[Senate Hearing 108-1015]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 108-1015

                           STATE SPENDING OF 
                      TOBACCO SETTLEMENT REVENUES

=======================================================================

                                HEARING

                               BEFORE THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 12, 2003

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation
                             
                             
                             
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South 
CONRAD BURNS, Montana                    Carolina, Ranking
TRENT LOTT, Mississippi              DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas          JOHN D. ROCKEFELLER IV, West 
OLYMPIA J. SNOWE, Maine                  Virginia
SAM BROWNBACK, Kansas                JOHN F. KERRY, Massachusetts
GORDON H. SMITH, Oregon              JOHN B. BREAUX, Louisiana
PETER G. FITZGERALD, Illinois        BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada                  RON WYDEN, Oregon
GEORGE ALLEN, Virginia               BARBARA BOXER, California
JOHN E. SUNUNU, New Hampshire        BILL NELSON, Florida
                                     MARIA CANTWELL, Washington
                                     FRANK R. LAUTENBERG, New Jersey
      Jeanne Bumpus, Republican Staff Director and General Counsel
             Robert W. Chamberlin, Republican Chief Counsel
      Kevin D. Kayes, Democratic Staff Director and Chief Counsel
                Gregg Elias, Democratic General Counsel
                            
                            
                            
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 12, 2003................................     1
Statement of Senator Lautenberg..................................    37
    Prepared statement...........................................    37
Statement of Senator Lott........................................    39
Statement of Senator McCain......................................     1
    Prepared statement...........................................     2
Statement of Senator Nelson......................................    47

                               Witnesses

Durbin, Hon. Richard, U.S. Senator from Illinois.................    42
    Prepared statement...........................................    42
Healton, Dr. Cheryl G., President and CEO, American Legacy 
  Foundation.....................................................     3
    Prepared statement...........................................     5
Hudson, Hon. Deborah, Chair, Revenue and Finance Committee, 
  Delaware House of Representatives, On behalf of the National 
  Conference of State Legislatures...............................    16
    Prepared statement...........................................    19
Moore, Hon. Mike, Attorney General, State of Mississippi.........    30
    Prepared statement...........................................    33
Myers, Matthew, President, Campaign for Tobacco-Free Kids........     8
    Prepared statement...........................................    10
Scheppach, Raymond C., Executive Director, National Governors 
  Association....................................................    24
    Prepared statement...........................................    25

                                Appendix

Article dated November 14, 2003 from MMWR Weekly entitled 
  ``Tobacco Use Among Middle and High School Students--United 
  States, 2002''.................................................    65
Letter dated November 14, 2003 to Hon. John McCain from Cheryl G. 
  Helton, Dr.P.H., President and CEO, American Legacy Foundation.    64
Letter dated November 24, 2003 to Hon. John McCain from John F. 
  Scruggs, Vice President, Government Affairs, Altria Group, Inc.    70
Letter dated October 17, 2003 to Hon. Dennis Eckhart, Senior 
  Assistant Attorney General, State of California from Howard A. 
  Willard III, Senior Vice President, Youth Smoking Prevention, 
  Philip Morris USA..............................................    73
Ross, Sheila M., Washington Representative, Alliance for Lung 
  Cancer Advocacy, Support and Education (ALCASE), prepared 
  statement......................................................    62
Seffrin, Ph.D., John R., Chief Executive Officer, American Cancer 
  Society, prepared statement....................................    59

 
                           STATE SPENDING OF 
                      TOBACCO SETTLEMENT REVENUES

                              ----------                              


                      WEDNESDAY, NOVEMBER 12, 2003

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. Today's hearing gives the 
Committee an opportunity to learn more about how states are 
spending revenues derived from the $247 billion Master 
Settlement Agreement, MSA, that was reached in 1998 between the 
states and the Nation's four largest tobacco companies. As this 
month marks the 5-year anniversary of the MSA, now is an 
appropriate time to revisit the effects of the agreement.
    I would like to have our witnesses come forward now.
    In the U.S. alone, an estimated 400,000 people die each 
year as a result of a smoking-related illness, which equates to 
approximately 1,200 smoking-related deaths per day. Nearly 
2,000 children start smoking each day. Sixty percent of smokers 
in this country begin before the age of 14, and nearly 90 
percent become addicted by age 19. While the Surgeon General 
estimates that 75 percent of smokers want to quit, only 
slightly over 2 percent actually succeed each year. Globally, 
the World Health Organization estimates that eight out of a 
hundred people who are currently alive will die from smoking.
    These statistics underscore the importance of both 
investing in tobacco prevention programs and preventing 
targeted tobacco marketing designed to allure our children. The 
MSA settled lawsuits filed by numerous states seeking 
reimbursement for decades of healthcare expenditures on 
tobacco-related illnesses and deaths. While the MSA does not 
direct how states allocate their settlement payments, one of 
the most recurring and dominant refrains of state officials 
pursuing litigation was the critical need to reduce the use of 
tobacco products by our youth. In fact, several of the recitals 
set forth in the beginning of the MSA expressly indicate the 
settling state's intention to dedicate significant MSA fundings 
to the reduction of youth smoking.
    In addition, in a resolution that was passed in 1999 and 
2001 by the members of the National Governors Association, the 
Nation's Governors committed to spending, ``a significant 
portion of the settlement funds on smoking-cessation 
programs.'' However, the state legislatures have committed 
their settlement revenues for other purposes. The NGA's 
promises have eroded over time. This fact is most apparent in 
its 2003 resolution that omits any reference to spending 
settlement funds on smoking-cessation programs.
    The Campaign for Tobacco-Free Kids is expected today to 
release a report that confirms that the vast majority of states 
are failing to live up to their promises to fund tobacco-
related programs. The report will show that only four states 
are funding tobacco prevention programs at the minimum 
recommended level suggested by the U.S. Centers for Disease 
Control, a level that typically amounts to only a fraction of a 
state's overall tobacco revenue. Despite the nearly $20 billion 
the states expect to receive from the MSA in Fiscal Year 2004, 
states will spend less than 3 percent of that total on tobacco 
prevention programs, which is less than half the CDC's 
recommended funding level.
    We are all fully aware of the budget shortfalls that are 
being experienced by the states, but isn't an ounce of 
prevention better than a pound of cure, from both a long-term 
economic perspective and a moral perspective? I'd like to 
better understand why states are, to a large degree, ignoring 
the problem of youth smoking.
    The Surgeon General testified in the year 2000, before this 
Committee, that smoking prevention programs work and that 
proper funding of these programs could cut smoking rates in 
half by 2010. I believe that the MSA settlement revenues may be 
our best chance to dramatically reduce smoking rates, 
especially among our children.
    Before we proceed any further, I want to mention my 
disappointment that the U.S. Department of Health and Human 
Services declined our invitation to have the CDC appear today. 
Perhaps that's an indication of the Department of Health and 
Human Services' involvement and interest in this issue.
    [The prepared statement of Senator McCain follows:]

   Prepared Statement of Hon. John McCain, U.S. Senator from Arizona
    Good morning. Today's hearing gives the Committee an opportunity to 
learn more about how states are spending revenues derived from the $247 
billion Master Settlement Agreement (MSA) that was reached in 1998 
between the states and the Nation's four largest tobacco companies. As 
this month marks the five-year anniversary of the MSA, now is an 
appropriate time to revisit the effects of the agreement.
    In the U.S. alone, an estimated 400,000 people die each year as a 
result of a smoking-related illness, which equates to approximately 
1,200 smoking-related deaths per day. Nearly 2,000 kids start smoking 
each day. Sixty percent of smokers in this country begin before the age 
of 14, and nearly 90 percent become addicted by age 19. While the 
Surgeon General estimates that 75 percent of smokers want to quit, only 
slightly over two percent actually succeed each year. Globally, the 
World Health Organization estimates that eight out of 100 people who 
are currently alive will die from smoking. These statistics underscore 
the importance of both investing in tobacco prevention programs, and 
preventing targeted tobacco marketing designed to lure our children.
    The MSA settled lawsuits filed by numerous states seeking 
reimbursement for decades of health-care expenditures on tobacco-
related illnesses and deaths. While the MSA does not direct how states 
allocate their settlement payments, one of the most recurring and 
dominant refrains of state officials pursuing the litigation was the 
critical need to reduce the use of tobacco products by our youth. In 
fact, several of the recitals set forth in the beginning of the MSA 
expressly indicate the settling states' intention to dedicate 
significant MSA funds to the reduction of youth smoking.
    In addition, in resolutions passed in 1999 and 2001 by the members 
of the National Governors Association (NGA), the Nation's Governors 
committed to spending ``a significant portion of the settlement funds 
on smoking cessation programs.'' However, as state legislatures have 
committed their settlement revenues for other purposes, the NGA's 
promises have eroded over time. This fact is most apparent in its 2003 
resolution that omits any reference to spending settlement funds on 
smoking cessation programs.
    The Campaign for Tobacco Free Kids is expected today to release a 
report that confirms that the vast majority of states are failing to 
live up to their promises to fund tobacco-related programs. The report 
will show that only four states are funding tobacco prevention programs 
at the minimum recommended level suggested by the U.S. Centers for 
Disease Control (CDC), a level that typically amounts to only a 
fraction of the states' overall tobacco revenue. Despite the nearly $20 
billion the states expect to receive from the MSA in Fiscal Year 2004, 
states will spend less than three percent of that total on tobacco 
prevention programs; which is less than half of the CDC's recommended 
funding level.
    We are all fully aware of the budget shortfalls that are being 
experienced by the states, but isn't an ounce of prevention better than 
a pound of cure? From both a long-term economic perspective and a moral 
perspective, I would like to better understand why states are, to a 
large degree, ignoring the problem of youth smoking.
    The Surgeon General testified in 2000 before this Committee that 
smoking prevention programs work, and that proper funding of these 
programs could cut smoking rates in half by 2010. I believe that the 
MSA settlement revenues may be our best chance to dramatically reduce 
smoking rates, especially among our children.
    Before we proceed any further, I want to mention my disappointment 
that the U.S. Department of Health and Human Services (HHS) declined 
our invitation to have the CDC appear today. I thank the witnesses for 
being here and I look forward to your testimony.

    The Chairman. Our witnesses today are the Honorable Mike 
Moore, Attorney General of the State of Mississippi; Mr. Matt 
Myers, President of Campaign for Tobacco-Free Kids; Mr. Raymond 
C. Scheppach, the Executive Director of the National Governors 
Association; the Honorable Deborah Hudson, Delaware State 
Legislature; and Dr. Carol Healton, President and CEO of the 
American Legacy Foundation.
    Dr. Healton, we'll begin with you.

STATEMENT OF DR. CHERYL G. HEALTON, PRESIDENT AND CEO, AMERICAN 
                       LEGACY FOUNDATION

    Dr. Healton. Chairman McCain, Senator Hollings, and other 
distinguished Members of the Committee, I deeply appreciate 
this opportunity to testify on behalf of the American Legacy 
Foundation.
    Our mission is to build a world where young people reject 
tobacco and anyone can quit. Every day in America, 1,200 lives 
are lost to tobacco-related disease. On that same day, 4,400 
young people under the age of 18 smoke their first cigarette.
    We are the national foundation born of the Master 
Settlement Agreement and funded through dollars directed to us 
by the states. Among the members of our Board are two--of 
directors--are two representatives each, designated by the 
National Association of Attorneys General, the National 
Governors Association, the National Conference of State 
Legislatures. I am especially pleased to serve on a panel with 
these organizations.
    Governor Napolitano, of Arizona, currently serves as one of 
the NGA representatives on our board, and she sends her special 
greetings to you, Chairman McCain.
    We are here, not to lobby today, but rather to assist the 
Committee in its oversight responsibilities by sharing our 
insights and experiences regarding the use of the MSA funds by 
the states. Perhaps because of our board's structure, Legacy is 
sensitive to the Solomon-like choices that must be made by 
states facing unprecedented budget deficits and escalating 
demands for resources. Nonetheless, we must add our voice to 
the public-health chorus that would remind states of the long-
term consequences of today's decision to rob Peter to pay Paul. 
The tobacco epidemic costs the U.S. $158 billion a year and 
hundreds of thousands of lives needlessly lost.
    Because only a small proportion of the original funds 
disbursed to the states via the MSA have been spent by the 
states to prevent or reduce tobacco use, and because of recent 
budget shortfalls, Legacy has become a de facto safety net at 
the national level. It is a role that will be increasingly 
difficult for Legacy to fulfill.
    At a time when state programs are critically wounded or 
disappearing, including some of the most effective, like those 
in California, Florida, Massachusetts, or Oregon, Legacy is 
faced with its own funding cliff, which is shown on the charts 
here.
    Payments would be made to Legacy under the agreement only 
if the participating manufacturers controlled 99.05 percent of 
the market share of tobacco sales nationally. Last April, 
Legacy received what it believes to be its last major payment, 
pursuant to the MSA, and that payment would be $330 million, so 
the wound is quite critical.
    In 2001 alone, the tobacco industry spent a record $11.2 
billion marketing their products, up by $5 billion since the 
MSA was signed, and outspending Legacy's national public-
education campaign 200-to-one.
    So far, Legacy, along with others, has been able to hold 
its ground in the David-versus-Goliath struggle, and youth 
smoking is now at its lowest level in 28 years. We are proud of 
the role Legacy has played in this life-saving effort. Programs 
like our award-winning Truth Youth Counter-Marketing Campaign 
have been cited as one of the reasons for the sharp and 
accelerating declines in youth smoking. Circle of Friends, 
another of our signature programs, provides social support for 
women smokers, 70 percent of whom want to quit. I am wearing a 
Circle of Friends pin, which symbolizes my support for the 20-
million-plus women who are struggling to quit smoking. The 
encouraging trends in youth smoking rates and the number of 
people who have quit smoking could end tomorrow, but they don't 
have to end.
    I'd like to conclude my testimony by issuing four 
challenges to the Committee and a pledge from Legacy. We must 
recommit, as a Nation, to youth smoking prevention. The 
American Legacy Foundation pledges to partner with the states 
to fund programs like Truth. Already, Legacy has spent over $3 
million in coops with the state and has committed six million 
next year of our own foundation funds for cooperative 
agreements with 15 states, including some of those Committee 
Members represent.
    We must turn our attention to the 47 million Americans who 
are smokers, most of whom want to quit, and the 177 million 
remaining Americans who should help them. Over the course of 
the coming year, the American Legacy Foundation is committed to 
leading a consortium of partners to raise $100 million, about 
$2 per smoker, to assist the states and the Nation in 
motivating and helping smokers to quit.
    We must encourage new and expanded public-private 
partnerships to help increase the lifesaving benefits of 
prevention programs and smoke-free workplaces throughout the 
country. Legacy proudly salutes those private sector partners 
that have already joined with us, including Avon, QVC, 
Novartis, the BlueCross/BlueShield Association, and the 
Entertainment Industry Foundation.
    Finally, Legacy urges this Committee and the U.S. Congress 
to continue your oversight responsibilities, tracking the 
progress of the MSA, and encouraging the Federal Government to 
find appropriate avenues to become a more direct partner in 
tobacco prevention and cessation programs at the national 
level.
    Legacy's role as a crucial funding and strategic 
counterweight against the tobacco industry will continue. We 
pledge that our efforts to partner with those states and 
organizations that are genuinely committed to the moral 
contract they made in the MSA will be redoubled in the months 
and years ahead.
    Mr. Chairman, I commend you for holding today's important 
oversight hearing, and thank you for including the American 
Legacy Foundation on the panel. I would be pleased to respond 
to questions.
    [The prepared statement of Dr. Healton follows:]

    Prepared Statement of Dr. Cheryl G. Healton. President and CEO, 
                       American Legacy Foundation
    Chairman McCain, Senator Hollings, and other distinguished Members 
of the Committee, I deeply appreciate this opportunity to testify on 
behalf of the American Legacy Foundation. Our mission is to build a 
world where young people reject tobacco and anyone can quit.
    We are the national foundation borne of the Master Settlement 
Agreement (MSA) and funded through dollars directed to us by the 
states. Our Board of Directors includes among its members two 
representatives each designated by the National Association of 
Attorneys General, the National Governors Association, and the National 
Conference of State Legislatures. I am thus especially pleased to serve 
on a panel with representatives from those organizations. Governor 
Napolitano of Arizona currently serves as one of the NGA 
representatives on our Board and she sends her special greetings to you 
Chairman McCain.
    Chairman McCain and Members of the Committee, let me say at the 
outset that Legacy is prohibited from lobbying pursuant to the terms of 
the MSA. Today, we are here not to lobby, but rather to assist the 
Committee in its oversight responsibilities, by sharing our insights 
and experiences regarding the use of MSA funds. Because of the unique 
circumstances of our birth, the American Legacy Foundation is a 
creature of the states. Therefore, we feel well qualified to share our 
views regarding the significant progress that has been made at the 
state level as a result of the MSA. And, we are equally qualified to 
point out where states have fallen short--despite the infusion of funds 
by the MSA--because of competing fiscal priorities.
    The Centers for Disease Control (CDC) issued their Best Practices 
for Comprehensive Tobacco Control Programs guidelines in August of 
1999, with a call to action on the percentage of funds that should be 
spent by each state for tobacco control programs. These recommendations 
became an important benchmark for the public health community. In 2003, 
the states will spend only 8 percent of the total tobacco settlement 
revenues they are expected to receive this year. That translates to 
just $682 million dollars that are committed to tobacco control 
programs of $8.7 billion total. Most states have failed to meet the 
minimum recommendations set forth by the CDC to promote tobacco 
prevention programs, let alone the ideal funding level which could 
aggressively address the epidemic of tobacco-related death and 
disability.
    Every day in America, 1,200 lives are lost to tobacco-related 
disease. On that same day, 4,400 young people under the age of 18 take 
their first puff of a cigarette, steering many of them down the road to 
a lifetime of tobacco addiction. Because lives are at stake, advocates 
from the tobacco control, medical and public health communities in the 
states are understandably disappointed that so few of the MSA dollars 
have been devoted to tobacco control programs. And the alarming trend 
shows no sign of abatement. Compounding the problem, some of the most 
effective state programs have already been lost or critically wounded, 
including California, Massachusetts, Oregon and Florida. Many feel 
strongly that the States have squandered an unprecedented opportunity 
to save lives and have argued that decisions to direct all--or 
virtually all--MSA dollars to other programs are especially short 
sighted in economic terms since smoking cessation dramatically reduces 
the enormous sums needed to treat sick and dying smokers in the long 
term and greatly curtails productivity losses. The tobacco epidemic 
costs the U.S. 158 billion dollars a year.
    Perhaps because of our board structure, Legacy is uniquely 
sensitive to the Solomon-like choices that often must be made by states 
that are facing unprecedented budget deficits and escalating demands 
for resources. However, we must nonetheless add our voice to the public 
health chorus that would remind States of the long term consequences of 
today's decision to rob Peter to pay Paul--including millions of lives 
needlessly lost and billions of dollars spent on preventable death and 
disease.
    Because only a small portion of the original sums disbursed to the 
States via the MSA have been spent by the states to prevent or reduce 
tobacco use, Legacy has become a de facto safety net at the national 
level to fill many of these gaps. It is a role that will be 
increasingly difficult for Legacy to fulfill.
    Notably, at a time when state programs are disappearing, Legacy is 
facing its own funding cliff as a result of what was in essence a 
``sunset provision'' in the MSA. That cliff is shown on the chart here.
    Specifically, Legacy was only guaranteed major payments from the 
states via the participating manufacturers for the first five years. 
Thereafter, payments would be made to Legacy only if the participating 
manufacturers controlled 99.05 percent market share of tobacco sales 
nationally. Because of the number of small companies not participating 
in the MSA, the 99.05 threshold was never met--although there were 
strong incentives built in to join the agreement. Last April, Legacy 
received what it believes will be its last major payment pursuant to 
the MSA.
    The sun is setting at a time when the industry is spending more 
than ever before on its marketing and advertising campaigns. In 2001 
alone, the tobacco industry spent a record $11.2 billion dollars 
marketing their products--up by 5 billion dollars since the MSA was 
signed. Although Legacy does its share of counter marketing through the 
truth campaign and other programs, the industry routinely outspends us 
by 200 to 1.
    So far, Legacy--along with others--has been able to hold its ground 
in this David vs. Goliath battle. But the threat of litigation haunts 
any successful tobacco-control advertising campaign--as you have 
witnessed in the State of California--and as the American Legacy 
Foundation currently finds itself engaged in the State of Delaware. 
Simply put, our foundation is working to save lives and the tobacco 
companies are in business to sell cigarettes. Effective efforts to 
reduce smoking that significantly decrease industry marketshare, have 
been met with long-term litigation that serves to distract us from our 
mission, rob us of limited resources and if successful, can ultimately 
silence our work and close our doors.
    Smoking is at its lowest level in 28 years. The American Legacy 
Foundation is proud of this achievement by the community as a whole, 
including the states.
    We are also proud of the role Legacy has played in securing this 
success through our programs, such as truth our award-winning youth 
counter marketing campaign that has been cited as one of the reasons 
for the sharp declines in youth tobacco use. We are also proud of 
``Great Start,'' our innovative cessation program for pregnant women, 
which was the brainchild of the former First Lady of Utah, Jackie 
Leavitt. The program worked with 20 First Ladies to spread the word to 
women about the benefits of quitting before and during pregnancy and 
staying smoke free.
    ``Circle of Friends'' is another signature foundation campaign 
designed to provide social support for women smokers, 70 percent of who 
want to quit but need strong social support to be successful in the 
long-term. I am wearing a Circle of Friends pin today, which symbolizes 
my support for the over 20 million women who are struggling to quit 
smoking.
    Mr. Chairman, on the anniversary of the MSA, we are at a 
crossroads. The encouraging trends in the number of people who have 
quit smoking and the number of youth who never start could end 
tomorrow. But they don't have to end. The MSA still has decades left to 
achieve the vision of a smoke free society--and the American Legacy 
Foundation is committed to staying the course, to help shape a society 
where all young people reject tobacco and anyone can quit.
    The past five years have taught us a great deal about what works in 
the effort to get the truth about tobacco to the American people--
especially our youth. We've also learned that it takes a partnership 
between states, Federal agencies, and private organizations such as 
Legacy to address the nationwide tobacco epidemic. We are working 
aggressively to forge partnerships with our colleagues in tobacco-
control and public health as well as states, national organizations and 
corporate America, who share in our conviction that working together, 
we can eliminate tobacco addiction and achieve healthier and longer 
lives for all Americans. But, these partnerships require the states to 
remain committed to the spirit of the MSA and require all of us to 
remain actively engaged.
    I'd like to end my testimony by issuing four challenges to the 
Committee and a pledge from Legacy:

  (1)  We must re-enforce and renew our commitment as a nation, and in 
        the individual states, to youth tobacco prevention. The 
        American Legacy Foundation pledges to partner with the states 
        in funding programs like truth. Already, Legacy has spent over 
        $3 million--with a commitment to spend $6 million--of our own 
        foundation funds on cooperative agreements with 15 states from 
        coast to coast, like Alaska, Arkansas, Indiana, Kentucky, New 
        Mexico, New York and Wisconsin, to leverage state dollars with 
        Legacy funds to provide sustainable state-led efforts.

  (2)  We must turn our attention to the 47 million Americans who are 
        smokers, most of whom want to quit, and the 177 million 
        remaining Americans who need to help them quit. Over the course 
        of the coming years, the American Legacy Foundation is 
        committed to leading a consortium of partners in raising 100 
        million dollars--about $2 per smoker--to assist the states and 
        our Nation in motivating and assisting smokers to quit.

  (3)  We must encourage new and expanded public/private partnerships 
        between business, unions, communities, states and the Federal 
        Government that will help us expand the life-saving benefits of 
        prevention programs and smoke-free workplaces throughout the 
        country. Legacy proudly salutes those private sector partners 
        that have already joined us including Avon, QVC, Novartis, the 
        Blue Cross Blue Shield Association, the Entertainment Industry 
        Foundation and others. We need more businesses, associations 
        and organizations to join us in these efforts.

  (4)  Finally, Legacy urges this committee and the United States 
        Congress to continue your oversight responsibilities, tracking 
        the progress of the MSA and encouraging the Federal Government 
        to find appropriate avenues to become a more direct partner in 
        tobacco prevention programs at the national level. Here, as 
        well, Legacy pledges our support and full partnership with you.

    We are putting our faith in the proven power of partnership to help 
us achieve the promise of a smoke-free future. Legacy's role as a 
crucial funding and strategic counter-weight against the tobacco 
industry will continue, and I pledge to this committee that our efforts 
to partner with those states and organizations who are genuinely 
committed to the moral contract they made in the MSA will be redoubled 
in the months and years ahead.
    Mr. Chairman, smoking is the number one killer in America today and 
all of these deaths are completely preventable. The American Legacy 
Foundation offers our resources, depth of knowledge and fierce 
determination to help states, and the Nation as a whole, meet these 
challenges. We commend you for holding today's important oversight 
hearing and thank you for including The American Legacy Foundation's on 
the panel.

    The Chairman. Thank you very much.
    Mr. Myers?

