State Studies Uses for Tobacco Money

By John Commins The Times & Free Press Nashville Bureau June 7, 1999

NASHVILLE -- What to do with Tennessee's $4.8 billion share of the historic $206 billion multi-state settlement with the tobacco industry will be a hot topic in the coming months as lawmakers try to ease the state's ongoing revenue woes.

"There are so many needs to cover and so many people will be out looking for money, so I expect there'll be considerable discussion about it," said Senate Majority Leader Ward Crutchfield, D-Chattanooga.

Last month, lawmakers left town after patching together a "Band-Aid" $16.5 billion budget for fiscal 2000 that used $170 million in one-time money to pay for ongoing expenses.

When the Legislature returns to Nashville, possibly for another special session on tax reform in November, lawmakers know they will face a revenue shortfall of at least $150 million for fiscal 2001. Sitting there like a fatted calf will be the $195 million that the tobacco settlement "Master Plan" is scheduled to dole out to Tennessee every year in perpetuity.

"I'm afraid the temptation will be too great not to apply it to immediate needs," said Rep. Bobby Wood, R-Harrison, a member of the House Finance Committee.

According to the terms of the contract, Tennessee was to have already received about $58 million from the settlement. That initial payment was delayed because of a "finality" clause dealing with ongoing lawsuits against Philip Morris, RJR Nabisco, Brown & Williamson, and Lorillard, the four tobacco companies participating in the settlement. As a result, Tennessee should get checks for $58 million and $156 million by June 30, 2000.

In 2001, Tennessee would get $156 million, and the rate would grow until it reaches $195 million in 2018, and continue in perpetuity. In addition, a separate $11 billion trust fund was established to help tobacco farmers in Tennessee and neighboring tobacco states. To date, however, Tennessee has not seen one dime from the settlement.

"My concern is that we'll never get the money," Rep. Wood said. "There's always going to be something new that puts it a little further down the road. That's why I've never depended in on it for any revenue needs we have."

Some legislators and public health advocates want the settlement money earmarked for TennCare and other expenditures related to public health.

"I don't know if they need all of it, but you could make a pretty good case for a good bit of the money going to TennCare," Sen. Crutchfield said.

However, Republican Gov. Don Sundquist does not want to pay for recurring expenses with the windfall. Instead, the governor has suggested putting at least part of the settlement money in a trust fund and using the interest generated to fund public school construction.

"We should never vote it to the general fund. I will fight that," Gov. Sundquist said. "I've talked to the legislative leadership in the past about making sure we preserve it in some way and invest it."

While the governor will make recommendations to the General Assembly on spending priorities, he cannot dictate how the money is to be spent because the Tennessee Constitution gives the Legislature authority to set an annual budget to offset the expenses of state government.

Nevertheless, officials said relying on "unsecured" master plan money to fund ongoing budget needs is risky.

"We shouldn't use this money for everyday expenses because it carries a certain degree of uncertainty. It's just not a prudent use of the money," said Courtney Pearre, former legal counsel for Gov. Sundquist who was involved in the negotiations finalizing the tobacco settlement.

"The money is subject to adjustments. It could go up a maximum 3 percent a year for inflation. But it's also based on current consumption of cigarettes, and by all indications, with the price increase and less advertising that are part of the settlement, I would assume fewer people over time are going to smoke.

"Nearly every state that's done anything with settlement money has taken that approach, which is prudent management," Mr. Pearre said.

In Mississippi, the first state to settle a lawsuit with the tobacco industry, the state Legislature created a $280 million trust fund this year, and decreed that it would only spend the fund's interest on state-run health care programs.

The fund is expected to generate $50 million for a variety of health care programs, including health care centers for the poor and indigent, maternal and child health care programs and reimbursements to trauma centers for charity care, said Nancy East, with the Mississippi Attorney General's office.

In addition, Mississippi's settlement called for an additional $62 million from tobacco companies to fund a two-year pilot program to reduce teen smoking.

The National Conference of State Legislatures compiled a list of legislative proposals of the 46 states that settled with the tobacco industry, and found that about one in three bills on the subject called for establishing a general trust fund for the money.

Sen. David Fowler, R-Signal Mountain, said the state has to remember the taxpayer when it starts talking about trust funds during a time of fiscal straits.

"I don't know if I would have any objection to holding some of the money and accumulating some of it for future purposes. At the same time, I don't know we should be going out here raising taxes and taking more from citizens pockets while the government accumulates $200 million a year.

"If it's needed to shore up an existing program like TennCare, so be it," Sen. Fowler said. "But I don't want to create new programs that are going to create an additional tax burden."

In the days after the settlement agreement was announced, a cadre of public health advocacy groups called on the state to earmark $40 million a year to reopen TennCare rolls to uninsured adults and $125 million for community-based long-term care for the elderly and disabled.

"In some states, there's been conflict within the pubic health community over how to use the money. Here, we're seeing significant consensus that people want money for TennCare and for long-term care," said Gordon Bonnyman, a public health advocate with the Tennessee Justice Center.

"We have people who need long-term care from the lifelong effects of tobacco use, and the money ought to be used to provide long-term services they need."

Mr. Bonnyman said the public health advocates want at least a portion of the long-term care money put in a trust fund.

"Since those services are so under developed in Tennessee, rather than dump a whole lot out there and not spend it wisely, we should put it in a trust fund to be used as the services are developed."

He said that some of the money also needs to go towards anti-smoking and smoking abatement programs aimed at teen-agers.

"A middle-aged person is not going to take up smoking. Children and youth have been the targeted age group by the tobacco industry, and that's why they have to be the focus of our efforts," Mr. Bonnyman said. "This is a historic opportunity for us to do the right thing."

The Chattanooga Publishing Co.