NEWS

Tobacco Programs Wither As States Divert Settlement Revenue

James Schultz

The November 1998 settlement between 46 of the nation’s attorneys general and the tobacco industry resulted in $206 billion paid to states by tobacco companies over 25 years with billions more to come in decades to follow, not including at least $40 billion in agreements separately negotiated by Florida, Minnesota, Mississippi, and Texas.

The multibillion-dollar pact was seen by cancer-prevention advocates as a milestone. Perhaps money directed to tobacco prevention and/or cessation programs would be a way to reduce the discouraging numbers put out by the Centers for Disease Control (CDC): more than 440,000 deaths each year are directly attributable to tobacco, with annual treatment costs of $75 billion, and the eventual deaths of an estimated 6.4 million children who currently smoke.

Four years later, as states’ fiscal crises have deepened, settlement monies have been diverted from smoking prevention and cessation, in some cases directly to deficit reduction, but more often to pay the bills for everything from Medicaid to education.

Settlement dollars have even gone to road construction (Michigan), flood control (North Dakota), industrial bonds (Alabama), upgraded ports facilities (Alaska), and the purchase of electric carts for public golf courses (New York). In the last 2 years, just 5% of the states’ share of the roughly $16 billion yearly from the settlement payout and other tobacco-related revenues like sales and taxes have been allocated to tobacco-cessation or prevention programs—far short of the 25% the CDC recommended to reduce smoking among all age levels.

According to the CDC’s 2002 update of its report, Tobacco Control: Impact and Opportunity, based on their latest budgets, the states will spend a total of $666.1 million on tobacco prevention in the 2003 fiscal year, down 13.3% from $768.4 million in FY 2002. Although 18 states have increased funding for tobacco prevention by a total of $65.3 million, 15 states have cut funding two-and-a-half times that much, for a total of $167.6 million. But the modest increases may be put at risk by continuing budget woes, which could intensify as states post record shortfalls, the weak economic recovery slows further, or the economy falters outright.

"Is the glass half full or half empty?" posited Lee Dixon, director of the National Conference of State Legislators health policy tracking service. "[Five percent] is about four times the amount the federal government spent in the same period. Advocates would like to see more dollars spent on prevention, but states feel they’re responding to citizens’ desire to keep programs going for the indigent and working poor. It’s the critical nature of the moment. It’s prioritizing dollars."

According to the state legislators conference, because the recession and rising health care costs are making citizens without health insurance more vulnerable and dependent on state health care programs, lawmakers are choosing to use tobacco settlement revenue to protect health care budgets from drastic cuts. The monies are going to support indigent care programs, primary care, more insurance coverage to the working poor, hospital charity care, the State Children’s Health Insurance Program (SCHIP), and community health centers. Dollars are also being used to meet expanding Medicaid enrollment and the rising cost of prescription drugs. The allocation of tobacco settlement revenue to Medicaid, the conference asserts, has the benefit of adding three federal dollars for every dollar the states spend.

That does not satisfy advocates like Cheryl Healton, Ph.D., chief executive officer and president of the American Legacy Foundation, a public-health foundation set up with tobacco settlement monies in March 1999. Healton, who is also a professor of public health at Columbia University, said the states with their short-term thinking are encouraging "a public-health tragedy in the making." Add up a dozen-plus causes of death, from homicides to car accidents to all alcohol-related deaths to those caused by HIV-AIDS and the 10 "lower level" cancers, and she said you still would not approach the number of deaths caused annually by smoking. The states’ failure to be more forward-looking is crippling efforts to help smokers quit before disease hurts or kills them, she said, adding that even a modest increase, on the order of 10% of the settlement dollars, could save tens of thousands of lives.

"It’s an example of being penny-wise and pound-foolish," Healton asserted. "For every dollar spent [on prevention], three are saved. The decisions now being made are ensuring deaths will be perpetuated at great cost to the taxpayer—not to mention the people affected, who are mostly lower-income. We are conducting the most nauseating natural experiment ever invented."

Prevention and control are not simply do-gooder goals, said William Corr, executive vice president for the Campaign for Tobacco-Free Kids. A variety of scientific studies clearly demonstrate the utility of prevention. Florida witnessed a 47% reduction in middle-school smoking rates, for instance, while lung cancer incidence dropped 14% in California as the direct result of such programs, Corr said.

"We have evidence-based solutions that have been proven to work," Corr said. "States could reduce disease and death. For legislatures to forego this opportunity to truly change the landscape is a tragedy for public health."

Five percent of settlement monies devoted to tobacco cessation and prevention could seem lavish in retrospect. States are increasingly turning to a process known as securitizing, which is similar to the lump-sum payments made to lottery winners. The practice began when the states, fearful that tobacco companies might face bankruptcy in the aftermath of the 1998 payout agreement, opted to sell their revenue-stream settlement rights to bondholders. In theory, the practice is beneficial: a single, up-front payment could bring a reasonable return on investment, forestalling the effects of inevitable inflation and the erosion of buying power. In practice, if close attention is not paid to the return on the dollar, states could lose substantial revenue.

Settlement bonds are sold like any other state capital improvement bond, and offered through an already existing or newly established quasi-state agency. The reason for doing so is to place a firewall between the bondholders and the state’s general fund. If the tobacco companies ever declare bankruptcy and default, the state’s general fund could not be used to pay off the tobacco bond holders.

States that have chosen or are considering securitizing are faced with deficits ranging from $2 billion to $24 billion, according to the legislators conference, often comprising 10% to 15% of their total budget. Of the 15 states that have securitized, seven—California, Iowa, New Jersey, Rhode Island, South Carolina, South Dakota, and Wisconsin—have done so for the full amount of their allocated settlement. Wisconsin, Rhode Island, New Jersey, and California have applied the entire payout amounts to reducing their deficits. For those states, no additional settlement money is forthcoming.


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