State Tobacco Payout May Be Smaller Than Expected

Money from the $206 billion tobacco settlement will start flowing to the states by the middle of December, but the payout over the next 25 years may ultimately be smaller than many officials anticipated. The reason: a legal Catch 22. If states accomplish their public health goal of curbing smoking, they’ll get less tobacco money — the fine print of the settlement stipulates that payments can be cut by up to 10 percent if there’s a slump in cigarette sales.

And with many states using the tobacco payments to fund aggressive anti-smoking campaigns, some officials fear that effective health policy could turn into irresponsible fiscal policy.

“Frankly, the prudent thing to do is not to spend specific dollars until they see what they will be. I thinks it’s a mistake for state legislatures to become addicted to the tobacco money,” said Laurie Loveland, an attorney who worked with North Dakota Attorney General Heidi Heitkamp on that state’s lawsuit.

Beginning with the April installments of the settlement, payments will be adjusted according to the number of cigarettes shipped in the United States in 1998 and 1999. For every full percentage point that the shipments decrease, the state payments will be reduced by .98 percent.

According to the U.S. Department of Agriculture, price increases and marketing restrictions have already led to an 8.6 percent reduction in the number of cigarettes sold this year. Comparatively, 1998 sales were down about 3 percent from 1997.

While the volume clause will not affect the first payments, expected to arrive on December 14, state officials are now scrambling to see how their share of the settlement will be affected.

Washington Attorney General Christine Gregoire, president of the National Association of Attorneys General, said that the decline in sales might not be permanent.

“The early [tobacco use] numbers are very encouraging. But we have to recognize that historically sales rebound with time after a price hike,” she said.

Connecticut revenue officials were the first to raise concern over the possible decrease in payments, saying that their tobacco payments will be up to 10 percent less than previously expected.

According to Marc Ryan, director of governor John Rowland’s budget office, the state had anticipated a payment of $166 million for the period between now and April. He offered no numbers on the possible reduction, saying only that it “will be significant.”

Connecticut lawmakers were hesitant to spend settlement money they have not yet received and therefore budgeted only a portion of their expected payout. Other states might not be so lucky.

Massachusetts officials were struck by the quandary between reducing smoking and losing revenue last week when announcing a decrease in the number of both adult and teen smokers in the state. According to the Department of Public Health, Massachusetts now has 150,000 fewer smokers than it did when state anti-smoking programs began in 1993. Youth smoking fell from 25 percent to 19 percent in that time.

While the numbers are welcome news for public health officials, the decline could represent a problem for legislators who earmarked $22.8 million of the state’s settlement share for the fiscal 2000 budget — boosting anti-smoking program budgets by 73 percent.

Nevada is another state where officials are uncertain whether they will be affected by the volume clause of the agreement. But unlike many other states, cigarette sales aren’t declining in Nevada. Tobacco tax collections, the measure Nevada uses to track cigarette sales, were up 4.3 percent for fiscal 1999 and 13.9 percent the previous fiscal year.

“We’re going to have to ask the National Association of Attorneys General [who negotiated the final settlement] for a clarification. But you can absolutely say that there could be a reduction,” said Nevada Deputy Attorney General John Albrecht.

Louisiana lawmakers continue to consider the possibility of selling the state’s projected $4.6 billion share as a way of protecting against reductions in future payments. Officials there remain wary of both sharp declines in smoking and depending on the continued solvency of the tobacco companies.

“The way it looks to me, between the federal government and the lawyers, they’re going to kill tobacco companies anyway and we’re not going to have any money coming in. So, if there’s somebody in the private sector that thinks it’s worth enough, I’ve always thought we ought to look at it,” Governor Mike Foster said at a recent press conference.

Foster said various Wall Street analysts have suggested the sale of the $4.6 billion settlement might net between $2 billion and $2.7 billionas little as 45 cents on the dollar.

But proponents of the sell-off plan say that a specific amount of money in the bank now is better than a promise of possibly reduced payments in the future. Louisiana voters last month approved a constitutional amendment that puts 75 percent of any tobacco settlement funds into education and health-care trust funds.

State budget officials estimate that under the 25-year plan, the trust funds would probably earn less than $10 million in interest for the first year. If the settlement is sold for $2 billion, the trust funds could make as much as $200 million a year in interest starting in year one.

According to the National Conference of State Legislatures, states in total have allocated about $1.5 billion of the funds expected next year. Fifty-four percent is allocated to health services; 12 percent to children’s programs; 9 percent for education; 8 percent for anti-smoking initiatives; and 6 percent for senior citizen programs. The remaining 11 percent is spread on various other projects, including aid to tobacco farmers and producing communities.