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Frequently Asked Questions about the Tobacco Settlement
Assembly on Federal Issues Health Committee
March 1999

  1. Who are the parties to the Tobacco Settlement? The parties to the settlement include 46 states (Florida, Minnesota, Mississippi, and Texas had previously settled with the tobacco manufacturers), Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam, the Northern Mariana Islands and the District of Columbia, Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Commonwealth Tobacco, and Liggett & Myers.
  2. What is the effective date of the tobacco settlement? The parties signed the Master Settlement Agreement (MSA) on Monday, November 23, 1998, the Master Settlement Agreement Execution Date. States that sued the tobacco manufacturers were required to go to state court and file a motion for the approval of the settlement agreement by December 11, 1998. States that had not filed a suit, were required to go to state court to file suit and to make a motion to approve the settlement agreement by December 23, 1998. The effective dates for the non-economic provisions of the MSA vary, but many are related to the MSA Execution date (e.g. 60 days after the MSA Execution date). There are two important effective dates related to the economic provisions of the MSA: the state specific finality date and the final approval date. The state specific finality date is the date when a state court gives final approval to the settlement and the consent decree. Final approval occurs when the state court has approved the settlement agreement and the consent decree in the state and either: (1) the appeal time from that approval has expired without an appeal; or (2) if there is an appeal, all appeals have been completed, resulting in the settlement and the consent decree being approved. The final approval date for the MSA 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 settlement payments.
  3. When do the settlement funds become available to the states? No funds can be dispersed to the states until final approval is attained. If the requisite number of states have not reached state specific finality before June 30, 2000, the funds will become available to all states that have reached state specific finality on June 30, 2000. If a state fails to obtain state specific finality by December 31, 2001, its participation in the settlement is terminated.
  4. I understand that tobacco manufacturers will begin making payments in December 1998. Where will these funds go if they are not available to states until June 30, 2000? The payments made by the tobacco manufacturers will be deposited into an escrow account. When a state obtains state specific finality, the funds that are to be allotted to that state will be moved from the general escrow account into a state specific escrow account, where the funds will accrue interest and will become available to the state on the final approval date.
  5. What must states do to attain state specific finality? States must obtain approval of the settlement by a state court. This includes approval of the consent decree. In addition, all opportunities for appeal of the approval must have expired, so that the court’s approval is final.
  6. What will state legislatures need to do to implement the tobacco settlement agreement? State legislatures are encouraged, but are not required, to enact the model statute included in the Master Settlement Agreement (See question #7), regarding the treatment of non-participating manufacturers, before the state begins receiving its allotment from the settlement. In addition, if there is any question about the legislative appropriation of the settlement funds, legislatures may want to enact laws to clarify the treatment of the funds under state law. The settlement agreement is silent on that issue. Finally, the legislature should probably review the state’s consent decree, the document that implements the settlement agreement in the state.
  7. What is the purpose of the model statute included in the Master Settlement Agreement? The model statute creates a reserve fund for non-participating manufacturers to pay future claims, establishing a level playing field between participating and non-participating manufacturers. The model act (See Appendix B-NCSL Summary of the Tobacco Settlement) must be enacted by states exactly as it is drafted in the MSA (Exhibit T) and as a stand-alone piece of legislation or the state must alternatively enact a "qualifying statute," as determined by a firm jointly retained by the settling states and the original participating manufacturers. The ruling of the firm is final. A "qualifying statute" is defined in the MSA as a settling state’s statute, regulation, law and/or rule (applicable everywhere the state has authority to legislate) that effectively and fully neutralizes the cost disadvantages that the participating manufacturers experience (as opposed to the non-participating manufacturers) as a result of the MSA.
  8. What happens if my state fails to enact the model statute? Under the MSA, if in any year the total aggregate market share of the participating manufacturers decreases more than 2 percent and an economic consulting firm determines that the provisions of the MSA were a significant factor contributing to the market share loss, payments to states may be reduced based on that loss. This reduction in state payments is called the non-participating manufacturers (NPM) adjustment (See Appendix D for details). This analysis is done annually. A state’s enactment of the model statute is significant because if there is an NPM adjustment in any year, a state’s payment will not be reduced at all if that state has passed and has in force the model statute. Payments to the states that do not have a model statute or qualifying statute in full force and effect will be reduced to cover the entire NPM adjustment. This could result in a state losing its entire payment for that year. If a state enacted the model statute, but the statute is overturned or invalidated by a court action, the state would pay no more than 65 percent of its payment toward the NPM adjustment in that year. If a state has enacted a "qualifying statute" as opposed to the model act in the MSA, and the qualifying statute is struck down by a court, the state will not enjoy any of the protections afforded states that enact the model act. In other words, those states would be subject to the full NPM adjustment in that year and would not enjoy the benefits of the 65 percent cap.
  9. When the final approval date arrives and the funds become available to the states, who controls the funds? The Master Settlement Agreement is silent on the matter; therefore the funds will be appropriated according to state law.
  10. How are the amounts each state will receive determined? Are the state allotments listed in the Master Settlement Agreement the actual amounts each state will receive? The state allotments were established by a formula developed by the Attorneys General. These allotments are subject to a number of adjustments, reductions and offsets. In addition, the federal government is laying claim to more than half the settlement dollars. The exact amount a state will receive is the net of the listed allocation minus any adjustments, reductions and offsets and may also be subject to recoupment of any settlement funds attributable to Medicaid.
  11. What is the basis of the federal claim on state tobacco settlement funds? The U.S. Department of Health and Human Services (DHHS) contends that existing Medicaid law (Section 1903(d) of the Social Security Act) compels it to recover its share (federal Medicaid matching percentage) of third party payments, collected by states on behalf of Medicaid clients, and argues further that state tobacco settlement funds are third-party recoveries under the provisions of the Medicaid statute (See Appendix F for additional details). DHHS has "recouped" some funds from states that reached an earlier settlement agreement with the Liggett Group, but temporarily suspended the collection of state tobacco settlement funds pending comprehensive federal tobacco legislation. An amendment to the Medicaid statute that would exempt tobacco settlement funds from recoupment must be enacted to prevent the seizure of state tobacco settlement funds when they become available to states.
  12. How would the federal government recoup the tobacco settlement funds from the states? States are required by law to report Medicaid-related recoveries on a Quarterly Statement of Expenditures for the Medical Assistance Program, the HCFA-64 form. Line 9E of the HCFA-64 Summary Sheet is reserved for "special collections." This is the line were the U.S. Department of Health and Human Services maintains states should report state tobacco settlement funds (attributable to the Medicaid program). The state’s federal matching percentage would be applied to the amount on line 9E and that amount would be deducted from the state’s quarterly Medicaid allotment. It is important to note that the recouped funds would be automatically deducted from the state’s Medicaid allotment and would not come directly from a state’s tobacco settlement payment.
  13. Have any bills been introduced in Congress that would prohibit the federal government from recouping state tobacco settlement funds? Yes. Representative Michael Bilirakis (D-Florida) introduced H.R. 351 on January 19, 1999; and Senators Kay Bailey Hutchison (R-Texas) and Bob Graham (D-Florida) introduced S. 346 on February 3, 1999. These bills would exempt state tobacco settlement funds from the third party liability provisions under Medicaid, and would place no restrictions on how states use their tobacco settlement funds. Other bills have been introduced, but would condition the prohibition on federal recoupment with spending restrictions on use of state tobacco settlement funds.
  14. Does the Master Settlement Agreement restrict or earmark the settlement funds? No. States will determine how the funds will be spent.
  15. If the federal government adopts an excise tax on tobacco products, will my state receive less money from the tobacco settlement? Maybe. Under the provisions of the settlement, if the federal government, prior to November 30, 2002, requires participating manufacturers to pay a tax or fee on tobacco products, and uses the proceeds to provide either unrestricted funds to states or funds earmarked for health care or tobacco-related health care, these funds may be subtracted from the state allotment on a dollar-for-dollar basis. The federal legislation offset would not apply if: (1) the funds were earmarked for assistance to tobacco growers or impacted communities; or (2) grant conditions that would require states to take some significant actions or to provide matching funds were placed on the federal funds and a state chose not to participate in the grant program.
  16. Aside from determining funding priorities and enactment of the model statute, are there other legislative actions related to the tobacco settlement state legislators might consider? Yes. The settlement agreement prohibits the sale and manufacture of cigarettes in packages of less than 20 cigarettes. This prohibition sunsets December 31, 2001. The settlement agreement also prohibits tobacco manufacturers from opposing state legislation prohibiting the sale and manufacture of these small cigarette packages. If a state wants to continue the ban, considered a key provision to discourage youth access to cigarettes, state legislation would be required. In addition, the settlement agreement identifies areas of state legislation, law and administrative rule related to youth access to tobacco products, that the tobacco industry is prohibited from opposing. That list provides a starting point for considering future legislation. Finally, there is a wide range of youth access issues that are not addressed in the settlement agreement that could be the subject of state legislative initiatives.

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Joy Johnson Wilson, Director
(202) 624-8689
mailto:joy.wilson@ncsl.org

Whitney Mueller, Administrative Assistant
(202) 624-8690
mailto:whitney.mueller@ncsl.org

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