State Legislatures Magazine: February 1999

Editor's Note: These articles appeared in the February 1999 issue of NCSL's magazine, State Legislatures. To order copies or to subscribe, contact the marketing department at (303) 830-2054.

States Settle Tobacco Suits

How Did It Come About?
Major Features
Agreements Differ
Enforcement
Effective Date
State Final Approval
Spending the Money
Getting All the Money

Alaska Has Oil Settlement Fund

Early Plans Made for Tobacco Funds

States Settle Tobacco Suits

The states’ battle with the tobacco companies is finally over. The states get large chunks of money, and the companies get guaranteed immunity from state lawsuits. A few questions remain, however.

By Carl Tubbesing and Joy Johnson Wilson

It must be like winning the lottery. Win the lottery and you quickly discover friends you had long forgotten, cousins whose addresses you lost years ago, financial advisors promising to double your winnings in a year, and charities you never, ever heard of.

On Nov. 23, attorneys general from 46 states, four territories and the District of Columbia agreed to a massive and unprecedented settlement with the five major tobacco companies. A week later, the Colorado legislature held a hearing on what to do with the state’s share of the $206 billion.

"It was standing room only," reported the Denver Post, "as public health advocates jammed a state Capitol hearing room to give officials advice on how best to spend the $2.7 billion Colorado will reap in a legal settlement from the nation’s major tobacco companies. Filling the Capitol’s Old Supreme Court Chambers to overflowing, an eclectic mix of hopeful persuaders clamored for a piece of the settlement pie."

Money talks. Lots of money draws lots of attention and lots of advice. Colorado’s "eclectic mix of hopeful persuaders" was joined by the New York Times, whose lead editorial on Dec. 1 stated unequivocally that New York’s share of the settlement "should be dedicated to anti-smoking programs and other health uses."

Lots of money also raises lots of questions. How much will my state get? Who decides how the money is spent? When does it start? Can the federal government claim any of it? Can this agreement take effect without congressional action? How does this agreement compare with the aborted 1997 settlement? Are the amounts listed in the agreement what states actually get? Here are a few answers starting with how this all happened.

Q. How did this all come about?

A. The events leading to the November 1998 agreement began in 1994 when attorneys general in Mississippi, West Virginia and Minnesota sued the tobacco industry. Although the tobacco companies had fended off several earlier suits, these relied on a different set of legal theories from the earlier unsuccessful ones. In 1995, the Liggett Company split from the other major firms and settled with 41 states for approximately $41 million over 25 years. In early 1997, Mississippi and Florida secured out-of-court settlements worth $3.6 billion and $11.3 billion, respectively. Texas and Minnesota negotiated similar settlements. Each of these involved large amounts of money and numerous other concessions, most of which were aimed at reducing smoking, especially among teenagers.

While attorneys general in 41 states pursued suits in court, several also entered negotiations with tobacco companies to produce a so-called global settlement. In June 1997, the attorneys general and the companies announced agreement on a global settlement. This agreement was so comprehensive that it required federal legislation to implement it. Attempts to move a bill ratifying the agreement foundered in the early summer of 1998. Shortly thereafter, attorneys general in Washington, Colorado, North Dakota, Oklahoma, California, New York, Pennsylvania and North Carolina began discussions with the industry on a settlement that would not require congressional approval. They announced their new agreement in mid-November.

Q. What are the major features of the new agreement?

A. The new agreement contains two components. One focuses on advertising, marketing and lobbying. Companies have to stop targeting young people in their advertising, and they have to stop using cartoon characters. The agreement also limits corporate sponsorships of sporting and other events. It bans billboard and transit advertising and product placement in movies. It stops the sale of apparel, such as T-shirts and backpacks, with brand name logos. It keeps companies from selling cigarettes in packs of less than 20 until December 2001. It prohibits the companies from lobbying state and local governments on certain issues, for example, vending machine and proof of age laws. The companies also will not be able to lobby to divert settlement funds from anti-smoking and health programs.

The central feature of the money side of the agreement is the payments tobacco companies will make to states. They will be made forever, with the total reaching $206 billion through 2025. They will be made annually starting April 15, 2000, and will be based on formulas to which the attorneys general have agreed. Alaska, for example, would receive about $668 million over 25 years. California and New York would get about $25 billion over that period. Florida, Minnesota, Mississippi and Texas—the states that have already arranged their own settlements—receive no additional money.

