Tobacco Settlement
States' Allocations of Payments from Tobacco Companies for Fiscal Years 2000 through 2005 Gao ID: GAO-07-534T February 27, 2007In the 1990s, states sued major tobacco companies to obtain reimbursement for health impairments caused by the public's use of tobacco. In 1998, four of the nation's largest tobacco companies signed a Master Settlement Agreement, agreeing to make annual payments to 46 states in perpetuity as reimbursement for past tobacco-related health care costs. Some states have arranged to receive advance proceeds based on the amounts that tobacco companies owe by issuing bonds backed by future payments. This testimony discusses (1) the amounts of tobacco settlement payments that the states received from fiscal years 2000 through 2005, the most recent year for which GAO has actual data, and (2) the states' allocations of these payments. We also include states' projected fiscal year 2006 allocations. The Farm Security and Rural Investment Act of 2002 required GAO to report annually, through fiscal year 2006, on how states used the payments made by tobacco companies. GAO based this testimony on five annual surveys of these 46 states' Master Settlement Agreement payments and how they allocated these payments.
From fiscal year 2000 through 2005, the 46 states party to the Master Settlement Agreement received $52.6 billion in tobacco settlement payments. Of the $52.6 billion total, about $36.5 billion were payments from the tobacco companies and about $16 billion were advance payments which several states had arranged to receive by issuing bonds backed by their future payments from the tobacco companies. The Master Settlement Agreement imposed no restrictions on how states could spend their payments, and as such, the states have chosen to allocate them to a wide variety of activities. Some states told us that they viewed the settlement payments as an opportunity to fund needs that they were not able to fund previously due to the high costs of health care. States allocated the largest portion of their payments to health care--$16.8 billion or 30 percent--which includes Medicaid, health insurance, hospitals, medical technology, and research. States allocated the second largest portion to cover budget shortfalls--about $12.8 billion or about 22.9 percent. This category includes allocations to balance state budgets or reduce deficits that resulted from lower than anticipated revenues, increased mandatory spending, or essential expenditures. Included among the next largest categories are allocations for infrastructure projects, education, debt service on securitized proceeds, and tobacco control.
GAO-07-534T, Tobacco Settlement: States' Allocations of Payments from Tobacco Companies for Fiscal Years 2000 through 2005
This is the accessible text file for GAO report number GAO-07-534T
entitled 'Tobacco Settlement: States' Allocations of Payments from
Tobacco Companies for Fiscal Years 2000 through 2005' which was
released on February 27, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Testimony:
Before the Committee on Health, Education, Labor, and Pensions, U.S.
Senate:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 9:30 a.m. EST:
Tuesday, February 27, 2007:
Tobacco Settlement:
States' Allocations of Payments from Tobacco Companies for Fiscal Years
2000 through 2005:
Statement of Lisa Shames, Acting Director:
Natural Resources and Environment:
GAO-07-534T:
GAO Highlights:
Highlights of GAO-07-534T, a testimony before the Committee on Health,
Education, Labor, and Pensions, U.S. Senate
Why GAO Did This Study:
In the 1990s, states sued major tobacco companies to obtain
reimbursement for health impairments caused by the public‘s use of
tobacco. In 1998, four of the nation‘s largest tobacco companies signed
a Master Settlement Agreement, agreeing to make annual payments to 46
states in perpetuity as reimbursement for past tobacco-related health
care costs. Some states have arranged to receive advance proceeds based
on the amounts that tobacco companies owe by issuing bonds backed by
future payments.
This testimony discusses (1) the amounts of tobacco settlement payments
that the states received from fiscal years 2000 through 2005, the most
recent year for which GAO has actual data, and (2) the states‘
allocations of these payments. We also include states‘ projected fiscal
year 2006 allocations.
