USING TOBACCO SETTLEMENT REVENUES FOR CHILDREN'S SERVICES
STATE OPPORTUNITIES AND ACTIONS
October 1999
and
INTRODUCTION
Tobacco revenues have long been an important source of state funding for education and an array of other services for children and families. Taxes on sales of cigarettes and other tobacco products have been a part of state excise tax revenues since the early part of this century. All or a portion of these taxes have often been earmarked to fund special purposes. Human services, including health care, elementary and secondary education, higher education, smoking cessation and prevention programs, and treatment for drug addiction and alcoholism have been among the most common purposes for which tobacco taxes have been earmarked.
The recent settlements between the states and the tobacco industry create a new and unprecedented opportunity for using tobacco revenues to fund supports and services for children and families. The November 1998 settlement with 46 states, estimated to total $206 billion over the next 25 years, is the largest windfall of its kind to states. Four states had previously reached separate settlements with the tobacco industry amounting to $40 billion. These agreements place no restrictions on how states spend the funds. And this new revenue source is coming about during some of the best fiscal times states have seen in recent history. Consequently, opportunities exist for creating new programs, increasing funding for existing programs, and experimenting with bold new financing strategies. Because of the historic nature and size of the tobacco settlement payments to the states, the opportunities, possibilities, and potential controversies for using these funds are staggering.
This report discusses the use of the tobacco settlement revenues to support services for children and their families—both in terms of state legislative action and opportunities for future decision making. It primarily focuses on the implications of the November 1998 agreement for the 46 participating states, but it also includes examples of state decision making in the four states with separate agreements. It first reviews the basic fiscal terms of the Master Settlement Agreement and the magnitude of the expected revenues, as well as the actions states must take to ensure receipt of their allotment. Through an examination of the actions taken by states in their 1999 legislative sessions, the report then discusses the several types of decisions states face concerning the disposition of the funds:
decisions on financial and governance structures for managing the funds;
decisions affecting the amount and timing of revenue a state will receive; and
decisions on the substantive allocation of the funds.
The report focuses particularly on state legislative action to allocate funds to children’s services. It provides examples of the multiple approaches that have been taken and describes prominent child-focused legislation in more detail. Several tables and attachments further document state legislative activity concerning the tobacco settlement funds.
BACKGROUND
In 1994, a number of states filed lawsuits against tobacco manufacturers seeking reimbursement for the states’ Medicaid and other smoking-related health costs. The tobacco industry decided to settle cases with four states (Florida, Minnesota, Mississippi, and Texas) in large cash payments totaling $40 billion over time in exchange for these states relinquishing any and all future claims seeking damages for medical expenses.
On November 23, 1998, the Attorneys General of the remaining 46 states, Puerto Rico, the U.S. Virgin Islands, the Northern Mariana Islands, Guam, and the District of Columbia signed a similar agreement—the Master Settlement Agreement—with the five largest tobacco manufacturers (Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company, Philip Morris Incorporated, R. J. Reynolds Tobacco Company, and Ligget & Myers). The four states that had previously settled with tobacco manufacturers are not included in the Master Settlement Agreement.
Under the agreement, the 46 participating states, the District of Columbia, Puerto Rico, Virgin Islands, and the Territories will receive payments from the tobacco companies in perpetuity. They will receive a total of approximately $206 billion over the next 25 years. Starting in 1998, certain "up-front" payments were credited to an escrow account as provided by the agreement. Annual payments, to be made on April 15, 2000 and each April 15 thereafter, will total $183.2 billion through 2025.
A summary of estimated annual tobacco settlement allotments by state through 2025 is shown in Table 1. State payments for FY2000 range from over $800 million in California and New York to $16 million in Wyoming. The payments reach a maximum in 2003, then rise again in three stages to reach more than $1 billion in California and New York and nearly $20 million in Wyoming for the years 1018 through 2025.
Each state’s annual allotment represents a fixed share of the total payments to be made by the tobacco companies in that year. The state shares (shown in Table 2) are based on a complex formula that accounts for each state’s total historical health spending. Total annual payments will be determined by adjusting a base amount by a number of factors, including the consumer price index and the amount by which domestic tobacco sales decline. Thus, there is considerable uncertainty about the precise amounts states will receive in the future.
Nevertheless, the projected payments can be expected to add significantly to state resources. Table 2 compares the total amount of payments each state can be expected to receive in FY2000 (from initial and FY2000 payments) to the estimated size of state budgets for that year. In most states, the settlement dollars will account for between 1.5 and 3.5 percent of budgets, and in six states, they will represent 4 percent or more of total budgets. The settlement revenues’ share of future budgets will depend on the level of total payments, state spending policies, and other factors. However, if states do not spend all of their payments annually, their accumulation of new revenues from the settlement can constitute even larger shares of annual state budgets.
