WASHINGTON, December 8, 2000 — Two years after cigarette makers reached a landmark settlement with the states over costs associated with treating sick smokers, less than 10 percent of the money is earmarked for anti-smoking programs, meaning the nations 47 million smokers who are financing the agreement are not getting enough help to break the habit.
Meanwhile, tobacco company earnings are up; lawyers are collecting billions in fees, growers are getting as much as half the settlement proceeds in tobacco-growing states and settlement funds are being used for everything from tax rebates to water projects, according to a Center for Public Integrity investigation.
“The vast majority of states are not spending even the minimum amount needed to put in place an effective and comprehensive tobacco prevention program,” Vince Willmore, spokesman for the Campaign for Tobacco-Free Kids, told the Center.
Chief law enforcement officers from 46 states, Puerto Rico, the U.S. Virgin Islands, American Samoa, North Mariana, Guam and the District of Columbia signed the agreement with the major manufacturers of cigarettes on Nov. 23, 1998. The $206 billion, plus another $40 billion awarded in separate settlement negotiations with four other states, are to reimburse the states for past costs associated with taking care of sick smokers under the Medicaid program.
Over the past two years, state legislatures debated how best to use the settlement. The money began pouring in in June, and the public is beginning to get a clearer picture of where the funds will go.
Thus far, $8.2 billion of the $246 billion settlement has been appropriated by 44 states, according to the Health Policy Tracking Service of the National Conference of State Legislatures.
How the money has been allocated
In 2000, legislators introduced more than 558 bills and enacted 91 relating to the allocation of the funds.
- 41 states have earmarked $3.5 billion, or 43.2 percent of the total, on health care services, the top recipient for settlement money.
- The second-leading category is “other uses,” with $1.4 billion, or 16.7 percent.
- Tobacco prevention programs are third, with 35 states planning to spend $754 million, or 9.2 percent, in that category.
- Tobacco growers are slated to receive the fourth highest amount. Farmers in seven states will share $537 million, or 6.6 percent of the total.
The remainder is spread among programs for children, budget reserves, education, long-term health care and research.
Since the tobacco settlement agreement did not specify how the money should be used, states have discretion. While many politicians have tried to adhere to the spirit of the agreement and spend money on health care and smoking cessation, some proposals have nothing to do with tobacco.
In Los Angeles, for example, a city in the midst of its worst police corruption scandal, Mayor Richard Riordan unsuccessfully lobbied to set aside the citys share to pay for lawsuits.
In Illinois, $280 million is being directed to property-tax relief.
“We blew it,” state Rep. John Fritchey, D-Chicago, told the Springfield Journal-Register. “I think that with respect to the tobacco settlement funds, 2000 will go down as the year that health services lost out to election-year politics.”
Connecticut dedicated the majority of its share to fund a freeze on tuition at the University of Connecticut and to local property tax relief. New York is spending $250 million for debt reduction. In North Dakota, a state that ranks third in the nation in youth smoking, 45 percent is being spent on a Water Resources Trust Fund, 45 percent for education and 10 percent for public health programs.
Some states left the decision to the voters. In November, Arizona voters approved a measure that expands insurance to uninsured families and funding for childrens health care. Arkansas, Montana and Oklahoma voted to dedicate their share to health care. Utah voters agreed to create a trust fund and let the legislature decide. Oregon voters defeated two ballot measures, which means it will be up to the legislators how to spend the money next session. Smoking-prevention groups opposed both ballot initiatives, saying there was not enough money set aside for anti-smoking programs.
Tobacco ingrained in the culture
While some states have spent considerable amounts on tobacco prevention, California, Florida and Massachusetts among them, others are falling far short.
Kentucky leads the nation in youth smoking rates, is second in adult smoking rates and leads in smoking-related deaths. Thirty percent of adults and 47 percent of children in grades 9 through 12 are smokers, according to the Centers for Disease Control and Prevention. Despite those alarming numbers, the state is funding tobacco prevention programs at less than 25 percent of what the CDC recommends.
“A large part of it stems from the fact that tobacco is such an ingrained part of our culture and our economy in this state, which makes it very tough to institute policies or laws that in any way cut or reduce smoking rates, even for youth,” Menisa Marshall, communications director for the tobacco use and prevention section of the Kentucky Department for Public Health, told the Center.
Kentucky is second only to North Carolina in tobacco production. The tax on cigarettes, at 3 cents per pack, is the nations second-lowest.
In the past, Marshall said her organization has “run into an absolute brick wall when it comes to trying to get passed the most innocent, most watered down attempts at tobacco-control laws.”
She sees a slight shift in attitude, however. The state enacted its first statewide effort to get Kentuckians to quit smoking, although the funding is $25 million short of what the CDC says is needed. The state has dedicated $10.5 million over two years, but $5 million of that is to be spread among all substance abuse programs. The lung association sought $20 million.
Marshall says she is encouraged by the progress, but thinks the state should be spending more.
“I remember I was struck by this when we were in the midst of this (debate),” she said. “Heres Indiana right next door do us. They spent a lot of money but have fewer smokers.”