The Farm Security and Rural Investment Act of 2002 required GAO to
report annually, through fiscal year 2006, on how states used the
payments made by tobacco companies. GAO based this testimony on five
annual surveys of these 46 states‘ Master Settlement Agreement payments
and how they allocated these payments.
What GAO Found:
From fiscal year 2000 through 2005, the 46 states party to the Master
Settlement Agreement received $52.6 billion in tobacco settlement
payments. Of the $52.6 billion total, about $36.5 billion were payments
from the tobacco companies and about $16 billion were advance payments
which several states had arranged to receive by issuing bonds backed by
their future payments from the tobacco companies.
The Master Settlement Agreement imposed no restrictions on how states
could spend their payments, and as such, the states have chosen to
allocate them to a wide variety of activities. Some states told us that
they viewed the settlement payments as an opportunity to fund needs
that they were not able to fund previously due to the high costs of
health care. States allocated the largest portion of their payments to
health care”$16.8 billion or 30 percent”which includes Medicaid, health
insurance, hospitals, medical technology, and research. States
allocated the second largest portion to cover budget shortfalls”about
$12.8 billion or about 22.9 percent. This category includes allocations
to balance state budgets or reduce deficits that resulted from lower
than anticipated revenues, increased mandatory spending, or essential
expenditures. Included among the next largest categories are
allocations for infrastructure projects, education, debt service on
securitized proceeds, and tobacco control.
Figure: Categories to Which States Allocated Their Tobacco Settlement
Payments And Securitized Proceeds (Fiscal Years 2000-2005):
[See PDF for Image]
Source: GAO analysis of data from state budget offices and their
designees.
[End of figure]
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-534T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Lisa Shames at (202) 512-
3841 or ShamesL@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
I am pleased to be here today to contribute to your deliberation on the
need for the Food and Drug Administration to regulate tobacco products.
Tobacco use is the leading cause of preventable death in the United
States. Most adults who use tobacco started using it between the ages
of 10 and 18. A Surgeon General's report to the Congress concluded that
preventing youth from starting to use tobacco is key to reducing
tobacco-related deaths and disease. The Centers for Disease Control and
Prevention reported a few years ago that, on average, more than 440,000
deaths and $76 billion in medical expenditures are attributable to
cigarette smoking annually. Reducing tobacco-related deaths and the
incidence of disease, along with their associated costs, is a
significant public health challenge.
Beginning in the mid-1990s, states sued the major tobacco companies for
reimbursement of the cost of health impairments caused by the public's
use of tobacco. The states alleged that the industry had violated
antitrust and consumer protection laws, withheld information about the
adverse health effects of tobacco, manipulated nicotine levels to keep
smokers addicted, and conspired to keep less risky and less addictive
tobacco products out of the market. Forty six states,[Footnote 1] along
with the District of Columbia and the five U.S. territories, negotiated
and signed a settlement agreement, called the Master Settlement
Agreement, with four of the largest tobacco companies--Phillip Morris,
USA; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco
Corporation; and Lorillard Tobacco company. The settlement was the
largest civil settlement in U.S. history. It committed the tobacco
companies to pay the 46 states an estimated $200 billion[Footnote 2]
over the first 25 years of the agreement, with payments to continue in
perpetuity. In addition, it restricted the tobacco companies' marketing
and advertising practices, among other things.
Today, I will focus on how the 46 states party to the Master Settlement
Agreement have allocated their settlement payments. Specifically, I
will discuss (1) the amounts of Master Settlement Agreement payments
that the states received from fiscal years 2000 through 2005, the most
recent year for which we have actual data, and (2) the states'
allocations of these payments. The Farm Security and Rural Investment
Act of 2002 (the 2002 Farm Bill) required GAO to report annually, from
fiscal years 2002 through 2006, on how these 46 states used their
Master Settlement Agreement payments.[Footnote 3] My testimony is based
primarily on these annual reports.