Table 1
Years |
||||||||
1998 |
2000 |
2001 |
2002 |
2003 |
2004 to 2007 |
2008 to 2017 |
2018 to 2025 |
|
Alabama |
$38.8 |
$103.6 |
$111.9 |
$134.4 |
$135.6 |
$113.2 |
$115.4 |
$129.4 |
Alaska |
$8.2 |
$21.9 |
$23.6 |
$28.4 |
$28.7 |
$23.9 |
$24.4 |
$27.3 |
Arizona |
$35.4 |
$94.5 |
$102.0 |
$122.5 |
$123.7 |
$103.2 |
$105.3 |
$118.0 |
Arkansas |
$19.9 |
$53.1 |
$57.3 |
$68.8 |
$69.5 |
$58.0 |
$59.1 |
$66.3 |
California |
$306.3 |
$818.4 |
$883.7 |
$1,061.1 |
$1,071.1 |
$894.0 |
$911.7 |
$1,021.6 |
Colorado |
$32.9 |
$87.9 |
$94.9 |
$114.0 |
$115.0 |
$96.0 |
$97.9 |
$109.7 |
Connecticut |
$44.6 |
$119.0 |
$128.5 |
$154.3 |
$155.8 |
$130.0 |
$132.6 |
$148.6 |
Delaware |
$9.5 |
$25.4 |
$27.4 |
$32.9 |
$33.2 |
$27.7 |
$28.2 |
$31.7 |
District of Columbia |
$14.6 |
$38.9 |
$42.0 |
$50.5 |
$50.9 |
$42.5 |
$43.4 |
$48.6 |
Georgia |
$58.9 |
$157.4 |
$169.9 |
$204.0 |
$206.0 |
$171.9 |
$175.3 |
$196.5 |
Hawaii |
$14.4 |
$38.6 |
$41.7 |
$50.0 |
$50.5 |
$42.2 |
$43.0 |
$48.2 |
Idaho |
$8.7 |
$23.3 |
$25.2 |
$30.2 |
$30.5 |
$25.4 |
$25.9 |
$29.1 |
Illinois |
$111.7 |
$298.4 |
$322.2 |
$386.9 |
$390.6 |
$326.0 |
$332.5 |
$372.5 |
Indiana |
$49.0 |
$130.8 |
$141.2 |
$169.6 |
$171.2 |
$142.9 |
$145.7 |
$163.3 |
Iowa |
$20.9 |
$55.8 |
$60.2 |
$72.3 |
$73.0 |
$60.9 |
$62.1 |
$69.6 |
Kansas |
$20.0 |
$53.5 |
$57.7 |
$69.3 |
$70.0 |
$58.4 |
$59.5 |
$66.7 |
Kentucky |
$42.3 |
$112.9 |
$121.9 |
$146.4 |
$147.8 |
$123.4 |
$125.8 |
$141.0 |
Louisiana |
$54.1 |
$144.6 |
$156.2 |
$187.5 |
$189.3 |
$158.0 |
$161.1 |
$180.5 |
Maine |
$18.5 |
$49.3 |
$53.3 |
$64.0 |
$64.6 |
$53.9 |
$55.0 |
$61.6 |
Maryland |
$54.3 |
$144.9 |
$156.5 |
$187.9 |
$189.7 |
$158.3 |
$161.5 |
$180.9 |
Massachusetts |
$96.9 |
$259.0 |
$279.6 |
$335.8 |
$338.9 |
$282.9 |
$288.5 |
$323.3 |
Michigan |
$104.4 |
$279.0 |
$301.3 |
$361.8 |
$365.2 |
$304.8 |
$310.9 |
$348.3 |
Missouri |
$54.6 |
$145.8 |
$157.5 |
$189.1 |
$190.9 |
$159.3 |
$162.5 |
$182.1 |
Montana |
$10.2 |
$27.2 |
$29.4 |
$35.3 |
$35.6 |
$29.8 |
$30.3 |
$34.0 |
Nebraska |
$14.3 |
$38.1 |
$41.2 |
$49.5 |
$49.9 |
$41.7 |
$42.5 |
$47.6 |
Nevada |
$14.6 |
$39.1 |
$42.2 |
$50.7 |
$51.2 |
$42.7 |
$43.6 |
$48.8 |
New Hampshire |
$16.0 |
$42.7 |
$46.1 |
$55.4 |
$55.9 |
$46.6 |
$47.6 |
$53.3 |
New Jersey |
$92.8 |
$247.9 |
$267.7 |
$321.5 |
$324.5 |
$270.8 |
$276.2 |
$309.5 |
New Mexico |
$14.3 |
$38.2 |
$41.3 |
$49.6 |
$50.0 |
$41.8 |
$42.6 |
$47.7 |
New York |
$306.3 |
$818.3 |
$883.6 |
$1,060.9 |
$1,071.0 |
$893.9 |
$911.6 |
$1,021.5 |
North Carolina |
$56.0 |
$149.5 |
$161.5 |
$193.9 |
$195.7 |
$163.4 |
$166.6 |
$186.7 |
North Dakota |
$8.8 |
$23.5 |
$25.3 |
$30.4 |
$30.7 |
$25.6 |
$26.1 |
$29.3 |
Ohio |
$120.9 |
$323.0 |
$348.8 |
$418.8 |
$422.7 |
$352.8 |
$359.8 |
$403.2 |
Oklahoma |
$24.9 |
$66.4 |
$71.7 |
$86.1 |
$87.0 |
$72.6 |
$74.0 |
$82.9 |
Oregon |
$27.5 |
$73.6 |
$79.5 |
$95.4 |
$96.3 |
$80.4 |
$82.0 |
$91.9 |
Pennsylvania |
$137.9 |
$368.5 |
$397.9 |
$477.8 |
$482.3 |
$402.5 |
$410.5 |
$460.0 |
Rhode Island |
$17.3 |
$46.1 |
$49.8 |
$59.8 |
$60.3 |
$50.4 |
$51.4 |
$57.5 |
South Carolina |
$28.2 |
$75.4 |
$81.4 |
$97.8 |
$98.7 |
$82.4 |
$84.0 |
$94.2 |
South Dakota |
$8.4 |
$22.4 |
$24.2 |
$29.0 |
$29.3 |
$24.4 |
$24.9 |
$27.9 |
Tennessee |
$58.6 |
$156.5 |
$169.0 |
$202.9 |
$204.8 |
$171.0 |
$174.4 |
$195.4 |
Utah |
$10.7 |
$28.5 |
$30.8 |
$37.0 |
$37.3 |
$31.2 |
$31.8 |
$35.6 |
Vermont |
$9.9 |