In return, the companies have the assurance from 50 states, four territories and the District of Columbia that they will not be sued again. The attorneys general have agreed to drop any pending suits and not to pursue future suits on any grounds, whether based on fraud, anti-trust, health or other reasons.

Q. How does the new agreement differ from the failed June 1997 agreement?

A. The June 1997 settlement was truly global. The new agreement is more limited. The 1997 settlement was expansive. The new agreement is primarily confined to matters the attorneys general and the companies can control. The global settlement covered a lot of issues not included in the November 1998 agreement, such as second-hand smoke, removal of vending machines, placement of products in stores, and conducting "sting" operations. The global settlement restricted advertising not just by companies, but by retail outlets. The new agreement does not.

A hallmark of the global settlement was the inclusion of "look back" penalties—financial penalties against the companies if they failed to reduce youth smoking by specified amounts. Look back penalties are not included in the new agreement. The global settlement would have expanded the authority of the federal Food and Drug Administration to regulate nicotine as a drug. The new agreement does not.

The two agreements differ substantially in the amount of money involved. The original global settlement called for payments that would have totaled $368.5 billion over 25 years, compared with the $206 billion in the 1998 agreement. The global settlement included money for the federal government. The new agreement does not. (This is a debatable point, though. See below.)

Q. How is the agreement enforced?

A. Each attorney general must get the settlement and a consent decree implementing the settlement approved in state court.

Q. What is the effective date of the settlement?

A. This is complicated and involves adding several new phrases to your glossary of public policy terms. The effective dates for the non-economic provisions vary. Many are tied to the "master settlement execution date," which was Nov. 23, the day the 51 attorneys general signed on to the master settlement. For example, companies have to drop cartoon characters from their advertising 180 days after that. There are two important dates related to the economic provisions. The "state specific finality date" is the date when a state court gives final approval to the settlement and the consent decree. The final approval date is the earlier of June 30, 2000, or the date when 80 percent of the states have obtained state specific finality and those states represent 80 percent of the payments.

Q. When can states spend the money?

A. States cannot receive funds until the final approval date—thus, no later than June 30, 2000. The timing—it is the last day of most states’ fiscal years—and the uncertainty about when the final approval date will actually occur could pose some interesting appropriations questions for state legislatures, at least in the first year.

Q. What happens if a state does not reach state specific finality?

A. If a state’s court does not give final approval to the settlement and the consent decree by Dec. 31, 2001, that state is dropped from the master settlement.

Q. The companies started making payments in December 1998. Where will this money be until June 2000?

A. The companies are paying into an escrow account. When a state obtains state specific finality, its share of the money goes into a state specific escrow account. It will earn interest there until the funds become available on the final approval date.

Q. Who decides how the state’s money will be spent?

A. The agreement does not answer this question. Because the money will go into a state’s general fund, it is almost certain that state legislatures will appropriate it. A few legislatures have already passed legislation clarifying their roles and establishing procedures for dealing with the settlement money. Others may follow their lead before the final approval date.

Q. Does the agreement specify how the states can spend the money?

A. No. That’s why the Colorado hearing room was so crowded a week after the agreement was signed. That’s why the New York Times believes Congress should set conditions on the money so it will be used "to improve health care, particularly for children, and to combat smoking." That’s why the American Lung Association chapter in North Carolina has already said that 10 percent of their money, about $500 million, should be spent on anti-smoking programs.

Public health advocates and others argue that tobacco causes illnesses, and the money should be used to reduce smoking and improve health care. Colorado Attorney General Gale Norton told the Colorado task force that "a large portion of the money should go to tobacco-related programs. That would include efforts to teach kids about the dangers of substance abuse, stop smoking programs, research into addiction and the diseases caused by smoking." She said the other major focus of the money should be on children’s health care in general.

Others assert that the money that states have spent over the years to treat smoking-related illnesses could have been used elsewhere. "I’m not against using some of the money, say, to persuade kids not to smoke," says Indiana Senator Lawrence Borst. "On the other hand, state health costs have risen steeply over the past 20 years. That’s diverted money from other priorities. Why not treat this settlement money in that context? Let the legislative process determine what the priorities are."