Our reports were based on our yearly surveys of the 46 states. Each
year we asked the states to report (1) the amount of payments they
received for the current state fiscal year, (2) the amount of payments
they expected to receive for the next state fiscal year, and (3) their
allocations of these payments among 13 spending categories. We
independently corroborated the states' data to the extent possible by
analyzing budget-related and legislative documents, and interviewing
state budget officials, staff from state attorneys generals' offices
and governors' offices and others as needed to clarify information. We
performed our work in accordance with generally accepted government
auditing standards.
In summary, from fiscal year 2000 through fiscal year 2005, the states
received $52.6 billion in Master Settlement Agreement payments from the
tobacco companies in amounts that varied from state to state and from
year to year. Of the $52.6 billion, about $36.5 billion were payments
from the tobacco companies and about $16 billion were advance payments
(securitized proceeds) that 15 states arranged to receive by issuing
bonds backed by their future payments from the tobacco companies. The
annual payments from the tobacco companies' are adjusted based on
several factors that include fluctuations in the volume of cigarettes
sales, inflation, and other variables, such as the participating
companies' shares of the tobacco market. Also, each state's share of
the tobacco companies' annual payments is a fixed percentage based on
smoking-related health care costs, which reflect population and smoking
prevalence.
The Master Settlement Agreement imposed no restrictions on how states
could spend these settlement payments and, as such, the states have
allocated their payments to a wide variety of activities. Some states
told us that they viewed the settlement payments as an opportunity to
fund needs that they were not able to fund previously due to the high
costs of health care. States allocated the largest portion of their
payments--30 percent or $16.8 billion--toward health care activities
such as Medicaid, health insurance, hospitals, medical technology, and
research. States allocated the second largest portion of their
payments--about 23 percent or $12.8 billion--to help balance state
budgets or reduce deficits that resulted from lower than anticipated
revenues, increased mandatory spending, or essential expenditures.
In descending order, the next largest categories where states used
their tobacco settlement payments were general purposes, infrastructure
projects, education, debt service on securitized funds, and tobacco
control.
States' Annual Tobacco Settlement Payments Have Varied:
The 46 states reported receiving a total of nearly $52.6 billion in
payments in varying annual amounts from fiscal year 2000 through fiscal
year 2005. Of the nearly $52.6 billion, about $36.5 billion were
payments from the tobacco companies and about $16 billion were
securitized proceeds that 15 states arranged to receive, as shown in
table 1.
Table 1: Master Settlement Agreement Payments and Securitized Proceeds
Received by the 46 States (Fiscal Years 2000-2005):
Fiscal year: 2000-2001;
Payments: $13,200,000,000;
Securitized proceeds: $928,900,000;
Total: $14,128,900,000.
Fiscal year: 2002;
Payments: 6,238,393,496;
Securitized proceeds: 3,838,376,465;
Total: 10,076,769,961.
Fiscal year: 2003;
Payments: 6,306,329,459;
Securitized proceeds: 6,482,764,469;
Total: 12,789,093,928.
Fiscal year: 2004;
Payments: 5,340,128,223;
Securitized proceeds: 4,374,698,723;
Total: 9,714,826,946.
Fiscal year: 2005;
Payments: 5,453,132,303;
Securitized proceeds: 389,977,667;
Total: 5,843,109,970.
Total;
Payments: $36,537,983,481;
Securitized proceeds: $16,014,717,324;
Total: $52,552,700,805.
Sources: GAO-01-851, GAO-03-407, GAO-04-518, GAO-05-312, GAO-06-502,
state budget offices or their designees, and GAO analysis.
Note: This table does not include payments to cities and counties in
California and New York.
