States Spend Tobacco Settlement on Budget Shortfalls

States Spend Tobacco Settlement on Budget Shortfalls
May 1, 2004

More than half (54 percent) of the funds states will receive this year from companies bound by the 1998 tobacco settlement will be spent patching state budget shortfalls, according to a report released March 22 by the U.S. General Accounting Office (GAO).

Just 2 percent of the funds will go toward tobacco control (anti-smoking) efforts, reported the GAO. Seventeen percent will go to health-related programs, 7 percent to debt service on securitized funds, 6 percent to general purposes, and 5 percent to infrastructure.

The report, Tobacco Settlement: States' Allocations of Fiscal Year 2003 and Expected Fiscal Year 2004 Payments, documents how states are spending the proceeds of their long-term tobacco settlement money. States expect to receive $11.4 billion in fiscal year 2004 as a result of the settlement.

The Farm Security and Rural Investment Act of 2002 (the 2002 Farm Bill) requires GAO to report annually on payments made by tobacco companies for fiscal years 2002 through 2006 and how states use these funds.

Shifting Priorities

The March report is the third GAO has released under the Farm Bill mandate. The first report (covering fiscal years 2000-2001) did not collect data on settlement funds spent for budget shortfalls and debt service. But the GAO has found spending of tobacco settlement funds for those purposes has increased dramatically since 2002, while spending for health care and tobacco control programs has fallen.

In 2002, 22 percent of tobacco settlement funds were allocated to budget shortfalls and debt service; in 2004, the GAO projects that figure will reach 61 percent. By contrast, in 2002 health and tobacco control efforts were allocated 40 percent of the settlement funds; in 2004 they will get just 19 percent.

Notes the GAO report, "States allocated the largest portions of their fiscal year 2003 tobacco settlement funds to address budget shortfalls and for health-related programs, and states expect the same to hold true for fiscal year 2004. Overall, the portion of allocations going to budget shortfalls has been increasing and the portion going to health costs has been decreasing."

The 1998 Master Settlement Agreement between 46 state attorneys general and the four major tobacco companies does not require states to spend settlement money on treating smoking-related illnesses. But many state officials, then and more recently, claimed a commitment to do so.

When the MSA was signed, the attorneys general and plaintiffs lawyers held news conferences touting how the money would be used for public health and protecting kids. Washington Attorney General Christine Gregoire said, "Washington state's proceeds from the tobacco industry settlement should be spent on public health issues or the integrity of the historic agreement will be violated."

The GAO report shows Washington allocated roughly 20 percent of its 2003 tobacco settlement funds for health and tobacco control purposes. In 2004, the GAO projects Washington will allocate nearly 75 percent for those purposes. As is true in most states, however, much of the health spending is unrelated to smoking, going to such programs as children's Medicaid and immunization programs.

Unkept Promises

"The $240 billion settlement was sold to the American people as compensation for treating smoking-related illnesses, but it's the states that have become addicted to tobacco money, spending it on all kinds of [unrelated] programs," said Sam Kazman, general counsel for the Washington, DC-based Competitive Enterprise Institute.

"State attorneys general and anti-tobacco activists at the American Legacy Foundation want smokers, who bear the brunt of the cost of the settlement, to pay for multimillion-dollar anti-smoking ads," said Kazman. "But it turns out that states themselves are spending very little of their tobacco settlement money on tobacco control.

"Trial lawyers were awarded an estimated $10 to $30 billion from the settlement. If anti-tobacco campaigns are so important, why can't they cough up a few million for the cause?" he asked.

Tobacco companies also noted the settlement money was intended to fund anti-smoking efforts.

R.J. Reynolds points out on its Web site, "Although the [Master Settlement Agreement] repeatedly mentions 'implementation of tobacco-related public health measures,' each state decides how its MSA funds are spent. Tobacco companies do not have any input into how the states spend their settlement funds.

"R.J. Reynolds Tobacco Company believes that states should take advantage of having unprecedented funds available to combat youth smoking, and that a significant portion of the states' payments should be spent on preventing tobacco use among minors."

The Centers for Disease Control and Prevention (CDC) has recommended that 20 to 25 percent of the MSA payments go toward smoking prevention programs.

By the end of 2001, states had received more than $13.4 billion in MSA payments. Only seven states--Arizona, Indiana, Maine, Massachusetts, Mississippi, Ohio, and Vermont--had met or exceeded the CDC's recommendation.

The National Conference of State Legislatures (NCSL) analyzed state plans for spending MSA funds during fiscal years 2000 through 2003. Of the total $33.1 billion in MSA funds states received during that period, more than half of the money was found to be earmarked for projects unrelated to smoking.


Christine Hall is director of research for the Competitive Enterprise Institute. Her email address is chall@cei.org.


For more information ...

The full text of the GAO's 81-page report, Tobacco Settlement: States' Allocations of Fiscal Year 2003 and Expected Fiscal Year 2004 Payments, can be found at on the GAO Web site at http://www.gao.gov/new.items/d04518.pdf. It is also available through PolicyBot™. Point your Web browser to http://www.heartland.org, click on the PolicyBot™ button, and search for document #14734.

The 70-page September 2003 NCSL Report, State Management and Allocation of Tobacco Settlement Revenue 2003, is available from the NCSL Web site at http://www.ncsl.org/programs/press/2003MSA.pdf.