Q. Is there a chance that states won’t get all of the settlement money?

A. Yes, and for several reasons. One is that the federal government may try to claim a large portion of it. The Clinton administration asserts that current Medicaid law entitles the Health Care Finance Administration to recoup part of the settlement money. It argues that the settlement money is reimbursement for Medicaid costs related to smoking, and the federal government has a legal right to some of it because of its contributions to Medicaid. In 1998, Texas Speaker Pete Laney, Florida Speaker Daniel Webster and Mississippi Speaker Tim Ford led an aggressive effort in support of federal legislation that would deny the HCFA claim. The bill died at the end of the session, but will get new attention now that all of the states have settled. Newly elected Ohio Senator George Voinovich may attempt to tie a denial of the recoupment claim to a requirement that states spend a portion of the settlement money on anti-smoking, health care and related programs.

There also are elements in the master settlement agreement that could reduce the states’ payments. For example, they could be reduced if the federal government enacts a new tax on tobacco products and earmarks these funds for health care or gives them to the states on an unrestricted basis. States would also lose a portion of their share if they fail to pass a model statute included in the agreement that is designed to protect the five major U.S. tobacco companies that are parties to the agreement from unfair competition by foreign and smaller companies that are not.

Q. Are there other roles for state legislatures in the agreement?

A. The agreement allows several opportunities for state legislatures to act. For example, it prohibits the sale of cigarettes in packages of less than 20 until the end of 2001. Legislatures could choose to continue that prohibition. The master settlement does not place restrictions on vending machines or on placement of tobacco products in retail outlets. It does not require states to conduct "sting" operations to discourage retailers from selling cigarettes to minors. These are areas in which some legislatures have chosen to legislate and others could. The fact that the master agreement prohibits the companies from lobbying on some of these issues presumably removes an obstacle to passage of these and other anti-smoking laws.

Q. What effect does the settlement have on the likelihood of comprehensive federal legislation?

A. The states’ settlement leaves open the possibility of congressional action. President Clinton has called the agreement "a good step." On the other hand, he says, "We have a lot more to do, for only the national government can take the full range of steps needed to protect our children." Senate Minority Leader Tom Daschle has noted that he also would like to see federal legislation, especially dealing with the Food and Drug Administration’s authority to regulate nicotine as a drug. Senator Mitch McConnell, a Kentucky Republican, however, believes the state settlement "reduces the argument for federal legislation, which should help those of us from tobacco states fend off another big tax, big government proposal like the one we defeated last year."

Editor’s note: Check out NCSL’s redesigned Web site at www.ncsl.org/ statefed/hlthfaqs.htm for more information. The National Association of Attorneys General is another good source. Look for them at www.naag.org/ settle.htm.

Carl Tubbesing, NCSL’s deputy executive director, heads the Washington, D.C., office. Joy Johnson Wilson directs the NCSL Health Committee.

Alaska has oil settlement fund

The tobacco settlement agreement will bring most states their largest revenue windfall ever. Not so for the state of Alaska, which currently holds $3.3 billion in its constitutional reserve fund, created primarily as a result of settlements between the state and six large oil companies in the early 1990s regarding mineral lease bonuses, royalties and taxes.

The fund has had a total of $4.8 billion deposited into it since 1991. Since the fund does not have any restrictions on its use, other than requiring a three-fourths vote of each legislative chamber, the Legislature has appropriated portions of the fund into general state operations in recent years. Last year, the Legislature appropriated $300 million from the constitutional reserve fund into its general fund. During the life of the fund, the state general fund has "borrowed" $2.3 billion from the reserve fund for state operations.

Creation of the reserve fund required placing a constitutional amendment before voters, who approved the change at the 1990 general election. The fund was reported to have earned $335.5 million in investment earnings in FY 1998.

Early plans made for tobacco funds

At least six states involved in the historic $206 billion tobacco settlement have approved legislation over the last two years in anticipation of the December 1998 settlement.

Alabama created the Children First Trust Fund while Kansas voted to appropriate 50 percent of the tobacco money toward a fund for children’s health care. Nebraska set up a trust fund from which interest will provide grants and loans for nursing home projects.

Kentucky and North Carolina approved legislation that would help tobacco farmers affected by the settlement and other new laws. New Hampshire says that tobacco money is subject to the same department and agency planning requirements as federal block grants.

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