October/November State Legislatures magazine: How states will spend tobacco company money

State Legislatures Magazine: October/November 1999

Editor's Note: This article appeared in the October/November 1999 issue of NCSL's magazine, State Legislatures. To order copies or to subscribe, contact the marketing department at (303) 364-7700.

Spending Tobacco Funds: States Cook Up Their Own Recipes

Slow for a Reason
Protecting the Principle
Most Spending Planned for Health Care
Some Money Goes to Schools
Help for Tobacco Farmers
It's Just the Beginning

Spending Tobacco Funds: States Cook Up Their Own Recipes

State lawmakers are taking a careful approach to make sure their states take advantage of the opportunities the historic tobacco settlements provide.

By Melissa Hough and Lee Dixon

In an effort to give students a taste of how the legislative process works, some state lawmakers use an exercise that challenges a class to come up with the perfect recipe for the chocolate chip cookie. Students learn that compromise and negotiation are key to finding a recipe the majority can accept.

Back in the legislative chambers, legislators are finding more cooks in the kitchen than usual as they try to come up with the perfect recipe for the historic $246 billion tobacco settlements with the five largest tobacco manufacturers.

There are as many suggestions on what to do with the settlement money as there are chocolate chips on the local grocer's shelf. Some national groups insist the payments be used only for tobacco prevention programs. State legislators, however, recognize that the agreement included no conditions and are-for good reason-rejecting "one-size-fits-all" approaches.

"The settlement agreement specifically gives state legislatures full authority to spend the money the way they see fit-and that fill the citizens' most pressing needs," says Indiana Republican House Leader Paul Mannweiler, president of the National Conference of State Legislatures.

"For some states that may mean spending more for health care and for others it could mean more for education, while some may use it to improve highways. I believe state legislators always listen to their constituents and spend money accordingly," he says.

As of early September:

35 states have enacted the model statute required by the settlement agreement.
19 states have passed laws to put their tobacco settlement money in trust funds. Four states decided to put the funds in endowments, and some states have done both.
23 states have passed enabling legislation or appropriation acts concerning how the money should be spent. (These laws vary greatly, however).

Other states ran out of time and deferred action to the 2000 sessions.

It hasn't been an easy task. "Since there are no restrictions on the money, everybody's got something they believe is worthy of priority funding," says Arizona Representative Susan Gerard. "It's a feeding frenzy. I see myself standing here with a huge fly swatter saying, 'Back, back,' but they still keep coming."

At least 480 bills related to the tobacco settlement were introduced in 49 states (Kentucky was not in session). Some 177 passed one house or the other, and at least 80 became law.

While 23 states (including Florida, Minnesota, Mississippi and Texas) have enacted enabling legislation or appropriation acts concerning how the money should be spent, only 12 percent of has been allocated for specific projects, programs or activities. This is approximately $1.1 billion of the $8.8 billion that will be available by June 30 next year.

SLOW FOR A REASON
Decision making has been slow for several reasons. Many states deferred actions until the federal recoupment issue was decided and were adjourned before it was resolved in May. Others decided to make broad decisions to create health trusts, but left the details to next year.

Although there are bills that would use the money for such things as veterans' homes, dinosaur museums, rescinding turnpike tolls, fire departments and highway construction, so far most of the allocated funds-51 percent-are aimed at health care services. Another 14 percent goes to K-12 education and scholarship funds, 11 percent to children's services, 7 percent to tobacco control and smoking cessation programs, and 7 percent to long-term care and pharmaceutical assistance for the elderly. The rest will go to other priorities such as water control in North Dakota to help prevent the flooding that caused so much misery in the spring of 1997 and five industrial development projects in Alabama to secure much needed jobs there.

These percentages are sure to change as the majority of the states make decisions on how best to spend their settlements. And the allocations in each state are apt to vary from year to year as needs change. Most of the decisions so far are only for the first two payments. This session, Alabama lawmakers reduced the initial amount of money they intended to put into the Children First Fund for school safety, alternative schools and juvenile probation officers, switching some to a senior services trust fund. And the Florida Legislature, where Governor Jeb Bush asked for $61.5 million to discourage youth smoking, lowered that amount this year to $44 million after concern over the effectiveness of such programs.

State approaches vary in soliciting the advice and opinion of citizens and policymakers. Arkansas, Illinois, Iowa, Kentucky, Louisiana, Maryland, Missouri, New Mexico, Ohio and Pennsylvania have task forces or commissions that have conducted hearings to seek public input. Others held public hearings as part of the normal appropriations process.