$26.4 |
$28.5 |
$34.2 |
$34.5 |
$28.8 |
$29.4 |
$32.9 |
Virginia |
$49.1 |
$131.1 |
$141.6 |
$170.0 |
$171.6 |
$143.2 |
$146.1 |
$163.7 |
Washington |
$49.3 |
$131.6 |
$142.2 |
$170.7 |
$172.3 |
$143.8 |
$146.7 |
$164.3 |
West Virginia |
$21.3 |
$56.8 |
$61.4 |
$73.7 |
$74.4 |
$62.1 |
$63.3 |
$71.0 |
Wisconsin |
$49.7 |
$132.9 |
$143.5 |
$172.3 |
$173.9 |
$145.1 |
$148.0 |
$165.8 |
Wyoming |
$6.0 |
$15.9 |
$17.2 |
$20.6 |
$20.8 |
$17.4 |
$17.7 |
$19.9 |
Total |
$2,400.0 |
$6,411.8 |
$6,923.7 |
$8,313.3 |
$8,392.0 |
$7,004.0 |
$7,143.0 |
$8,004.0 |
Source: National Association of Attorneys General |
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Note: Figures assume no significant volume adjustments due to tobacco manufacturers’ sales. |
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Table 2
Total Initial and FY2000 Payments as a Share of State Budgets
States Participating in Master Settlement Agreement |
State’s Share of Allotments |
Total Amount State will receive in Initial and FY 2000 Payments (in millions)a |
FY 2000 State Budget (in millions)b |
Settlement Dollars as a Share of State Budget |
| Alabama | 1.62% |
$142 |
$5,040 |
2.83% |
| Alaska | 0.34% |
$30 |
$2,295 |
1.31% |
| Arizona | 1.47% |
$130 |
$5,881 |
2.21% |
| Arkansas | 0.83% |
$73 |
$3,417 |
2.14% |
| California | 12.76% |
$1,125 |
$63,732 |
1.76% |
| Colorado | 1.37% |
$121 |
$5,852 |
2.06% |
| Connecticut | 1.86% |
$164 |
$10,582 |
1.55% |
| Delaware | 0.40% |
$35 |
$2,045 |
1.70% |
| Georgia | 2.45% |
$216 |
$12,599 |
1.72% |
| Hawaii | 0.60% |
$53 |
$5,812 |
0.91% |
| Idaho | 0.36% |
$32 |
$1,675 |
1.91% |
| Illinois | 4.65% |
$410 |
$20,691 |
1.98% |
| Indiana | 2.04% |
$180 |
$9,573 |
1.88% |
| Iowa | 0.87% |
$77 |
$4,776 |
1.60% |
| Kansas | 0.83% |
$73 |
$4,430 |
1.66% |
| Kentucky | 1.76% |
$155 |
$6,491 |
2.39% |
| Louisiana | 2.26% |
$199 |
$6,068 |
3.28% |
| Maine | 0.77% |
$68 |
$2,279 |
2.97% |
| Maryland | 2.26% |
$199 |
$8,940 |
2.23% |
| Massachusetts | 4.04% |
$356 |
N/A |
N/A |
| Michigan | 4.35% |
$383 |
$9,589 |
4.00% |
| Missouri | 2.27% |
$200 |
$7,194 |
2.79% |
| Montana | 0.42% |
$37 |
$1,102 |
3.40% |
| Nebraska | 0.59% |
$52 |
$2,329 |
2.25% |
| Nevada | 0.61% |
$54 |
$1,566 |
3.43% |
| New Hampshire | 0.67% |
$59 |
$1,040 |
5.64% |
| New Jersey | 3.87% |
$341 |
$19,514 |
1.75% |
| New Mexico | 0.60% |
$53 |
$3,320 |
1.63% |
| New York | 12.76% |
$1,125 |
$73,288 |
1.53% |
| North Carolina | 2.33% |
$205 |
$13,532 |
1.52% |
| North Dakota | 0.37% |
$32 |
$781 |
4.13% |
| Ohio | 5.04% |
$444 |
$15,655 |
2.84% |
| Oklahoma | 1.04% |
$91 |
$4,941 |
1.85% |
| Oregon | 1.15% |
$101 |
$4,640 |
2.18% |
| Pennsylvania | 5.75% |
$506 |
$19,061 |
2.66% |
| Rhode Island | 0.72% |
$63 |
$2,205 |
2.87% |
| South Carolina | 1.18% |
$104 |
$5,330 |
1.94% |
| South Dakota | 0.35% |
$31 |
$753 |
4.08% |
| Tennessee | 2.44% |
$215 |
$6,649 |
3.23% |
| Utah | 0.44% |
$39 |
$3,367 |
1.16% |
| Vermont | 0.41% |
$36 |
$809 |
4.48% |
| Virginia | 2.04% |
$180 |
$11,096 |
1.62% |
| Washington | 2.05% |
$181 |
$10,159 |
1.78% |
| West Virginia | 0.89% |
$78 |
$2,662 |
2.93% |
| Wisconsin | 2.07% |
$183 |
N/A |
N/A |
| Wyoming | 0.25% |
$22 |
$545 |
4.01% |
a Initial and FY2000 payments as stated in Master Settlement Agreement. Source: National Association of Attorneys General. |