[End of table]
The tobacco companies' annual payments are adjusted based on several
factors contained in the Master Settlement Agreement that include
fluctuations in the volume of cigarette sales, inflation, and other
variables, such as the participating companies' share of the tobacco
market. Declining tobacco consumption alone would result in lower
Master Settlement Agreement payments than originally expected. Tobacco
consumption has declined since the Master Settlement Agreement was
signed in 1998--by about 6.5 percent in 1999 alone--mostly due to one-
time increases in cigarette prices by the tobacco companies after the
agreement took effect. Analysts project that, in the future, tobacco
consumption will decline by an average of nearly 2 percent per
year.[Footnote 4] As a result, tobacco consumption is estimated to
decline by 33 percent between 1999 and 2020.
However, the Master Settlement Agreement also includes an inflation
adjustment factor that some analysts have estimated increases payments
more than any decreases caused by reduced consumption. The inflation
adjustment equals the actual percentage increase in the Consumer Price
Index for the preceding year or 3 percent, whichever is greater. The
effect of these compounding increases is potentially significant,
especially given that the payments are made in perpetuity. Assuming a 3-
percent inflation adjustment and no decline in base payments,
settlement amounts received by states would double every 24 years.
Also, several tobacco companies' interpretation of the provision that
addresses participants' market share led them to lower their payments
in 2006. Under this provision, an independent auditor determined that
participating tobacco companies lost a portion of their market share to
non-participating companies. An economic research firm determined that
the Master Settlement Agreement was a significant factor in these
market share losses. Based on these findings, several participating
companies reduced their fiscal year 2006 payments by about a total of
about $800 million. Many states have filed suit to recover these funds.
Each state's share of the tobacco companies' total annual payments is a
fixed percentage that was negotiated during the settlement. These
percentages are based on two variables related to each state's smoking-
related health care costs, which reflect each state's population and
smoking prevalence. In general, the most populous states receive a
larger share of the tobacco companies' total annual payments than the
less populous states. For example, California and New York each receive
about 13 percent, while Alaska and Wyoming each receive less than 1
percent. However, these percentages are not strictly proportional to
population.
In addition to the annual payments states receive, the Master
Settlement Agreement requires that a Strategic Contribution Fund
payment begin in 2008 and continue through 2017. The base amount of
each year's Strategic Contribution Fund payment is $861 million, which
will be adjusted for volume and inflation and shared among the states.
Strategic Contribution Fund payments are intended to reflect the level
of the contribution each state made toward final resolution of their
lawsuit against the tobacco companies. They will be allocated to the
states based on a separate formula developed by a panel of former state
attorneys general.
States Are Exercising Their Flexibility to Use Tobacco Settlement
Payments for a Wide Variety of Activities:
The Master Settlement Agreement imposed no restrictions on how states
could spend their settlement payments and, as such, the states have
allocated their payments[Footnote 5] to a wide variety of activities,
with health-related activities the largest among them. As part of their
decision making on how to spend their payments, some states established
planning commissions and working groups to develop recommendations and
strategic plans for allocating their states' payments. In six states,
voter-approved initiatives restricted use of the funds and, in 30
states, the legislatures enacted laws restricting their use.
Overall, we identified 13 general categories to which states have
allocated their Master Settlement Agreement payments, as shown in table
2. Appendix I provides more details on the categories to which states
allocated their payments.
Table 2: Amount and Percentage of States' Allocations of Master
Settlement Agreement Payments and Securitized Proceeds by Category,
Fiscal Years 2000-2005:
Dollars in millions and percent.
Category: Health;
Dollars: $16,807;
Percent: 30.0.
Category: Budget shortfalls;
Dollars: 12,806;
Percent: 22.9.
Category: Unallocated;
Dollars: 6,639;
Percent: 11.9.
Category: General purposes;
Dollars: 3,955;
Percent: 7.1.
Category: Infrastructure;
Dollars: 3,350;
Percent: 6.0.
Category: Education;
Dollars: 3,078;
Percent: 5.5.
Category: Debt service on securitized funds;
Dollars: 3,005;
Percent: 5.4.
Category: Tobacco control;
Dollars: 1,943;
Percent: 3.5.
