more than $1 billion.