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b As estimated by the National Conference of State Legislatures, September 17, 1999. |
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N/A – Not available because budget bill has not been enacted yet. |
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Required State Actions
Under the terms of the agreement, states that are part of the Master Settlement Agreement must enact legislation and take other actions in order to finalize the agreement and receive their settlement payments in full. Each state needs to enact the Model Statute and achieve State Specific Finality, and together the states need to meet the requirements for Final Approval of the settlement. Table 3 summarizes the status of the states in taking these actions
.Enact Model Statute. The Master Settlement Agreement includes a requirement that states enact a model statute or another "qualifying statute." Intended to create a "level playing field" between tobacco companies participating in the Master Settlement Agreement and those that are not, the Model Statute would require any new tobacco companies that were not party to the agreement to place into an escrow fund a percentage of revenue "per unit sold" of a tobacco product, or become a participating member of the settlement agreement. This Model Statute must be enacted by states exactly as it is drafted in the Master Settlement Agreement or the state’s payment may be reduced. If a state fails to enact the Model Statute or if a state enacts the Model Statute and a court subsequently overturns it, the agreement specifies that the state allotment will be reduced by no more than 65 percent. Thus, while enactment of the Model Statute is not required by the states in order to receive some money from the tobacco settlement, it is necessary if the state wants to receive all of its allotment. Thirty-seven states have enacted the Model Statute to date.
Achieve State Specific Finality. To achieve State Specific Finality, a state’s courts must approve the Master Settlement, all subsequent appeals must be exhausted, and all parties must be released from liability, except for criminal liability. For example, third-party lawsuits seeking to intervene in the settlement agreement must be resolved as part of this process. When State Specific Finality is achieved, the state becomes vested and funds can be transferred to a special account established for that state. To date, 38 states have achieved State Specific Finality.
Final Approval. When a state actually begins receiving payments depends not only on when it achieves State Specific Finality, but also on when other states do so. States will not receive their payments until the Final Approval Date of the agreement. This date will be the earlier of June 30, 2000, or the date when 80 percent of the participating states attain State Specific Finality and states with 80 percent of the states’ total financial allocation attain State Specific Finality. As of mid-October 1999, the 38 states that have achieved State Specific Finality constituted about 83 percent of the 46 states included in the agreement, and represented just under 80 percent of the total financial allocation. It is expected that at least one additional state (Virginia) will reach State Specific Finality shortly. Thus, it is likely that states will begin receiving their payments before the end of 1999.