Category: Economic development for tobacco regions;
Dollars: 1,490;
Percent: 2.7.
Category: Social services;
Dollars: 961;
Percent: 1.7.
Category: Reserves/rainy day funds;
Dollars: 810;
Percent: 1.4.
Category: Tax reductions;
Dollars: 616;
Percent: 1.1.
Category: Payments to tobacco growers;
Dollars: 521;
Percent: 0.9.
Total;
Dollars: $55,981;
Percent: 100.1.
Source: GAO analysis of data from state budget offices and their
designees.
Note: Percentages do not total to 100 due to rounding. Also, states'
allocations do not match the payment amounts on an annual basis because
states have carried over funds from one year to the next and earned
interest on their payments.
[End of table]
States allocated the largest portion of their payments--about $16.8
billion, or 30 percent of the total payments--to health-related
activities. To a closely related category--tobacco control--states
allocated $1.9 billion, or 3.5 percent of their total payments. States
allocated the second largest portion of their payments--about $12.8
billion or 22.9 percent--to cover budget shortfalls. Some states told
us that they viewed the settlement payments as an opportunity to fund
needs that they were not able to fund previously due to the high cost
of health care. Figure 1 illustrates the relative magnitude of the
categories receiving allocations.
Figure 1: States' Allocations of Master Settlement Agreement Payments
and Securitized Proceeds by Category, as a Percent of Total
Allocations, Fiscal Years 2000-2005:
[See PDF for image]
Source: GAO analysis of data from state budget offices and designees.
Note: Percentages do not total to 100 due to rounding.
[A] The "other" category includes economic development for tobacco
regions, social services, reserves/rainy day funds, tax reductions, and
payments to tobacco growers.
[End of figure]
The seven largest categories of allocations, in descending order, are
health, budget shortfalls, general purposes, infrastructure, education,
debt service on securitized funds, and tobacco control. States'
allocations to these categories have varied considerably from year to
year--with some categories showing wide fluctuations. For example, for
budget shortfalls, the states allocated from 2 to 44 percent of the
total payments. On the other hand, for health care, the states
allocated from 20 to 38 percent of the total payments. Figure 2 shows
these annual changes for these seven categories.
Figure 2: States' Allocations of Combined Master Settlement Agreement
Payments and Securitized Proceeds to Seven Categories, Fiscal Years
2000 through 2005; and Expected Allocations for Fiscal Year 2006:
[See PDF for image]
Source: GAO-06-502 and GAO analysis of data from state budget offices
and their designees.
[A] We did not obtain data for budget shortfalls and debt service on
securitized funds for fiscal years 2000-01.
[End of figure]
Information about how states have allocated their Master Settlement
Agreement payments follows.
Health. From fiscal years 2000 through 2005, states allocated about
$16.8 billion of their Master Settlement Agreement payments to a
variety of health care programs, including Medicaid; health insurance;
cancer prevention, screening, and treatment; heart and lung disease;
and drug addiction. Over this period, the amounts states allocated to
health care ranged from about $1.9 billion in fiscal year 2005 to
nearly $4.8 billion in fiscal years 2000-2001 combined.
In fiscal year 2005, the most recent year for which we collected actual
data, 36 of the 46 states allocated some of their Master Settlement
Agreement payments to health care. Of the 36 states, 5 states allocated
two-thirds or more of their payments to health care; 19 states
allocated one-third to two-thirds; and 12 states allocated less than
one-third. Ten states did not allocate any of their payments to health
care activities. In fiscal year 2005, Pennsylvania, Illinois, Michigan,
and Maryland allocated larger amounts to health care than the other
states. Pennsylvania allocated over $326 million of its payments to
health care programs for adult health insurance, uncompensated care,
medical assistance for workers with disabilities, and community medical
assistance. Illinois allocated nearly $204 million of its payments to
health care, citing Medicaid drugs as a key program that would receive
funds. Michigan allocated over $185 million of its payments to areas
such as elder pharmaceutical assistance and Medicaid support programs.