Indiana has earmarked $35 million for anti-smoking programs for fiscal 2001. “Whats wrong with this picture?” she asked. “Weve got 47 percent of our kids smoking.”
Seeds for defeat sown in Mississippi
The seeds of big tobaccos biggest defeat were sown in Mississippi. That states attorney general, Michael Moore, with the help of law school buddy Richard “Dickie” Scruggs, seized on a novel way of suing the industry. They would sue for Medicaid funds spent on health care for indigent smokers.
In past suits against tobacco companies, plaintiffs claims that cigarettes caused their disease had to overcome the issue of their own contributory negligence. Moores suit eliminated that problem by claiming that the state itself was the injured party.
The tactic worked. Soon state attorneys general began filing lawsuits across the country with help from dozens of private law firms.
In several instances, attorneys general had another ally the state legislatures. In such states as Florida and Maryland, common-law rules were changed to thwart tobacco companies defenses in the courtroom.
The potent combination of state prosecutorial power and the best private attorneys money could buy was too much for the tobacco industry, and settlement talks began.
First to settle
Mississippi, Texas, Florida and Minnesota settled first, for roughly $40 billion. The industry agreed to pay the rest of the states $206 billion over 25 years, whether they participated in the lawsuits or not.
The settlement freed cigarette makers from claims for reimbursement to the states for the cost of treating sick smokers. As part of the agreement, cigarette companies agreed to lay to rest Joe Camel and any other cartoon mascots, end outdoor advertising, pay for youth anti-smoking campaigns, limit industry lobbying and disband tobacco trade associations.
The funding for the settlement is based on projected tobacco sales over the next 25 years. The settlement amount is actually an estimate. If a manufacturers operating income decreases in a year, payments are reduced according to an extraordinarily complicated formula in the settlement agreement.
In effect, the states negotiated themselves into an inherent conflict of interest. Because the states share of the settlement is based on cigarette sales, legislators are being asked to cut smoking rates. But each time someone kicks the habit, the settlement share goes down.
Nothing in the settlement precludes manufacturers from raising prices to pay for the settlement costs. The settlement was signed Nov. 23, 1998. A day later, Philip Morris, the nations biggest cigarette maker, launched the largest cigarette price increase in history, an average of 45 cents per pack wholesale. The No. 2 manufacturer, R.J. Reynolds Tobacco Co., quickly followed. Nine months later, prices rose another 18 cents a pack. Over the past two years, the price of a pack of cigarettes has gone up 44 percent.
The price increases initially caused a dip in cigarette consumption, but that trend has slowed, from 8 percent the first year to 1 percent the second, and consumers are adjusting to higher prices. In October, Philip Morris posted its largest earnings gain since 1997, and the companys price per share reached its highest level in a year. R. J. Reynolds earnings for the last quarter are up 6 percent over 1999.
Rather than punish tobacco companies, some argue, the settlement with the states actually protects tobacco company profits by creating a program of price fixing and monopolization. Meanwhile, cigarette smokers are paying the cost of the settlement and then some.
Lawyers awarded $10.7 billion
From the outset, private lawyers contracted by the states opted to negotiate attorney fees outside the $246 billion in settlements, meaning that trial lawyers did not take their cut as a percentage of the total. Instead, fees are being negotiated directly with cigarette makers.
The Tobacco Fee Arbitration Panel was created in 1998 to negotiate fees between tobacco companies and the outside legal counsel that negotiated the settlement in each state. So far, the panel has awarded $10.7 billion in 15 states and Puerto Rico, according to the figures compiled by the Center and supplied by the Tobacco Fee Arbitration Panel. Scruggss firm alone was awarded $1.2 billion.
The private lawyers argue that they put forth money and effort early on in the suits with no guarantee of success. But others say that many firms who came on board late in the process simply filed “clone” suits, identical to papers filed in other states.
Further aggravating the public were charges of cronyism. The private lawyers selected to work on the suits were often large contributors or friends of people in power. Critics claim the process of selecting lawyers was open to favoritism.
In Texas, the five law firms that won $3.3 billion in fees for representing the state were all long-time donors to the Texas Democratic Party and to Attorney General Dan Morales. In 1998, members of the firms gave $1.8 million to the state Democratic Party.
One lawyer who claimed a fee has a close acquaintance with Morales dating back to 1981, when the two men worked for the same firm. He withdrew his claim after questions about whether he had even worked on the case. A federal grand jury is investigating financial ties between Morales and lawyers who represented Texas in the $17 billion lawsuit.
In Kansas, Attorney General Carla Stovall had to take an oath before a state legislative committee and explain why she selected her former law firm Entz & Chanay to be local counsel in the suit. The firm was chosen despite a lack of experience in trying tobacco litigation.
From 1997 to 1999, contributions from trial lawyers to political candidates, mostly Democrats, totaled $18 million, according to the American Tort Reform Foundation, a coalition of business interests allied against plaintiff’s attorneys.