Legislative Developments
In their 1999 sessions, state legislatures devoted time not only to taking the necessary actions to ensure that their states would receive their shares of the tobacco settlement monies, but also to considering the disposition of the funds. This involved considering both how to manage the tobacco settlement revenues (for example, whether to establish a special trust fund for the monies, the extent to which to spend versus invest the funds) and how to allocate the payments and potential investment earnings (that is, the purposes, programs, services, or projects towards which the monies would be applied).
Early in January, most governors put forth proposals on how their states would use the tobacco settlement fund money. These proposals were made in State of the State addresses, inaugural speeches, executive budgets, and simple press releases. Some governors asked legislators to introduce bills that they then endorsed. A few took no position and let the Legislature work through the details. During the next several months state legislatures wrestled with how to receive the money, how to manage the money, and how to spend it. Several states initially chose to establish special commissions, task forces, or study committees and hold public hearings to solicit public and expert opinion on how to best use the funds.
While states were eager to start exploring the range of options for managing and spending the settlement funds, legislators initially were hesitant to make anything but general decisions this year—for good reason. The actual amount states would end up receiving was in question when the federal government indicated it would seek to "recoup" a portion of the states’ tobacco settlement payments. The federal Health Care Finance Administration (HCFA) argued it was legally entitled to recoup its share of smoking-related Medicaid costs under the Medicaid third-party recovery provisions of the Social Security Act.
State legislators and governors from both ends of the political spectrum vigorously opposed federal recoupment and urged Congress to protect the states’ settlement payments from federal interference. Federal legislation was required to prevent the recoupment of tobacco settlement funds. On May 21st, President Clinton signed the FY1999 Supplemental Appropriations bill including a provision stating that the federal government relinquishes all claims on the state tobacco settlement funds. With the recoupment issue settled, state decision makers were able to focus on how to use the tobacco settlement funds in their particular state.
Over 500 bills concerning the tobacco settlement payments were introduced in the 49 state legislatures in session this year. Much of this legislation did not pass out of committee; some stalled in the House or Senate or was stalemated when differences between the two chambers could not be resolved. By early June a majority of state legislatures had adjourned.
As of mid-October 1999:
Thirty-seven states have enacted the model statute.
Nineteen states have enacted laws to place the tobacco settlement funds in trust funds and four states have enacted laws to place the funds in endowments.
Twenty-three states have enacted enabling legislation or appropriation acts concerning how the money should be spent. However, the specificity of these laws varies greatly.
Several of the legislatures that did not reach a decision on the disposition of the settlement funds are using the period between sessions as an opportunity to gather additional information and input from interested and concerned public and private entities. For example, Iowa, Idaho, Missouri, New Mexico, Ohio, and Pennsylvania all have task forces or study committees conducting meetings around the state to solicit opinions on how to manage and use the tobacco settlement funds.
Thus, about half of the states have yet to enact any legislation on what they would support with the tobacco money. Furthermore, much of the legislation that has been passed on the use of the funds tends to be written in broad terms. Therefore, both in the states that have taken legislative action and those that have not, ample further opportunity exists for individuals and groups to attempt to shape the policy and spending priorities for this money in their state.
DECISIONS ON FINANCIAL AND GOVERNANCE STRUCTURES
One of the first things states need to consider is how they will manage their tobacco settlement monies. This includes establishing the financial arrangements and governing mechanisms for receiving, maintaining, and disbursing the funds—that is, where the money will reside and who will have control over it. These decisions should be of key interest to those concerned with the potential use of these funds for children and family supports and services.
States are using a variety of financial arrangements to manage the tobacco settlement funds, ranging from placing them in the General Fund to establishing separate financial and governing structures. However, nearly all of the states are choosing to segregate these funds to some extent. Even if they are placed in the General Fund, for example, states are establishing separate accounts and codifying policy and intentions on their use.
Many states are choosing to manage their tobacco settlement funds by establishing trust funds, endowments, or foundations. Each of these mechanisms provides a tool for managing and disbursing the settlement monies separately from other funds. In this way, they are also tools for reserving and directing funds to specific purposes or uses, such as funding supports and services to children and families. These mechanisms are discussed below, followed by a discussion of other approaches.
Three Options for Managing the Tobacco Settlement Revenues States are using these financial and governance structures to separate the tobacco settlement revenues from other funds:
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Trust Funds
The creation of trust funds has been the most popular mechanism for managing the tobacco settlement funds. Nineteen states have established such funds to date.
