Tobacco Payment Cuts Worry States
HARRISBURG, Pa. (AP) -- State governments fearful of losing billions in tobacco settlement money are scurrying to find ways to keep the cash coming in the face of lagging cigarette sales and high-stakes litigation in Florida.
The states already took a billion-dollar hit this month after their payments were decreased to reflect last year's 9 percent decline in U.S. cigarette shipments. Pennsylvania received $198 million, about $28 million less than projected, and other states reported similar declines of 10 percent to 15 percent.
The losses, which some state officials say may continue, could shave more than $20 billion from the $206 billion due to 46 states over 25 years to cover health-related costs, under a ``volume adjustment'' clause of the settlement agreement. Even worse, states worry that payments could be delayed for years in the event of a crippling punitive award in a Florida class-action lawsuit.
It's a potential problem for many states, which are using their cut of the settlement to pay for projects ranging from smoking prevention programs and health insurance for the uninsured to schools, water projects and new jails.
With so much at stake, state governments are keeping close watch on the health of the very industry at the core of the health-related problems to begin with.
``I do think state appropriators have been very cautious where they put these dollars, knowing they're going to change,'' said Joan Henneberry, a health policy expert at the National Governors Association. ``I think state budgeters would be more concerned not about the amount (of payments), but whether bankruptcy of the industry delays the process.''
Many states, like Pennsylvania, want to cushion the impact of fluctuating payments with plans to set aside portions in rainy day investment funds and by appropriating the settlement money for programs year by year.
Other states are bolder. Four tobacco states -- Georgia, Kentucky, Virginia and North Carolina -- have passed or are pondering bills to shield industry assets during a court appeals process. That came after some analysts predicted record damages in Florida and as the Justice Department sues the industry to recover billions the federal government says it spent on smoking-related health care.
And a handful of states, including Florida, Virginia and Louisiana, cite the declining payments and the industry's bankruptcy risk as reasons why they may sell some of their settlement to investors at a discount. They say it's better that than counting on the industry to stay fully afloat for 25 years.
``We can't afford to take that risk,'' said Louisiana State Treasurer John Kennedy. ``If your rich uncle died and left you $4.6 billion, you wouldn't buy all Philip Morris stock; you'd diversify ... but every day we wait and more bad news comes out about the tobacco industry, the price goes down.''
Under the settlement agreement signed Nov. 23, 1998, the tobacco companies agreed to pay 46 states for smoking-related health costs. The companies earlier signed separate deals, also with ``volume adjustment'' provisions, with Mississippi, Florida, Texas and Minnesota for a combined $40 billion.
The agreements forced companies to end billboard advertising and certain other marketing tactics, such as cartoon images like Joe Camel. Companies then raised cigarette prices about 45 cents per pack to help pay for the settlement, leading to about a 9 percent decline in shipments last year, analysts say.
Analysts don't expect similarly sharp sales declines in future years -- one projected a 1 percent to 2 percent drop annually. But they are encouraging state governments nevertheless to consider ways to minimize risk, either by legislating against the impact of large damage awards or selling some of their shares to investors.
``It would be imprudent for any state not to consider the best ways of protecting the annual revenues to that state,'' said Martin Feldman, an analyst with New York-based Salomon Smith Barney. The two best methods, he said, are legislation and securitization, selling to investors.
In Pennsylvania, Attorney General Mike Fisher said he is not too worried about losing the state's projected $11.3 billion in settlement money. He called selling to investors a ``risky venture'' for now since investors would expect a discount.
The best way to cushion the impact of fluctuating payments is to devote funds to health care, the costs of which will decrease as smoking levels dwindle, said Fisher, a member of the tobacco committee of the National Association of Attorneys General, which negotiated the multistate settlement.
``We shouldn't be concerned that the amount of cigarettes being sold is going down,'' he said. ``It's a good sign and the primary goal behind bringing this litigation in the first place.''
Anti-tobacco activists, meanwhile, worry that exaggerated fears of losing settlement payments may undermine anti-smoking efforts.
Even if smoking were reduced by one percent annually for five years, they said, the country would save billions of dollars that would otherwise go toward treating smoking-related heart attacks, strokes, low-birth rate babies and other costs.
``I do think that so far there has been much too much focus on lost settlement revenues and too little on the benefits from reduced smoking levels,'' said Eric Lindblom of the Campaign for Tobacco-Free Kids.