Maryland allocated nearly $100 million of its payments to areas such as
Medicaid; cancer prevention, screening, and treatment; heart and lung
disease; and drug addiction.
Budget Shortfalls. From fiscal years 2000 through 2005, states
allocated about $12.8 billion of their Master Settlement Agreement
payments to budget shortfalls. Over this period, the amounts the states
allocated to budget shortfalls ranged from a high of about $5.1
billion, or 44 percent of the total payments in fiscal year 2004, to
$261 million, or 4 percent in fiscal year 2005. In fiscal year 2005,
only 4 of the 46 states allocated some of their Master Settlement
Agreement payments to budget shortfalls. Of these states, only Missouri
allocated more than one-third of its total payments--about $72 million-
-to budget shortfalls.
General Purposes. From fiscal years 2000 through 2005, states allocated
about $4 billion of their Master Settlement Agreement payments to
general purposes, including law enforcement, community development
activities, technology development, emergency reserve funds, and legal
expenses for enforcement of the Master Settlement Agreement. Over this
period, the amounts states allocated to general purposes ranged from
$623 million, or about 5 percent of the total payments they allocated
in fiscal years 2000-2001 combined, to about $1.1 billion, or 8 percent
in fiscal year 2003.
In fiscal year 2005, 27 of the 46 states allocated some of their Master
Settlement Agreement payments to general purposes. Of these 27 states,
4 states allocated two-thirds or more of their total payments to
general purposes; 2 states allocated one-third to two-thirds; and 21
states allocated less than one-third. Nineteen states did not allocate
any of their payments to general purposes. Massachusetts, Tennessee,
Connecticut, and Colorado allocated the largest amounts to general
purposes in fiscal year 2005. Massachusetts allocated nearly $255
million of its payments to general purposes for its General Fund,
Tennessee allocated nearly $157 million of its payments to its General
Fund, and Connecticut allocated about $113 million of its payments to
its General Fund. Colorado allocated about $64.5 million of its
payments to general purposes, but did not specify which programs would
receive funds.
Infrastructure. From fiscal years 2000 through 2005, states allocated
about $3.4 billion of their Master Settlement Agreement payments to
infrastructure-related activities, including capital maintenance on
state owned facilities, regional facility construction, and water
projects. Over this period, the amounts states allocated to
infrastructure have ranged from $31 million, or about 1 percent of the
total payments in fiscal year 2005, to about $1.2 billion, or 10
percent in fiscal year 2002.
In fiscal year 2005, 5 of the 46 states allocated some of their Master
Settlement Agreement payments to infrastructure. Of these 5 states,
North Dakota was the only state that allocated more than one-third of
its total payments to infrastructure. North Dakota, Hawaii, and
Kentucky allocated the largest amounts to infrastructure in fiscal year
2005. North Dakota allocated about $10.5 million of its payments to
infrastructure for work on water projects. Hawaii allocated
approximately $10 million of its payments to infrastructure, citing
debt service on University of Hawaii revenue bonds issued for the new
Health and Wellness Center as a primary program that would receive
funds. Kentucky allocated $6.1 million of its payments to service debt
on such things as water resource development and a Rural Development
Bond Fund.
Education. From fiscal years 2000 through 2005, states allocated about
$3 billion of their Master Settlement Agreement payments to education
programs, including early childhood development; special education;
scholarships; after-school services; and reading programs. Over this
period, the amounts states allocated to education ranged from between
$280 million or 2 percent of the total payments in fiscal year 2004, to
over $1.1 billion, or 9 percent, in fiscal year 2002.
In fiscal year 2005, 16 of the 46 states allocated some of the Master
Settlement Agreement payments to education. Of the 16 states, only New
Hampshire allocated more than two-thirds of its total payments to
education; 4 states allocated between one-third and two-thirds to
education; and 11 states allocated less than one-third. Thirty states
did not allocate any of their payments to education-related activities.