Trust funds are usually separate accounts in the state treasury. Their purposes are typically broadly defined. North Carolina, for example, enacted SB 6, which established a Health Trust. Under this legislation, twenty-five percent of the state’s tobacco settlement funds will be placed in the trust and monies can be expended from the trust for health programs, services, and other activities. Currently, the legislature is considering HB 1431 to establish a Health Trust Fund Commission, which would have the authority to decide more specifically how the trust funds will be used. The commission would be comprised of 15 members and would meet quarterly to decide how to disburse funds to state agencies, local government, and non-profit organizations.
Trust funds receive money through an annual appropriation in the course of the normal legislative process. Expenditures from the trust applying the funds to specific initiatives or projects are also determined through the appropriations process. Colorado, for example, enacted Senate Bill 172, which creates the Tobacco Litigation Settlement Fund within the state treasury to act as a depository for the funds the state will receive from the tobacco settlement. The bill does not directly appropriate any funds; it simply says that money in the Settlement Fund will be subject to appropriation by the General Assembly for purposes authorized by law in accordance with the Master Settlement Agreement and the Consent Decree.
Whereas other financial management mechanisms may be designed to preserve all or a portion of the funds for investment purposes, the principal in a trust typically—but not always—is available for expenditure. Mississippi, for example, is using a trust fund approach but also preserving its principal. Lawmakers in that state enacted House Bill 519, creating the Health Care Trust Fund into which the state will deposit $280 million from revenues the state receives from its separate tobacco settlement agreement. While directing money from the Trust Fund to be used for health purposes, the act states that the principal of the Trust Fund will remain inviolate and will never be expended—only interest on the fund will be appropriated.
Florida has used a variation on the trust fund approach to manage its tobacco settlement monies. It created one "main" trust fund to receive the money, and "mini" or "sub" trust funds to disburse the funds. The Department of Banking and Finance Tobacco Settlement Clearing Trust Fund will receive the money and then disburse it, through operating transfers, to trust funds that were created for specific agencies like the Department of Child and Family Services, the Department of Veterans’ Affairs, and the Agency for Health Care Administration.
Endowments
An endowment is similar to a trust fund in many ways. Both establish a separate mechanism for receiving, holding, and disbursing funds. The main difference between the two is that an endowment is more permanent—creation of an endowment usually implies the intention to preserve a base amount of principal for a long time or in perpetuity. Thus, the goal of an endowment is long-term viability. Four states (Kansas, Louisiana, Minnesota, and Mississippi) are establishing endowments for their tobacco settlement funds.
Unlike in a typical trust, only the income generated from investing the funds is expended from an endowment. The principal is never spent. Louisiana, for example, enacted legislation that divides the settlement money into two funds, the Millienium Trust and the Louisiana Fund. The Millienium account is an endowment and only the interest from this fund can be spent. In the first year (FY 2000), the Louisiana Fund will receive 100 percent of the tobacco settlement funds. In FY 2001, 45 percent of the settlement will be placed in the Millenium Trust. This amount will increase to 75 percent by the third year and then remain at that level. Successive payments over the years will create a "nest egg" for the state, with the return on investment to be spent on health, education, and tuition programs. The Louisiana Fund is a trust. It will receive 55 percent of the initial payment, decreasing to 25 percent by the third year. The legislation allows for all of the money in the Louisiana Fund to be spent on an annual basis.
| Considerations in Setting Up Financial Arrangements
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Boards are often chosen to set priorities for and manage the expenditure of funds from an endowment. As these boards can have an important influence on the ultimate use of endowment funds, policy makers and concerned citizens will want to be mindful of the make-up of these boards.
Foundations
A third option for managing the tobacco settlement funds is to create a foundation that would receive the funds and control their use. Virginia provides an example of a state that has taken this approach. It established a foundation to distribute the 10 percent of its tobacco settlement funds that it will use for smoking cessation and tobacco control activities.
Foundations are non-profit, philanthropic entities established to aid and maintain charitable activities. They are actual organizations that receive and disburse funds according to their charter, and they often make grants to other non-profit entities to carry out their purposes. Foundations operate outside the legislative process and answer only to the entity outlined in their charter. The longevity of a foundation can vary according to the long-term needs and mission for which it was created; however, foundations are often considered to be permanent.
General Fund/Other Existing Funds
Rather than creating new financial structures for managing the tobacco settlement funds, some states are planning to place these monies in the General Fund or other existing funds. In general, this option places these monies under the same rules as other monies in the fund—typically, expenditures of these funds are determined through the regular appropriations process. As noted above, however, even where the tobacco settlement funds have been placed in existing funds, some states have put special restrictions on them.
Connecticut, Idaho, Montana, New Hampshire, New Jersey, Vermont, and Wyoming have taken a more traditional approach to managing their tobacco settlement funds. For example:
Wyoming has decided to place its initial payment in the General Fund and appropriate it for health and prevention programs. While placing the money in its General Fund, the state also made clear that the funds are not to be mixed with other General Fund revenue.