States have established avenues for continuing input from the public. A special cabinet will advise the Kansas Legislature and governor on how to spend proceeds of an endowment fund. Commission members and a board of trustees, with considerable health experience, will make decisions on allocating the money for health and tobacco control in North Carolina and Virginia. Citizens with tobacco prevention and control experience will advise the Hawaii Department of Health on how to administer a trust fund and help develop prevention programs. Vermont lawmakers created the Smoking Cessation, Prevention and Health Care Trust Fund and appointed a task force to develop comprehensive plans on how the money should be spent.

PROTECTING THE PRINCIPLE
Most of the states making decisions about how to spend the money have created trust funds. Kansas, Louisiana, Minnesota and Mississippi established endowments-which continue to grow while only the interest is spent.

"It's the gift that keeps giving," says Kansas Representative Ed McKechnie. "An endowment fund grows the money rather than just spending the money."

Legislators there established the Kansas Endowment for Youth Fund to invest payments from the settlement. Earnings will be transferred to a newly created Children's Initiatives Fund and be spent through the annual appropriations process on programs aimed at the health and well-being of Kansas young people. A specially created Children's Cabinet will make recommendations to the Legislature and governor about how the money should be spent and will also evaluate the programs that get funded to determine how efficient and beneficial they are.

Except for approximately $80 million that will go into the general fund in the first two years, all of the tobacco settlement money will go into the youth endowment fund.

McKechnie recommends that other states consider endowments that protect the bulk of the tobacco funds. He says states can't be sure that the payments won't change.

"We really don't know what's going to happen. Ten years from now all these companies could go bankrupt. We don't know how consumption is going to change and what that will do to our payments. The thing we know for sure is that we don't want to start funding important programs and then, 10 years from now, it's gone. An endowment gives us a way to benefit kids today and for many years down the road."

In Kansas, the difference in using an endowment and just spending the money as soon as it comes in amounts to around $900 million, McKechnie says. "This way we spend a billion and save a billion."

An endowment allows only the interest earned on the principal to be spent each year. In a trust, the interest earned, plus any amount of the trust is available for allocation. What most states have done is to establish a trust that allows the interest and up to a specific percentage (say 40 percent) of the principal to be spent each year.

Mississippi created the Health Care Trust Fund with $280 million of its first year payments. Only the interest will be spent. The Legislature is anticipating a conservative 4 percent yield on its investments, so approximately $11.4 million will be available each year for health projects

MOST SPENDING PLANNED FOR HEALTH CARE
So far, health care is receiving the bulk of the settlement money. "This money has created an amazing opportunity to start talking about health care policy in the states like we have never had before," Representative Gerard says. "We can take all of the stakeholders, sit them down and determine our state health policy goals. We need to leverage the tobacco money to get the biggest bang for our buck."

Lawmakers have allocated settlement funds for everything from prescription programs for elderly and disabled adults to dental and medical care for poor citizens, long-term care programs and cancer research. New Jersey is putting money into psychiatric care for prisoners and, along with West Virginia, into health benefits for state workers. Florida and North Dakota are using some of their funds to beef up community health care. Texas has some earmarked for minority health care and capital improvements at community hospitals. Medicaid programs will get some of the money in Alabama, Louisiana, Maine and Mississippi.

Nevada lawmakers voted to put 50 percent of the payments into a newly created Fund for a Healthy Nevada and 10 percent into a Trust Fund for Public Health. The funds will be used to: provide pharmaceutical and independent living services for senior citizens; establish programs to prevent, reduce and treat effects from the use of tobacco; fund health services for children and people with disabilities, and promote health and prevent disease, as well as fund research on public health issues. Some of the first year payment will fund health care assistance to rural and underserved areas and telemedicine projects.

Both health care and anti-smoking programs are a priority in Hawaii's plans to spend its settlement money ($95 million through 20001). Thirty-five percent will go to the health department for Children's Health Insurance Programs (CHIP) and health, disease and prevention programs. Twenty-five percent will go to the Hawaii Tobacco Prevention and Control Trust Fund aimed at reducing cigarette smoking by young people and helping adults quit. (Hawaii's remaining money will go into a rainy day fund for budget emergencies.)

Hawaii is among 21 states in 1999 that have either appropriated or established the structure to allocate settlement funds to tobacco prevention and cessation programs. Currently all 50 states get federal funds for such programs. In 1998, 23 states authorized reimbursement for smoking cessation and treatment through their Medicaid programs.