Michigan, New Hampshire, Nevada, and Colorado allocated the largest
amounts to education in fiscal year 2005. Michigan allocated over $99
million of its payments to education for Merit Award scholarships and
tuition incentive grants for higher education students; the Michigan
Educational Assessment Program testing for K-12 students, nursing
scholarships, the Michigan Education Savings Plan, and general higher
education support. New Hampshire allocated $40 million of its payments
to areas such as an Education Trust Fund, which distributes grants to
school districts in the state. Nevada allocated about $33 million of
its payments to education programs, citing a scholarship program for
Nevada students attending Nevada's higher education institutions as a
key recipient. Colorado allocated over $16 million of its payments to
education, including its Read to Achieve program.
Debt Service on Securitized Funds. From fiscal years 2000 through 2005,
states allocated about $3 billion of their Master Settlement Agreement
payments to servicing debt on securitized funds. This category consists
of amounts allocated to servicing the debt issued when a state
securitizes all or a portion of its Master Settlement Agreement
payments. Over this period, the amounts states allocated for this
purpose have ranged from $271 million, or about 2 percent of the total
payments in fiscal year 2002, to about $1.4 billion, or about 24
percent, in fiscal year 2005. In fiscal year 2005, four states--
California, Rhode Island, South Carolina, and Wisconsin--allocated 100
percent of their Master Settlement Agreement payments to servicing debt
on securitized funds, while New Jersey allocated just under 100
percent. In addition, Alaska, Louisiana, and South Dakota, allocated
more than half of their payments for this purpose. In fiscal year 2005,
California and New York allocated the largest amounts to servicing debt
on securitized funds.
Tobacco Control. From fiscal years 2000 through 2005, states allocated
about $1.9 billion of their Master Settlement Agreement payments to
tobacco control programs, including prevention, cessation, and counter
marketing. Over this period, the amounts states allocated to tobacco
control ranged from $790 million, or about 6 percent of the total
payments in fiscal years 2000-2001 combined, to $223 million, or about
2 percent, in fiscal year 2004.
In fiscal year 2005, 34 of the 46 states allocated some of their Master
Settlement Agreement payments to tobacco control programs. Of the 34
states, Wyoming allocated more than one-third of its payments to
tobacco control, while 33 states allocated less than one-third. Twelve
states did not allocate any of their payments to tobacco control-
related programs. Pennsylvania and Ohio allocated more than the other
states to tobacco control--about $44 million and $37 million,
respectively--in fiscal year 2005.
Mr. Chairman, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other Members of the Committee
may have.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact Lisa Shames, Acting
Director, Natural Resources and Environment at (202) 512-3841 or
ShamesL@gao.gov. Key contributors to this statement were Charles M.
Adams, Bart Fischer, Jennifer Harman, Natalie Herzog, Alison O'Neill,
and Beverly Peterson.
[End of section]
Appendix I: Categories of States' Allocations:
To standardize the information reported by the 46 states, we developed
the following categories and definitions for the program areas to which
states allocated their payments.
Budget shortfalls: This category is comprised of amounts allocated to
balance state budgets and close gaps or reduce deficits resulting from
lower than anticipated revenues or increased mandatory or essential
expenditures.
Debt service on securitized funds: This category consists of amounts
allocated to service the debt on bonds issued when the state
securitized all or a portion of its Master Settlement Agreement
payments.
Economic development for tobacco regions: This category is comprised of
amounts allocated for economic development projects in tobacco states
such as infrastructure projects, education and job training programs,
and research on alternative uses of tobacco and alternative crops. This
category includes projects specifically designed to benefit tobacco
growers as well as economic development that may serve a larger
population within a tobacco state.
Education: This category is comprised of amounts allocated for
education programs such as day care, preschool, Head Start, early
childhood education, elementary and secondary education, after-school
programs, and higher education. This category does not include money
for capital projects such as construction of school buildings.