New Hampshire chose to place all of its initial and FY 2000 payment (about $59 million) in its General Fund and spend all but $4 million on education. The state did so because it was facing a crisis over school funding—the New Hampshire Supreme Court had mandated that the state correct the flaws in its education funding formula. During 1999, the legislature also voted to increase the state’s tobacco tax by 5 cents a pack to address the problem in future years. Some speculate that in subsequent years, New Hampshire may use its tobacco settlement payments for other purposes.
Idaho directed all of its tobacco settlement money to be deposited into its existing Budget Reserve Account and Budget Stabilization Fund. According to HPTS state contacts, Idaho chose to act in this fashion mainly because the legislative session adjourned before the federal recoupment issue had been settled and state lawmakers were not sure how much tobacco settlement money they would actually have.
DECISIONS AFFECTING THE AMOUNT AND TIMING OF REVENUES
In their 1999 legislative sessions, as state leaders considered what to do with their tobacco settlement funds, they did not know exactly how much their states would receive over time. One reason was that the federal recoupment issue had not been settled. If successful, the federal bid to reclaim a portion of the settlement funds would have resulted in states receiving only a fraction of what they otherwise would have. Other factors that will continue to create uncertainty about the amount of future payments are built into the agreement, such as the provision for downward adjustment of the payments if cigarette sales decline. And tobacco companies’ ability to make good on the settlement agreement in the face of potential future litigation and other developments will also not be known for some time.
As noted above, many states have chosen to establish trust funds or endowments or to otherwise segregate the tobacco settlement monies from other funds. Banking the funds this way provides a way of dealing with the uncertainty of how much revenue will be available over time. It protects the funds from being mingled with general revenues or other funds until the state knows the amount of funds it will receive and determines exactly how it will use them.
Spending vs. Saving the Payments
Another critical issue for states to consider is whether to spend all of the tobacco settlement revenue or to save some or all of it for the future. Through its choices about whether to defer spending some or all of the payments, a state can dramatically affect the amount and timing of revenues it will have at its disposal. Recognizing the importance of this issue, at least six states have conducted analyses of how much revenue would be available if various portions of the funds were preserved and the balance spent. (See box for example.)
As noted above, states have made decisions that range from spending all the principal of an annual payment (e.g., Wyoming) to spending none of the principal and only the investment earnings (e.g., Mississippi). Other states have taken a combination approach, appropriating a portion of the funds and setting the rest of the funds aside to accumulate. In Massachusetts, for example, the Speaker of the House proposed placing all of the state’s initial payment of $259 million in a trust fund and spending $40 million of the corpus of the trust plus the return on investment, approximately $19 million, on health care and prevention. After 25 years, and assuming a rate of return of 7.3% on the state’s investments, the Speaker estimated that the corpus of the trust will have grown to $5.475 billion and generate $40 million each year.
While spending the annual payments allows states to direct these resources to meet current needs, saving some or all of the payments—while still spending the investment earnings on the payments—allows the body of funds to continue to accumulate and compounds the returns that can be earned. For example, if a state invested its annual payment of $144 million (the FY2000 amount for Maryland), it could generate $11.52 million in investment returns annually, assuming an 8% rate of return. This amount could provide permanent funding for a program, initiative, or activity and no general revenue funds would have to be appropriated to support it. At the same time, the body of the first and succeeding years’ principal would continue to accumulate and earn a return on investment.
| Louisiana Tobacco Settlement Trust Fund Options Louisiana lawmakers considered the following revenue projections in deciding how much of the state’s tobacco settlement revenues to preserve and how much to spend annually. In this table, available revenues are the amounts not preserved, plus all interest earned. The table clearly illustrates the tradeoff between spending more earlier and having more revenue available later. Available Revenues Under Savings Scenarios
Assumptions Source: Council for a Better Louisiana, May 1999. |
Issuing Bonds
Another approach affecting the amount and timing of a state’s revenues would be to sell bonds. Maine, New York, Louisiana, and Arkansas are exploring this option. Here a state would get its entire amount of settlement funds at once by issuing bonds that would be repaid out of future payments. The state would receive a reduced amount of money, however, in exchange for taking it in a lump sum up front. Given the risk of decreased payments over time due to volume adjustments and other factors, as well as the higher value of present money over future money, states might find this an attractive option.
The mechanics of issuing bonds can vary, but, in general, a state would sell the revenue stream of the yearly settlement payments to a securities firm for a lump sum. The firm would issue the state-authorized bonds to get the lump sum amount up front for the state. The yearly settlement payments would then go to paying the interest and debt on the bonds.
DECISIONS ON THE SUBSTANTIVE ALLOCATION OF THE REVENUE
While over 500 bills were introduced in state legislatures in 1999 relating to the tobacco settlement, to date little has actually been decided about the ultimate use of those dollars. First, as shown in Table 4, only a small number of bills that were introduced resulted in enacted legislation. Furthermore, of the total number of bills introduced, as well as of those enacted, by far the greatest number have to do with creating trust funds—a mechanism for managing the money rather than actually making use of it. Another group of bills have to do with the federal recoupment issue. So only a relatively small number deal with the uses to which the funds will be put.
Those statutes with a substantive focus that have been enacted tend to prescribe only the broad purposes towards which the money should go, leaving considerable room for further decision making. Many do not specify the actual programs to be funded nor the amount to be appropriated. While some statutes earmark a dollar amount and a time frame to use the funds, others only suggest areas in which the legislature should spend the money, or direct a commission or task force to bring recommendations to the legislature on specific programs the money should go towards.
Nevertheless, it is instructive to look at the actions that were taken in the 1999 sessions. The types of legislation that were introduced, moved through legislatures, and enacted indicate the current parameters of the debate over the use of these funds, and likely indicate where further discussion will occur. For example, many bills died in 1999 because they couldn’t be acted on before the end of session. It is anticipated that many of the issues these bills seek to address, if not the very same bills, will be introduced next session. Moreover, state actions taken to date can provide models for other states that are not as far along in the decision making process or that are looking to direct their settlement payments to particular purposes. The many examples of legislation directing funds to children’s services, for example, will be of interest to those concerned with designing policies for this purpose in other states.
Legislation Focusing on Children’s Services
As shown in Table 4 and Figure 1, legislation that has been introduced and moved to enactment can be grouped into several categories according to the purposes it addresses. Not considering trust funds and recoupment, the largest numbers of enactments allocate the settlement funds for health care services (30) or smoking cessation, education, and prevention (21). Some of these enactments have a general focus while others include a focus on children (for example, directing funds to CHIP or the prevention of smoking among children). Thirteen enactments in 10 states focus specifically on children’s services, and another eight enactments direct funds to K-12 education.
Legislation targeting tobacco growers also saw 13 enactments. Other purposes on which smaller numbers of enactments focus include cancer/medical research; senior services, including long-term care; graduate medical education; and a variety of miscellaneous purposes. Interestingly, although ten bills were introduced to use the funds for tax cuts or tax credits, none of these were enacted.
Below we provide examples of legislation that allocate the tobacco settlement funds to children’s services. The discussion is organized by major category of legislation. For a summary of all legislation considered in 1999 with provisions affecting children, see Attachment 1. For a summary of each state’s activity with regard to tobacco settlement legislation in any category, see Attachment 2.
Health
As noted above, outside of trust funds, the largest number of both introduced and enacted bills would allocate the tobacco settlement funds for health care programs. Approximately 140 health-related bills were introduced in 41 states. Of these, 30 bills were enacted in 21 states.
In general, these bills allocate tobacco settlement funds for indigent care programs, prevention and wellness programs, expanding insurance coverage, and numerous other purposes. Although the settlement was largely a result of the states initially seeking reimbursement for Medicaid and other smoking-related health costs, there have been few bills introduced that specifically allocate money to state Medicaid programs. Instead, most of these bills allocate funds for a range of health purposes. CHIP or other services for children are sometimes enumerated among these purposes.
Legislation in Arizona and West Virginia provides examples of allocating the tobacco settlement funds to a broad range of health purposes, including those affecting children:
In 1998, Arizona enacted Senate Bill 1008d, which directs any money received from a tobacco settlement to be used to implement the provisions of Proposition 203, as approved by voters in 1996. (Proposition 203 raised the state tax on cigarettes and directed the state to use the tax revenue for anti-smoking programs.) Any remaining monies will be deposited in the medically needy account of the tobacco tax and health care fund to expand the premium sharing demonstration project, provide health care services to children as part of CHIP, and provide any other health care services the Legislature deems necessary to meet the health care needs of the state.
West Virginia House Bill 3031 as enacted creates the West Virginia Tobacco Settlement Medical Trust Fund as a special account in the state treasury. This fund will be comprised of 50 percent of all revenues the state receives from the tobacco settlement. The purpose of the fund is to stabilize the state’s health-related programs and delivery systems. Money in the fund will also be used to educate the public about the health risks associated with tobacco use and for the establishment of a program designed to reduce and stop tobacco use, especially by teenagers.
Five states (Florida, Louisiana, Mississippi, Montana, and Pennsylvania) included language in their bills related to the Children’s Health Insurance Program (CHIP), although three of these states did not succeed in passing the legislation. All of these bills would have approp