David Shrager, a noted Pennsylvania trial lawyer and former smoker, called the suit a “racketeering scheme” involving public health. Shrager has filed a federal class action suit in an attempt to get a share of the settlement for smokers.
Shrager told the Center he is disappointed in some of his colleagues who negotiated the settlement.
“Some of our friends sold out. I admire what was done, but at the end of the day they did not demand a distribution scheme that would (help) victims,” he said. “We really screwed up on this and this lawsuit is my apology for having not done enough.”
Tobacco growers didn’t do badly
Lawyers did well by the settlement, but growers didnt do badly, either. Tobacco growers are considered a critical constituency, particularly in North Carolina and Kentucky, the two top growing states, and in Virginia, where Philip Morris Co. began manufacturing cigarettes in 1929.
Tobacco-growing lawmakers were not shy about pursuing legislation that would be directly beneficial to their pocketbooks.
“People who fight for tax cuts might pay a lot in taxes. Its hard to introduce legislation that doesnt affect yourself.”
That was Rep. Jim Battles rationalization when he explained his sponsorship of legislation that would give half of South Carolinas $2.2 billion settlement to tobacco growers. Battle, a Democrat from Nichols, is a tobacco grower. His brother is a prominent tobacco warehouseman.
In North Carolina, 75 percent of the funds are to be spent on growers and tobacco-dependent communities. The man leading the charge, House Minority Leader Leo Daughtry, holds interests in two tobacco warehouses.
In Kentucky, Sen. Joey Pendleton, chairman of the General Assembly’s Tobacco Task Force, has been a force in efforts to direct a substantial percentage of the states settlement funds to agricultural interests. He has empathy for tobacco farmers. Actually, he owns a tobacco quota, meaning he receives income from the sale of tobacco.
Growers partly owe their dependence on tobacco to a system of quotas and price supports created by the federal government.
In 1938, Congress passed legislation setting tobacco prices and production through a quota system. Each year, if a farmers crop isnt bought at auction by cigarette makers, a cooperative, financed by loans from the government, buys the tobacco until the cigarette maker needs it.
The system, designed to keep small farmers in business through artificially high prices, has changed little in 62 years.
But growers still are in trouble.
Since 1997, quotas have been cut by 65 percent for burley tobacco and 45 percent for flue-cured tobacco, the two varieties that make up the nations production. To offset the quota cuts, the government in 1999 appropriated $328 million to help farmers; in 2000, the figure was $340 million, according to Charles Hatcher, director of the Farm Service Agencys tobacco and peanuts program.
“Theyre hurting,” Hatcher said of the nations growers. “Any time you take a quota cut up to 65 percent or 45 percent, yes, it is a problem,” he told the Center.
A side agreement
The chief concern among growers is that the settlement will push cigarette prices higher (it did) and reduce demand for tobacco. As a solution, cigarette makers created the National Tobacco Growers Settlement Trust.
The four major tobacco companies and the political leadership of the tobacco growing states negotiated a 12-year, $5.15 billion “Phase II” settlement.
When the settlement was reached, Phil Carlton, a lawyer for the tobacco industry, said that “Five billion dollars is an awful lot of money. It would allow an orderly transition . . . for a 10-year period for farmers essentially to made whole.”
Despite the various aid programs, states are still dedicating enormous amounts of the Phase I proceeds to growers. Virginia is a good example.
Allocations in Phase I settlement are based on how much each state spends on Medicaid programs. The Phase II settlement shares were awarded based on how much tobacco each state produces.
Virginia produces only 6.58 percent of all tobacco nationally, but half the Phase I settlement has been earmarked for growers. Thats in addition to the $340 million growers will collect under the Phase II settlement. The two men who sponsored the states tobacco spending bill hail from Pittsylvania County, the leading tobacco producing county in the state.
Whats next?
Big Tobacco is not out of the woods yet. The biggest threat to the settlement with the states and to the industry is, not surprisingly, more lawsuits.
In Florida, a jury recently returned a $145 billion verdict in a class action suit against cigarette makers. The industry says if the award stands up on appeal, cigarette makers will be bankrupted.
In September 1999, the U.S. Department of Justice filed a civil lawsuit against the largest cigarette manufacturers to recover billions of dollars the federal government spends each year on smoking-related health care costs.
They estimate that the federal government spends more than $20 billion per year to treat smoking-related illness. In a morbid twist, opponents claim that medical programs save on the cost of old-age medical care, Social Security and nursing home care because smokers die younger. A federal judge recently gutted a portion of the Justice Departments case.
Regardless, states are concerned any federal award would threaten the financial stability of the tobacco industry and the settlement.
Meanwhile, anti-smoking activists would like to see the states spend more of their settlement on prevention programs.
“Were not asking that they spend all the money on tobacco prevention,” said Willmore of the Campaign for Tobacco-Free Kids. “Were asking they spend enough of the money to have effective programs under the guidelines of the Centers for Disease Control and Prevention,” he told the Center.
So far, only five states – Indiana, Maine, Massachusetts, Minnesota and Mississippi – have reached that level.