SOME MONEY GOES TO SCHOOLS
Education is among the big benefactors in the states that have taken action on spending their settlement money-accounting for about 14 percent of the funds allocated so far. As other states make decisions, however, experts watching the action say that percentage is likely to drop.

New Hampshire, facing court-ordered improvements, created an education trust fund that will provide adequacy grants to local school districts. Forty million dollars of its $55 million initial payment will go into the fund the first year. Colorado and Ohio hope to devote funds to K-12 education in the 2000 legislative session.

Scholarships were a big priority in Michigan and Nevada. Some $86 million will go into the Michigan Merit Award Scholarship Trust Fund in FY 2000, and Nevada lawmakers have earmarked 40 percent of their settlement funds for the Millennium Scholarship Trust Fund. Both these funds will help high school students attend community colleges and state universities.

Minnesota set up a Medical Education Trust Fund ($377.5 million in FY 1999-20001) that will be used for medical students and health care providers in clinical residencies. One of three trust funds set up in North Dakota will benefit its public schools. Likewise the Louisiana Millennium Trust Fund contains an Education Excellence Fund that will assist private schools, charter schools and K-12 public schools.

Lawmakers have also set aside $10 million of the first year payment for higher education endowed chairs and professorships. Although Texas lawmakers have earmarked tobacco fund spending mostly for health-related projects, higher education also gets a share-$350 million for the FY 1999-2001 biennium.

HELP FOR TOBACCO FARMERS
The historic settlement plays out a bit differently in states that depend on the crop and the industry for their livelihoods. Tobacco contributes to the economy in 10 states, mostly in the South. There lawmakers are looking at the settlement as a way to help farmers and communities find alternative crops and industries.

North Carolina created a nonprofit corporation that will oversee spending half the settlement money each year to assist tobacco-dependent and economically affected communities. Kentucky didn't have a 1999 session, but the 1998 General Assembly created a trust fund to receive the money until action can be taken by the 2000 legislature. Legislative priorities are for farmers, affected communities and health-related areas, according to state fiscal staff.

Virginia, which has so far determined how to spend only 60 percent of its anticipated payments ($4 billion over 25 year), established two trusts-one to assist tobacco-dependent and economically affected communities, and one to fund programs that discourage young people from using tobacco.

Delegate James Almand says lawmakers in Virginia are mostly concerned with the economic impact that the settlement could have on its tobacco farmers and tobacco-dependent communities. The fifth largest tobacco producer, Virginia also ships out more tobacco exports (47 percent) than any other state. The Philip Morris plant in Richmond is the world's largest cigarette manufacturing plant, making the state second in tobacco manufacturing.

"Economic redevelopment became the big push," Almand says.

The Virginia Tobacco Indemnification and Community Revitalization Fund will get 50 percent of the proceeds to be used to reimburse farmers and related industries for lost income and encourage alternative development. Another 10 percent will go into a fund for the Virginia Tobacco Settlement Foundation and will be used to eliminate, prevent and discourage tobacco use by young people.

In an unusual move, the funds will not pass through the legislature, but go straight from the state treasury to a commission set up to distribute them. Both the commission and the foundation were created as separate political subdivisions, independent of the legislature and the governor. Almand says the move was "a recognition that the tobacco-growing communities of Virginia need economic revitalization, and this is a way to ensure that at least a substantial amount of the funds will remain for that purpose." Ten legislators will serve on the revitalization fund board and four on the health trust board.

Almand says lawmakers will decide how to spend the remaining 40 percent of the settlement in the upcoming session. A task force is to make recommendations. "We want to watch the other tobacco-growing states and see what ideas come up there," he says. "We also want to know what the other states do to prohibit youth access to tobacco products."

IT'S JUST THE BEGINNING
Twenty-seven states and the District of Columbia had taken no action at all as the 1999 sessions ended. Colorado, Idaho, New Mexico and Rhode Island made decisions about how to receive the money when it starts coming in, but have not decided how it will be spent. Colorado and New Mexico created trust funds to accept the money. Idaho's payments will be deposited in an existing budget stabilization fund while an interim study committee decides how to spend them. Rhode Island will put its payments directly into the general fund.

More decisions must be made in the approaching 2000 sessions, and it's not expected to be easy, especially in those states that unsuccessfully struggled for answers in 1999. "Anyone who thinks that this whole thing will be over any time soon is mistaken," says Arizona Representative Gerard. "This is just the beginning."

Melissa Hough and Lee Dixon are two of NCSL's experts on the tobacco settlements. NCSL staffers Patrick Johnson and Arturo Perez also contributed to this article.

©1999, National Conference of State Legislatures. All rights reserved.

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