General purposes: This category is comprised of amounts allocated for
attorneys' fees and other items, such as law enforcement or community
development, which could not be placed into a more precise category.
This category also includes amounts allocated to a state's general fund
that were not earmarked for any particular purpose. Amounts used to
balance state budgets and close gaps or reduce deficits should be
categorized as budget shortfalls rather than general purposes.
Health: This category is comprised of amounts allocated for direct
health care services; health insurance, including Medicaid and the
State Children's Health Insurance Program (SCHIP); hospitals; medical
technology; public health services; and health research. This category
does not include money for capital projects such as construction of
health facilities.
Infrastructure: This category is comprised of amounts allocated for
capital projects such as construction and renovation of health care,
education, and social services facilities; water and transportation
projects; and municipal and state government buildings. This category
includes retirement of debt owed on capital projects.
Payments to tobacco growers: This category is comprised of amounts
allocated for direct payments to tobacco growers, including subsidies
and crop conversion programs.
Reserves/rainy day funds: This category is comprised of amounts
allocated to state budget reserves such as rainy day and budget
stabilization funds not earmarked for specific programs. Amounts
allocated to reserves that are earmarked for specific areas are
categorized under those areas--e.g., reserve amounts earmarked for
economic development purposes should be categorized in the economic
development category.
Social services: This category is comprised of amounts allocated for
social services such as programs for the aging, assisted living, Meals
on Wheels, drug courts, child welfare, and foster care. This category
also includes amounts allocated to special funds established for
children's programs.
Tax reductions: This category is comprised of amounts allocated for tax
reductions such as property tax rebates and earned income tax credits.
Tobacco control: This category is comprised of amounts allocated for
tobacco control programs such as prevention, including youth education,
enforcement, and cessation services.
Unallocated: This category is comprised of amounts not allocated for
any specific purpose, such as amounts allocated to dedicated funds that
have no specified purpose; amounts states chose not to allocate in the
year Master Settlement Agreement payments were received that will be
available for allocation in a subsequent fiscal year; interest earned
from dedicated funds not yet allocated; and amounts that have not been
allocated because the state had not made a decision on the use of the
Master Settlement Agreement payments.
FOOTNOTES
[1] The four states that are not party to the Master Settlement
Agreement--Florida, Minnesota, Mississippi, and Texas--reached earlier,
individual settlements with the tobacco companies.
[2] This original estimate does not take into account adjustments in
tobacco companies' payments that have and will occur.
[3] GAO, Tobacco Settlement: States' Allocations of Phase II Funds, GAO-
03-262R (Washington, D.C.: Dec. 3, 2002); GAO, Tobacco Settlement:
States' Allocations of Fiscal Years 2002 and 2003 Master Settlement
Agreement Payments, GAO-03-407 (Washington, D.C.: Feb. 28, 2003); GAO,
Tobacco Settlement: States' Allocations of Fiscal Year 2003 and
Expected Fiscal Year 2004 Payments, GAO-04-518 (Washington, D.C.: Mar.
19, 2004); GAO, Tobacco Settlement: States' Allocations of Fiscal Year
2004 and Expected Fiscal Year 2005 Payments, GAO-05-312 (Washington,
D.C.: Mar. 21, 2005); and GAO, Tobacco Settlement: States' Allocations
of Fiscal Year 2005 and Expected Fiscal Year 2006 Payments, GAO-06-502
(Washington, D.C.: April 11, 2006).
[4] Cigarette consumption peaked in 1981 and has been declining since.
[5] When states allocate payments, they may include carry-over funds
from prior years and interest earned; therefore, in any one year,
states' payments and securitized proceeds may not equal payments
allocated for spending.
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site.
To have GAO e-mail you a list of newly posted products every afternoon,
go to www.gao.gov and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548:
