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States Relying Too Much on Tobacco Funds [07/02-3]

Excerpts from: Tobacco Tempts States in Financial Need. Settlement Funds, Tax Increases Help Make Ends Meet

By: Robert E. Pierre Staff Writer, http://www.washingtonpost.com [06-30-02]

In state capitols across the country, tobacco is derided as a scourge on society, addicting and killing the young and ill-informed and forcing nonsmokers to pay smoking-related doctor bills.

But as states confront their worst budget crises in a decade, tobacco often has been a savior. Eleven states this year have raised their cigarette taxes, and more than a dozen others are considering doing the same.

And to the chagrin of those who fought for the multi-state settlement with tobacco companies -- which was intended to spread an estimated $246 billion to states over 25 years -- some states are regularly trading future payments from that settlement for cash now.

At least 12 states have "securitized" their settlement money by selling bonds that give investors a claim on future installments from the tobacco companies in exchange for a lower, though significant, one-time payment that can be used to build bridges, fund scholarships or pay down debt.

Maryland has taken both approaches. In April, lawmakers approved a 34-cent increase in the cigarette levy, bringing it to $1 per pack. Earlier, the state securitized 5 percent of its settlement money that was paid into a trust for tobacco farmers. The legislature has approved using a larger portion for the general fund if necessary.

"Thank God for the tobacco industry," said a sarcastic Bud Kelley, executive director of the Illinois Association of Tobacco and Candy Distributors, whose members are coming to grips with that state's recent 40-cents-per-pack tax increase. "Between the tobacco tax and the master settlement, we're kind of where most of the new revenue came from."

States turn to tobacco because it is the path of least resistance, said Illinois state Sen. Emil Jones Jr. (D-Chicago), who supported the 40-cent increase even though he thinks the tax hurts poor people the most.

"Many legislators are afraid to raise taxes because [after redistricting based on the 2000 Census] many of them are running in new districts," said Jones, minority leader of the Illinois Senate. "That's why they pass the sin taxes. They are the easiest."

Jones was among the supporters of a plan that would have allowed Gov. George H. Ryan (R) to borrow up to $750 million against future tobacco payments as a way to buy time until the economy improved. "Are you going to lay off a lot of people, or are you going to use these dollars?" Jones asked. "Other states have done it, and I think we should, too."

Ryan recently chose deeper spending cuts instead. But the two competing scenarios -- higher cigarette taxes or raiding the settlement money -- have left anti-smoking advocates with mixed feelings. They generally support the tax increases.

The per-pack increase in Utah was 18 cents. Connecticut raised its tax by 61 cents. And in Rhode Island, legislators approved a 32-cents-per-pack increase this year, another 18-cent increase in 2003, and 10 cents more in each of the following five years.

But as pleased as anti-smoking advocates have been with higher cigarette taxes, they have been upset by states that have tried to balance budgets by severely reducing spending on smoking cessation programs. Some states have redirected the stream of money from tobacco settlements, which anti-smoking advocates had expected to tap for decades to try to get smokers to quit and persuade nonsmokers not to start.

"It's happening all over the country," said Eric N. Lindblom, manager of policy research at the Campaign for Tobacco-Free Kids in Washington. "Roughly speaking, states are only getting 40 cents on the dollar on those deals. And they're stealing money from future budgets."

Wisconsin was set to collect $5.9 billion over the next 25 years, but it chose instead to sell those payments on the bond market for $1.59 billion. The state is using the $1.59 billion to plug a budget deficit -- a move some consider shortsighted.

"The public perception was that we had an historic opportunity to do the right thing," said Mark Andrew, president of the Wisconsin Medical Society. "What it turned out is that the pot of gold is just being used as a temporary fix on a long-term budget problem."

When Illinois health officials who work on tobacco cessation programs met last week, reactions were mixed.

They were pleased with the new cigarette tax and new programs -- including a phone line to help smokers quit and meetings with students -- that were funded with the $46 million the state spent this year on tobacco control.

In next year's budget, the state has set aside $12 million for such programs. And that money is in jeopardy because Ryan has not decided whether to use the authorization to sell up to $750 million in general obligation bonds that would be repaid with settlement money.

"On one hand, it was a celebration to look at all the things we've accomplished," said Janet Williams, director of tobacco prevention for the Cook County health department. "On the other hand, it was a sad occasion because a number of people won't be working on the job next year. They're going to be cut."

The debate over what to do with massive infusions of settlement money began almost as soon as the deal between the states and the tobacco industry -- known as the master settlement agreement -- was struck. Anti-smoking advocates pushed for increased spending on cessation programs, medical research and health care. Others suggested the money be used for any needs.

Michigan decided to spend its estimated $300 million annual payment to fund college scholarships and Republican Gov. John Engler's Life Sciences Corridor initiative, which invests in biotechnology projects related to asthma and cancer. But that program, in place since 2000, is in jeopardy.

A coalition of health and business groups known as the Citizens for a Healthy Michigan have launched a campaign to get the 300,000 signatures necessary to force a referendum in November to divert most of the state's money to health causes.

Susan Shafer, a spokeswoman for Engler, said the effort is a money grab by private groups. If approved, the initiative would direct $45 million of the state's annual payment to a fund to be run by a new organization comprising the health groups leading the effort. Only 10 percent would go to the general fund, effectively killing the scholarship program.

"There will be some opposition from people who like the way we're currently spending the money," Shafer said. "There is no reason to put this money basically into the hands of private corporations that will have no state oversight."

But organizers of the effort say they have the moral high ground.

"This money was not intended to be expended by the state's leadership any way it wants," said Mary Soper, executive director of the Tobacco-Free Michigan Action Coalition, which is helping with the initiative. "It was intended to go towards health and health-related issues."