www.CNSNews.com - (CNSNews.com) - The American Lung Association Wednesday blasted several states for allegedly taking proceeds from the national tobacco settlement and investing that money in tobacco companies.

The 1998 Master Settlement Agreement was designed to punish the tobacco industry and reimburse states for their Medicaid expenses related to tobacco illnesses. Forty-six states were awarded $206 billion in settlements with "no strings attached," according to Doug Cogan, director of the Investor Responsibility Research Center's (IRRC) Tobacco Information Service. According to an IRRC report, 33 states have invested some of their tobacco proceeds and 16 of those states have had no restrictions on where to invest the money. As a result, seven states -- Texas, Connecticut, New Mexico, North Carolina, North Dakota, Utah and West Virginia -- have actually directed part of their tobacco settlements back into the tobacco industry through investments, the IRRC alleges. Texas alone is investing more than $10 million in the tobacco industry, according to the IRRC. Wednesday, one of the nation's biggest anti-smoking groups reacted. "The American Lung Association opposes states investing any of their dollars in tobacco funds and have been very supportive of states that have chosen to divest their pension funds," American Lung Association spokeswoman Cassandra Welch said. "For instance, Massachusetts has divested in that way," she said. "We just think that states should not invest money in companies such as the tobacco industry, whose product kills over 400,000 people a year," Welch added. Numerous attempts to get reaction from tobacco companies to the IRRC report and Welch's comments failed. During an interview with CNSNews.com Wednesday, West Virginia Attorney General Darrell V. McGraw, Jr., admitted that his state had used tobacco settlement proceeds to invest in the tobacco industry, but added that the state Legislature was responsible for that decision. "Most of these aspiring investment bankers in the Legislature or consultants I should call them ... would still defend the investment in tobacco stock and any other kind of stock that they think would reap some kind of a profit for the state," McGraw said. McGraw, who is a Democrat, also accused the Democratic-controlled state Legislature of taking steps to "blow about $52 million" of the tobacco settlement in other ways. "They put the money out of the tobacco trust into the state's health program and then they moved the money that the state would ordinarily be obligated to spend on those health programs off into other enterprises, which they used in the election to advance theirs and, at that time, the incumbent governor's campaign, McGraw said, referring to former Republican Governor Cecil Underwood. "I cannot defend the state," McGraw said. "The experience of this state with the tobacco recovery has not been pretty. James LeBas, chief revenue estimator for the state of Texas, said there is an important distinction to be made when looking at how the state invested its tobacco proceeds. "Let me clarify that the state of Texas, as far as our direct control of the funds, has not made any direct investments in the tobacco stocks. We do have some in SP 500 index funds, as you probably understand, which will include tobacco companies, at least for now. We also hire some private money managers," LeBas said. According to the IRRC, the Standard and Poors 500 Index includes tobacco companies Phillip Morris U.S.A., Loew's, and UST Inc. LeBas said Texas' investment advisory committee will soon be discussing the state's investment policy and "they will be given the option as to whether they want to have targeted or limited investments, which would probably include tobacco. "That's a pretty easy one to discuss and people might want to take it out of the portfolio," LeBas said. "For now, the funds have been invested in a neutral manner." Kathrine Kirkman, director of public affairs for North Carolina State Treasurer Richard Moore, said a portion of the state's tobacco settlement is invested in three separate mutual funds, two of which are managed by the state and contain no investments in tobacco companies. The third fund, Kirkman said, is managed by the Golden LEAF Foundation. The foundation, according to its website, is a non-profit established by the state of North Carolina in 1999 to receive and distribute a portion of the funds from the tobacco settlement. The Golden LEAF fund, the IRRC alleges, used state proceeds from the tobacco settlement to invest in tobacco companies. Valeria Lee, who directs the Golden Leaf Fund, did not return calls to CNSNews.com. Bob Levy, senior fellow in constitutional studies for the Cato Institute, said the Master Settlement Agreement was effective, but not for those it was originally intended to help. "It hasn't been effective at doing what the health community proponents of the settlement had hoped, namely to have big bucks available to counter the usage of cigarettes, mostly by kids," Levy said. "I don't think that has been a success, but it certainly has been a success for the attorneys general. It has certainly been a success for the tobacco companies." Sam Thompson, public information director for New Mexico Attorney General Patricia A. Madrid, said the attorney general's office was not involved in deciding how to spend the proceeds from the tobacco settlement. "The proceeds of the tobacco settlements are allocated by the Legislature, not by the attorney general's office," Thompson said. Levy explained that by purchasing mutual funds that included tobacco stocks, the states were helping those selling the stocks and the tobacco companies make a profit. "When a mutual fund goes out on the floor of the New York Stock Exchange and wants to buy 300,000 shares of Philip Morris, none of that money gets to Philip Morris. It gets to some shareholder who is selling Philip Morris. It basically does have an upward pressure on stock price, which redounds, ultimately, to Philip Morris' advantage as well as to the advantage of the stockholders of Philip Morris," Levy said. "Because the Master Settlement Agreement did not stipulate how the money would be spent, the legislatures and the governors really have, like kids in a candy store, had this big pot of money come in and are free to spend it on any purpose they see fit," Cogan said.

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