            STATEMENT OF MATTHEW MYERS, PRESIDENT, 
                 CAMPAIGN FOR TOBACCO-FREE KIDS

    Mr. Myers. Mr. Chairman and Members of the Committee, first 
I want to thank you very much for holding this hearing. The 
spotlight you shine on how the tobacco settlement money is one 
of the most important public health issues of our time.
    Let me briefly summarize our testimony. As you correctly 
said, when the states sued the tobacco industry and when they 
settled, they said that they were both suing and settling for 
very specific purposes. They were trying to stop an epidemic of 
tobacco use among children, and they were trying to stop the 
crushing rise in Medicaid costs the states were experiencing 
due to tobacco-related diseases.
    These quotes are typical. Pennsylvania Attorney General 
Mike Fisher, ``Emphysema, heart disease, cancer, more than 
20,000 Pennsylvanians die from tobacco-related diseases each 
year. This money will not bring back those who have died, but 
it may be used to keep others from starting this deadly 
habit.''
    West Virginia Attorney General Darrell McGraw, ``The reason 
we got into this fight was to protect public health and prevent 
underage smoking. A significant portion of this money should go 
toward these curses.''
    When the states came to this Committee and to Congress in 
1999 and asked you to waive any potential right the Federal 
Government had to direct the spending of that money, or to its 
share of that money so that the Federal Government would have 
more funds to fight this battle, they also made specific 
promises. You correctly quoted the National Governors 
Association's resolution. But in May 1999, the National 
Governors Association said something else, and I quote, 
``States are already spending state funds on smoking-cessation 
programs and will substantially increase funding as the 
effectiveness of these programs is established.''
    Mr. Chairman and Members of the Committee, as I will note 
later on in our report, the effectiveness of these programs has 
been established, and the states have done just the opposite.
    Three years ago, you held a hearing. At that time, you were 
harshly critical, as were we, of the fact that the states were 
only spending 9 percent of the tobacco settlement money at that 
time on tobacco prevention programs. Well, today we and the 
American Cancer Society, the American Heart Association, and 
the American Lung Association are issuing a new report 
entitled, ``A Broken Promise To Our Children.'' What it shows 
is that the case has become substantially worse. The amount of 
money the states are now spending on tobacco prevention has 
dropped by 28 percent in the last 2 years. It is now down to 
$541.1 million out of a total of that the states have received 
this year from tobacco excise taxes and tobacco settlement 
money of over $19 billion.
    Mr. Chairman and Members of the Committee, we can't win 
this war if we don't wage it, and currently we are not waging 
it.
    The situation is even worse in another respect. The cuts in 
tobacco spending have decimated some of the most effective 
programs this Nation has ever seen, programs whose 
effectiveness is beyond debate, programs that have already 
saved lives, programs in California, Massachusetts, and 
Florida, which have proven they can dramatically drive down 
tobacco-use rates. And yet today, Massachusetts and Florida's 
programs barely exist, and California's program has been cut in 
half.
    This tragedy comes about at a time when the need for strong 
action is greater, not less than it was 5 years ago. We had 
hoped that the tobacco industry would take advantage of the 
Master Settlement Agreement to decrease their targeting of 
young people and young people's exposure to tobacco marketing. 
The data shows that they have done just the opposite of that. 
There's a chart in our report that shows that in the 3 years 
after the Master Settlement Agreement, tobacco marketing 
actually increased by 66 percent to a record $11.5 billion. 
What does that mean today? It means that today the tobacco 
industry is spending $20 marketing this product for every 
dollar the states are spending to prevent the sale of its 
product. What it means is that in 3 weeks, the tobacco industry 
spends more money marketing its products than all of the states 
combined spend in an entire year.
    What does that mean? The variation from state to state is 
dramatic. States like Maine and Delaware, that have committed 
substantial funds to this program, are only being outspent 
three to one, and it's the reason we're seeing results in those 
states. But a state like Florida, whose program was a model for 
the Nation when it was created, whose program resulted in the 
most dramatic decrease in youth tobacco use in history over a 
4-year period, is now being outspent 655 to one by the tobacco 
industry. We're already seeing smoking rates among the youngest 
kids in Florida turn around. It isn't an accident that it's 
happening.
    And that's the critical fact, Mr. Chairman. We're not 
asking the states to spend money on unproven programs. We're 
asking the states to spend money on programs that are 
scientifically based, that have been fully evaluated, and that 
have been found to reduce tobacco use.
    Attorney General Moore, at the end, today, will talk about 
what's going on in Mississippi, but Mississippi is not an 
isolated case. In Maine, they used the Master Settlement money 
to fund comprehensive tobacco prevention programs, increased 
excise taxes, and expanded clean indoor air. Maine went, in 4 
years, from a state with the worst youth smoking rates to one 
of the best, from over 39 percent to 20 percent.
    Mr. Chairman, we have--we have an antidote to lung cancer. 
We know how to prevent lung cancer from ever happening if we 
would only spend the money that the states promised to spend. 
We know that budget times are tight. But when you compare the 
results of our study with the published data from the states, 
what you find is that in this fiscal year the states are 
spending more money on tobacco farmers than they're spending on 
tobacco prevention.
    Our organization has worked with tobacco farmers. We want 
to help them. But it is a tragedy beyond comprehension, it is 
political malpractice, for a nation to be spending its money 
this way. They're hard choices. That's why we elect public 
officials, to make hard choices. These funds came for a 
specific purpose. We don't need to spend all of them. If the 
states will spend just 8.2 percent of the tobacco revenue 
they're receiving on tobacco prevention and cessation programs, 
they can meet the minimum recommended by the CDC. This is not a 
partisan issue.
    The current director of the CDC issued a report only 2 
months ago that carefully evaluated the effectiveness of 
tobacco prevention programs and isolated the impact of tobacco 
prevention from smuggling, excise taxes, and other factors. And 
this is what the current director of the CDC said at that time, 
``This study provides our clearest evidence to date that 
tobacco control programs are an excellent investment in public 
health.''
    Mr. Chairman, we applaud this Committee for holding this 
hearing. Literally, the lives of millions of our children are 
at stake. We hope this hearing is the first step in a real 
focus in asking the question how we can ensure that the states 
spend the money that they say they received to deal with the 
problem of tobacco control to help protect our Nation's 
children.
    Thank you.
    [The prepared statement of Mr. Myers follows:]

            Prepared Statement of Matthew Myers, President, 
                     Campaign for Tobacco-Free Kids
    Good morning Mr. Chairman, and members of the Committee. My name is 
Matthew Myers. I am the President of the Campaign for Tobacco-Free 
Kids, a national organization created to protect children from tobacco 
by raising awareness that tobacco use is a pediatric disease, by 
changing public policies to limit the marketing and sales of tobacco to 
children, and by actively countering the special interest influence of 
the tobacco industry.
    Mr. Chairman, I want to thank you for your continued leadership on 
the issue of tobacco control. Many others and I are very grateful for 
your willingness to stand up for our kids, take on the tobacco 
companies, and hold the states accountable for living up to their 
commitment to spend a significant portion of the funds they received 
from the tobacco industry in settlement of their cases to prevent kids 
from starting to smoke and help adults to quit.
Summary of Key Points
    Let me summarize my key points:

  (1)  When the states sued the tobacco industry and then again when 
        they settled their cases against the tobacco industry, they 
        said they were doing so because of what they described as a 
        tragic epidemic of tobacco use among children and the crushing 
        and rising burden of tobacco-related disease on state Medicaid 
        expenditures. Their goal and their promise was to insure that 
        the states had adequate funds to address these problems.

  (2)  When the states came to Congress in 1999 and asked the Federal 
        Government to waive its claim to a portion of these funds, the 
        leaders of the National Governors Association pledged to spend 
        ``a significant portion of the tobacco settlement funds on 
        smoking cessation programs, health care, education and programs 
        benefiting children'' if Congress agreed to waive its right to 
        any of these funds.

  (3)  Over three years ago you held a hearing on the use of revenues 
        from the tobacco settlement. This hearing took place before the 
        states faced serious budget crises. At that hearing we released 
        a report that showed the states were not then living up to 
        their promise. Today we are releasing an update of that report 
        and the picture has become significantly worse. The report 
        released today by the Campaign for Tobacco-Free Kids, the 
        American Cancer Society, the American Heart Association and the 
        American Lung Association demonstrates that far fewer states 
        are spending a significant amount of their tobacco settlement 
        money on tobacco prevention and cessation. As of October 2003, 
        24 states have cut their funding for tobacco prevention and 
        cessation, including several of the programs that have proven 
        most successful at reducing youth tobacco use, such as the 
        programs in California, Massachusetts and Florida. It appears, 
        sadly, that there is no relationship between success and 
        continued funding.

  (4)  The failure of the states to do as they promised will have 
        tragic consequences for the health of our Nation's children and 
        the amount taxpayers are forced to pay in the future to cover 
        the costs of tobacco-related Medicaid expenditures. The 
        scientific evidence is now conclusive-comprehensive tobacco 
        prevention programs have been proven to be effective in 
        reducing tobacco use, particularly among our Nation's children.

    Every state that has implemented a well-funded tobacco prevention 
program in accordance with the guidelines issued by the Centers for 
Disease Control and Prevention (CDC) has experienced a significant 
reduction in tobacco use. The data from California, Washington, Oregon, 
Arizona, Minnesota, Alaska, Maine, Mississippi, Florida, New York, 
Massachusetts and Indiana all tell the same story. These programs work.
    As the current Director of the CDC, Dr. Julie Gerberding, said just 
two months ago in conjunction with the release of the most 
authoritative study ever done on the impact of tobacco control 
programs, ``This study provides our clearest evidence to date that 
tobacco control programs are an excellent investment in public 
health.''
    Thus, the failure of the states to do what they promised their 
citizens and Congress is having very real world consequences. We too 
often think of tobacco in statistical terms. To tobacco victims-
parents, children, grandchildren, husbands, wives and siblings 
tobacco's victims are not statistics. A couple of examples from our 
website, ``Voices Against Tobacco'' show that:

        Ever since I was 3 there was a big green oxygen tank sitting in 
        the front room of my house and a small portable one sitting 
        next to it. They were there to help my mother breathe because 
        she was dying from emphysema, a smoking disease. My family was 
        never able to do the things that most families could do, like 
        go on vacations and weekend camping trips because we always had 
        to worry about my mom. When I was 9 she died, at the age of 49, 
        it was hard growing up without a mother. She wasn't there for 
        the mother daughter talks that all my friends were having with 
        theirs. I promised myself that I will never let that happen to 
        me.

                Joyce R., West Valley City UT, November 10, 2003

        On March 23, 2000, l lost my sister, Mary, to lung cancer. She 
        started smoking at age 13 and stopped when she was 32. She had 
        a lot of stress in her life when she was diagnosed with lung 
        cancer. She was 46 years old. She was 47 years old when she 
        passed away. Watching her wither away and suffer through the 
        inability to breathe was very painful. It's something you never 
        forget. I miss her a lot.

                Eileen R., Dimondale MI, November 10, 2003

        I lost my father to a tobacco-related heart attack. It was just 
        10 days after my 13th birthday in 1996. I was home getting 
        ready to go to my Boy Scouts meeting and watching TV and my mom 
        and myself received the phone call that my dad had died that 
        day. He was just 48 yrs old when he died. I lost more than just 
        a father because anyone can be a father but it takes someone 
        special to be a dad and I lost my dad. Everyday I think about 
        my dad and wonder if he would be proud of me. April 30th, 2003 
        will be 7 years I have had to live without my dad because he 
        smoked cigarettes. Is that fair?

                Ray L., Punta Gorda FL, May 29, 2003

    The funds from the Master Settlement Agreement gave the states an 
historic opportunity to improve the lives of their citizens. Former 
U.S. Surgeon General David Satcher who testified at your hearing three 
years ago concluded that investing tobacco settlement dollars in these 
comprehensive prevention programs represented the greatest opportunity 
in public health since the polio vaccine. Unless the public officials 
who make the decisions about how these funds or the funds from state 
tobacco excise taxes are used, literally millions of citizens will die 
prematurely from wholly preventable tobacco-caused deaths. We can do 
better and we must hold our public officials accountable.
Background
    Mr. Chairman, as you know, between 1994 and 1998 every state sued 
the tobacco companies. In state after state Attorneys General indicated 
that the primary purpose for filing the lawsuits was that far too many 
children were smoking, the tobacco companies were targeting minors with 
their marketing campaigns and the states could no longer afford the 
rising costs from tobacco-related Medicaid expenditures. Something had 
to be done to address these problems, these public officials said, and 
these lawsuits were the answer.
    On November 23, 1998, 46 states settled their lawsuits against the 
major tobacco companies to recover tobacco-related health care costs, 
joining four states (Mississippi, Texas, Florida and Minnesota) that 
had reached earlier, individual settlements. These settlements required 
the tobacco companies to make annual payments to the states in 
perpetuity, with total payments over the first 25 years estimated at 
$246 billion. The multi-state settlement, known as the Master 
Settlement Agreement (MSA), also imposed limited restrictions on the 
marketing of tobacco products.
    At the press conference announcing the settlement, the tobacco 
settlement was presented as an historic opportunity to attack the 
enormous public health problem posed by tobacco use in the United 
States. As described by state Attorneys General and Governors, the 
promise of the settlement was two-fold: It would significantly increase 
the amount of money the states were spending on programs to prevent 
kids from starting to use tobacco and help those already addicted to 
quit, and it would greatly reduce youth exposure to tobacco marketing.
    Mr. Chairman, while the multi-state settlement did not dictate how 
states should spend the money, state Attorneys Generals and Governors 
from across the Nation pledged that they would use the tobacco 
companies' own money to address the tobacco problem.
    Why did we think these cases were about reducing the death toll 
from tobacco? Listen to what our public officials said:

        New Jersey Governor Christine Whitman: ``Every penny of these 
        funds should be used for health purposes including prevention 
        programs and counter advertising to protect kids, cessation 
        programs and community partnerships to serve those who have 
        already put their health at risk by smoking, in addition to 
        existing important health programs such as charity care and 
        Kidcare''

        Indiana Governor Frank 0'Bannon: ``This money can go a long way 
        toward preventing Hoosier Kids from ever getting hooked on 
        tobacco and toward helping our citizens stop smoking and 
        recover from smoking-related illness.''

        Utah Attorney General Jan Graham: ``Utah has a moral duty to 
        invest a good part of this money in keeping our kids away from 
        cigarettes. One-third of kids who start smoking will die of 
        smoking caused disease''

        Pennsylvania Attorney General Mike Fisher: Emphysema, heart 
        disease, cancer more than 20,000 Pennsylvanians die from 
        tobacco-related diseases each year.'' ``I sued the tobacco 
        industry because it conspired to increase the addictive 
        properties of tobacco products and suppressed vital information 
        about the deadly nature of tobacco. This money will not bring 
        back those who have died, but it may be used to keep others 
        from starting this deadly habit.''

        West Virginia Attorney General Darrell V. McGraw: ``The reason 
        we got into this fight was to protect public health and prevent 
        underage smoking. A significant portion of this money should go 
        toward these causes.''

        North Carolina Governor Jim Hunt: the consent decree gives 
        North Carolina ``a balanced approach'' to allocate tobacco 
        settlement money. ``It will address our efforts to crack down 
        on underage smoking and to protect the health and well-being of 
        North Carolinians.''

    State officials made similar promises to Congress less than a year 
later. Shortly after the settlement, the Health Care Financing 
Administration (HCFA) notified the states that Medicaid related 
recoveries would be subject to recoupment under Medicaid third party 
recovery provisions.
    The Clinton Administration indicated a willingness to let the 
states keep all of the funds but wanted to require the states to spend 
a portion of the funds on reducing teenage smoking among others things. 
Instead, the states pressed Congress to change the existing Medicaid 
law to allow them to keep the Federal Government's share of the 
settlement without any strings attached. The states promised Congress 
that they would do the right thing with the funds and that they were 
committed to reducing tobacco use.
    In order to persuade Congress, the states made explicit promises. 
The National Governors' Association, the National Conference of State 
Legislators and others stated

        ``[We] are committed to spending a significant portion of the 
        tobacco settlement funds on smoking cessation programs, health 
        care, education, and programs benefiting children.''

    In May 1999, the National Governors Association told Congress,

        ``States are already spending state funds on smoking cessation 
        programs and will substantially increase funding as the 
        effectiveness of these programs is established.''

    Some made an even more explicit commitment according to Washington 
State Attorney General Christine Gregoire. According to Attorney 
General Gregoire,

        ``The representations we (the states) made to them (Congress) 
        were that states would use not less than 50 percent of the 
        money for health and anti-tobacco causes.''

    Five years after the November 1998 state tobacco settlement, we 
find that most states have failed to keep their promise to use a 
significant portion of the settlement funds to reduce tobacco's 
terrible toll on America's children, families and communities. We also 
find that the settlement's marketing restrictions have done little to 
reduce the tobacco companies' ability to market their products 
aggressively in ways effective at reaching and influencing our 
children.
    Disturbingly, in the past two years the states have cut funding for 
their tobacco prevention programs by more than a quarter, and several 
states have completely eviscerated some of the most successful and 
promising tobacco prevention and cessation programs in history. 
Remember the program in Florida that received so much publicity because 
it reduced tobacco use by 35 percent among high school students and by 
50 percent among middle school students in just four years? In 2003 
Florida's governor and legislature virtually eliminated it. 
Massachusetts is another case in point. In the 10 years its program was 
in existence, cigarette consumption dropped by 36 percent versus just 
16 percent in the rest of the country. Nonetheless, in the last two 
years Massachusetts' governor and legislature also virtually wiped out 
the program and with this decision, we can expect to see a decade of 
progress gradually eroded.
    As the report we release today details, the states lack credible 
excuses for their failure to do more to protect our children from 
tobacco. They are collecting record amounts of tobacco revenue from the 
tobacco settlement and tobacco taxes. To protect our children states 
only need to spend a small portion--20 to 25 percent per state and an 
even smaller percentage of a state's total tobacco revenues from the 
tobacco settlement and tobacco taxes--of those funds on tobacco 
prevention and cessation programs to meet the minimum levels 
recommended by the CDC.
    The findings for this year:

   Only four states--Maine, Delaware, Mississippi and 
        Arkansas--currently fund tobacco prevention programs at minimum 
        levels recommended by the CDC. Last year Maryland and Minnesota 
        were in this category, but both cut funding.

   Only eight other states are funding tobacco prevention 
        programs at even half the minimum levels recommended by the 
        CDC. Last year a total of 15 states fell into this category.

   Thirty-three states are spending less than half the CDC's 
        minimum amount. Another five states--Michigan, Missouri, New 
        Hampshire, South Carolina and Tennessee--and the District of 
        Columbia allocate no significant state funds for tobacco 
        prevention.

   In the current budget year, Fiscal Year 2004, the states 
        cumulatively plan to spend $541.1 million on tobacco prevention 
        programs. This amounts to just 33.8 percent of the CDC's 
        minimum recommendations for all the states, which total $1.6 
        billion.

   Over the past two years, the states have cut total annual 
        funding for tobacco prevention by 28 percent, or $209 million 
        (from a high of$749.7 million in Fiscal Year 2002 to $674.4 
        million in Fiscal Year 2003 and $541.1 million in Fiscal Year 
        2004).These cuts have decimated three of the Nation's longest 
        standing and most successful tobacco prevention programs, in 
        Florida, Massachusetts and Oregon, and they have seriously 
        hampered some of the Nation's most promising new programs, 
        including those in Indiana, Maryland, Minnesota, Nebraska and 
        New Jersey.

   While many states have cut funding for tobacco prevention, 
        the tobacco industry increased its marketing expenditures to 
        record levels, up 66 percent in the three years after the 
        settlement to a record $11.45 billion a year, or $31.4 million 
        a day, according to the Federal Trade Commission's most recent 
        annual report on tobacco marketing. While the FTC report was 
        for calendar year 2001, there is strong evidence that tobacco 
        industry marketing expenditures have continued to increase. 
        Based on the latest FTC figures, the tobacco companies are 
        spending more than twenty dollars marketing their deadly 
        products for every dollar the states spend to prevent tobacco 
        use. Put another way, the tobacco companies spend more in three 
        weeks marketing their products than all 50 states spend over a 
        full year trying to prevent tobacco use.

    The settlement included important restrictions on tobacco 
        marketing, but since the settlement, the tobacco companies have 
        simply shifted their resources and increased spending on other 
        forms of marketing that appeal to kids, especially promotions 
        in convenience stores and other retail outlets. These include 
        payments for highv·isibility store placements and 
        displays, price discounts that make cigarettes more affordable 
        to kids, and free gifts with purchase. The settlement's 
        restrictions on tobacco marketing, thus, did not succeed in 
        reducing the tobacco companies' ability to market their 
        products aggressively to either children or adults. The need 
        for the states to act is no less today than it was when the 
        settlement took place five years ago.

   The states this year will collect $19.5 billion in tobacco-
        generated revenue from tobacco taxes and the tobacco 
        settlements. It would take just 8.2 percent of this total for 
        every state to fund tobacco prevention programs at the minimum 
        levels recommended by the CDC ($1.6 billion for all the 
        states). The states are spending only about one-third of what 
        the CDC recommends for tobacco prevention, amounting to only 
        2.8 percent of their total tobacco revenue. (Looking only at 
        settlement money, the National Conference of State Legislatures 
        recently reported that in Fiscal Year 2004 states are spending 
        just three percent of their tobacco settlement money on tobacco 
        prevention.)

   At least 20 states and the District of Columbia have also 
        sold to investors, or securitized, their rights to all or part 
        of their future tobacco settlement payments for a much smaller, 
        up-front payment, or have passed laws authorizing such action. 
        Several states used the revenue generated to balance budgets 
        for just one year. Securitization eliminates or reduces the 
        amount of settlement money available to fund tobacco prevention 
        and meet other needs in the future.
Why States Should Increase Funding for Tobacco Prevention Programs
    The states' funding of tobacco prevention and cessation is woefully 
inadequate given the magnitude of the tobacco problem. The amount the 
states are spending on tobacco prevention today pales in comparison to 
the enormity of the problem. Tobacco use is the number one cause of 
preventable death in the United States, claiming more than 400,000 
lives every year. The annual cost of treating tobacco-caused disease 
exceeds $75 billion. Despite recent progress in reducing youth smoking 
rates, more than a quarter of high school seniors (26.7 percent) still 
graduate as smokers, and every day another 2,000 kids become regular, 
daily smokers, one-third of whom will die prematurely as a result. 
These children are the tobacco companies' valued ``replacement 
smokers.''
    The evidence is conclusive that state tobacco prevention and 
cessation programs work to reduce smoking, save lives and save money. 
Every scientific authority that has studied the issue, including the 
National Cancer Institute, the Institute of Medicine and the U.S. 
Surgeon General, has concluded that when properly funded and 
implemented, these programs reduce smoking among both kids and adults.
    For example, the 2000 Surgeon General's report, Reducing Tobacco 
Use, provides an in depth analysis of tobacco intervention strategies. 
This report offers a science-based blueprint for achieving the goal of 
reducing tobacco use among both adults and children. A key conclusion 
of the Report is that the Federal Government's Healthy People 2010 
objectives with regard to tobacco can be achieved, but only if 
comprehensive tobacco prevention and cessation approaches to tobacco 
control are implemented.
    In September 2003 a study conducted jointly by the Research 
Triangle Institute, the CDC, and the University of Illinois published 
in the Journal of Health Economics, provided the most powerful evidence 
yet of the effectiveness of comprehensive tobacco prevention programs. 
The study found that states with well-funded, sustained tobacco 
prevention programs during the 1990s--Arizona, California, 
Massachusetts and Oregon--reduced cigarette sales more than twice as 
much as the country as a whole (43 percent compared to 20 percent). 
This is the first study to compare cigarette sales data from all the 
states and to isolate the impact of tobacco prevention program 
expenditures from other factors by controlling for changes in excise 
taxes, cross-border sales and other state specific factors. The study 
shows that the more states spend on tobacco prevention, the greater the 
reductions in smoking, and the longer states invest in such programs, 
the larger the impact. The study concludes that cigarette sales 
nationwide would have declined by twice as much as they did between 
1994 and 2000 had all states fully funded tobacco prevention programs.
    These studies are buttressed by the real life examples of every 
state that has committed significant funds to tobacco prevention in 
accordance with the CDC guidelines. A case in point: In 1997, Maine had 
one of the highest youth smoking rates in the country at almost 40 
percent. That year, Maine increased its cigarette tax and used a 
portion of the funds to establish a comprehensive tobacco prevention 
program known as the Partnership for a Healthy Maine. Maine 
subsequently expanded its program with settlement money to meet the 
CDC's minimum funding level and has now achieved dramatic results. 
Between 1997 and 2003, smoking among Maine's high school students 
declined by an astounding 48 percent, falling from 39.2 percent to 20.5 
percent. Smoking among middle school students declined by 59 percent, 
from 21 percent to 8.7 percent. This report ranks Maine first in the 
Nation in its funding of tobacco prevention.
    Mississippi, which has also used settlement funds on a 
comprehensive program and ranks third among the states in funding 
tobacco prevention, reduced smoking by 48 percent among public middle 
school students and by 29 percent among public high school students 
between 1999 and 2002. As Mississippi Attorney General Mike Moore often 
states, ``What state has an excuse to not fund tobacco prevention when 
we have done it in Mississippi, one of the poorest states.''
    Maine and Mississippi's experience is similar to what happened in 
other states. Programs in Washington, Alaska, Oregon, Arizona, Florida, 
Minnesota, New York, California, Massachusetts and Indiana all have 
reduced tobacco use. The only place these programs haven't worked is 
where they haven't been seriously tried.
    Florida is a very visible example of the power of these programs to 
save lives and what happens when a state guts a successful program. 
Florida's once innovative and successful program served as a model 
around the country. Despite the program's success, the Florida 
legislature and Governor cut the funding for the program each year 
since the program's inception and then virtually eliminated the program 
in 2003. Florida's kids are already paying a price for the decision to 
dismantle a program that reduced high school smoking by 35 percent and 
middle school smoking by 50 percent in four years. In 2002 there was no 
decline in smoking among middle school students. Even more disturbing, 
smoking between 6th and ih grades and between 7th and 8th grades rose 
in 2001 and the increases in smoking between 6th and 7th grades 
persisted in 2002. There is no excuse and there can be no excuse for 
Florida's decision to abandon a program whose results were proven and 
universally applauded.
    The evidence also shows that when sustained over time, 
comprehensive, well-funded tobacco prevention programs also save lives 
and money. Two recent studies show that California, which started the 
Nation's first tobacco prevention program in 1990, has saved tens of 
thousands of lives by reducing smoking-caused birth complications, 
heart disease, strokes and lung cancer. Other studies have shown that 
California and Massachusetts, which started their tobacco prevention 
programs in 1990 and 1993 respectively, have saved as much as $3 in 
smoking-caused health care costs for every dollar spent on tobacco 
prevention.
    The states have a clear source of revenue to address the problem. 
Despite their recent budget shortfalls, the states are actually 
collecting more tobacco-generated revenue than ever before from the 
tobacco settlement and tobacco taxes. That is because 32 states and DC 
have increased tobacco taxes since January 1, 2002. Altogether, the 
states this year will collect $19.5 billion in tobacco-generated 
revenue. It would take just 8.2 percent of this tobacco revenue, about 
$1.6 billion, for every state to fund tobacco prevention programs at 
the minimum levels recommended by the CDC. That leaves plenty of 
tobacco revenue to balance budgets and meet other needs. But the states 
are spending barely a third of what the CDC recommends.
Assessing Other Aspects of the Tobacco Settlement
    Mr. Chairman, the news is not all bad. Smoking rates, particularly 
among children, are down. While the tobacco settlement has failed to 
deliver on its promises to provide significant funding for state 
tobacco prevention programs or to curtail tobacco marketing, it has 
contributed to the significant reductions in tobacco use over the last 
five years. First, the settlement led the major cigarette companies to 
increase their prices by more than $1.10 per pack between 1998 and 
2000. Part of these increases was used to pay the states, but about 
half of the price increases bolstered the tobacco companies' profits.
    Second, the settlement included about $300 million a year in 
industry payments over five years to create a new national foundation, 
the American Legacy Foundation, to conduct public education campaigns 
to reduce tobacco use. Both the settlement-related price increases and 
the Legacy Foundation's campaigns along with the states that have 
implemented their own programs have contributed significantly to the 
reduction in youth smoking rates in the last several years.
    While tobacco price increases are effective at reducing smoking, 
especially among children, they are not a substitute for prevention and 
cessation programs. The research shows that tobacco price increases are 
most effective when part of a comprehensive approach that includes 
prevention and cessation programs and smoke-free workplace policies. In 
addition, the benefits of price increases are difficult to sustain over 
time prices erode with inflation and can be undermined by tobacco 
industry price reductions.
    The Legacy Foundation's programs have been highly effective, but it 
will lose a large portion of its funding after this year because of a 
loophole in the settlement that lets the major tobacco companies cease 
payments after 2003. In addition, Legacy's programs were always 
intended to enhance and not to replace state tobacco prevention 
efforts.
    Today we are at a critical juncture in determining the settlement's 
long-term impact. Our hope is that this hearing will make a difference. 
Our nation has made important progress in recent years in reducing 
youth tobacco use. Continued progress will not occur unless more states 
use more of the billions of dollars they are receiving from the tobacco 
settlement, and from tobacco taxes, to fund comprehensive tobacco 
prevention and cessation programs based on the recommendations of the 
CDC. If they do, the 1998 state tobacco settlement could yet mark a 
historic turning point in the battle to reduce tobacco's terrible toll. 
If they do not, it will be a tragic missed opportunity for the Nation's 
health.
    In conclusion, Mr. Chairman and Members of the Committee, our 
policy makers in the states are in a rare position on this issue.
    We know exactly what the problem is--that tobacco use is the cause 
of more than 400,000 preventable deaths and millions of illnesses each 
year.
    We have also identified an evidence-based solution to the problem 
that we know will work when implemented.
    We have a clear source of revenue to implement the solution.
    And, we have the support of the voters as 86 percent of Americans 
support spending a significant portion of tobacco settlement funds on 
tobacco prevention and cessation.
    We simply have no excuses for not exercising the political will to 
spend tobacco money on tobacco prevention. Thank you.

    The Chairman. Thank you.
    Ms. Hudson, welcome.

        STATEMENT OF HON. DEBORAH HUDSON, CHAIR, REVENUE

            AND FINANCE COMMITTEE, DELAWARE HOUSE OF

           REPRESENTATIVES, ON BEHALF OF THE NATIONAL

                CONFERENCE OF STATE LEGISLATURES

    Ms. Hudson. Thank you very much. Good morning. It's very 
nice to be here.
    Chairman McCain and distinguished Members of the Committee, 
I'm Deborah Hudson, a member of the Delaware House of 
Representatives, where I serve as Chair of the Revenue and 
Finance Committee, and I'm also on the Delaware Health Fund 
Advisory Committee, which was established in 1999 to make 
recommendations to the Governor and our General Assembly about 
how to spend Delaware's allocation of the tobacco settlement 
funds. But I am here today on behalf of the National Conference 
of State Legislatures to discuss the states' use of tobacco 
settlement funds.
    On November 23, 1998, the Attorneys General and other 
Representatives of 46 states, Puerto Rico, U.S. Virgin Islands, 
American Samoa, the Northern Marianna Islands, Guam, and the 
District of Columbia signed an agreement with the five largest 
tobacco manufacturers, ending a 4-year legal battle between the 
states and the industry, a battle that began in 1994, when 
Mississippi became the first state to file suit. The settlement 
funds became available in 2000, and I am honored to be a part 
of this distinguished panel today to talk about the settlement.
    In keeping with the rules, I will be as brief as possible, 
but I need to make four points. One, the states have dedicated 
the largest percentage of tobacco funds to healthcare services 
and programs. Second, a growing number of states are 
securitizing their tobacco settlement funds, and many more are 
expressing interest in securitization. Third, the number of 
nonparticipating tobacco manufacturers is growing. And, fourth, 
Federal legislation is needed to help some states in key areas.
    It is really difficult to discuss all of the programs that 
the states currently support with tobacco settlement funds. 
It's even more difficult to compare and contrast among the 
states. But the Master Settlement Agreement provided no 
direction to states and imposed no restrictions regarding the 
allocation of the tobacco settlement funds. So, as such, these 
funds are treated as state revenue and are subject to regular 
appropriations. Most states, like Delaware, do receive 
continuing feedback from citizens regarding the allocation of 
these tobacco funds. And, as a result, state tobacco settlement 
fund expenditures, by and large, reflect the priorities 
established by citizens of each state. Delaware has dedicated 
the majority of its tobacco settlement funds to healthcare. We 
are very comfortable with our decision, but would not venture 
to second-guess the other states that have made different 
decisions.
    I've been asked to talk about other states. NCSL has 
tracked states' tobacco expenditures since FY-2000 and has 
divided the expenditures into nine categories: health services, 
long-term care, tobacco use and prevention, research, 
education, children and youth services, tobacco farmers, 
endowment and budget, and the other category of ``other.''
    In nearly 5 years since the beginning of the historic 
settlement, much has changed, though. State fiscal conditions 
have eroded, tobacco manufacturers are facing their own 
challenges.
    So how have states spent the funds? Health services, as I 
said before, represents the largest single category of tobacco 
settlement fund expenditures. In FY-2000 and 2001, a third of 
the tobacco settlement funds went toward healthcare services. 
Today, these expenditures represent 28 percent of the total 
fund expenditures.
    The kind of health services vary by state. For instance, in 
Arizona, our Chairman's state, the people, in 2000, voted for 
Proposition 204, which directed the state to use tobacco 
settlement funds to expand eligibility for the Arizona 
Healthcare Cost Containment System. That's the state's Medicaid 
program.
    Now, South Carolina was one of the first states to 
securitize its tobacco settlement fund. The state received $791 
million, and distributed the funds as following: 75 percent of 
the funds to the healthcare endowment, 15 percent to the 
community trust fund for farmers affected by the drop in 
tobacco demand and prices, 10 percent for economic development 
grants to the I-95 corridor of tobacco communities, and 2 
percent for water and sewer projects in rural communities.
    In my state, we established the Delaware Health Fund and 
the Health Fund Advisory Committee to make recommendations to 
the Governor, and this has worked very successfully.
    The second largest category of expenditures was, until this 
year, endowments and budget reserves. The dramatic shift in 
funds allocated from endowments and budget reserves to the 
``other'' program is very clear, and a dramatic illustration of 
the serious fiscal challenges facing states today.
    While experts may differ on the adequacy and level of each 
state's expenditures for tobacco use and prevention, in the 
aggregate they remained constant at about 5 percent until the 
current Fiscal Year. This year, states increased the percentage 
of tobacco settlement funds that were allocated to education. 
Tobacco-producing states also increased the amount of funding 
allocated to tobacco farmers and as part of their commitment to 
provide economic and educational alternatives to tobacco 
farmers and the communities in which they live.
    Now, in Delaware, as I said, we have a Health Fund Advisory 
Committee, which is chaired by our Secretary of Health and 
Social Services, which advises the Governor and the legislature 
of how to allocate the funds. I am a member of this committee. 
The committee has regular open, public meetings, and we 
maintain a Website where our advisory committee meetings are 
listed, and the minutes are listed, as well, so people can see 
our recommendations.
    All of Delaware tobacco fund settlement money is dedicated 
to healthcare programs and services and to tobacco prevention 
and control. But, like many other states, we have reduced our 
reserve funds this year, but only to assure full funding for 
state healthcare priorities. We've slightly increased funding 
for tobacco prevention and control, as people want us to, and 
have provided level funding for most other ongoing programs. We 
are happy that we were able to maintain this.
    But now some states choose to securitize their settlement 
funds. Securitization is the process by which states sell their 
revenue streams of the tobacco settlement payments for a set 
number of years in return for a single up-front payment. 
Although the up-front payment is less than the normal sum of 
the annual payment, the state receives a lump sum, and the 
funds are immediately available. It is comparable to receiving 
a lump-sum payment instead of an annuity.
    There has always been a level of uncertainty regarding 
whether tobacco funds would continue into perpetuity, so 
initial interest in securitization was popular among states 
that feared bankruptcy of one or more of the tobacco 
manufacturers. Now, decreasing state revenues, continuing 
class-action litigation against manufacturers, makes this a 
more vulnerable to bankruptcy, and, therefore, decreasing 
tobacco sales.
    To date, sixteen states have securitized all or part of 
their tobacco settlement funds. We've seen a dramatic decline 
in the volume of cigarettes shipped by participating 
manufacturers. It is due, in part, to lower demand for 
cigarettes, but much of the decline can be attributed to the 
growing number of nonparticipating manufacturers who have 
entered the market and who sell their products at a deep 
discount. These deeply discounted products are more attractive 
to children, because they are often sold over the Internet and, 
therefore, are more available. This represents a serious 
problem for states and for people who support reducing youth 
access to tobacco. In addition, there is a reduction in the 
volume of cigarettes shipped by participating manufacturers.
    Five years ago, the most immediate task for state 
legislators related to the Master Settlement Agreement was the 
model statute. This statute was designed to provide a level 
playing field between participating and nonparticipating 
manufacturers by creating a reserve fund into which 
nonparticipating manufacturers are to pay future claims. Since 
the signing of the Settlement Agreement, we have found that the 
model act needs some fine-tuning to close loopholes in the 
participating manufacturers. NCSL is working with the National 
Association of Attorneys General to close these loopholes in 
existing state laws.
    The National Council of State Legislators and individual 
legislators are also working with Congress to enact Federal 
legislation that would strengthen the Jenkins Act and provide 
states with additional tools to enforce both the Jenkins Act 
and existing state laws. This legislation will help states 
reduce youth access to tobacco products and to collect state 
tobacco tax revenue that is not currently being collected.
    A recent Government Accounting Office report advised that 
states would lose approximately----
    The Chairman. Ms. Hudson, if you----
    Ms. Hudson. Yes.
    The Chairman.--could----
    Ms. Hudson. Yes.
    The Chairman.--complete your statement. We usually----
    Ms. Hudson. I certainly could.
    The Chairman.--give 5 minutes for----
    Ms. Hudson. I'm talking about the part where we would like 
to cooperate with you, and we would like to do that the best 
way we can to make sure that this program is the most effective 
that it can be.
    And we thank you for your time today.
    [The prepared statement of Ms. Hudson follows:]

 Prepared Statement of Hon. Deborah Hudson, Chair, Revenue and Finance 
    Committee, Delaware House of Representatives, On behalf of the 
               National Conference of State Legislatures
    Good morning Chairman McCain, Senator Hollings and Members of the 
Committee:

    I am Deborah Hudson, a member of the Delaware House of 
Representatives where I serve as chair of the Revenue and Finance 
Committee. I also serve as a member of the Delaware Health Fund 
Advisory Committee, which was established in 1999 to make 
recommendations to the governor and to the General Assembly regarding 
the allocation of Delaware's tobacco settlement funds.
    I am here today on behalf of the National Conference of State 
Legislatures (NCSL) to discuss the states' use of tobacco settlement 
funds. On November 23, 1998 the Attorneys General and other 
representatives of 46 states \1\, Puerto Rico, the U.S. Virgin Islands, 
American Samoa, the Northern Mariana Islands, Guam and the District of 
Columbia signed an agreement with the five largest tobacco 
manufacturers, ending a four-year legal battle between the states and 
the industry. A battle that began in 1994, when Mississippi became the 
first state to file suit. The settlement funds became available to 
states in 2000. I am honored to be a part of such a distinguished panel 
on a day so close to the fifth anniversary of the historic tobacco 
settlement agreement.
---------------------------------------------------------------------------
    \1\ Florida, Minnesota, Mississippi and Texas had previously 
settled with tobacco manufacturers for $40 billion.
---------------------------------------------------------------------------
    In keeping with the rules of the Committee, my oral statement will 
be limited to five minutes. I am submitting my written statement to be 
included in the hearing record. Today I will focus on the following 
observations:

  (1)  States have dedicated the largest percentage of tobacco funds to 
        health care services and programs.

  (2)  A growing number of states are securitizing their tobacco 
        settlement funds and many more are expressing interest in 
        securitization.

  (3)  The number of non-participating tobacco manufacturers is 
        growing.

  (4)  Federal legislation is needed to help states in some key areas.

    It is difficult to discuss the myriad programs that states 
currently support with tobacco settlement funds. It is even more 
difficult to contrast and compare among the states. The Master 
Settlement Agreement (MSA) provided no direction to states and imposed 
no restrictions on states regarding the allocation of their tobacco 
settlement funds. As such, these funds are treated as state revenue and 
are subject to the regular appropriation process. Most states, like 
Delaware, receive continuing feedback from citizens regarding the 
allocation of tobacco settlement funds. As a result, state tobacco 
settlement fund expenditures by and large reflect the priorities 
established by the citizens of each state. Delaware has dedicated the 
majority of its tobacco settlement funds to health care. We are 
comfortable with our decision, but would not venture to second-guess 
states that have made other choices.
State Tobacco Settlement Expenditures
    I have been asked to provide an overview of how states have spent 
and are spending their tobacco settlement funds. NCSL has tracked state 
tobacco settlement expenditures since FY 2000 and has divided 
expenditures into nine categories: health services, long term care, 
tobacco use prevention, research, education, children and youth 
services, tobacco farmers, endowments and budget, and other. In the 
nearly five years since the signing of the historic tobacco settlement 
agreement, much has changed.
    State fiscal conditions have eroded and tobacco manufacturers are 
facing their own financial challenges. How have states spent the funds? 
What are the trends? Below is a summary of what we have observed.

                  Table 1.--Allocation of Tobacco Settlement Funds by Category, FY 2000-FY 2004
                         [Dollar figures represent total allocation for the fiscal year]
----------------------------------------------------------------------------------------------------------------
                                FY 2000/FY 2001      FY 2002  ($10.97     FY 2003  ($9.83       FY 2004  ($7.9
                                ($10.97 billion)         billion)             billion)             billion)
----------------------------------------------------------------------------------------------------------------
Health Services                              33%                  29%                  29%                  28%
----------------------------------------------------------------------------------------------------------------
Long Term Care                                3%                   7%                   8%                   6%
----------------------------------------------------------------------------------------------------------------
Tobacco Prevention                            5%                   5%                   5%                   3%
----------------------------------------------------------------------------------------------------------------
Education                                     4%                   8%                   3%                   5%
----------------------------------------------------------------------------------------------------------------
Research                                      3%                   6%                   3%                   3%
----------------------------------------------------------------------------------------------------------------
Children & Youth Services                     4%                   2%                   3%                   3%
----------------------------------------------------------------------------------------------------------------
Tobacco Farmers                               3%                   3%                   2%                   4%
----------------------------------------------------------------------------------------------------------------
Endowments and Budget                        29%                  24%                  18%                   2%
 Reserves
----------------------------------------------------------------------------------------------------------------
Other                                        16%                16.2%                  29%                  47%
----------------------------------------------------------------------------------------------------------------
Source: National Conference of State Legislatures, Health Policy Tracking Service, 2003

Trends in State Expenditures
    Health Services represents the largest single category of tobacco 
settlement fund expenditures. In FY 2000/FY 2001 a third of the tobacco 
settlement funds went toward health care services. Today these 
expenditures represent 28 percent of total expenditures. The kinds of 
health services vary considerably by state. For instance in Arizona, 
the chairman's state, the people in 2000 voted for Proposition 204 
which directed the state to use the tobacco settlement funds to expand 
eligibility for the Arizona Health Care Cost Containment System 
(AHCCCS), the state's Medicaid program. South Carolina was one of the 
first states to securitize its tobacco settlement funds. The state 
received $791 million and distributed the funds as follows: (a) 75 
percent of the funds to the Health Care Endowment \2\; (b) 15 percent 
to the Community Trust Fund for farmers affected by the drop in tobacco 
demand and prices; (c) 10 percent for economic development grants to 
the I-95 corridor of tobacco communities; and (d) 2 percent for water 
and sewer projects in rural communities. We established the Delaware 
Health Fund and the Delaware Health Fund Advisory Committee to make 
recommendations to the Governor and General Assembly regarding the 
allocation of Delaware's tobacco settlement funds.
---------------------------------------------------------------------------
    \2\ The initial awards from the endowment supported the state's 
pharmaceutical assistance program.
---------------------------------------------------------------------------
    The second largest category of expenditures was, until this year, 
endowments and budget reserves. The dramatic shift in funds allocated 
to endowments and budget reserves between FY 2003 and FY 2004 to the 
``Other'' program category is a very clear and dramatic illustration of 
the serious fiscal challenges facing the states. While experts may 
differ on the adequacy of each state's expenditures for tobacco use 
prevention, the level of expenditures for tobacco use prevention in the 
aggregate remained constant at about 5 percent until the current Fiscal 
Year. This year states increased the percentage of tobacco settlement 
funds that were allocated to education. Tobacco-producing states also 
increased the amount of funding allocated to tobacco farmers as part of 
their commitment to provide economic and education alternatives to 
tobacco farmers and the communities, in which they live and work.
Delaware Health Fund
    The Delaware Health Fund Advisory Committee, a twelve member board, 
chaired by the Secretary of the Delaware Health and Social Services 
Department, advises the governor and the legislature on how to allocate 
the state's tobacco settlement funds. I am a member of the advisory 
committee. The committee has regular, open meetings and maintains a 
website where advisory committee meeting minutes and the advisory 
committee recommendations can be read and downloaded. All of Delaware's 
tobacco settlement funding is dedicated to health care programs and 
services and to tobacco prevention and control. Like many other states 
we have reduced our reserve fund this Fiscal Year to provide funding 
for state health care priorities. We have slightly increased funding 
for tobacco prevention and control and have provided level funding for 
most ongoing programs. We are happy that we are able to maintain this 
commitment despite the fiscal challenges we face. (See Table 2 for 
details).
Securitization of State Tobacco Funds
    Securitization is the process by which states sell the revenue 
stream of its tobacco settlement payments, for a set number of years, 
in return for a single, up-front payment. Although the up-front payment 
is less than the sum of the annual payments, the state receives a lump 
sum payment and the funds are immediately available. It is comparable 
to receiving a lump sum payment instead of an annuity. There has always 
been a level on uncertainty regarding whether the tobacco funds would 
in fact continue into perpetuity. Initial interest in securitization 
was among states that feared that the bankruptcy of one or more of the 
tobacco manufacturers would undermine the settlement agreement. 
Decreasing state revenues, continuing class action litigation against 
tobacco manufacturers that may in fact make tobacco manufacturers 
vulnerable to bankruptcy, and decreasing tobacco sales, have increased 
the interest among states in the securitization of tobacco settlement 
funds. To date, 16 states \3\ have securitized all or part of their 
tobacco settlement funds. (See Table 3 for details)
---------------------------------------------------------------------------
    \3\ Alabama, Alaska, Arkansas, California, Connecticut, Iowa, 
Louisiana, New Jersey, New York, North Dakota, Oregon, Rhode Island, 
South Carolina, South Dakota, Washington, Wisconsin
---------------------------------------------------------------------------
Growing Number of Non-participating Tobacco Manufacturers
    The dramatic decline in the volume of cigarettes shipped by 
participating manufacturers is due in part lower demand for cigarettes, 
but much of the decline can be attributed to the growing number of non-
participating manufacturers who have entered the market and who sell 
their products at a deep discount. These deeply discounted products are 
more attractive to children and because they are often sold over the 
Internet, are more available to children. This represents a serious 
problem for states and for people who support reducing youth access to 
tobacco. In addition, the reduction in the volume of cigarettes shipped 
by participating manufacturers can result in an overall decrease in 
state tobacco settlement fund allocations.\4\
---------------------------------------------------------------------------
    \4\ Under the provisions of the MSA, if the total aggregate market 
share of the participating manufacturers decreases more than 2 percent 
and an economic consulting firm determines that the provisions of the 
MSA were a significant factor contributing to the market share loss, 
the payments to states may be reduced based on that loss. This 
reduction in state payments is called the non-participating 
manufacturers (NPM) adjustment. This analysis is done annually. A 
state's enactment of the model statute is significant because if there 
is an NPM adjustment in any year, a specific state's share of the funds 
from the payment in question will not be reduced at all if that state 
has passed and has in force the model statute.
---------------------------------------------------------------------------
    Five years ago, the most immediate task for state legislatures 
related to the Master Settlement Agreement was the consideration and 
enactment of the ``Model Statute'' included in the settlement 
agreement. This model statute was designed to provide a level playing 
field between participating and non-participating tobacco manufacturers 
by creating a reserve fund into which non-participating manufacturers 
are to pay future claims. Since the signing of the settlement 
agreement, we have found that the Model Act needs some fine-tuning to 
close some loopholes the non-participating manufacturers have 
discovered. NCSL is working with the National Association of Attorneys 
General (NAAG) to close these loopholes in the existing state laws.
    We are also working with Congress to enact Federal legislation that 
strengthens the Jenkins Act and provides states with additional tools 
to enforce both the Jenkins Act and existing state laws. This 
legislation will help states reduce youth access to tobacco products 
and to collect state tobacco tax revenue that is not currently being 
collected. A recent Government Accounting Office (GAO) report advised 
that states would lose approximately $1.5 billion in tax revenues by 
the year 2005 if the current state of Internet tobacco sales continues. 
As you know, the Senate Judiciary Committee recently reported S. 1177, 
the Prevent All Cigarette Trafficking Act (PACT Act), a bill that 
amends both the Jenkins Act \5\ and the Contraband Cigarette 
Trafficking Act.\6\ A related piece of legislation, H.R. 2824, amends 
the Jenkins Act and is pending in the House Judiciary Committee. NCSL 
looks forward to working with you to work towards passage of this 
important legislation.
---------------------------------------------------------------------------
    \5\ The Jenkins Act (18 U.S.C. 375) requires any person who sells 
and ships cigarettes across state lines to anyone other than a licensed 
distributor, to report the sale to the buyer's state tobacco tax 
administrator, allowing state and local governments to collect the 
taxes due. The current penalty for violating the Act is a misdemeanor.
    \6\ The Contraband Cigarette Trafficking Act (CCTA) (18 U.S.C. 
2342) makes it unlawful for any person to ship, transport, receive, 
possess, sell, distribute, or purchase contraband cigarettes.
---------------------------------------------------------------------------
    I thank you for this opportunity to share NCSL's thoughts and 
observations with you. I would be happy to answer questions.

                       Table 2.--Delaware Health Fund Appropriations State FY 2002-FY 2004
                                                 [in thousands]
----------------------------------------------------------------------------------------------------------------
                       Initiative                             FY 2002            FY 2003            FY 2004
----------------------------------------------------------------------------------------------------------------
Continuing Initiatives
----------------------------------------------------------------------------------------------------------------
Strategic Reserve                                                    6,025              9,843              5,291
----------------------------------------------------------------------------------------------------------------
DE Prescription Drug Assistance                                      5,150              7,213              7,500
----------------------------------------------------------------------------------------------------------------
Tobacco Prevention/Control                                           5,005              5,009              5,072
----------------------------------------------------------------------------------------------------------------
Medical Coverage for SSI Transition                                  1,485              1,485              4,485
----------------------------------------------------------------------------------------------------------------
DHCC Uninsured Action Plan                                           1,000                885                500
----------------------------------------------------------------------------------------------------------------
Chronic Disease Pilot                                                  500                500                500
----------------------------------------------------------------------------------------------------------------
Medicaid Increase for Pregnant Women                                   409                408                408
----------------------------------------------------------------------------------------------------------------
Public Access Defibrillation                                           375                141                134
----------------------------------------------------------------------------------------------------------------
Substance Abuse Transitional Housing                                   200                200                200
----------------------------------------------------------------------------------------------------------------
Lesser-Known Illnesses                                                 150                100                100
----------------------------------------------------------------------------------------------------------------
DHCC Staff Assistance                                                   57                 57                 57
----------------------------------------------------------------------------------------------------------------
Heroin Residential Program                                             500                500                500
----------------------------------------------------------------------------------------------------------------
Attendant Care                                                         340                430                430
----------------------------------------------------------------------------------------------------------------
Breast & Cervical Cancer Treatment                                     150                150                150
----------------------------------------------------------------------------------------------------------------
Cancer Care Connection                                                                    150                150
----------------------------------------------------------------------------------------------------------------
The Wellness Community                                                                    200                200
----------------------------------------------------------------------------------------------------------------
DE Breast Cancer Coalition                                              40                 40                 40
----------------------------------------------------------------------------------------------------------------
Delaware School survey (Statewide)                                                                            48
----------------------------------------------------------------------------------------------------------------
New Nurse Formation Programs                                                              750              1,297
----------------------------------------------------------------------------------------------------------------
Disease Cost Containment Initiatives                                                      500                500
----------------------------------------------------------------------------------------------------------------
Perinatal Association                                                                     200                200
----------------------------------------------------------------------------------------------------------------
Southbridge Community Health Outreach                                                     120
----------------------------------------------------------------------------------------------------------------
University of Delaware/Drug & Alcohol Studies                                              48
----------------------------------------------------------------------------------------------------------------
Instruments for TB & Metabolic Disorders                               150                150
----------------------------------------------------------------------------------------------------------------
Fire Suppression Program                                               500                750
----------------------------------------------------------------------------------------------------------------
Support for People with Cancer                                         200
----------------------------------------------------------------------------------------------------------------
Gift of Life                                                           105
----------------------------------------------------------------------------------------------------------------
Resource Mothers                                                       200
----------------------------------------------------------------------------------------------------------------
Council on Cancer Inc. & Mortality                                                                         4,938
----------------------------------------------------------------------------------------------------------------
DE Ecumenical Council                                                                                        100
----------------------------------------------------------------------------------------------------------------
Total Initiatives                                                  $20,325            $19,986            $24,509
----------------------------------------------------------------------------------------------------------------
Total Program and Reserves                                         $26,391            $29,829            $29,800
----------------------------------------------------------------------------------------------------------------
Source: Delaware Health and Social Services Department, Delaware Health Fund Advisory Committee (http://
  www.state.de.us/dhss/healthfund.html)


          Table 3.--Securitized State Tobacco Settlement Funds
------------------------------------------------------------------------
     State          Year           Amount                Purpose
------------------------------------------------------------------------
Alabama                2000        $50 million  Industrial bonds to
                                                 attract new jobs
------------------------------------------------------------------------
Alaska           2000, 2001       $242 million  Remodel and build new
                                                 schools, rehabilitate
                                                 buildings at the
                                                 University of Alaska
                                                 and update several port
                                                 facilities
------------------------------------------------------------------------
Arkansas               2001        $60 million  Biomedical research
                                                 facilities
------------------------------------------------------------------------
California       2002, 2003       $4.2 billion  Deficit
------------------------------------------------------------------------
Connecticut            2003       $300 million  General revenue
------------------------------------------------------------------------
Iowa                   2001       $644 million  Retire capital debt to
                                                 free up general fund
                                                 revenue for health care
                                                 services
------------------------------------------------------------------------
Louisiana              2001       $1.2 billion  Millennium Fund
                                                 (endowment) to be used
                                                 for health care,
                                                 education and
                                                 scholarships
------------------------------------------------------------------------
New Jersey             2002       $1.8 billion  Deficit
------------------------------------------------------------------------
New York               2003       $4.2 billion  Deficit
------------------------------------------------------------------------
North Dakota           2000        $32 million  Debt service on water
                                                 resource and flood
                                                 control projects
------------------------------------------------------------------------
Oregon                 2002       $200 million  Deficit
------------------------------------------------------------------------
Rhode Island           2002       $685 million  Retire capital debt,
                                                 deficit
------------------------------------------------------------------------
South Carolina         2000       $934 million  73% to the Health Care
                                                 Endowment \7\, balance
                                                 for rural
                                                 infrastructure and
                                                 tobacco farmers
------------------------------------------------------------------------
South Dakota           2002       $278 million  Education endowment
------------------------------------------------------------------------
Washington             2002       $518 million  Deficit
Wisconsin              2001       $1.6 billion  Deficit
------------------------------------------------------------------------
\7\ The initial awards from the fund supported the state's
  pharmaceutical assistance program.


    The Chairman. Thank you very much. Thank you for coming to 
help us in this very difficult issue.
    Mr. Scheppach, welcome.

STATEMENT OF RAYMOND C. SCHEPPACH, EXECUTIVE DIRECTOR, NATIONAL 
                     GOVERNORS ASSOCIATION

    Mr. Scheppach. Thank you, Mr. Chairman and Members of the 
Committee. I thank you for the opportunity to represent the 
Nation's Governors before this Committee today.
    The MSA was reached on behalf of the attorney generals of 
46 states, five commonwealths and territories, and the District 
of Columbia in 1998. That agreement, worth $206 billion over 25 
years, is actually worth $246 billion, when combined with the 
other four states.
    The MSA did not require set-asides. There was a fundamental 
difference between the settlement reached and the proposals 
being promoted in the late 1990s involving Federal legislation. 
In fact, on May 21, 1999, President Clinton signed into law the 
measure PL 106-31, recognizing that decisions about how to 
spend the tobacco settlement dollars were more appropriately 
made at the state level, where Governors and legislators could 
be the most responsive to the unique needs and circumstances of 
their citizens.
    Over the 2000 to 2003 period, I think states have received 
about $37 billion from the Master Agreement. Over this period, 
there has been substantial stability in the allocation of these 
revenues. About 36 percent went to healthcare services and 
long-term care, another 4 percent to tobacco use prevention, 12 
percent went to research, education, and services for children. 
Also, states allocated 3 percent to tobacco farmers for crop 
diversification and efforts to reduce the state's dependence on 
tobacco production. The remainder went to endowments, budget 
reserves, and other programs.
    One area that did witness a major change over the last 3 
years was in the percent allocated to endowments and budget 
reserves, which went from 29 percent in 2000 to 18 percent in 
2003, and to 2 percent in 2004.
    Throughout the last 2 years, due partly to the budget 
crisis, as well as concerns regarding bankruptcy of tobacco 
firms, 16 states have securitized their tobacco settlement 
revenues, for total proceeds of about $13 billion.
    The tobacco settlement funds are allowing states to develop 
a significant number of innovative programs in biotechnology 
and economic development, smoking cessation, early childhood 
and prevention healthcare. This period of innovation and 
experimentation, which helped states develop best practices, 
will pay great dividends over time.
    The most important issue facing states today is the dismal 
fiscal situation. States are enduring the worst fiscal crisis 
since the second world war. And although the national economy 
is beginning to recover, state revenue growth has not yet 
responded.
    The fiscal situation is driven by two major factors--an 
obsolete tax base and lower revenues, and exploding Medicaid 
and other healthcare costs. Unfortunately, in 2001 states 
witnessed both a reduction in total state revenues of 5 
percent, at the same time Medicaid exploded to grow 13 percent 
per year. Medicaid has now become the Pac-Man of state budgets, 
gobbling up every additional dollar of revenues. Medicaid 
growth rate has average 10 percent per year during the past two 
decades and now represents 21 percent of the average state 
budget, up from 12.5 in 1990. Other healthcare costs represent 
another 10 percent of state budgets. The major reason for the 
Medicaid continued growth is that it serves to supplement the 
Medicare program for many services Medicare beneficiaries do 
not obtain other places.
    It is shocking to note that the Medicaid's 50 million 
beneficiaries, the six million who are dual-eligible for 
Medicare and Medicaid, account for 42 percent of the Medicaid 
budgets. Prior to year 2001, state spending over those previous 
two decades was growing about 6.5 percent per year. For the 
last 3 years, spending essentially has been flat or negative, 
essentially no growth.
    This fiscal crisis has had several major impacts--number 
one, on the allocation of funds from the Master Settlement 
Agreement, two, the cost of tobacco products, and, three, total 
spending on healthcare.
    First, settlement dollars that originally were to be placed 
in rainy day funds or specific endowment funds were utilized to 
balance state budgets. Second, a larger number of states were 
forced to securitize part of their funds. Third, funds for 
tobacco prevention from the MSA were reduced. And, fourth, a 
large number of states enacted significant increases in excise 
taxes on cigarettes, which should have a huge impact on 
smoking, over time. Since January 2002, 28 states plus the 
District have increased cigarette taxes, some as high as over a 
dollar a pack. The median has increased to 58 cents from 28 
cents, over a hundred-percent increase. We have not seen yet 
the impacts of these tax increases.
    Finally, Medicaid spending growth at 10 percent per year, 
all states have enacted changes to moderate the growth of 
Medicaid.
    I would say, Mr. Chairman, this is about hard choices. And, 
unfortunately, Governors and state legislatures have had to 
look at the potential of pushing as many as a million to two 
million women and children off the rolls of Medicaid, and 
compare that to smoking cessation programs. That's what's going 
on, in terms of hard choices, when you have virtually no 
revenue growth.
    In conclusion, given the long history of state expenditures 
for smoking-related illnesses and the fiscal pressures facing 
states, the financial flexibility provided to states in the MSA 
is not only appropriate, but vitally necessary. The state 
fiscal crisis will continue, and, without flexible use of MSA 
funds to target emerging priorities, states will be forced to 
cut education spending and make painful cuts in Medicaid 
expenditures for prescription drugs and other programs.
    Thank you, Mr. Chairman. I'd be happy to answer any 
questions.
    [The prepared statement of Mr. Scheppach follows:]

    Prepared Statement of Raymond C. Scheppach, Executive Director, 
                     National Governors Association
    Chairman McCain, Senator Hollings, and members of the Committee, my 
name is Ray Scheppach and I'm the Executive Director of the National 
Governors Association. Thank you for the opportunity to represent the 
Nation's Governors before this committee today.
    The tobacco Master Settlement Agreement (MSA) was reached on behalf 
of the Attorneys General of forty-six states, five commonwealths and 
territories, and the District of Columbia on November 23, 1998. That 
agreement, worth $206 billion over a 25-year period, is actually worth 
$246 billion when combined with previous settlements on behalf of 
Florida, Minnesota, Mississippi, and Texas.
The MSA Contains Many Important Provisions to Discourage Smoking
    Two major programs in the settlement are dedicated to reducing teen 
smoking and educating the public about tobacco-related diseases. A 
total of $250 million was used to fund the creation of the American 
Legacy Foundation, a national charitable organization, to support the 
study of programs to reduce teen smoking and substance abuse as well as 
prevent diseases associated with tobacco use. An additional $1.45 
billion was utilized to create a National Public Education Fund to 
counter youth tobacco use and educate consumers about tobacco-related 
diseases.
    In addition, the price of tobacco has increased. Immediately after 
the MSA, the price of tobacco products jumped by 40 to 50 cents per 
pack. Additional price increases have occurred as companies attempt to 
maintain profit margins and make settlement payments. These price 
increases will substantially reduce smoking over time.
    The settlement agreement also has a significant number of 
restrictions on advertising and promotion. The settlement prohibits 
targeting youth in tobacco advertising, including a ban on the use of 
cartoon or other advertising images that may appeal to children. The 
settlement also prohibits all outdoor tobacco advertising, tobacco 
product placement in entertainment or sporting events, and the 
distribution and sale of apparel and merchandise with tobacco company 
logos. Further, the settlement places restrictions on industry lobbying 
against local, state, and Federal laws. These restrictions on tobacco 
companies' ability to market their products to children and young 
adults will eventually have a major impact on smoking.
The MSA Did Not Require Set-Asides
    There is a fundamental difference between the settlement we reached 
and the proposals being promoted in the late 1990s involving Federal 
legislation. For that reason, Congress acted wisely in 1999 in 
declaring that decisions about the MSA funds should be made at the 
state and local level.
    In the original lawsuits, states filed complaints that included a 
variety of claims, such as consumer protection, racketeering, 
antitrust, disgorgement of profits, and civil penalties for violations 
of state laws. Medicaid was not mentioned at all in a number of cases 
and was only one of a number of issues in many others. Further, the 
state-by-state allotments were determined, not based on Medicaid 
expenditures, but on an overall picture of health care costs in a given 
state.
    It is important to note that, ultimately, the master settlement 
agreement bore no direct relationship to any particular state lawsuit. 
The master settlement agreement represents a global settlement approach 
that encompassed states who sued for Medicaid, states that had Medicaid 
claims thrown out of court, and other states that simply did not sue at 
all. The attorneys general were attempting to obtain a fair monetary 
recovery for all states considering the variety of claims and requests 
for relief and the common goals of the multistate settlement process.
    The Federal Government was invited to participate in the state 
lawsuits, but declined. Therefore, states were forced to bear all of 
the risk initiating the suits and the entire fiscal burden of carrying 
forth the unprecedented lawsuits against a well financed industry that 
had never lost such a case before. It was not until after state victory 
was ensured that the Federal Government began to pay renewed attention 
to state activities.
    Simply put, the master settlement agreement negotiated between the 
Attorneys General and the tobacco companies is separate and distinct 
from the agreement that was proposed in the 105th Congress. That 
proposal would have represented almost 50 percent more money, $368 
billion compared to the current settlement of $246 billion. That 
agreement was much more comprehensive, representing both state and 
Federal costs and requiring congressional approval. In the context of 
the negotiations over the $368 billion amount, the Federal Government 
may have had a legitimate claim to a share of the settlement, but the 
proposal's inability to garner enough votes for passage in Congress 
fundamentally changed the debate. Without passage of supporting 
legislation, states were forced to proceed with their own lawsuits and 
negotiate settlements based on nonfederal claims.
Congress Acted Definitively to Give States Spending Authority
    On May 21, 1999, President Clinton signed into law a measure (P.L. 
106-31) recognizing that decisions about how to spend the tobacco 
settlement dollars were most appropriately made at the state level, 
where Governors and legislators could be the most responsive to the 
unique needs and circumstances of their citizens. Championed by a large 
bipartisan group of Senators led by Sen. Kay Bailey Hutchison (R-Tex.) 
and Sen. Bob Graham (D-Fla.), the provision was successfully added to 
the FY 1999 Emergency Supplemental Appropriations bill.
State Spending
    Over the 2000 to 2003 period, states have received $37.5 billion 
from the Master Settlement Agreement. Over this period there has been 
substantial stability in the allocation of revenues. About 36 percent 
went to health services and long-term care. About four percent went to 
tobacco use prevention. Another 12 percent went to research, education, 
and services for children. Also, states allocated three percent to 
tobacco farmers for crop diversification efforts to reduce their 
states' dependence on tobacco production. The remainder went to 
endowments, budget reserves, and other programs.
    The one area that witnessed a major change over the three year 
period was the percent allocated to endowments and budget reserves, 
which went from 29 percent in 2000 to 18 percent in 2003 and then two 
percent in 2004. This was caused by the worst state fiscal crisis since 
World War II. Regardless of this crisis, 37 states continued to spend 
funds on health services and about 33 maintained their commitment to 
tobacco use prevention.
    Throughout the last two years, due partly to the budget crisis as 
well as concerns regarding the bankruptcy of tobacco firms, 16 states 
have securitized their tobacco settlement revenues. The proceeds from 
this securitization were about $13 billion.
Innovative Programs
    The tobacco settlement funds allowed states to develop a 
significant number of innovative programs in biotechnology and economic 
development, smoking cessation, early childhood, and preventive health 
care. This period of innovation and experimentation, which helped 
states develop ``best practices'', will pay dividends for a long time. 
States are proud of the smoking cessation initiatives and other 
programs they've developed with the tobacco settlement funds.
    There are several innovative programs designed to prevent maternal 
smoking that are showing great promise. Smoking during pregnancy is 
currently responsible for 20 percent of all low-birth weight babies, 8 
percent of preterm births, and 5 percent of all perinatal deaths. 
Several states have invested a portion of its tobacco settlement to 
target smoking cessation among pregnant women. These include both 
classes and one-on-one counseling on the dangers of smoking; effective 
protocols for breaking the smoking habit; statewide quit lines, and 
media campaigns aimed at women of childbearing age. Besides traditional 
cessation education and counseling, these services address a range of 
barriers to cessation, including weight gain, by providing support such 
as free enrollment in sports clubs.
    Other states have used portions of the settlement to develop unique 
approaches to enhance education opportunities for low-income and 
disadvantaged students; strengthening foster care and child welfare 
initiatives; and expanding options for early childhood development and 
Healthy Start programs.
    Many states have used tobacco settlement funds to make critical 
investments in pharmaceutical assistance programs for seniors and home 
and community-based care programs for people with disabilities. As many 
as 16 states have invested funds in biomedical research or research on 
cancer and other tobacco-related illnesses. The dividends that these 
investments pay will benefit all the other states as well.
    Finally, the largest investment has been in traditional health 
care. States have invested billions in funds for indigent care 
programs, primary care, increasing insurance coverage for the working 
poor, for hospital charity care, community health centers as well as 
Medicaid and the State Children's Health Insurance Program (S-CHIP).
Fiscal Condition of the States
    The most important issue facing the states today is the dismal 
fiscal situation. States are enduring the worst fiscal stress since 
World War II, and although the national economy is beginning to 
recover, state revenue growth has not responded, and historically has 
lagged Federal recoveries by upwards of 18 months. In fact, the current 
state crises are likely to endure well into Fiscal Year 2005. These 
fiscal conditions are driven by two major factors, sagging revenues and 
exploding Medicaid costs.
    States have responded sensibly to these difficult conditions. 
Although the need for services has increased rapidly, state spending 
has only increased by 1.6 percent over the last two years, and our 
estimates for 2004 are that state spending will actually decrease by 2-
3 percent State spending will have been essentially flat for three 
years.
    On the spending side, the program that has been responsible for the 
deteriorating fiscal condition is Medicaid, the state-federal health 
care entitlement for the poor, the elderly, and the disabled. Now 
larger than Medicare in terms of total population, total expenditures, 
and annual growth rate, Medicaid has become the ``Pac-Man'' of state 
budgets, gobbling up every additional dollar of revenue. Medicaid's 
growth rate has averaged 10 percent per year during the past two 
decades and now represents 21 percent of the average state budget, up 
from 12.5 percent in 1990.
    The major reason for Medicaid's continued growth is that it quietly 
serves to supplement the Medicare program for the many services 
Medicare beneficiaries can not obtain anywhere else. Medicaid pays for 
the prescription drugs and long-term care that Medicare does not cover, 
and subsidizes the significant cost-sharing burdens that Medicare 
places on its poorest beneficiaries.
    It is shocking to note that of Medicaid's 50 million beneficiaries, 
the six million people eligible for both programs (the ``dual 
eligibles'') account for 42 percent of Medicaid's budget. Therefore, 42 
percent of a $280 billion budget is being spent on people who are 
already receiving the FULL Medicare benefits package. State budgets 
simply cannot sustain this growing cost shift.
    The 2001-2004 state fiscal crisis has had major impacts on:

   The allocation of funds from the Master Settlement 
        Agreement;

   The cost of tobacco products in the states; and

   Total spending on health care.

    First, settlement dollars that originally were to be placed in 
rainy day funds or specific endowment funds were utilized to balance 
state budgets. Second, a larger number of states were forced to 
securitize part or all of their funds. Third, funds for tobacco 
prevention from the MSA were reduced. Fourth, a large number of states 
enacted significant increases in excise taxes on cigarettes which 
should have a huge impact on smoking cessation over the next 20 years. 
The proceeds from some of these taxes went into other endowment funds 
that are being used for smoking cessation. Finally, with Medicaid 
spending growing at 10 percent per year all states enacted changes to 
moderate the growth in Medicaid.
Tobacco Prevention and Control is Important to the States
    The Federal and state governments have always had the 
responsibility of ensuring and protecting the public health of its 
citizens. Smoking, as the leading cause of preventable death and 
disease, results in $150 billion in direct and indirect medical costs 
per year.
    In 2001, 22.8 percent of the population were reported to be 
smokers, a reduction from 25 percent reported in 1993. Progress 
continues to be made in meeting national goals related to reduction in 
the percentage of the population who smoke. States are leaders in these 
efforts--through direct program efforts and changes to public policy.

   Twenty states increased funding in Fiscal Year 2003 for 
        tobacco prevention.

   Forty three states have laws restricting smoking in public 
        places, 45 restrict smoking in government buildings, and 25 
        have laws restricting smoking in private work places.

   Five states have comprehensive laws with statewide 
        restrictions on indoor smoking in restaurants, bars, and other 
        public places.

   Between 1990 and 2000, cigarette sales fell 20 percent.

    Since January 2002, 28 states and the District of Columbia have 
implemented or enacted new cigarette tax increases. These increases are 
as high as $1.01 per pack in Connecticut and are more than 50 cents per 
pack in a dozen states. This raises the median tax rate to 58 cents per 
pack, an increase from 28 cents in July 2002.
Conclusion
    The nation's Governors feel strongly that the states are entitled 
to all of the funds awarded to them in the tobacco settlement agreement 
without Federal restrictions. The master settlement agreement is 
fundamentally different from the earlier proposals considered by 
Congress. It is a global settlement of myriad claims.
    Given the long history of state expenditures for smoking related 
illnesses and the fiscal pressures facing states, the financial 
flexibility provided to states in the MSA is not only appropriate, but 
vitally necessary. The state fiscal crisis will continue, and without 
flexible use of MSA funds to target emerging priorities, states will be 
forced to cut education spending and make painful cuts in Medicaid 
expenditures for prescription drugs and long-term care as well as other 
public health and health promotion activities.
    I thank you again for the opportunity to appear before the 
Committee, and I would be happy to answer any questions you may have.

               Cigarette Tax Increases Since January 2002
------------------------------------------------------------------------
                       Increase Per
  Rank      State          Pack                 Effective Date
------------------------------------------------------------------------
1        Connecticut           $1.01     April3, 2002 and March 15, 2003
2        Massachuset            0.75                       July 25, 2002
          ts
2        Vermont                0.75       July 1, 2002 and July 1, 2003
4        New Jersey             0.70                        July 1, 2002
4        New Mexico             0.70                          Jul1, 2003
------------------------------------------------------------------------
6        Pennsylvani            0.69                       July 15, 2002
          a
7        Oregon                 0.60                    November 1, 2002
7        Washington             0.60                     January 1, 2003
9        Arizona                0.58                   November 25, 2002
10       Kansas                 0.55        July1, 2002 and July 1, 2003
------------------------------------------------------------------------
11       Montana                0.52                         May 1, 2003
12       Michigan               0.50                      August 1, 2002
12       Rhode                  0.50        May 1, 2002 and July 1, 2003
          Island
14       Wyoming                0.48                        July 1, 2003
15       lllinois               0.40                        July 1, 2002
------------------------------------------------------------------------
15       Indiana                0.40                        July l, 2002
17       New York               0.39                       April 3, 2002
18       West                   0.38                         May 1, 2003
          Virginia
19       District of            0.35                     January 1, 2003
          Columbia
20       Maryland               0.34                        July 1, 2002
------------------------------------------------------------------------
21       Ohio                   0.31                        July 1, 2002
22       Hawaii                 0.30    October 1, 2002 and July 1, 2003
22       Nebraska               0.30                     October 1, 2002
24       Idaho                  0.29                        June 1, 2003
25       Arkansas               0.25                        June 1, 2003
------------------------------------------------------------------------
26       South                  0.20                       March 18,2003
          Dakota
27       Utah                   0.18                          May6, 2002
28       Louisiana              0.12                      August 1, 2002
29       Tennessee              0.07                       July 15, 2002
------------------------------------------------------------------------
Source: Federation of Tax Administrators and news reports


               State Excise Tax Rates on Cigarettes, 2003
------------------------------------------------------------------------
 Rank     State     Cents Per Pack    Rank     State     Cents Per Pack
------------------------------------------------------------------------
1      Connecticu             151.0  26     Idaho                   57.0
        t
1      Massachuse             151.0  27     Indiana                 55.5
        tts
3      New Jersey             150.0  28     Ohio                    55.0
3      New York               150.0  28     West                    55.0
                                             Virginia
3      Rhode                  150.0  30     South                   53.0
        Island                               Dakota
6      Washington             142.5  31     New                     52.0
                                             Hampshire
7      Hawaii                 130.0  32     Minnesota               48.0
8      Oregon                 128.0  33     North                   44.0
                                             Dakota
9      Michigan               125.0  34     Texas                   41.0
10     Vermont                119.0  35     Iowa                    36.0
11     Arizona                118.0  36     Louisiana               36.0
12     Alaska                 100.0  37     Nevada                  35.0
12     Maine                  100.0  38     Florida                 33.9
12     Maryland               100.0  39     Delaware                24.0
12     Pennsylvan             100.0  40     Oklahoma                23.0
        ia
16     Illinois                98.0  41     Colorado                20.0
17     New Mexico              91.0  41     Tennessee               20.0
18     California              87.0  43     Mississipp              18.0
                                             i
19     Kansas                  79.0  44     Missouri                17.0
20     Wisconsin               77.0  45     Alabama                 16.5
21     Montana                 70.0  46     Georgia                 12.0
22     Utah                    69.5  47     South                    7.0
                                             Carolina
23     Nebraska                64.0  48     North                    5.0
                                             Carolina
24     Wyoming                 60.0  49     Kentucky                 3.0
25     Arkansas                59.0  50     Virginia                 2.5
------------------------------------------------------------------------
Source: Campaign for Tobacco-Free Kids, May 2003


    The Chairman. Thank you.
    Attorney General Moore, welcome.

   STATEMENT OF HON. MIKE MOORE, ATTORNEY GENERAL, STATE OF 
                          MISSISSIPPI

    General Moore. Thank you, Senator McCain. And it's great to 
see my friend, Senator Lautenberg, back again, and Senator 
Durbin, Senator Nelson, and my hometown Senator, Senator Lott. 
It's good to be with you.
    I will just talk from my heart a little bit today. Some of 
the information that I've just heard just grieves me just a 
little bit, and I think we might ought to rewind history a 
little bit and remember what this was all about.
    I know the courage that Senator McCain showed, and Senator 
Lott and others, who worked with us to put this bill in the 
Commerce Committee back in 1997. People seem to forget about 
that, that there was really an original settlement that came 
before Congress that turned into the McCain bill. It had FDA 
jurisdiction in it, something that a lot of the naysayers said, 
``Oh, we'll get that through the courts.'' Well, we didn't. It 
had, eventually, $550 billion worth of dollars in there, some 
that would go to the Federal Government, some that would go the 
State Government. It had advertising and marketing restrictions 
way beyond anything any public-health person had ever even 
thought about.
    In my opinion, had the McCain bill passed the United State 
Senate, we would have seen a 50 percent or greater reduction in 
teen smoking in this country by this point. We certainly 
wouldn't be having this argument with the states about how 
they're spending the money. But, unfortunately, we're not 
there.
    In 1997, Mississippi settled its case that it had fought 
for about 4 years. Florida followed, settling its case. Texas 
followed, and Minnesota. Later on, Plan B, which was the 46-
state settlement, which didn't have the same type advertising 
and marketing restrictions, and much less money, because the 
leverage had changed in those years.
    All those things that the naysayers said were going to 
happen didn't happen. We lost FDA. A lot of the states' cases 
were lost. And so by the time of the 1998 settlement, basically 
the leverage was lessened.
    My point about that is, if you rewind history a little bit, 
a couple of things come to mind. When we settled our case and 
Florida settled their case, the tobacco companies gave us an 
extra amount of money while the bill was pending in Congress. 
To do what? To start prevention programs. I got $62 million 
extra, on top of my settlement, to immediately start a pilot 
program to find out what worked on prevention. Florida got $200 
million. Texas got above $200 million.
    Mississippi, one of the poorest states in America, and 
Florida, started their programs. We began to see immediate 
reduction in teen smoking and even adult smoking in our states 
over the first two or 3 years. The plan was for us to use that 
as a template for all the other states, should there be a 
national settlement.
    Texas--it hasn't been pointed out, but I'll point out--
never even used the $200 million that they were given, on top 
of their settlement, for prevention programs statewide. They 
expended it in just a few counties. They put the money in the 
bank, even though their settlement said they ``shall have a 
prevention program.'' And, unfortunately, that didn't occur.
    So, fast forward. The settlement occurs in 1998, the MSA 
that everybody talks about. And then all of a sudden we start 
getting letters. Senator Lott will remember this, because I 
think that was the first phone call I made. Donna Shalala sent 
me a letter and said she wanted 80 percent of my money, in 
Mississippi. And I remember what happened. The Governors of the 
country, the legislators of the country, and attorneys general 
of the country, what we said together was, ``The states fought 
this fight. The Federal Government didn't fight this fight, 
even though we invited them in. They thought we were foolish 
and we didn't have a chance to win.'' I'll never forget them 
telling me that when I went to see them in 1994. So what we did 
is, we asked Congress, the House and the Senate, ``Please pass 
a bill, let the states keep all the money. And, if you do, so 
there won't be any Medicaid claim, trust us''--I remember it, 
because I was one of the messengers going to each and every one 
of your offices and saying this--``trust us, we'll spend the 
money on prevention and public health matters.'' Trust us. The 
Governors said that, the national legislative groups said that. 
Trust us. There was even a debate--Senator Lott, you will 
remember, ``I don't know if we can trust the states or not, 
maybe we ought to have a set-aside,'' and Senator Lott--I guess 
I can say it now--was helping us, ``Maybe we should have as 
much as a 25 percent set-aside.'' Some wanted 50 percent. But, 
``No,'' we heard from the Governors and others, ``let the 
states decide how to spend this money. But, trust us, we'll 
spend it on this prevention program.''
    This was a tobacco lawsuit. It didn't have anything to do 
with highways. It didn't have anything to do with sewers. It 
didn't have anything to do with creating a morgue out in North 
Dakota. It didn't have anything to do, in Michigan, for 
creating college scholarships for middle- and upper-class 
students. This was about the number one public health problem 
in America. Now, whether people believe it or not, more people 
die from this cause than any other cause in this country.
    And I was glad to hear my friend, Matt Myers and Senator 
McCain, say that now only 2,000 kids start smoking a day. When 
we were debating this in Congress, it was 3,000 kids start 
smoking a day, and it was 430,000 people die. Now it's only 
400,000 people a year die from tobacco-related disease.
    My point to you is, if you know that more people die from 
one thing than anything else in this country--I remember the 
debate. You guys debated this for a solid year on the floor of 
the Senate and the House, and I didn't hear, one time, people 
talking about budget deficits. What I heard was, ``We need--
help our children, protect our children. Prevent the tobacco 
companies from hooking them into a horrible addiction that will 
turn out to lung cancer and heart disease and emphysema.'' And 
I heard about all the great things that Senator Lautenberg did, 
and Senator Durbin, Senator Wyden, and all these courageous 
people before us that did this. It was just a great cause. It 
was the number one story on every newspaper, TV show. It was a 
great thing, and people were really going to do something. We 
were going to change the public health of this country.
    And then guess what happened? We settled the cases. We got 
the money to do it. Not a little bit of money. $246 billion. To 
do what? To clean up the mess.
    And are we cleaning up the mess? I've been to 44 states 
giving a speech called ``Spend The Money On What The Fight Was 
About.'' And one of the analogies I use, and I'll say it very 
quickly, is, what if, in Alaska, when the Exxon Valdez ship 
crashed, and the oil spilled out into the beautiful, pristine 
Sound and all the little oily fish and oily birds and the 
pristine environment was destroyed--what if the Governor and 
the legislature in Alaska had said, ``You know, when we get 
this money from Exxon, we need some new schools. You know, we 
need to build some new roads. You know, we have a budget 
deficit this year. We've got a hole in our budget. Leave the 
mess out there. Leave the oil out there.'' You see, everybody 
in this country and the world would have been in an outrage. 
Why? Because you can see the mess. I mean, you can see the 
birds and the fish and all the terrible environmental disasters 
that are occurring, so of course they had to clean up the mess.
    I'm not talking about oily fish here, Senator. I'm not 
talking about little floppy birds. I'm talking about 400,000 
grandmas and grandpas and uncles and aunts, and I'm talking 
about 2,000 real children who are beginning a life that, one 
third of them, are going to die from it. And I'm talking about 
having the antidote, having the penicillin, having the 
substance that we can inject and make a change.
    Some say I'm in the poorest state in America in 
Mississippi. Sometimes I think we're the richest state in 
America. Who has an excuse in this room? Mississippi takes all 
of its money from the tobacco settlement, places 100 percent in 
a healthcare trust fund, by statute. On top of that, we've 
spent over $20 million on a prevention program. And, Senator 
Lott knows this, we've reduced teen smoking in Mississippi by 
over 30 percent. We've reduced middle-school smoking by 50 
percent. We've reduced adult smoking by 20 percent. That's the 
astounding number. We have 70 percent more smoke-free homes now 
than we had when we started.
    The only place that prevention programs don't work are 
where they're not being tried. I've used some strong words in 
my speeches across the country. I call it ``moral treason.'' I 
remember why we filed these cases. With all due respect to the 
Governors and the legislators in this country who are making 
decisions about this, this money didn't fall out of heaven. It 
really didn't fall out of heaven. It has a connection with a 
lawsuit that we filed that was real. And if it wasn't real, we 
wouldn't have settled, we wouldn't have won this money.
    Governor Chiles, in Florida, God rest his soul, would turn 
over in his grave today if he knew what had happened in Florida 
to his program. Tremendous gains. And then all of a sudden, 
well, we're successful, so let's quit doing it.
    Every single state in this country that's doing the right 
thing, including Delaware, by the way, are making a difference. 
So if I sound like I've got a hollow place in my belly about 
this, I do. I'm proud of my state, and we're doing good, and 
we--Senator McCain, we lived up to what I told you. I told you, 
``Trust us. You let us keep all the money, and we'll do the 
right thing.'' But the majority of the states in this country, 
frankly, think the money fell out of heaven, and I really wish 
that Congress would do something about this injustice. We had 
one chance to change the public health of this country for the 
better, and I think we're wasting it.
    Don't tell me about the budget deficits. Don't tell me 
about needs coming Mississippi. I'm going to have a $700 
million budget deficit next year, in Mississippi. $700 million 
bucks. That's a lot of money. They're not going to attack my 
prevention program. Do you know why? Because in the long run, 
every dollar you invest in prevention in tobacco saves you 
three dollars.
    All this woe about the Medicaid program? Why do you think 
we filed this lawsuit? The majority of people who smoke are the 
folks who are on Medicaid. They're the poorest people in this 
country. If you reduce the number of people that are the 
poorest from smoking, you will stop heart disease and lung 
cancer and emphysema and all those things, and you will, 
therefore, reduce your Medicaid budget tremendously.
    So it is shortsighted thinking to securitize your money, to 
sell off the future of your children and your people. It is 
shortsighted thinking to take the money that you have and spend 
it on other things because you have a budget deficit. My 
question to the Governors and the legislators today is, What 
would you have done if we didn't have a tobacco settlement?
    Thank you, Senator.
    [The prepared statement of Attorney General Moore follows:]

       Prepared Statement of Hon. Mike Moore, Attorney General, 
                          State of Mississippi
    Good morning, Chairman McCain and Members of the Senate Commerce 
Committee.

    It is my pleasure to again appear before you and address the 
important public health issues concerning the historic tobacco 
settlement. I remember very well the days, weeks, months, and years put 
into the historic battle with the tobacco companies. I remember the 
legal battles, the political battles, and the legislative battles.
    Mississippi filed the first case against the Tobacco Industry in 
May of 1994. We claimed the tobacco companies were killing 430,000 
people a year, attracting 3,000 new teenage smokers every day by their 
marketing and advertising, and costing our state millions of dollars a 
year in the medical treatment for those indigent citizens in our health 
care programs.
    The industry responded that the use of their product did not cause 
death and disease, that nicotine was not an addictive drug and they 
certainly didn't advertise and market to children. They were proven 
wrong on all counts. In June of 1997 a historic settlement was 
announced among all the states Attorneys General and the Tobacco 
Industry. That settlement provided Food and Drug Administration (FDA) 
regulation over nicotine, $368 billion for the states and various 
Federal programs, major marketing and advertisement restrictions and 
much more. This Committee with the leadership of Senator McCain brought 
forward the settlement in legislation, held hearings, added many 
refinements and strengthened the original settlement. Unfortunately, 
that fell a few votes short of the requisite 60 votes needed to pass 
the Senate. In the interim between June of 1997 and June of 1998 the 
landscaped had changed. Mississippi, Florida, Texas, and Minnesota 
settled their cases, taking away some of the toughest cases against the 
industry. Some of the states had legal setbacks, FDA regulation looked 
shaky and thus leverage had shifted. In November of 1998 a settlement 
of $206 billion that included some of the advertising and marketing 
provisions of the original settlement was announced by the remaining 46 
states. Known as the Master Settlement Agreement (MSA) this settlement 
did not require any Congressional approval and settlement dollars began 
to flow to all the states in the next year. A huge public health 
victory-we had what we needed to immediately impact the number one 
cause of death in this country.
    Since the Tobacco Settlements I have been in 44 states giving a 
speech called ``spend the money on what the fight was about.'' I have 
discovered that some governors and state legislators must believe that 
the tobacco settlement dollars fell out of heaven . . . that the 
dollars have no connection to the public health lawsuit that we 
brought. The money is being spent on one-time budget deficits, college 
scholarships, tobacco warehouses, roads, anything but prevention, 
cessation, and improving public health of this country.
    If tobacco really kills 430,000 people a year in America-If tobacco 
related disease really is the number one cause of preventable death in 
America-then why is it we get $246 billion to do something about the 
problem and only a few states are using the money at a substantial 
level to make a difference. Comprehensive tobacco prevention programs 
work. They have worked everywhere they have been implemented. The only 
place they don't work is where they have not been tried.
    In Mississippi, one of the poorest states in this country, we take 
all the money from our tobacco settlement and place it by law in our 
Health Care Trust Fund. These dollars can only be spent on public 
health matters. We spend $20 million a year on a prevention/cessation 
program call the Partnership for a Healthy Mississippi. It is truly a 
successful comprehensive program. In the first few years we have 
reduced the number of public high school students smoking by more than 
20 percent and middle school students smoking by almost 50 percent. 
That means that there are 28,000 fewer kids smoking in Mississippi 
since the start of the program. We have dramatically reduced adult 
smoking by 20 percent and changed attitudes across our state about the 
importance of clean indoor air increasing the number of smoke-free 
homes by 63 percent since 2000--that means 406,000 people are no longer 
exposed to second-hand smoke in their homes.
    I have heard all the arguments by those states that have chosen not 
to live up to the purposes of the tobacco fight.

  1.  That the settlement documents don't say we have to spend the 
        money on tobacco prevention and cessation. To them I say the 
        preamble of the settlement provides ample language that public 
        health improvements, protection of our children, and the 
        reduction of death and disease from tobacco form the basis of 
        the agreement. When did doing the right and moral thing have to 
        be spelled out? These same public officials promised Congress 
        in 1999 that if Congress would prevent the Department of Health 
        Human Services from requiring the states to reimburse the 
        Federal Government the Federal percentage of Medicaid from the 
        tobacco settlement dollars they would spend appropriate amounts 
        on tobacco prevention and cessation. Governors and legislators 
        all over the country rallied and lobbied to keep Secretary 
        Donna Shalala from seizing the Federal share, promising they 
        would do the right thing-I was there, I heard it, they said 
        'trust us'. Congress agreed, passed the appropriate legislation 
        and most of the states have not lived up to word.

  2.  I also hear ``we have a budget problem-a hug deficit, so we need 
        this money to fill the hole.'' This short-term thinking makes 
        little sense when compared with the dollars saved by a long 
        term investment in reducing deaths and disease from tobacco use 
        and preventing our children from starting. We have had the 
        capability to reduce the deaths, disease and the billions spent 
        in health care costs by half. This public health campaign 
        should have begun in every state in American in 1999 but 
        unfortunately it has not.

    I congratulate all those states like Maine who just announced 
dramatic reductions in youth smoking this month. Florida, 
Massachusetts, and California all had great results but have now been 
cut back. I know we can do better. The Attorneys General of this 
country fought long and hard to achieve this important public health 
victory, I hope that this committee will take action to make sure that 
this victory does not tum into another defeat by Big Tobacco.

    Senator Nelson. Mr. Chairman, may I take a point of 
personal privilege to commend the attorney general of 
Mississippi, who was one of the great leaders in this fight, 
and I was aware of it at the time, as a statewide elected 
official in Florida, where Florida and Mississippi, our two 
attorneys general, Bob Butterworth and Mr. Moore, consulted so 
frequently. And there is a tale of two states. The State of 
Mississippi today, that all that tobacco money is being spent 
as it was intended, on prevention, and the State of Florida, 
the chart that makes that chart pale by comparison, having $840 
million a year coming in, and they are spending on prevention 
now one million dollars. It's a sad commentary.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you very much.
    I'd like to mention that Senator Lott was the Majority 
Leader at the time we passed this bill through this Committee 
with a vote of 13 to 1. He was the one that allowed us to spend 
weeks on the floor of the U.S. Senate in an effort to get that 
bill passed. And I'm grateful for his support. And I understand 
why we had to pull the bill. And so I want to personally thank 
him and all others who were involved in this issue.
    You know, Mr. Scheppach, my beloved friend, Mo Udall, used 
to have a saying. He said, ``There's a politician's prayer that 
goes, `May the words that I utter today be tender and sweet, 
because tomorrow I may have to eat them.' ''
    [Laughter.]
    The Chairman. Here's what our public officials said at the 
time of the MSA. New Jersey Governor Christine Whitman, quote, 
``Every penny of these funds should be used for health 
purposes, including prevention programs and counter-advertising 
to protect kids, cessation programs, and community partnerships 
to serve those who have already put their health at risk by 
smoking, in addition to existing important health programs, 
such as Charity Care and Kid Care.'' New Jersey now ranks 30th 
amongst the states.
    Indiana Governor Frank O'Bannon, ``This money can go a long 
way toward preventing Hoosier kids from ever getting hooked on 
tobacco and toward helping our citizens stop smoking and 
recover from smoking-relating illness.'' They now rank 26th.
    It goes on and on. It's really disturbing, because Attorney 
General Moore and others came to us and said, ``Stay out of 
this. Don't make the states devote any money to prevention and 
treatment of tobacco illness. Trust us. Trust us.''
    North Carolina Governor Jim Hunt, the consent decree gives 
North Carolina, quote, ``a balanced approach to allocate 
tobacco settlement money. It will address our efforts to crack 
down on underage smoking and to prevent the health and well-
being--protect the health and well-being of North 
Carolinians.'' They now rank 33rd in the country.
    Dr. Healton described what's going on here.
    My first question is to you, Mr. Scheppach, and I know 
you'll spout the party line, just as you did in your opening 
statement, but how do you answer Attorney General Moore's 
statement, if Mississippi can do it, the poorest nation in the 
country, why is it that other states in this country can't live 
up to the promises and commitments they made to their citizens 
and to Congress when they made this deal?
    Mr. Scheppach. Well, I'm sorry it wasn't somewhat better, 
in all honesty. I mean, the--I wish the percentage was 8 to 10 
percent, rather than 4 percent, in this particular area. I do, 
however, say that it does take us awhile--yes, I think we do 
know what our effective programs are now, but I don't know that 
we knew that, necessarily, 3 or 4 years ago.
    Plus, this fiscal crisis has really been impacted very 
differentially across the states. When I say, ``This is the 
worst fiscal crisis since the second world war,'' I mean it. In 
2001, revenues were down over 5 percent. We have never had a 
year of negative revenue growth for states since the second 
world war. We've had quarters, but we've never had a year. We 
were down negative five percent. Medicaid growth over the boom 
period, 1995 through year 2000, was down to 5 percent. Those 
are the baselines we were working with. Medicaid jumped, in 
2001, to 13 percent growth, and other healthcare, which is 
another 10 percent of the budget, jumped, as well. So I think 
states were caught in a very, very difficult situation. And it 
was differential. Places like New Jersey, New York, and 
California were hit extremely hard, where other states were hit 
less hard.
    So I wish it was better. My hope is that, as revenues turn 
around and begin to grow, that larger amounts of money go into 
these particular programs. States have experienced when they've 
taken money from trust funds in the past that they have, in 
fact, replenished them when revenues did grow.
    The Chairman. Well, I thank you, Mr. Scheppach, and I 
understand what your job is, and I appreciate you coming here 
today, unlike the Department of Health and Human Services.
    But I just--and I don't--it's not useful for me to keep 
kicking you around, but a resolution adopted by your members in 
1999 states, ``The Nation's Governors are committed to spending 
a significant portion of the settlement funds on smoking 
cessation,'' unquote. In a 2001 NGA resolution, the same 
commitment is repeated. In 2003, silence. This is what gives 
politicians a bad name.
    Ms. Hudson, securitization, I understand that you think 
that that's a good idea. Is that right?
    Ms. Hudson. I do not.
    The Chairman. You do not. Isn't this--and maybe the other 
witnesses--well, I'm about out of time--isn't this, sort of, a 
commitment to keep the use of tobacco products as a viable way 
of continuing revenue?
    Ms. Hudson. Well, I just think that states should have done 
what Delaware did, and put it into an account and spend it for 
health. Securitization is so risky, and it really hasn't been 
that successful. And it doesn't necessarily solve the problem, 
in that it'll be spent in the right way when they do have it to 
spend. I also think it would be good if states would pass a 
clean indoor-air bill, so that there wouldn't be an opportunity 
to smoke in indoor public places, that would go with all of 
this, and many states are doing that.
    The Chairman. Thank you.
    Dr. Healton, do you want to comment on that?
    Dr. Healton. On securitization?
    The Chairman. Yes.
    Dr. Healton. Well, I think securitization is the 
penultimate example of robbing the--you know, robbing the fund 
and making the chance that a poor decision during a fiscal 
crisis can be changed in the future. I think that's the great 
tragedy. And I also think--I don't know the exact percentage--
but it's fiscally foolish, given the amount that's being paid 
on the dollar at this juncture, given the liability situation 
and the litigation situation for the tobacco industry.
    The Chairman. Senator Lautenberg?

            STATEMENT OF HON. FRANK R. LAUTENBERG, 
                  U.S. SENATOR FROM NEW JERSEY

    Senator Lautenberg. Thanks, Mr. Chairman. And I thank you 
for your interest in resolving this dispute over tobacco. 
You've been a staunch supporter.
    My work on tobacco began here, and Dick Durbin was on the 
other side of the Capitol. We did it together, started in 1986, 
it was our activity in 1987, we got a bill passed. And it's 
very disappointing to see the reduction in prevention funds 
that we are regularly dealing with.
    I want to say this, as kind of a start. First, Mr. 
Chairman, I want to ask consent that my full statement be 
included in the record.
    The Chairman. Without objection.
    [The prepared statement of Senator Lautenberg follows:]

            Prepared Statement of Hon. Frank R. Lautenberg, 
                      U.S. Senator from New Jersey
    Mr. Chairman:

    I know that you and I both are dedicated to protecting Americans--
especially our youth--from the dangers of tobacco. I applaud your 
leadership in this regard and thank you for holding this important 
hearing.
    Today, five years after the settlement agreed to by 46 states and 
five major tobacco companies, tobacco control remains one of America's 
most pressing public health issues.
    It is estimated that direct medical expenditures attributed to 
smoking now total more than 75 billion dollars per year.
    I used to smoke--a lot. Fortunately, my daughter, when she was a 
young girl, convinced me to quit. Since then, I have been fighting the 
tobacco industry. I'm proud to say that my work on the public health 
side of the tobacco debate started long before tobacco control became a 
mainstream issue.
    I authored the law banning smoking on airplanes, which protected 
people from deadly secondhand smoke. That law changed our culture's 
attitudes about smoking in public places.
    I also wrote the laws banning smoking in all federally-funded 
places that serve children. And I have consistently supported higher 
tobacco taxes to pay for expanding health coverage for children and the 
uninsured.
    We have made progress over the past several years but we still have 
so much further to go. Tobacco use continues to be the No. 1 leading 
cause of preventable death and disease. Each year, tobacco claims over 
400,000 lives here in the United States.
    According to the Centers for Disease Control (CDC), if current 
tobacco use patterns persist in the United States, an estimated 6.4 
million children will die prematurely from a smoking-related disease. 
Every day, nearly 5,000 young people try cigarettes for the first time. 
On a positive note, smoking among adults has slowly but steadily 
declined since 1993; however, 46.5 million American adults still smoke.
    After the flawed ``Global Tobacco Settlement'' proposal failed, and 
Chairman McCain's good tobacco bill was killed by the industry, the 
states struck their own, separate settlement with the tobacco industry.
    While this ``master settlement'' did not tell states how they 
should spend the money, the governors and other officials from many of 
the States promised that they would use the funds for tobacco 
prevention and anti-smoking campaigns targeted to children.
    At the time I was skeptical of the state settlement because it did 
not earmark funding for health. Unfortunately my doubts proved correct.
    A study by the Campaign for Tobacco Free Kids found that only four 
states currently fund tobacco prevention programs at the level 
recommended by the CDC.
    This is deeply disturbing. Especially when you consider that 
tobacco companies continue to spend more than 20 times as much to 
market their deadly products as the States spend to protect kids from 
tobacco.
    The states are facing their biggest fiscal crisis since World War 
II or, in some instances, the Depression. It's no surprise that 
financially-strapped State officials are diverting tobacco settlement 
funds. But it's disappointing and it's short-sighted. Spending 
settlement money on tobacco control now will save money down the road 
by reducing health care costs. More important, spending settlement 
money on tobacco control now will save lives down the road as well.
    Thank you, Mr. Chairman.

    Senator Lautenberg. And that is that we suffer from a 
depletion of funds. And, you know, Attorney General Moore and 
Matt Myers and--we had a lot of contact. It's been several 
years since I've seen you. You're looking well.
    And also, oh, for those days when we were constantly on the 
press and doing the right thing, and we thought that this was a 
role that was going to really curb smoking, and we wind up 
dealing with what I'll say is an opposition that never stops 
writhing, never stops fighting back, in such devious ways, at 
times, we don't recognize what's happening.
    But I do want to say that the reduction in Federal funding 
in the states has caused us great distress. And I don't approve 
of what New Jersey did, and I don't approve of what other 
states have done, either. But some of it is to reduce 
pollution, which causes lots of lung problems, and some of it 
is designed to reduce accidents, which causes death and 
destruction. None of them have the impact, however, of tobacco.
    And a dear friend of mine, who stopped smoking 30 years 
ago, just in the last couple of months was diagnosed with a 
lung cancer that evolved from his smoking days, and the future 
is bleak. Even though he's a mature man, the fact is that he 
was in the good state of life.
    Matt Myers, I want to ask, should the FDA--should we 
continue to fight that fight and see if we can get tobacco 
regulated under the FDA? Can we trust them to do the job? What 
do you think?
    Mr. Myers. Senator Lautenberg, thank you for your question. 
We need a comprehensive approach. We need the states living up 
to their promise and spending tobacco settlement money on 
tobacco prevention. But we also need to regulate tobacco. It 
remains the least regulated consumer product in this Nation. We 
need to do both.
    It's shocking that if Philip Morris sells macaroni and 
cheese, they have to test the ingredients, notify consumers of 
the ingredients, label the ingredients. If they put a known 
carcinogen in Marlboro, they don't have to do any of those 
things. We need to do that, and we need to do it soon.
    But it's also not a substitute for states doing the right 
thing. I mean, Mike Moore said it correctly. If states as poor 
as Maine and Mississippi can find a way to protect their 
children from tobacco, every state can find a way to protect 
their children from tobacco.
    Senator Lautenberg. I think that's fair to say. Again, not 
defending state action and not doing these things, but the 
states are in a pinch that has not been seen, perhaps, for 50 
to 60 years.
    Mr. Myers. You know, while we all talk about that as a 
critical issue, and it is, tobacco has actually come to the 
rescue of revenue in over half the states in this nation, 
because they've increased their excise taxes, as did New 
Jersey. If the states would devote just a small percentage of 
those excise-tax increases, even after they securitize, we can 
protect our children. All we really need is them to spend about 
8.2 percent of their tobacco revenue. This is money that came 
off of the backs of smoking so that we can do both. We 
shouldn't have to choose, in this country, between protecting 
our kids.
    If we announced that, because of a budget crisis, we were 
going to withdraw polio immunization from our children, would 
anyone be saying, ``Well, there's a budget crisis. That's OK''? 
That's what we've done with regard to tobacco.
    Senator Lautenberg. That's a pretty good comparison. The 
problem is that it takes a long time for the impact of tobacco 
to----
    Mr. Myers. Actually, we see relatively rapid results in 
certain areas. For example, Massachusetts and California both 
targeted pregnant women. They reduced smoking among pregnant 
women by 50 percent, and paid for the entire cost of the 
program by doing so. They also reduced heart disease caused by 
tobacco within 12 months. That's not a 20 year lag time, as for 
lung cancer. Tobacco-prevention programs begin to pay dividends 
immediately.
    Senator Lautenberg. Mr. Chairman, there is lots more that 
we'd like to hear from our witnesses. It's an excellent panel, 
and we thank you, but time is up. I don't know whether you 
intend to----
    The Chairman. Sure.
    Senator Lautenberg.--go around again.
    The Chairman. Be glad to, Senator.
    Senator Lautenberg. Thank you.
    The Chairman. Senator Lott?

                 STATEMENT OF HON. TRENT LOTT, 
                 U.S. SENATOR FROM MISSISSIPPI

    Senator Lott. Well, first, thank you, Mr. Chairman, for 
having this hearing and having this very good panel here this 
morning. And thanks to all of you for being here. I apologize 
for not directing a lot of questions to the other four 
panelists, but he is from my home state and my hometown, so I'm 
going to address most of my questions to our attorney general 
from Mississippi.
    And I want to say we appreciate the job you have done. You 
know, if people want to know why Mississippi was able to put 
this money where it needed to go and handle it in the right 
way, the simple answer is because Mike Moore wouldn't let them 
do otherwise. But you did also, I guess, we'd have to say, have 
cooperation from the state legislature to set it up in the way 
that it was done, and I'm very proud of how our state is 
handling it.
    As a matter of fact, those funds are being used in ways 
that do some things that would need to be done by regular 
funding from the state if they didn't have this fund, so it's 
not a zero-sum game. We're taking some of the programs that 
needed funding and are taking care of it.
    But let me ask you some specific questions for the benefit 
of those that have not been as wise as Mississippi. What did 
you do to make sure it was handled this way in Mississippi? 
Other than being a watchdog and snarling at anybody that 
started breathing heavily on it. What did you and the state 
legislature and the Governor do to set it up the way it was 
done?
    [Laughter.]
    General Moore. Well, if you'll remember, we didn't get a 
lot of cooperation from the Governor. The Governor actually 
sued me to try to stop the lawsuit, so we--that wasn't going to 
work. The Governor at the time was opposed to it. So the first 
thing we did was, I got it written in our court order that 
settled our case, that the money should just be used for 
healthcare and prevention programs. And that could be 
challenged, the legislature could have challenged that, but 
when presented with a court order, let's just say they were 
cajoled very easily into saying that we ought to spend--pass a 
law that says create a healthcare trust fund, put all the money 
in there, and the original idea was just to spend the interest 
on expanded healthcare programs in Mississippi. And that worked 
for the first two or 3 years. The last couple of years, one of 
the things they could spend some money on is the expansion of 
new programs for Medicaid, so they took some money out to spend 
on Medicaid.
    But separate and apart from that, we also put in a court 
order the establishment of the Partnership for a Healthy 
Mississippi, which is our comprehensive prevention program, and 
that has remained unchallenged through the years. Part of it is 
cooperation, Senator Lott. Truthfully, part of it is its 
success. Had it been a failure, had numbers not gone down in 
Mississippi, I guarantee you I would have had folks challenge 
me in court about the validity of the court order, and they 
would have tried to dismantle the Partnership for a Healthy 
Mississippi. But because it's been just a remarkable success, 
you know, we don't believe in shutting down success in 
Mississippi when you get it going, like some of the other 
states have done. I think Senator Nelson mentioned that, in 
Florida.
    Senator Lott. But the legislature did pass the legislation 
to set up the----
    General Moore. The healthcare trust fund, absolutely.
    Senator Lott. What is it being spent on? Other than, you 
know, the prevention programs, the programs that have been 
targeted at children, trying to make sure they understand that 
they shouldn't be smoking. You mentioned some of the Medicaid 
programs. Could you give me just two or three examples?
    General Moore. Sure. We've expanded some Medicaid programs, 
covering more folks, which was the original intention of the 
settlement. Matt will remember this, when we were in 
discussions with the White House and others, part of this 
money--Senator Lautenberg and--or, he's gone--Senator Durbin, 
you will remember--to fund the extra part of children's 
healthcare, the match for the Federal--and we're using part of 
our money--matter of fact, the first 2 years, we took $6 
million from the interest that funded the entire match for 
Mississippi to expand our children's healthcare by 50,000 
folks. We set up trauma centers in hospitals that didn't have 
any trauma centers, a lot of things for the disabled. So it's 
been--it's done very well.
    Senator Lott. OK. All right. So we have a problem, though, 
in all these other states that have not followed your example 
and our example. What is the solution? And is this going to be 
resolved again in the courts? Do we need to come back and 
address it again at the Federal level?
    General Moore. Well, you know, for years--and you and I 
have talked, Senator McCain and I have talked--about the 
possibility, and especially when you had the hearing 3 years 
ago--I always, in these speeches, tell folks, you know, what 
Congress gives, Congress can take away. You know, you gave an 
exemption for the expenditure of this tobacco money, basically 
saying that there wouldn't be any Medicaid claim. I would 
certainly hope that Congress didn't do that, but it might be 
that this statute ought to be revisited and take a look at how 
the states are spending their money, because it was a deal.
    I mean, the reason I remember it is, I was up here every 
single day, walking into offices, talking to legislators, 
saying, ``Believe me, trust us, we're going to do this the 
right way.'' And we met with the Governors Association, met 
with the legislators, and they just wanted autonomy, but they 
said, ``Trust us.'' If they'd never said that, you would have 
never passed that bill. Kay Bailey Hutchison, in your body, and 
Chairman Bilirakus, in the other body, never would have gotten 
those things passed had we not said, ``Trust us, we'll spend 
the money the right way.''
    So I'm saying most of the states have reneged on the deal 
they made with the U.S. Congress to get that historic change in 
the Medicaid law. Maybe we should revisit it.
    Senator Lott. Well, thank you for being here. I'm proud to 
hear the statistics that you've given about, you know, what's 
happened in our State of Mississippi. It's been a good week, 
with this information and beating Auburn, too.
    [Laughter.]
    General Moore. That's exactly right.
    Senator Lott. We're on a roll. Let's keep it going.
    General Moore. Six-and-oh, Senator, and we're--and thank 
you, again, too, for the leadership that you provided to us and 
the help behind the scenes, especially with this issue.
    The Chairman. In all due respect to the great State of 
Mississippi, isn't it true that Mississippi has been noted as 
the poorest state in America; and it is the poorest people, 
generally speaking, lowest income people, that are addicted to 
smoking.
    Senator Lott. Right.
    The Chairman. So, therefore, what's been achieved in 
Mississippi is truly remarkable, when put in that context. Is 
that right, Mr. Myers?
    Mr. Myers. That's exactly right, Your Honor, and--I mean--
Your Honor----
    [Laughter.]
    Mr. Myers.--Mr. Chairman. You like that, too.
    The Chairman.--you're talking to Senator Lott.
    [Laughter.]
    Mr. Myers. That's exactly right. And when we talk about 
crushing Medicaid burden, that's what we have to understand, is 
that states like Mississippi and Maine and several others have 
proved that we can literally lift that burden off our poorest 
citizens, who can least afford it, and that's a burden that 
falls on every taxpayer, because it translates into billions of 
Medicaid dollars that are needlessly spent.
    We can do something about state budgets if we lower smoking 
rates among the poorest citizens. And programs like the program 
in Mississippi, the program that originally existed in Florida, 
were doing just that.
    The Chairman. Senator Durbin?

               STATEMENT OF HON. RICHARD DURBIN, 
                   U.S. SENATOR FROM ILLINOIS

    Senator Durbin. Mr. Chairman, thank you for inviting me 
here. I'm not a Member of this Committee, and I came to 
testify, and you were kind enough to let me come take a seat. 
Bill Nelson was kind of enough to let me precede him in 
questioning. And I'd like to make my statement part of the 
record, with your permission.
    The Chairman. Without objection. You're welcome here, 
Senator Durbin.
    [The prepared statement of Senator Durbin follows:]

 Prepared Statement of Hon. Richard Durbin, U.S. Senator from Illinois
    Mr. Chairman, Ranking Member Hollings, and Members of the 
Committee, thank you for holding this important hearing on how states 
have allocated their settlement revenues since signing the 1998 Master 
Settlement Agreement (MSA). I would like to commend you, Mr. Chairman, 
for your work 6 years ago to try to enact comprehensive legislation to 
hold the tobacco industry accountable for the harm it has caused to so 
many millions of Americans. While it was an assignment you might not 
initially have sought, you worked valiantly to promote a public health-
oriented solution. And while your bill did not become law, I think it 
is fair to say that the Master Settlement Agreement between the states 
and the tobacco companies would not have been as strong as it was 
without your efforts.
    I also salute you, Senator Hollings, for standing up for public 
health and accountability with a position that must have required a 
deft handling of some of your constituents back home.
    I am sure that a lot will be said today about the importance of 
holding states to their commitment to use a significant portion of the 
settlement funds to attack the enormous public health problem posed by 
tobacco use in the United States. As we reach the 5th anniversary of 
the MSA, I agree that states have a responsibility to adequately fund 
these prevention programs.
    The Institute of Medicine, the Surgeon General, and the National 
Cancer Institute have all issued reports on reducing youth tobacco use. 
These reports signal that state funds spent on tobacco prevention and 
cessation will produce important results for the health of our country. 
In fact, in its August 2000 report, the Surgeon General found that the 
United States could make unprecedented progress and reduce tobacco use 
by 50 percent in one decade through the implementation of nationwide 
prevention and cessation programs.
    Clearly, state tobacco programs play a vital role in decreasing 
tobacco use among youth, and it is critical that we take a close look 
at how states have been using the settlement funds. However, we must 
also recognize that an overwhelming majority of states, facing severe 
budget constraints, have turned to settlement funds to provide 
essential services, such as health care. I would hope that as the 
economy improves and the gaps in states' budgets are filled in, they 
will devote more of their MSA funds to launch tobacco prevention 
programs. But, we cannot ignore the fact that the ultimate 
responsibility of reducing youth tobacco use rests with the tobacco 
industry.
    It is no accident that more than 80 percent of adult smokers today 
started smoking before the age of 18 and over half before the age of 
16. Despite claims that their products are intended for adults, for 
years tobacco companies have targeted kids and have been deceptive 
about their alleged efforts to reduce youth tobacco consumption.
    Eighteen months prior to the signing of the MSA, the tobacco 
industry claimed, during negotiations on a broader proposed agreement, 
that youth smoking would decline by approximately 40 percent over a 5-
year period and 67 percent over a 10-year period. If those targets 
weren't reached, the industry agreed to be subject to penalties. The 
tobacco industry appeared to be committed to these goals. However, when 
I offered an amendment to include these ``lookback'' provisions in the 
tobacco settlement bill and hold individual companies accountable for 
their share of the reductions to which they agreed the previous year, 
these same companies opposed my amendment.
    So, here we are, five years later. Has the tobacco industry 
followed through on its promise, on its commitment to our Nation's 
children? The answer to this question, I am sad to say, is a resounding 
NO.
    While youth smoking has decreased, we have not reached the goals 
that would have been established in the lookback. The decline has 
largely been the result of cigarette tax increases despite the 
industry's insistence that youth smoking is not price sensitive. Five 
years have passed, yet we find ourselves still fighting the same 
battle, youth smoking.
    So, let's take a look back. Since 1998, tobacco companies have 
launched youth anti smoking campaigns, buying full page ads in the 
Washington Post, the New York Times, and the Wall Street Journal, 
saying that they adamantly oppose the sale of tobacco to kids. Hearing 
these claims, one would assume that the tobacco industry had turned 
over a new leaf, finally committing itself to reducing youth smoking. 
But, a California judge thought differently, and just a year ago, fined 
R. J. Reynolds $20 million for continuing to target kids through their 
advertisements in youth oriented magazines ads, which directly violate 
the MSA.
    So, why would tobacco companies continue to advertise their 
products in magazines with high youth readership when their products 
are intended for adults? The answer is so simple that I will quote 
directly from a 1981 Philip Morris report:

        ``Today's teenager is tomorrow's potential regular customer, 
        and the overwhelming majority of smokers first begin to smoke 
        while still in their teens.''

    It is no surprise that in the first year after the MSA was signed, 
advertising in youth-oriented magazines, especially for the three 
brands most popular with youth, increased by 15 percent, jumping from 
$58.5 million in 1998 to $67.4 million in 1999.
    We can no longer tum a blind eye to what is going on. The tobacco 
companies have continued to wage a war against our communities, and our 
youth are the most innocent of its victims. Clearly, as the system 
stands today, the tobacco industry continues to benefit from youth 
smoking. There is no incentive for the tobacco industry to truly work 
to prevent kids from smoking, so we must get rid of that profit motive 
that makes teen smoking attractive to them.
    We cannot ignore the critical foundation that was laid five years 
ago by the state attorneys general in fighting youth tobacco use, and I 
agree that we must hold states accountable for their use of settlement 
funds. But we must broaden this discussion to include holding the 
tobacco industry to its promises as well.
    I hope that out of this hearing today, we will develop a plan to 
successfully tackle this problem of youth smoking. I think it is time 
resurrect the lookback mechanism to hold each company accountable for 
its share of youth smoking. We owe it to our nation, our communities, 
and especially to the 5 million kids who are regular smokers and find 
themselves facing a deadly addiction.
    I commend this Committee for taking the first step in that 
important direction. Again, thank you Mr. Chairman. I appreciate the 
opportunity to share my views. It is important that we continue to 
monitor this issue, and I look forward to working with you in that 
regard.

    Senator Durbin. Thank you.
    Mr. Chairman, let me start by saying thank you. We don't 
talk about tobacco anymore around this place. There hasn't been 
a good conversation about tobacco on Capitol Hill in a long, 
long time. Thank goodness you're an exception and are willing 
to step out and continue to lead on this issue. It really is a 
matter of life and death. And the fact that you're showing this 
political leadership is not lost on this Senator and a lot of 
your colleagues and people who are following these hearings.
    Tobacco has been an important part of my life, personally 
and politically. When I was a sophomore in high school, my 
father died of lung cancer. He was 53 years old. I didn't stand 
by his bedside as he gave his last breath and say, ``I'll get 
even with those bastards,'' but when I was elected to Congress 
and started facing these tobacco issues, whether it was wasted 
money on the so-called ``safe cigarette'' research or some of 
the things we're doing to promote tobacco in other places, it 
wasn't lost on me that there were a lot of people around 
America who shared the same life experience that I did and my 
family did. And that's why I joined Senator Lautenberg--and we 
were successful many, many years ago now, Frank--in banning 
smoking on airplanes, and why I stood and watched, with real 
admiration, Senator McCain, as you led the way in trying to 
show some Federal leadership on this issue.
    Today, we are discussing the obvious. We are not putting 
money into tobacco prevention, and more children are becoming 
addicted, and those addicted children will ultimately--at least 
one out of three of them--die from this addiction. That's the 
simple fact of the matter.
    We've talked about the lack of money that's there. But, in 
my mind, it is not so much a depletion of revenue, but a 
depletion of resolve. A depletion of resolve at the State and 
Federal level.
    Attorney General Moore, thanks for your leadership. You 
have been a national leader on this issue. And, Matt Myers, you 
and I have been colleagues on this for a long, long time. I 
would just say your Prince William Sound Exxon Valdez analogy--
I'd take it a step further, for Mr. Scheppach and the 
Governors. How many of these Governors are willing to walk away 
from earmarked funds, from gasoline taxes, and highway trust 
funds, and say, no, we're going to spend those on Medicaid? You 
know what would happen in my state capital and most others? The 
contractors and the labor unions and the mayors would all be 
there screaming bloody murder, ``Wait a minute. That money was 
for highways. That money's not for Medicaid.'' And yet when it 
comes to the tobacco money to save the lives of people in those 
states and to prevent death and disease among children, there 
isn't this same level of anger.
    And at the Federal level, I was afraid, when Senator 
Hutchison offered her amendment, that we'd be sitting here 
today, 5 years later, saying, ``They didn't keep their word.'' 
The states didn't spend the money as they were promising they 
would, and we let them off the hook. We let them off the hook 
here on Capitol Hill, and that is sad and unfortunate.
    Dr. Healton, I want to tell you something. I really admire 
what Legacy's done. And I watch those Truth ads and think, 
``Right on.'' If we could get those ads on the air on the right 
program and across America, it'll have as great an impact as 
raising the cost of the product does with children.
    I read your testimony and hear that you may be going away. 
Is that a fact?
    Dr. Healton. Well, our revenue source has declined by 90 
percent because of a provision in the Master Settlement 
Agreement. It required that the participating manufacturers 
collectively represent 99.05 percent of the market for us to 
receive a payment. If they represent 99.04, we do not receive a 
payment, which, in essence, is a sunset clause, though Mike 
Moore may want to comment a little more on it.
    So our existence is threatened. But, because the board 
wisely set aside some of the payments to us, we will operate at 
a level, but it will be so substantially below the current 
level that we will be unable to provide a national ad campaign.
    And I would just comment, Senator Durbin, that I want to 
thank you for coming to the event that we had here on the Hill 
for staffers about the Truth Campaign, and just also point out 
that presently spending about $75 million in the advertising 
marketplace for the Truth Campaign and bringing it to the 
highest risk kids, it has been enormously successful, and it's 
probably responsible for about half of the decline that has 
been observed in youth smoking.
    If the rates stayed where they were in 1997, when you folks 
were talking about this issue here on the Hill, two million 
more young people would be regular smokers than are today. So I 
think we should all collectively be proud of the successes we 
have had, while we remain vigilant about what still needs to be 
done. And I thank you for your interest in the program and your 
support for, at times, a controversial campaign that's intended 
to grab the hearts and minds of our most at-risk adolescents.
    Senator Durbin. Mr. Chairman, the voice of Truth, the voice 
of the Legacy campaign, is a small voice against the roar of 
tobacco advertising, but it's so good that we can't let it go 
away. I don't know what I can do. I hope that you'll join me, 
Frank Lautenberg, and Bill Nelson, and any other Senator. We 
can't let this go away. If this is all that we make a 
commitment to do, we can't force Governors to spend this money 
at this point, but we can't let this go away. And I hope we can 
find a way to find the revenue to keep you on the air.
    Thank you, Mr. Chairman.
    Mr. Scheppach. Mr. Chairman, can I make a comment?
    The Chairman. Yes, sir.
    Mr. Scheppach. Since everybody's talking about the 
commitment of the Governors, I just want to read from our 
resolution that was longstanding, and it was that they're 
committed to----
    The Chairman. In what year, Mr. Scheppach?
    Mr. Scheppach. Well, this goes all the way back, I 
believe--it's been in existence from probably 1997 or so.
    But the commitment was to spend a significant portion of 
the settlement funds on smoking cessation, healthcare, 
education, and programs benefiting children. Now, I think that 
that depends upon what you define as significant, but I think 
45 percent of the money is, in fact, going to those areas. Now, 
everybody has focused on cessation, and, you know, our hopes 
are that that can be increased over time. But as far as I 
remember, that was our commitment. Now, I can't speak for any 
individual Governor, but as far as the organization is 
concerned, I think that's been our commitment.
    The Chairman. Well, I guess that deserves a response. Mr. 
Moore?
    General Moore. What I know is that, you know, it's great to 
put something down on a piece of paper and have a vote and read 
it. The people who came up here and lobbied Congress, we would 
have never gotten Congress to pass the exemption that they 
passed with a, you know, ``We'll spend a little money,'' or, 
``Don't worry about it, we'll take care of it.'' I mean, it 
was--you remember, President Clinton and Donna Shalala, from 
the Administration, were against this bill, and they were only 
for it if the states spent the money on prevention programs and 
expansion of children's healthcare and had four categories that 
he was for. So I can't imagine that we would have been 
successful without the cohesiveness of Governors and 
legislators and others at least telling a convincing story 
that, ``Trust us, we'll spend the money the appropriate way.''
    And I understand all the excuses. I've heard them all. I 
live in Mississippi. I hear all the excuses about needs and 
deficits and all those kind of things. But this was a lawsuit 
against tobacco. This had nothing to do with any of those other 
things.
    Mr. Myers. Mr. Chairman, could I just also respond to--
because I think it's important to note--and it's very 
disturbing--that when the National Governors Association was 
seeking the waiver, they came forth with a resolution to 
contain the commitment. But when Congress stopped looking, they 
revised the resolution, and they took out that paragraph, that 
promise.
    I don't think that was a promise for 2 years or 3 years. 
That money is coming in in perpetuity. I thought that was a 
long-term promise that the states and the Governors made to 
Congress, not that they would change the second that no one was 
looking.
    The states do face hard choices. But, in 2000, they spent 
43 percent of the money on health, now it's down to 28 percent. 
In 2000, they spent 9 percent on tobacco prevention, now it's 
down to 3 percent.
    If we're going to solve the problem with tobacco, it 
requires a straight-up, honest commitment of a long-term and 
sustained nature, not that we go somewhere else as soon as 
someone stops looking. I don't think we can afford to see this 
continued diversion of funds if we're going to protect our 
kids.
    The Chairman. Mr. Scheppach, I don't want--again, I don't 
want to continue this debate, because I think facts will take 
care of this argument. But these two statements, of 1999 and 
2001, clearly they are talking about healthcare and education 
as related to tobacco. That's why policy position tobacco 
settlement funds policy. I mean, when you read the entire 
statement, in 1999 and 2001, you draw the obvious conclusion 
we're not talking about taking care of Medicare. We're talking 
about tobacco-related illnesses. That's certainly the way that 
I read this statement.
    Now, you can draw out--say, ``Oh, healthcare, so it's OK 
for us to spend the money on our Medicaid programs,'' but 
that's not the way that reads in its context, at least from my 
viewpoint and that of others.
    And I also, again, want to repeat, I know that you are here 
to defend your organization, and I appreciate that. But I can't 
let it go, just say, ``Well, we said that it would be 
healthcare.'' It's clear that this statement is about health-
related illness--tobacco-related illnesses and could be--I 
don't see how you could interpret it any other way.
    And, in interest of fairness, please, you respond if you 
would like to.
    Mr. Scheppach. Yes. I mean, you have the advantage of, in 
report language and other things, of knowing what the debate 
was. I think I was there at the time and listened to the 
debate. We did a lot of analysis on the effectiveness of 
cessation programs at the time, and the feeling was you 
couldn't put $8 billion or $10 billion a year of additional 
money in cessation programs and make them effective. So I 
think----
    The Chairman. Well, I----
    Mr. Scheppach.--we were talking more broadly.
    The Chairman. Are you talking about treating health-related 
illnesses, too--tobacco-related illnesses?
    Mr. Scheppach. Well, you get into problems, I think, of 
defining what is specifically tobacco related. I think, you 
know, you've got to deal with those in the broader programs 
that we've got.
    The Chairman. Well, I guess I wish that I had been in there 
when the debate and discussion took place, because then I would 
have had a different position about earmarking funds that--and 
making it mandatory that it be spent for certain purposes. And 
I thank----
    General Moore. Senator, if I could respond for just 1 
second?
    The Chairman. Yes, sure.
    General Moore. Just very quickly. I don't want anybody to 
be confused. In 1999, when this decision was made, the 
California results had been in for years and years and years 
and years, about the reduction in their program. The Florida 
numbers had come in that year, humongous reduction. 
Massachusetts numbers were in. We knew, in this country, what 
worked. And the reason I know that is, we modeled our program 
in Mississippi, starting in 1998, on the successful programs of 
Florida and Massachusetts and California and others.
    And another point, and I'll quit, is that we're not talking 
about if a state receives $100 million a year, to take that 
$100 million and spend it on TV anti-tobacco. What we're saying 
is if you even spent 20 percent of that money--if you took 20 
million out of that hundred and take the 80 and do whatever it 
is you want to do with it--if you took 20, you could have a 
huge impact on this problem. But what we're doing is, we're 
taking 3 percent nationwide, and that's just not--it's not 
good.
    The Chairman. Senator Nelson?

                STATEMENT OF HON. BILL NELSON, 
                   U.S. SENATOR FROM FLORIDA

    Senator Nelson. Mr. Chairman, what we've heard here is 
shocking to me; it's not surprising. And I must say that I am 
chagrined, Mr. Chairman, that the states being in the fiscal 
distress that they are, and we had in front of this Congress, 
earlier this year on the tax bill, a question of how much money 
we were going to send to the 50 states who are in fiscal 
distress. What ultimately emerged in the package was $20 
billion to the states, close to a billion dollars going to my 
state alone. There was an amendment that I voted for, $40 
billion to help the states in their fiscal distress. And yet 
what we're hearing today, shockingly, is the money that came 
from the tobacco settlement, which was clearly stated at the 
time that a certain portion of this was going to go for 
prevention so that ultimately the states would have less 
healthcare costs through Medicaid, that that money is not being 
spent. That's unconscionable.
    And, again, I go back with great commendations for 
Mississippi and the attorney general, who's with us today, of 
where the recommended spending by the CDC that Mississippi 
today, years later, over half a decade later, after the 
settlement, that Mississippi is exceeding that in spending on 
tobacco prevention.
    And then, sadly, I turn to the page on Florida. Florida, 
having settled its case one month after Mississippi, a much 
bigger state than Mississippi, with a lot more dollars coming 
in, and lo and behold, what the CDC's recommended spending on 
tobacco prevention--Florida today is spending 1 percent of the 
CDC's recommendation. And yet we send $20 billion to the 
states, and I voted for a version that was to send $40 billion 
to the states because of their fiscal distress. So it 
distresses me.
    You know, Mr. Scheppach, one of the things that the 
Governors ought to be asking themselves is how much of the 
dollars that they are spending for smoking-related illnesses--
how does that compare to what you're spending for prevention? 
Are the Governors asking themselves that?
    Mr. Scheppach. I would probably disagree that, in the short 
run, there would be significant savings. Medicaid, most of that 
money is going into nursing homes, and people generally are 
going to end up there at some point in time. Women and children 
are relatively inexpensive. Most of the money is in long-term 
care, drugs, it's for the so-called dual-eligibles for Medicare 
and Medicaid. That's where all the money is.
    Senator Nelson. Well, do you know what's happening in 
Florida right now? Now that you brought up nursing homes? 
What's happening--under Florida law, a person who is in a 
nursing home, under Medicaid, pays their income to the State of 
Florida in return for being treated. But there are certain 
exceptions that the State of Florida is to deduct for their 
income--how much they pay out for health insurance, how much 
they pay out-of-pocket healthcare costs for deductibles and co-
pays. And do you know that the State of Florida, right now, is 
not deducting that money, but, instead, is taking that money 
from the senior citizens to the average of $125 a month, or, 
for 15,000 seniors in Florida that are affected, that's $35 
million a year that seniors on Medicaid in nursing homes are 
paying that they're not supposed to be paying, under the 
eligible law, because Florida, the State of Florida, is not 
adhering to the Federal law. So when you start talking about 
nursing homes, you've just hit a hot button of mine.
    I want to get back to tobacco.
    Mr. Myers. Senator, could I also just--a quick comment on 
getting some facts straight. You do see a quick turnaround in 
Medicaid costs. Over half the pregnant women who smoke in this 
country are on Medicaid, because it is so directly related to 
poverty. A low birth weight baby, due to smoking, costs an 
additional $60,000 in healthcare costs. If you can dramatically 
reduce that, not only do you improve the life of our youngest, 
most vulnerable children, you save immediate taxpayer dollars, 
let alone the huge taxpayer dollars that you will save over the 
long run. It's not just shortsighted. It's wrong to think that 
tobacco prevention doesn't save money quickly.
    Senator Nelson. I believe that that's true. I mean, it just 
is common sense to understand what you just said. But even if 
it weren't true, to save those 2,000 children a day that are 
beginning to get hooked every day, and the long-term healthcare 
costs to the country and to the states? That's worth it, right 
there.
    Mr. Myers. There's no question about that.
    Senator Nelson. You know, this is something that we 
shouldn't be divided on. The tobacco companies, I would think, 
are on the same side of this issue of what we're arguing. And 
yet the tobacco settlement is not being implemented in the way 
that it was supposed to, with the understanding and the 
promises.
    Mr. Myers. To quote a tobacco industry lobbyist this year 
in the state legislature, ``You know, my job would be a lot 
easier if my state had spent the money on roads and other 
things, like other states had.'' And I fear that that's true. 
They recognize that tobacco prevention programs work and make 
an immediate difference. We can't afford not to treat this 
problem seriously.
    Senator Nelson. Amen.
    Mr.----
    The Chairman. Senator----
    Senator Nelson.--Chairman, that light is red, and I've got 
a couple more questions that I need to ask, so I'll wait.
    The Chairman. Senator Lautenberg?
    Senator Lautenberg. Thanks, Mr. Chairman.
    This settlement-lite, which is what we got, as compared to 
the tobacco industry--and, by the way, just to make sure that 
people understand where the industry is going, you know, we see 
the ads that say, ``Buy nourishing food, and this is where you 
get it,'' and all that stuff, but lurking behind there, I 
suspect, is a lot of tobacco revenue still coming in there. And 
what do we do further to acquaint the public with the fact--
when they buy a cigarette lite, that the fact is that, in many 
cases, they're damaging their health even more than if they 
smoked the regular cigarettes? And one of the things, Dr. 
Healton, that we see--and Senator Durbin adequately, I think, 
described our dismay at the fact that your voice isn't out 
there. How do we get these messages across, when the companies 
are spending, what, $7 billion a year, I think it is, on 
marketing?
    Mr. Myers. That's now up to 11 and a half billion dollars, 
31 million dollars a day. The answer is, we need a sustained 
public-education campaign, both from Truth and from the Federal 
Government and in each state. The scientific evidence is now 
conclusive. Lite and low-tar cigarettes are not safer or less 
hazardous than regular cigarettes. Millions of smokers have 
switched to these products thinking that they were reducing 
their risk, and we now know it's not true.
    We need a sustained media campaign to educate every 
consumer before they make that mistake and to help every 
consumer understand that the only safe cigarette is the one you 
don't smoke.
    Senator Lautenberg. We look at the cost--and I thought 
Senator Nelson was going there some--and that is, the costs of 
the deferrals of investment in the smoking-cessation programs, 
have we--is there a way to calculate that? That we say, look, 
this thing that you don't do today will not get you out of a 
financial obligation, no matter what, that these costs are 
inherently there, and you're going to just get them. Is there 
anything that you see that has a--that can attract the kind of 
attention that we'd like to see put into this that says, ``Hey, 
if you don't spend the money today, you're going to spend it 
tomorrow,'' because I agree with much of what was said here 
about the irresponsibility of the states, and mine included, 
that says, ``Hey, spend it on other things. Spend it on debt 
forgiveness.'' There are other ways that we could generate 
revenues, but, instead, it's--I guess it's easier to give away 
something that people don't see for awhile.
    General Moore. I think yours is a salient question. The 
best way I can describe it for you is that, you know, we just 
talked about the numbers--3,000, we used to say, kids start 
smoking a day, and now, 7 years later, we're at 2,000 a day. 
The best way to say what the cost would be is, what if it was a 
thousand a day? What if we had actually reduced it down to a 
thousand a day? Then your cost is, for not acting, there are a 
thousand new kids a day who are going to start an addiction, 
and at least we know one third of them are going to die, so 333 
kids a day times 365 days a year. Those are real lives that 
will be lost, and we forget about that. I mean, statistics--you 
know what statistics are. People just--the numbers go over your 
heard. But they're real people, Senator Lautenberg. I mean, all 
that you've done, all that this Committee's done, all that this 
settlement has done, we save lives.
    The other thing is the saving in the money. What I don't 
understand--and, you know, you talked about polio--or was it 
you or--what if we had the polio vaccine, and we had a lot of 
folks that are infected with polio virus, and we had it here, 
and we said, ``You know, we're going to put all this money into 
a trust fund, and we're going to wait a few years before we 
innoculate folks.'' Well, what would be the result? People 
would die from polio, right? Or they would suffer illness, 
disability from polio. It's the same very thing. The longer you 
wait to apply the serum to this problem, the more people who 
are going to be addicted, the more people who are going to have 
lung cancer and heart disease and the like.
    It is just unfathomable to me that we're waiting to use the 
funds, when we know exactly what works to solve the problem, 
but we're not doing it. And then our excuses are so weak, 
``Well, we need to spend money in another area.'' That's so 
weak, when we're talking about real lives. We're not talking 
about somebody getting injured and recovering. We're talking 
about somebody starting a behavior that will kill them.
    I mean--and the other thing I'll mention to you--boy, times 
have changed. When we began this lawsuit, you know, we were 
telling--the tobacco companies were still lying, they were 
testifying before Congress in March 1994 that, ``No, nicotine 
is not an addictive drug,'' and, ``No, it doesn't cause cancer, 
and we certainly don't market and advertise to children.'' That 
was in March 1994. Every day, you turn on the TV, and there's 
Philip Morris with their little, you know, message, ``Cigarette 
smoking causes cancer, cigarette smoking is addictive.'' I 
mean, of course, they're doing that for a reason, and the 
reason is because they've got lawsuits pending and they want 
to, you know, invade the populace out there and maybe even 
infect the jury pool. I'd do the same thing. But----
    So the tobacco companies are saying it. I mean, Philip 
Morris is saying, ``This will kill you if you do it.'' We've 
got $246 billion out here to impact the problem. And are we 
doing it? No, we're not. I mean, even--it's not just the Matt 
Myers of the world telling us that it's bad for you, it's now 
the tobacco companies who are saying, ``This will kill you.'' 
And, in America, what we're saying is, ``We don't care.''
    Senator Lautenberg. Yes, it's an obtuse kind of thing, 
because it gets their name out there. They look like good 
citizens, but they know that those people who are hooked, they 
are staying hooked, and the more they stay hooked, the more the 
cash register rings, and that's the ultimate mission. It's like 
saying, you know, ``If you speed, get up to crazy speeds, it 
can kill you.'' Does that stop people from speeding? I don't 
think anybody who is making the decision says, ``You know what? 
If I do this, it could kill me.''
    Mr. Myers. That's why youth prevention programs are so 
critical. The way to stop this problem is to get them before 
they start. If we do that, we can save a generation of American 
children from dying.
    Senator Lautenberg. If the members of the board of these 
companies, or the executives of the companies, were wearing a 
white, kind of, dress with a turban, we'd have the FBI and the 
DEA and the Marine Corps and everybody else in there, ``They're 
out to kill 400,000 Americans? What is going on here?'' The 
rest is in your imagination, which----
    Mr. Myers. Senator, you asked an economic question, though, 
and we do have data. You know, we know several things. We know 
that the programs in Florida--in Massachusetts, in California, 
saved between two and three dollars in healthcare costs for 
every single dollar they spent. That's an enormous savings to 
our country. We can calculate the reduction in healthcare costs 
from a reduction in smoking in any state. And we have often 
provided that information to state legislators. What we need to 
do is get across the immediacy of it. This isn't a long-term 
problem. We have to stop our kids from starting today.
    Dr. Healton. I'd like to embellish that a little bit. That 
report that Matt is talking about is a report that was produced 
by the Legacy Foundation and co-branded with many leading 
public-health groups, including Tobacco-Free Kids. It did a 
state-by-state analysis of the additional Medicaid revenues 
that would accrue for a 25 percent and a 50 percent decline in 
smoking within the 50 states. And it demonstrated the 
advantages. It excluded adolescents and kids and newborns, and 
we are now producing another report that will be out shortly 
that very compellingly makes the case that Medicaid savings 
accrue very, very rapidly, because approximately one in ten 
babies in NICUs are there because of tobacco-related--low birth 
weight or other tobacco-related complications, not to count the 
thousands upon thousands of asthma incidents, asthma attacks, 
otitis media, surgeries, and bed days related to that problem. 
And the one in four fire deaths--one in four of all fire deaths 
in the United States are caused by tobacco. The medical care 
costs associated with that are enormous. Controlling smoking in 
the home can take a huge bite out of that. You don't hear a lot 
about it.
    And I want to just mention one more thing, for the record. 
The Philip Morris ad campaign does not say the product will 
kill you. And I've pointed that out to Steve Parrish, that 
that's one item that is not mentioned in any of their ads.
    General Moore. They do say it causes cancer.
    Dr. Healton. That's right.
    The Chairman. Senator Nelson?
    Senator Nelson. Mr. Chairman, there have been a lot of 
accolades coming your way. I want to add to that, because the 
multi-state agreement had placed some limits on tobacco product 
advertising and marketing, but it didn't go far, as far as your 
bill. And so what we're left with is that the multi-state 
agreement does not restrict print advertising, it does not 
restrict Internet advertising, or marketing and advertising 
inside of retail stores, it does not include any provisions 
limiting youth access to tobacco products, nor does it provide 
for the enforcement of Federal and state minimum-age-of-sale 
laws, and if fails to address the FDA regulation of tobacco 
products, indoor smoking restriction, and smoking cessation.
    Now, I'm curious, Dr. Healton, tell me--the agreement was 
to restrict advertising on television, but there seems to be a 
lot of advertising of tobacco products going on in movies these 
days. Now, it's one thing, under freedom of speech, to 
accurately portray whoever the actor or actress is portraying 
and whatever brand of cigarette, but it's another thing if the 
cigarette companies are paying for the placement of that. Your 
organization recently did a study on this. Would you share with 
us your conclusions?
    Dr. Healton. Yes. I would start by saying that we are not 
in a position, though I think the attorneys general are, to 
prove whether or not money exchanged hands or any form of a 
quid pro quo exists, both of which would be a violation of the 
MSA agreement and possibly also of the FTC reporting 
requirements, because they are indicating that such exchanges 
are not occurring.
    The findings in the study were highly provocative. What we 
did is, we looked at the prevalence of smoking in R, PG-13, PG, 
and G movies, and we found proportional declines in the 
presence of smoking across each of the ratings, such that it 
looks as if there's a quota for how much smoking. But, more 
importantly, and the area that I think needs serious evaluation 
is the ads for the movies that are 30- and 60-second spots that 
are televised and that are highly salient to adolescents. I 
have two adolescents and one 22-year-old. They look up when a 
movie ad starts, because it's the coming attraction.
    A very substantial proportion of those 30- and 60-second 
spots have a smoking scene in them. In the typical movie, only 
about 2 to 4 minutes include smoking if it has smoking in the 
movie. So it's, first of all, statistically bizarre that so 
many of these televised commercials include smoking. But what's 
more important and what I think may, in fact, be a ``smoking 
gun'' is that if there is a brand appearing in a movie, the 
probability that there will be smoking in the televised ad is 
fourfold.
    Senator Nelson. Very interesting. But you, at this point, 
do not have any proof of the actual exchange of remuneration in 
return for that, in effect, cigarette advertising in the movie 
promotion.
    Dr. Healton. Right, because obviously I'm not in the 
position of doing that type of research. But, of course--
because that's a legal matter, in my view. However, you, of 
course, know that for many years that practice was legal and 
did occur. And the tobacco documents, which, thanks to the work 
of attorneys general like Mike Moore, have become available, 
and the endowment that the Legacy Foundation gave to UCSan 
Francisco to make those forever available to scholars, has 
unearthed a very large number of communications related to 
product placement practices, and I think that they begin to lay 
out the roadmap, as do documents that are provided to the FTC 
on an annual basis, what the companies themselves represent. 
We've been in a dialogue with the FTC about that information, 
and we do have some information available to us.
    But, again, what I find most curious is that there's a 
steady increase in the amount of smoking that is occurring, 
there's a steady increase in the amount of smoking on 
television. I mean, I'll be perfectly frank, the new show where 
Whoopi Goldberg appears, who's an actress whose talents, I 
think, are enormous, she is holding a pack of Marlboros in 
every show. Maybe it's a coincidence. Maybe she just decided to 
smoke Marlboros on an NBC show. But I think it's pretty 
extraordinary, and that's, by no means, the only example.
    A few years ago, a movie came out called ``The Smokers,'' 
and it's about a gang of five adolescent girls, who literally 
had a cigarette in their hand for the entire duration of the 
film. It was shown on HBO over and over and over again over the 
last 2 years. So there's definitely something going on. The 
question is, what is it? And I know that the AGs are looking 
into it. A coalition of 26 of them have begun a dialogue with 
Jack Valenti, which isn't a moment too soon, in my view.
    Senator Nelson. Do you think the FTC is an appropriate 
agency to further look into this?
    Dr. Healton. Well, I think they are. They look into it 
every year, when they ask some very specific questions. And I 
would point out, as I think Mike Moore probably knows, after 
the settlement, the nature of the questions that the FTC asked 
of the industry tightened up considerably, such that it covers 
a broader range of activities, including a wink on the golf 
course. So I think it's fairly interesting, and they would 
certainly be one venue. But I don't think they're the only one. 
I think that there was--there was very strong language in the 
Master Settlement Agreement, and I'm--as I often say, one of my 
favorite movies involved cutting out all the kisses, and it was 
a, you know, terrific European film in which, at the end, the 
young man looks at all the kisses that the town priests had 
removed.
    I am a great defender of the First Amendment. I don't think 
this has anything to do with the First Amendment. I think it 
has to do with maintaining market share in some fashion. Now, 
I'm speculating, and maybe it's inappropriate to do so, but I 
think it deserves serious consideration, particularly given the 
most recent study in The Lancet that, very convincingly--and 
it's my understanding Jack Valenti actually agreed that the 
science was clear and did not debate the science--that 50 
percent of adolescent uptake of smoking is related to the 
depictions of smoking in film.
    Senator Nelson. General Moore and Mr. Myers, you all are 
familiar with the agreement, and certainly the settlements in 
your state. Was it clearly your intent that paid advertising 
for cigarettes be banned from television advertising?
    Mr. Myers. Actually, that was done by Congress, in 1969. 
The Master Settlement Agreement addressed the issue of paid 
advertising for product placement in movies, and explicitly 
banned it. If it were happening, the state attorney generals 
would have an opportunity to take strong--and I would hope 
would, in fact, take very strong and quick action. Finding it 
is the key.
    Senator Nelson. And so if you found such evidence, General 
Moore, of payment in return for product placement in a movie or 
in a promotional for a movie, what would be the response of the 
attorney general of Mississippi?
    General Moore. We are in a dialogue right now with the 
motion-picture industry. I'm not going to prejudge it, but I'm 
not sure that it's going to bear fruit. There's supposed to be 
a meeting very soon with Jack Valenti to begin a discussion 
about how and what is going on. Of course, they think that they 
should have the freedom to do this. The thing that they cannot 
do is to pay money, such as the Brown & Williamson documents 
revealed, that Sylvester Stallone, for example, was paid by 
Brown & Williamson to--you know, on one occasion, a half a 
million dollars to smoke their brands in his particular movies. 
That's what they're prohibited from doing.
    We've got some ramifications from the settlement that we 
can take on in fines, penalties, and I think you would see AG's 
file litigation against the industry if we found them doing 
that. It's absolutely a direct violation of the agreement, but 
it--to me, it's also even more egregious than that. If we catch 
them doing that, then there'll be a whole new series of 
litigation that we won't settle until the very end.
    I think Dr. Healton mentioned something that's worth 
saying, that 50 percent of the folks who begin smoking are 
impressed by the smoking in the movies. When that move, the 
``Titanic'' came out and, you know, the cute young fellow on 
the front of the boat was smoking a cigarette the whole time, 
that did more to set us back on teen smoking than just about 
anything that could happen, because Leonardo Di Caprio was up 
there, and all the little girls were, you know, saying, ``Oh, I 
want to be--you know, be like him,'' or, you know, whatever it 
might be. It's just such an image, it's hard for us to impact 
that.
    And then this idea that they don't advertise, Matt's right, 
they got rid of advertising on TV, promoting the brands, but 
every day you can see, whether it's Philip Morris or somebody 
else, telling us how good they are to us, you know, ``We're 
also Kraft Foods, and we give to the poor, and we donate money 
to domestic violence, and we do this, and we do that.'' They 
spend more on building themselves up in the minds of the public 
than they do on the prevention programs that they ask for so 
much acclaim for. So I----
    And then a group comes in my office every single day--it 
might be the 4-H Clubs or the Boy Scouts or whoever it might 
be, and they're telling me that, ``Well, do you think we ought 
to take this money from Philip Morris? They're going to give us 
some money, several million dollars, to do so and so.'' And I 
said, ``What do you have to do for it?'' ``Well, they want us 
to--they say really nothing,'' but really what they want is, 
they want to be able to advertise that the Boy Scouts of 
America or the 4-H Clubs of America have been endorsed and 
supported by Philip Morris Tobacco Company.
    Again, that hurts us in our effort to demonize them, as you 
will, so that people don't take up smoking. So it's hard, it's 
very hard. We've got a little bitty small message going out 
there that says, ``Don't smoke,'' and they have a humongous 
message that's really overpowering us, saying, ``Do smoke.''
    And that's why this whole hearing is important, Senator 
McCain. It's an unfair fight. I mean, it's still an unfair 
fight. We thought we had leveled the playing table, but it--
their spending has increased and increased and increased, and 
the state spending has been diminished and diminished and 
diminished. And, you know, but for Legacy's loud message 
nationwide in a few spots around the country, there's not 
another message that says, ``Don't smoke.''
    There are no prevention programs in schools anymore, like 
there used to be. You remember the days of the drug and alcohol 
abuse programs? If you look around this country, those programs 
have slowly gone away, too. So there are very few programs left 
that tell our kids, at a very early age, to stay away from this 
product.
    So I'm extremely concerned that--in 1997 we had a peak in 
teen smoking, and we've gone down, and we're headed that way. 
I'm afraid that it may go back up if the loud message 
continues.
    Mr. Myers. That's a very important message. There is good 
news. We have seen youth smoking rates decrease every year 
since 1997. The question is, what would have happened had the 
states spent the money properly? And the best available data 
says they would have dropped by twice that rate.
    And then the second question is, Now that we know actually 
how to impact these things, will we put our political will 
behind the scientific knowledge we have? We do have the 
opportunity, in the next 10 years, if we spend the money 
wisely, literally to decrease the number of kids in this 
country who become addicted to tobacco to a very small number, 
and it's solely a matter of political will.
    The Chairman. Dr. Healton wanted to comment.
    Dr. Healton. I just wanted to add two comments. One, that 
the last time I looked at it, which was about 2 years ago, 
Kraft spends about a billion, with the networks and magazines 
alone, and I'm certain also spends a considerable amount in 
product placement in film for Kraft products. And I believe the 
same, in a letter that I just looked at that R.J. Reynolds 
penned to their product placement firm. They, too, at least at 
that time, had Lifesavers and Planters as two products that 
they were having placed. And there was significant discussion 
in that letter, which I can make available to you, about where 
they were able to get products appearing in film.
    So I think it's a very complicated web of relationships 
that one would have to look at. And as the final note, my 
understanding of the MSA language--and I may have it wrong, but 
I was at a meeting with the attorneys general preparing for the 
meeting with Jack Valenti--I believe that it isn't just paid 
product placement that would be literally a check in exchange 
for a placement. I think any form of quid pro quo also is 
implied in that.
    The Chairman. I want to thank----
    Please, Mr. Scheppach.
    Mr. Scheppach. Just one comment, Mr. Chairman. We seem to 
be saying that all the decrease in smoking is due to cessation 
programs. I think we underplay the fact that we're in a market 
economy, and actually the Master Agreement did raise the price 
of cigarettes quite considerably. And, second of all, I think 
the tax increases that states have just done are important, and 
I suspect some of that, in that there is probably some 
interaction between raising of prices and cessation programs. 
So I think the evidence is that at least that group of children 
that we're trying to hit, the young teens, are fairly 
responsive to the tax increases.
    So I don't think it is a one-way street.
    The Chairman. And I assume that the states that raised 
taxes did it because they said, ``Gee, we'd like to stop kids 
from smoking, so we'll raise these taxes.''
    Mr. Scheppach. Oh, I think it was both, Mr. Chairman.
    The Chairman. I don't think so.
    Ms. Hudson, you've been strangely unpummeled here.
    [Laughter.]
    The Chairman. I would like to allow you to speak, but I 
would also like, before you do, to say that I think you should 
be proud of what Delaware has done, but you are here 
representing, as I understand it, the National Conference of 
State Legislatures. I don't think you can be proud of what the 
state legislatures have done. Please go ahead.
    Ms. Hudson. I am not. And that's what I wanted to say. It 
makes me feel very awkward here. But what I think is important 
is that legislators realize what we did today was discuss with 
you our successes and our failures, and they need to know your 
frustration and disappointment with the states that are not 
spending the money on tobacco cessation and health-related 
issues.
    And I will recommend to the National Conference of State 
Legislatures that they have sessions on this at their 
conferences and they put something, a really good article, in 
their magazines to let legislators know that they really are 
wrong, and perhaps we need to step up our language with them 
and let them know just how serious we are.
    The Chairman. Thank you. I hope they would invite our 
witnesses, all of them, including Mr. Scheppach, to these 
deliberations so that they can hear all sides of this issue.
    We try very hard in these hearings, despite the bias that I 
may bring to it, to allow the other side to be heard. And, Mr. 
Scheppach, I think you have earned your considerable salary 
this morning at this----
    [Laughter.]
    The Chairman.--at this hearing.
    Mr. Scheppach. You've never seen it, Senator, so----
    [Laughter.]
    The Chairman. I do thank you for appearing this morning, 
and I mean that, on behalf of the National Governors 
Association.
    Attorney General Moore, it's always a pleasure to see you 
again. Mr. Myers, thank you for your dedicated efforts. Ms. 
Hudson, thank you for being here. And, Dr. Healton, I hope we 
can do something to keep your program alive, and I'll work with 
others in trying to see that that happens.
    I thank you all, and this hearing is adjourned.
    [Whereupon, at 11:25 a.m., the hearing was adjourned.]

                            A P P E N D I X

Prepared Statement of John R. Seffrin, Ph.D., Chief Executive Officer, 
                        American Cancer Society
    On behalf of the millions of volunteers and supporters of the 
America Cancer Society, I thank you, Mr. Chairman, and your Committee 
colleagues for the opportunity to submit testify on the fifth 
anniversary of the multi-state agreement, the Master Settlement (MSA), 
with the tobacco companies.
    Tobacco is highly addictive and causes more than 440,000 deaths 
each year in the United States, including approximately 150,000 cancer 
deaths. Put another way, we know that one out of every three cancer 
deaths in this country is caused by tobacco use. That is an 
unacceptable fact.
    Shortsighted states with budget crises and other priorities have 
frustrated the heroic efforts of tobacco advocates to get states to 
commit substantial funds for comprehensive tobacco prevention and 
cessation programs. Out of $11.6 billion the states received in Fiscal 
Year 2003, states spent only $682.3 million on tobacco prevention and 
cessation. Over the past year, funding levels have fallen even further 
and successful programs in states like Oregon, Florida, Massachusetts, 
and California have suffered major cuts.
    The American Cancer Society has long been at the forefront of 
efforts to educate the public about the dangers of smoking and to 
advocate on behalf of policies, including regulation, to reduce 
disease, suffering, and death caused by tobacco use.
    It is impossible to evaluate the success or failure of the 1998 
Master Settlement Agreement without awareness that the MSA was the 
aftermath of the failed effort by the state attorneys general to bring 
about broad comprehensive public health change through the settlement 
of their lawsuits against the tobacco companies in June 1997. That 
settlement led to the comprehensive national tobacco control bill 
proposed by Senator John McCain, as the chairman of the Senate Commerce 
Committee.
    The McCain bill, launched by a 19-1 vote of the Senate Commerce 
Committee, proposed landmark tobacco control goals far beyond the reach 
of the MSA. However, a combination of tobacco industry opposition and a 
splintered public health community resulted in the bill's demise. While 
the tobacco companies fiercely opposed the McCain bill, so did many 
tobacco control advocates, but not because of its public health 
provisions, which addressed almost every policy objective dreamed of by 
tobacco control advocates over the past 30 years. They opposed the 
McCain bill because it set a ``cap'' at $8 billion on the amount of 
product liability damages the cigarette companies could be forced to 
pay out in a single year. This concession to the tobacco companies 
would protect them against a possibility some advocates considered 
highly likely--that, as Dr. Stanton P. Glantz, a leading opponent, 
predicted, ``given patience and hard work, the tobacco industry will 
lose enough of these cases to be brought to their knees.''
    The tobacco companies and their supporters in the Senate greeted 
the public health community's opposition as a welcome opportunity to 
delay the bill's passage. By the time the Senate was prepared to vote 
on the McCain bill, the New York Times reported that the eight-week 
national advertising blitz the tobacco industry launched in the interim 
``has been remarkably successful in turning what tobacco opponents view 
as a bill that would discourage teenage smoking into a tax issue and an 
assault on working stiffs who cannot afford to pay more for 
cigarettes.''
    Even so, the bill came within just three votes of the 60 needed to 
override a tobacco industry-spawned filibuster on the Senate floor. But 
those three missing votes were enough. Few observers of the White House 
and the Congress believe we shall soon again, if ever, see a serious 
piece of legislation with the same potential for saving lives as the 
McCain bill embodied.
    Innovative lawsuits against the tobacco companies brought by state 
attorneys general led by Mike Moore of Mississippi, Christine Gregoire 
of Washington, and Hubert Humphrey III of Minnesota, had forced the 
companies to agree to the June 1997 settlement that laid the 
foundations for the McCain bill. The bill's death, the failure of the 
public health community to support the state attorneys general initial 
settlement efforts, and independent settlements by four states that 
changed the situation dramatically for all the state attorneys general. 
Some feared losing at trial. Others remained deeply concerned about the 
public health impact of their cases. But the vast majority cared only 
about the amount of money they could bring home to their state. Now the 
state attorneys general, not the tobacco industry, felt the pressure to 
settle.
    With this shift in leverage, it was not surprising that what 
emerged from the 1998 Master Settlement Agreement negotiations bore no 
resemblance to the scope of the 1997 settlement or to the McCain 
legislation. Public health advocates were united in their concern about 
its flaws and limited scope. Even the attorneys general who negotiated 
the MSA were quick to acknowledge that it accomplished far less than 
the changes proposed only a year earlier, although they still argued 
that it would bring about meaningful progress.
    It is in this setting that we should view the MSA and the efforts 
of tobacco control advocates to make the most of the settlement. What 
was lost when the McCain bill died? Has the MSA lived up to its promise 
of change?
    The core of the MSA focused on marketing restrictions on the 
tobacco industry, funding for the states, and the creation of the 
independent American Legacy Foundation. The agreement's stated goals 
were to curtail marketing to children, to provide the funds necessary 
for sustained comprehensive tobacco prevention and cessation efforts, 
and to better address the health problems caused by tobacco. It also 
funded a long-term national public education campaign through the 
American Legacy Foundation.
    Comparing the MSA to the 1997 settlement and the McCain legislation 
exposes startling contrasts. For example, the McCain bill contained 
comprehensive restrictions on tobacco marketing that would have sharply 
curtailed the tobacco industry's ability to reach kids. Since the 
industry has easily thwarted the MSA's limited restrictions in this 
area, despite the enforcement efforts of the state attorneys general.
    True, cigarette billboards have disappeared, along with promotional 
materials like t-shirts and caps with company logos. But the tobacco 
industry's marketing expenditures have increased each year since the 
MSA and the results continue to bombard our children.
    Through a penalty scheme that few tobacco control advocates had 
dared dream of, the McCain bill held the tobacco companies responsible 
if youth tobacco use did not fall dramatically: penalties up to $2 
billion annually if the companies failed to reduce youth smoking by 30 
percent in five years; 60 percent in ten years. The MSA contained no 
such provision.
    The McCain bill and the 1997 settlement specifically earmarked more 
than $2.5 billion every year for tobacco prevention and cessation-on 
top of revenue from the uncommitted funds each state was to receive. 
Unfortunately, states' budget crises and other priorities have 
frustrated the heroic efforts of tobacco advocates to get states to 
commit substantial funds to comprehensive tobacco prevention and 
cessation programs.
    The earlier provisions also proposed permanent funding for public 
education about tobacco prevention and cessation without restrictions 
as to its content. By contrast, the MSA's funding of the American 
Legacy Foundation prohibits the Foundation from ``vilifying'' tobacco 
companies. Further, the MSA guarantees funding for the Foundation's 
public education for only five years. As a result, funding for the 
Legacy's education campaign is about to end and the Foundation faces 
continuing attacks by the tobacco companies.
    Most important, the McCain bill granted the U.S. Food and Drug 
Administration broad power to regulate every aspect of tobacco product 
manufacturing, distribution, and marketing. It authorized a Federal 
agency, for the first time, to regulate the tobacco product itself; it 
forced the tobacco companies to disclose the ingredients in tobacco 
products and what they knew about the products. Five years later, 
regulation of tobacco remains an unmet priority.
    Another advantage of the 1997 settlement and the McCain bill was 
the ability to impose additional costs on all tobacco manufacturers. 
The MSA applied only to the specified defendants. The upshot? Other 
manufacturers can sell cigarettes at far lower prices. Some adult 
smokers who might have quit because of the increased cost can still buy 
low-priced cigarettes. This very likely has reduced the impact of our 
efforts on both youth starting to smoke and adult consumption.
    The 1997 settlement would have provided funding to charities to 
replace the dollars they would have received from the cigarette 
companies, so that worthy causes would no longer be forced to choose 
between their desperate need for funds and their integrity. But the 
failure of the 1997 settlement and the McCain bill left open a critical 
window of opportunity for the tobacco companies to resurrect their 
reputations through a big-budget propaganda campaign, focused on their 
philanthropy and new-found acknowledgement of tobacco's risks. At the 
same time, they continue to buy the silence of many worthy causes that 
must now rely indefinitely on tobacco money.
    From the beginning, the MSA was a missed opportunity to make 
historic change; it is not surprising that, five years later, its 
achievements pale compared to the promise of the 1997 settlement and 
the McCain bill. To date, the MSA has not lived up even to the limited 
advances it promised.
    The tobacco control movement has nevertheless made significant 
progress in the last five years. And that progress has come from the 
remarkable level of effective advocacy and action from a movement that 
picked itself up and fought on heroically. We have made huge strides in 
raising tobacco excise taxes, expanding clean indoor air protection, 
and--yes, even in bleak times increasing funds for tobacco prevention 
and control programs. And we have proven to the world that 
comprehensive programs work.
    A significant number of states funded their programs substantially 
and these states have achieved powerful results. As one inspiring 
illustration, Indiana, a state notably lackluster in its tobacco 
control until the MSA settlement. Tobacco control advocates in 
Indiana--a notoriously fiscally conservative state--persuaded the state 
legislature to allocate $32.5 million to tobacco control for Fiscal 
Year 2002 and 2003. Under the direction of veteran tobacco control 
leader Karla Sneegas, Indiana launched a comprehensive, state-of-the-
art tobacco control program. By the fall of 2002, when the program 
conducted the state's first adult tobacco survey, 193,000 Indiana 
adults had quit smoking. Overall cigarette consumption had fallen 18 
percent.
    And Maine, with ample funding, has gone from the state with the 
highest teen smoking rate to one of the lowest. Maine has cut smoking 
among kids literally in half.
    Finally, we need to give the MSA credit for two signal 
achievements. First, it changed the debate about what adequate spending 
is for tobacco control. With the MSA and the publication of Center for 
Disease Control and Prevention's Best Practices, even half hearted 
state legislators now acknowledge that meaningful comprehensive tobacco 
prevention costs more than they assumed-much more.
    The high cost and lack of access to effective smoking cessation 
therapies are among the biggest obstacles to achieving the Nation's 
Healthy People 2010 goal of reducing smoking rates from 23 percent 
today to 12 percent by 2010.
    In August 2002, Health and Human Services Secretary Tommy Thompson 
created a Subcommittee on Cessation of the Interagency Committee on 
Smoking and Health. He appointed 16 tobacco policy experts as committee 
members. The Subcommittee was charged with developing a series of 
broad-based recommendations to substantially increase tobacco cessation 
in the United States. He asked the Subcommittee to look at action steps 
that could be employed by the Federal Government as well as the private 
sector to reduce the number of people who smoke. I was privileged to 
serve as a member ofthe Subcommittee.
    The Subcommittee considered the existing body of scientific 
evidence regarding effective tobacco dependence strategies and 
policies. Numerous effective treatments exist today to treat tobacco 
dependence. These treatments can double, triple or even quadruple the 
likelihood that a smoker will be able to quit. There are also proactive 
policies that are being employed to assist smokers in their efforts to 
quit such as, telephone quitlines, paid media campaigns, cigarettes 
excise tax increases, and reducing out of pocket costs for cessation 
treatment.
    The report entitled Preventing Three Million Premature Deaths, 
Helping Five Million Smokers Quit: A National Action Plan for Tobacco 
Cessation, was submitted to the Interagency Committee on Smoking and 
Health for its approval. The full Committee voted unanimously to accept 
the recommendations and to transmit the report in its entirety to the 
Secretary. The success of our efforts was due in large part to the 
tremendous work of many organizations and individuals who attended the 
public hearings, submitted comments, and provided visibility for the 
Committee's activity.
    I want to highlight just two of the ten recommendations.
    The Subcommittee's first recommendation was to establish a 
federally-funded National Quitline network by 2005 that will provide 
universal access to evidence-based counseling and medications for 
tobacco cessation. This quitline would work with existing state or 
regionally managed quitlines. Research has shown that quitlines are a 
very effective tool in assisting smokers to quit. To date thirty-four 
states provide some level of quitline service.
    The American Cancer Society provides Quitline services through our 
call center in Austin, Texas. The center receives approximately 12,000 
calls per year from people of all walks of life with one thing in 
common--they recognize that they need help to quit smoking. The trained 
counselors who answer the quitline work with the callers to set a quit 
date and provide them with materials and other support to help them in 
their efforts. It is important to remember that tobacco is addictive. 
Therefore, the most successful cessation strategies and policies 
combine counseling with FDA-approved pharmacotherapies. Studies have 
shown that the combination of counseling and drugs substantially 
increases the likelihood that a smoker will quit.
    The second recommendation of the Subcommittee was to increase 
awareness by launching an ongoing, extensive paid media campaign by 
Fiscal Year 2005 to help Americans quit using tobacco products.
    The American Legacy Foundation's truth campaign has been a 
success, supported by rigorous evaluation. The Foundation has shown 
that an aggressive, well-executed, well funded public education 
campaign can make a difference at the national level, and it has helped 
drive down youth tobacco-use rates. Whether or not the Foundation gains 
new financing, its experience gives us a powerful argument for future 
major national investment in tobacco control.
    This otherwise dismal history offers lessons to us all. Perhaps the 
most painful, in the words of the ancient Taoist poet Lao-Tzu, is 
``that we know, but never learn.'' Windows of opportunity can slam 
shut; the passion for the perfect can sabotage the attainable near 
perfect.
    But there are affirming lessons, too: A civic movement deeply 
grounded in a passionate vision for a future free of preventable misery 
and death can recover from internal dissension and setbacks, renew its 
pursuit of the common good, and continue to march toward that vision.
                                 ______
                                 
                       Submission for the Record
    This article can be found in Journal of Health Economics 22 (2003) 
843-859 and online at www.sciencedirect.com

    The impact of tobacco control program expenditures on aggregate 
                       cigarette sales: 1981-2000

    Matthew C. Farrellya, Terry F. Pechacekb, 
Frank J. Chaloupkac

    a RTI. 3040 Cornwallis Road, Research Triangle Park, NC 
27709, USA
    b Office on Smoking and Health, Centers for Disease 
Control and Prevention, Research Triangle Park. NC, USA
    c Department of Economics, University of Illinois at 
Chicago, Chicago, IL, USA
                                 ______
                                 
   Prepared Statement of Sheila M. Ross, Washington Representative, 
   Alliance For Lung Cancer Advocacy, Support And Education (ALCASE)
    Mr. Chairman:
    The Alliance for Lung Cancer Advocacy, Support and Education 
appreciates this opportunity to make a statement for the record on the 
hearing you are holding today on how the 46 states that were parties to 
the 1998 Master Settlement Agreement (MSA) with the Nation's five 
largest tobacco companies are allocating their settlement revenues 
since the signing of the MSA.
    We thank you, Mr. Chairman, and commend you for holding this 
hearing.
    ALCASE was founded in 1995 to help lung cancer patients and their 
families, to educate the public and to advocate for a change in public 
health policy on lung cancer. It is the only national organization 
dedicated to those goals. I present this testimony on behalf of ALCASE, 
as a survivor of two bouts of lung cancer and as a former Hill staffer 
for nearly 20 years.
    The MSA was negotiated with, to best of our knowledge, no input 
from those most affected by tobacco: lung cancer patients and their 
caregivers and families. Indeed, we cannot ascertain that even a single 
dollar of the $213 billion settlement has gone to lung cancer research.
    The primary reason is this: The mortality rate of lung cancer is so 
high that not enough people remain alive long enough to establish a 
grass roots organization with sufficient political clout to demand more 
attention and funding.
    Lung cancer kills more people each year than breast, prostate and 
colon cancers combined. Yet it receives a miniscule amount of Federal 
research funding and that inequity is reflected in the statistics. 
Since the passage of the Cancer Act of 1971 the five year survival rate 
for breast cancer has risen to 88 percent and for prostate cancer to 97 
percent. Thirty years ago the 5 year survival rate for lung cancer was 
12 percent. Today it is 15 percent. The cancers with the highest 
survival rates and the largest advocacy groups consistently receive the 
most funding, up to ten times as much per death as lung cancer.
    In a recent study, even the National Cancer Institute conceded that 
lung cancer is being funded far below its public health impact. 
(Progress Review Report on Lung Cancer, August 2001.)
    At the state level, lung cancer research lost out again when the 
MSA funds were allocated, again for lack of political support. 
Ironically the pay outs to the states are predicated on prospective 
tobacco sales. Followed to its logical conclusion, unless states want 
to reduce their anticipated, and in many cases already appropriated 
revenues, it is in their interest that cigarette sales be at least 
maintained.
    In this surreal world of the MSA settlement, the states did set 
aside or earmark hundreds of millions of dollars for tobacco cessation 
programs. So much money was spent so fast that many of these programs 
have been of dubious success. The sheer number of these programs has 
also unfortunately served to stigmatize lung cancer as a life style 
choice rather a disease, which stimatization, in turn, has become a 
convenient fig leaf to hide the addiction of the state legislatures to 
tobacco money.
    The fact is, Mr. Chairman, that over 60 percent of new lung cancers 
are being found in former smokers, people who quit smoking, many of 
them years ago, or in people who have never smoked. U.S. women have the 
highest lung cancer mortality in the world. Since 1988 more women in 
the United States have been dying each year from lung cancer than 
breast cancer and the number is increasing so rapidly that by 2006 lung 
cancer deaths among women will be double that of breast cancer. People 
are not being told these statistics.
    The sad truth is that by the time symptoms, such as a cough, occur, 
it is already too late. The only hope is to find it early and treat it 
early. Finally we can do that Advances in spiral CT and computer 
assisted diagnostic technology can detect small nodules in the lungs 
even before they become cancerous.
    We must research these nodules and early disease management now. We 
must leap at this opportunity to finally make a dent in lung cancer 
mortality. 438 people are dying from lung cancer every day in the 
United States. We cannot allow this to continue. These facts cannot be 
covered up any longer.
    We recognize, Mr. Chairman, that the Federal Government cannot 
dictate to the states how they should allocate their revenues. However, 
with the Federal suit against big tobacco still in utero in the 
Department of Justice, and with this opportunity for a breakthrough on 
lung cancer finally at hand, the Federal government can suggest and 
encourage the states to put some of the MSA money into lung cancer 
research and treatment.
    And hopefully, Mr. Chairman, in the FY 05 budget, the Federal 
government will do its part by directing money and a mandate to its 
agencies to turn these promising breakthroughs in to better outcomes 
with dispatch and urgency.
    Please speak for us, Mr. Chairman. We need your voice.
                                 ______
                                 
                                 American Legacy Foundation
                                                  November 14, 2003
Hon. John McCain,
Chairman,
U.S. Senate Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Senator McCain:

    It was an honor to have the opportunity to testify before the 
Senate Commerce Committee on November 12 and to share the American 
Legacy Foundation 's insights on States' use of Tobacco Master 
Settlement Agreement Funds. I wish to thank you again for your 
leadership in holding this hearing. After the hearing, several Senators 
requested detailed information about Legacy's funding situation and the 
threat it poses to the continuation of our truth youth counter 
marketing campaign. We are pleased to provide you with the information 
below.
    As I stated during my testimony, Legacy has become the de facto 
safety net at the national level for youth tobacco prevention programs. 
In most states, truth television ads are the only tobacco prevention 
messages that young people see.
    Legacy is facing an alarming funding cliff as a result of a sunset 
clause in the MSA. Legacy received what it believes will be its last 
major payment of approximately $300 million from participating 
cigarette manufacturers pursuant to the MSA in April of this year. 
While Legacy has prepared for this ``rainy day,'' the sharp decline in 
funding means that we will be forced to sharply reduce, if not 
eliminate, many of our programs. Although Legacy will do all it can to 
preserve truth, the fact is that an effective national counter 
marketing campaign cannot be staged with less than $40-60 million for 
media placement.
    It is worth noting that the youth market is among the most 
expensive segments to buy. It is also a significant consideration that 
this $40-60 million figure does not include the cost of cultural 
immersion and study required for creative development, which is the 
heart of truth. Nor does it include our aggressive and innovative 
grass roots and web based outreach efforts. Today, these efforts are 
combined with state based youth empowerment grants and all of this work 
is the subject of the unprecedented evaluation of the campaign's impact 
on youth smoking. These non-media efforts, again at a minimum, would 
cost an additional $30-40 million.
    To put this into context, Legacy is already on a glide path to a 
greatly reduced overall operating budget, which is reflected on the 
attached funding cliff. By 2008, we expect our overall operating budget 
to be $30-$35 million in today's dollars. Consequently, even if Legacy 
were to shut down every other program, truth as we know it would 
ultimately be silenced.
    Youth smoking rates are at their lowest level in 28 years. Evidence 
suggests that truth is responsible for a very substantial proportion 
of that decline. Included with this letter is an MMWR report from the 
Centers for Disease Control that was released today. It provides some 
of the most recent data on youth smoking rates, as well as an analysis 
of truth's contribution to those declines.
    What is most alarming is that the loss of truth is coming at a 
time when States, for whatever reason, have backed away from their 
commitments to fund comprehensive tobacco control pro rams, including 
youth prevention. We know that 90 percent of smokers . start before 
their 19th birthday. It is estimated that the steady decline in youth 
smoking since 1997 has prevented over 2 million teenagers from becoming 
adult smokers and thus saved a minimum of 700,000 lives. Thus, if we 
can continue to inoculate young people with a dose of truth, millions 
of lives will be saved in the long term.
    Senator McCain, I commend you again for holding the hearing and 
thank you for allowing me to testify. Should you or your staff require 
any additional information about the American Legacy Foundation or our 
truth counter marketing campaign, please do not hesitate to contact me 
at (202) 454-5547.
            Sincerely,
                                 Cheryl G. Healton, Dr.P.H.
                                                 President and CEO.
enclosures

                     MMWR Weekly--November 14, 2003

 Tobacco Use Among Middle and High School Students--United States, 2002

    Each day in the United States, approximately 4,400 youths aged 12-
17 years try their first cigarette (1). An estimated one third of these 
young smokers are expected to die from a smoking-related 
disease(£). The National Youth Tobacco Survey (NYTS), conducted 
by the American Legacy Foundation, provides estimates of usage among 
U.S. middle and high school students for various tobacco products 
(i.e., cigarettes, cigars, smokeless tobacco, pipes, bidis [leaf 
wrapped, flavored cigarettes from India], and kreteks [clove 
cigarettes]). This report summarizes tobacco use prevalence estimates 
from the 2002 NYTS and describes changes in prevalence since 2000. Both 
tobacco use and cigarette smoking among students in high school (i.e., 
grades 9-12) decreased by approximately 18 percent during 2000-2002; 
however, a decrease among students in middle school (i.e., grades 6-8) 
was not statistically significant. The lack of progress among middle 
school students suggests that health officials should improve 
implementation of proven antismoking strategies and develop new 
strategies to promote continued declines in youth smoking.
    Sampling frames for the 2002 NYTS were stratified by U.S. Census 
Bureau region; black, Hispanic, and Asian students were oversampled. A 
partial panel design was used (i.e., comprising a newly drawn sample 
and a sampling of schools that participated in the 2000 NYTS). The 
sampling frame for the drawn sample consisted of all public and private 
schools in the United States. A total of94 primary sampling units 
(PSUs) (i.e., large counties or groups of counties) were selected in 
the first stage of the sampling, and 215 schools were selected from 
these PSUs in the second stage of the sampling; 83 additional schools 
were selected randomly for the panel sample. Of these 298 eligible 
schools, 246 (83 percent) participated in the 2002 NYTS. Approximately 
125 students were then drawn from each school by selecting classes 
randomly, depending on the average class size of each school, from a 
required subject area (e.g., English or social studies). Participation 
was voluntary and anonymous, and school parental permission procedures 
were followed; students recorded their responses on a computer-
scannable sheet.
    Among youths attending the 246 participating schools, 26,119 (90 
percent) (i.e., 12,581 middle school students and 13,538 high school 
students) completed the survey, resulting in an overall response of75 
percent. Data were weighted to be nationally representative. STATA 7 
was used to compute 95 percent confidence intervals for prevalence 
estimates, which were used to identify differences among populations. 
Current use of a specific tobacco product was defined as having used 
that product on at least one occasion during the 30 days preceding the 
survey. Current use of any tobacco product was defined as having used 
any of the listed products on at least one occasion during the 30 days 
preceding the survey.
    In 2002, a total of 13.3 percent of middle school students reported 
current use of any tobacco product (Table 1). Cigarettes (10.1 percent) 
were the most commonly used product, with no statistically significant 
differences in usage by sex. Cigars (6.0 percent) were the second most 
commonly used tobacco product, followed by smokeless tobacco (3.7 
percent), pipes (3.5 percent), bidis (2.4 percent), and kreteks (2.0 
percent). Males were more likely than females to use all tobacco 
products except for cigarettes. No significant differences were found 
for any type of tobacco use by race/ethnicity.
    Among high school students, 28.4 percent reported current use of 
any tobacco product (Table 2). Cigarettes (22.9 percent) were the most 
commonly used product, with no difference by sex; however, white 
students were more likely to use cigarettes than black, Hispanic, or 
Asian students. Cigars (11.6 percent) were the second most common 
tobacco product, followed by smokeless tobacco (6.1 percent), pipes 
(3.2 percent), kreteks (2.7 percent), and bidis (2.6 percent). Males 
were more likely than females to use all tobacco products except for 
cigarettes. Asian students were less likely to use cigars) and white 
students were more likely to use smokeless tobacco than students in 
other racial/ethnic groups.
    During 2000-2002, current use of any tobacco product among high 
school students decreased from 34.5 percent to 28.4 percent; cigarette 
use decreased from 28.0 percent to 22.9 percent, cigar use from 14.8 
percent to 11.6 percent, bidi use from 4.1 percent to 2.6 percent, and 
kretek use from 4.2 percent to 2.7 percent (Iable 2). However, no 
significant change was found among middle school students in the 
prevalence of tobacco use (Table 1).
    Reported by: JA Allen, MA, D Vallone, PhD, ML Haviland, DrPH, C 
Healton, DrPH, American Legacy Foundation, District of Columbia. KC 
Davis, MS, MC Farrelly, PhD, Research Triangle Institute, Research 
Triangle Park, North Carolina. CG Husten, MD, T Pechacek, PhD, Office 
on Smoking and Health, National Center for Chronic Disease Prevention 
and Health Promotion, CDC.
Editorial Note
    The declines in cigarette smoking and overall tobacco use among 
high school students reflect downward national trends since 1997 (3,4). 
The declining use of cigars) bidis) and kreteks and the unchanged use 
of smokeless tobacco and pipes among high school students suggests that 
students are not substituting other tobacco products for cigarettes and 
that efforts to reduce cigarette smoking might be reducing use of all 
tobacco products. However, the lack of any statistically significant 
decline in tobacco usage among middle school students is cause for 
concern.
    The findings in this report are subject to at least two 
limitations. First) these data apply only to youth who attended middle 
school or high school and are not representative of all youths in these 
age groups. Nationally, approximately 5 percent of youths aged 16-17 
years were no longer in school (4). Second, the data were from self-
reports of survey participants. Although underreporting of tobacco use 
by youths has been minimal in previous surveys (5), recent declines in 
the acceptability of smoking might have led to increased 
underreporting.
    Why middle school and high school students appear to be responding 
differently to the current antismoking environment is not clear. 
Factors expected to discourage youth from smoking include increases in 
cigarette prices (i.e., approximately 88 percent from December 1997 to 
December 2002) (6); implementation of smoke-free laws and policies; 
restrictions on tobacco advertising; and local, state) and national 
antitobacco campaigns (e.g., the truth campaign) (7). However, 
spending on tobacco industry marketing doubled during 1997-2001 (8), 
and tobacco industry-sponsored media campaigns have been determined to 
reduce the impact of public health campaigns (7).
    The data in this report suggest that further refinements in 
evidence-based strategies will be needed to decrease tobacco use among 
middle school students. Efforts might focus on (1) devising more 
targeted and effective media campaigns, (2) reducing depictions of 
tobacco use in entertainment media (9), (3) instituting campaigns to 
discourage family and friends from providing cigarettes to youths, (4) 
promoting smoke-free homes, (5) instituting comprehensive school based 
programs and policies in conjunction with supportive community 
activities, and (6) decreasing the number of adult smokers (e.g., 
parents) to present more nonsmoking role models.
    Because tobacco use is the leading cause of preventable death in 
the United States, efforts to reduce tobacco use must remain a public 
health priority. Preventing tobacco use among youth is essential to 
reduce future smoking-related illness and associated costs. However, in 
2003, states cut spending for tobacco use prevention and control 
programs by $86.2 million (11.2 percent) (10). For the decline in 
tobacco use among youth in the United States to continue, such funding 
must be restored and perhaps expanded.
References
    1. Substance Abuse and Mental Health Services Administration. 
Summary of findings from the 2001 National Household Survey on Drug 
Abuse: Volume II. Technical appendices and selected data tables. 
Rockville, Maryland: U.S. Department of Health and Human Services, 
2002; NHSDA Series H-18; DHHS publication no. (SMA)02-3759.
    2. CPC. Projected smoking-related deaths among youth. MMWR 1996 
45:971-4.
    3. Johnston LD, O'Malley PM, Bachman JG. Monitoring the future: 
national survey results on drug use, 1975-2002. Volume 1: secondary 
school students. Bethesda, Maryland: National Institutes of Health, 
National Institute on Drug Abuse, 2003; DHHS publication no. (NIH) 03-
5375.
    4. Grunbaum JA, Kann L, Kinchen S, et al., Youth risk behavior 
surveillance--United States, 2001. In: Surveillance Summaries (June 
28). MMWR 20Q2; 5l(No. SS-4).
    5. Office on Smoking and Health. Preventing tobacco use among young 
people: a report of the Surgeon General. Atlanta, Georgia: U.S. 
Department of Health and Human Services, CDC, National Center for 
Chronic Disease Prevention and Health Promotion, 1994.
    6. U.S. Department of Labor, Bureau of Labor Statistics. Consumer 
price index--all urban consumers (current series). Washington, DC: U.S. 
Department of Labor, 2003. Available at http://data.bls.gov/
labjavaloutside.jsp?survey=cu.
    7. Farrelly MC, Healton CG, Davis KC, Messeri P, Hersey JC, 
Haviland ML. Getting to the truth: evaluating national tobacco 
countermarketing campaigns. Am J Public Health 2002;92:901-7.
    8. Federal Trade Commission. Cigarette report for 2001. Federal 
Trade Commission, 2003. Available at http://www.ftG.gov/opa/2003/06/
2001cigrpt,hl;m.
    9. Sargent JD, Dalton MA, Beach ML, et al., Viewing tobacco use in 
movies: does it shape attitudes that mediate adolescent smoking? Am J 
Prev Med 2002;22:137-45.
    10. Campaign for Tobacco-Free Kids, American Lung Association, 
American Cancer Society, American Heart Association, SmokeLess States 
National Tobacco Policy Initiative. Show us the money: a report on the 
states' allocation of the tobacco settlement dollars. Washington, DC: 
National Center for Tobacco-Free Kids, 2003. Available at http://
www.tQbaccofreekids.org/reportsLsettlements/2003/fullnm_ort.pdf.

  Table 1.--Percentage of &tudents in middle school (i.e., grades 6-8) who were current users* of any tobacco product. by product type, sex, and race/
                                         ethnicity--National Youth Tobacco Survey, United States, 2002 and 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Any           Cigarettes          Cigars           Smokeless           Pipes             Bidis            Kreteks
                             tobacco ------------------------------------      tobacco     -----------------------------------------------------
      Characteristic       ------------------                                    ------------------
                                      (95%      %     (95% CI)    %     (95% CI)                      %     (95% CI)    %     (95% CI)    %     (95% CI)
                              %     CISec. )                                        %     (95% CI)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Middle school, 2002
  Sex
    Male                     14.8  ( Cigarettes. cigars. smokeless tobacco, pipes. bidis (leaf-wrapped, flavored cigarettes from India), or kreteks (clove cigarettes).
Sec.  Confidence interval.


   Table 2.--Percentage of students in high school (i.e., grades 9-12) who were current users* of any tobacco product, by product type, sex, and race/
                                         ethnicity--National Youth Tobacco Survey, United States, 2002 and 2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                   Any           Cigarettes          Cigars           Smokeless           Pipes             Bidis            Kreteks
                             tobacco ------------------------------------      tobacco     -----------------------------------------------------
      Characteristic       ------------------                                    ------------------
                                      (95%      %     (95% CI)    %     (95% CI)                      %     (95% CI)    %     (95% CI)    %     (95% CI)
                              %     CISec. )                                        %     (95% CI)
--------------------------------------------------------------------------------------------------------------------------------------------------------
High school, 2002
  Sex
    Male                     32.9  ( Cigarettes. cigars. smokeless tobacco, pipes. bidis (leaf-wrapped, flavored cigarettes from India), or kreteks (clove cigarettes).
Sec.  Confidence interval.



                                 ______
                                 
                                 ______
                                 
                                          Altria Group Inc.
                                  Washington, DC, November 24, 2003
Hon. John McCain,
Chairman,
Committee on Commerce, Science, and Transportation,
Washington, DC.

Dear Mr. Chairman:

    Attached hereto is written testimony from Philip Morris USA that we 
respectfully request be included in the record of proceedings before 
the Committee on Commerce, Science, and Transportation conducted on 
November 12, 2003 to consider State use of tobacco settlement funds.
    During the course of that hearing, two issues in particular were 
discussed that believe warrant further information be provided to the 
Committee. Thus, the attached statement discusses the position of PM 
USA on the use of cigarettes in movies, as well as the company's 
current marketing and promotion practices and expenditures. Should the 
Committee desire additional information on these matters, beyond that 
contained in our statement, please do not hesitate to have your staff 
contact this office.
    Thank you for your consideration of this request.
            Sincerely,
                                           John F. Scruggs,
                                                    Vice President,
                                                    Government Affairs.
cc. Senator Ernest F. Hollings
Ranking Minority Member,
Committee on Commerce, Science, and Transportation
                                 ______
                                 
                               Attachment
                 Written Comments of Philip Morris USA
    Philip Morris USA is pleased to submit these comments regarding the 
Committee's November 12, 2003 hearing on the use of tobacco settlement 
funds. That hearing was held to discuss, among other things, the issue 
of whether states are devoting enough tobacco settlement funds to youth 
smoking prevention efforts.
    We want to express our appreciation to the Committee and to 
Chairman McCain for holding a hearing on this subject. As we have 
stated over the years, Philip Morris USA encourages the states to spend 
a significant portion of the tobacco settlement funds on youth smoking 
prevention efforts. We share the disappointment expressed by many at 
the November 12 hearing that more states have not taken advantage of 
the opportunity to use these funds to support programs that can help 
reduce youth smoking. Indeed, there is no question that support for 
youth smoking prevention efforts is a worthy and appropriate use for 
the tobacco settlement funds. For our part, as the manufacturer of a 
product intended for adults that causes serious disease in smokers such 
as lung cancer, emphysema, and heart disease, and which is addictive, 
we believe we have a responsibility to help prevent youth smoking. In 
fact, with a dedicated Youth Smoking Prevention staff and an annual 
budget of over $100 million, we support positive youth development 
programs, research, and communications aimed at helping parents talk to 
their kids about not smoking. We believe there is a great opportunity 
for the States to increase their support for these kinds of activities. 
For Philip Morris USA, youth smoking prevention is a long-term 
commitment, and we stand ready to work with members of the Committee, 
as well as other interested stakeholders, in making progress on this 
important policy issue.
    Philip Morris USA would like to take this opportunity to address 
two other issues that were raised during the hearing.
Product Placement and Smoking Scenes in Movies and Television Shows
    We share the concern raised by a number of the hearing participants 
about the incidence of smoking in motion pictures and television shows. 
In connection with our marketing activities generally, Philip Morris 
USA conducts extensive training and continuously monitors compliance 
with our obligations under the Cigarette Advertising and Promotion Code 
(the ``Ad Code'')-a voluntary agreement originally entered into by the 
major domestic manufacturers in 1964 and most recently updated in 1990-
as well as our internal guidelines and the terms of the Master 
Settlement Agreement (the ``MSA''), which collectively address issues 
with respect to the content and placement of our cigarette advertising.
    With regard to product placement in particular, our policy for more 
than a decade has been to deny all third party requests for permission 
to use, display or make reference to our cigarette brand names, 
products, packages, or advertisements in media such as motion pictures 
or television shows produced for viewing by the general public, 
irrespective of whether the target audience is adults or minors. Since 
that policy was implemented, Philip Morris USA has not made, or caused 
to be made, any payment, or given other consideration to any person or 
entity to use, display or make reference to or use as a prop our 
cigarette brand names, products, packages or advertisements in any form 
of media covered by the policy, including movies or television shows 
produced for viewing by the general public.
    This policy is consistent with the terms of the MSA, which, as 
Attorney General Moore correctly noted in his remarks, prohibits 
participating manufacturers from paying for product placements in 
movies, television shows, or other performances or video games.\1\ 
Philip Morris USA has been in full compliance with the MSA and the Ad 
Code, including all provisions relating to product placement 
prohibitions. Moreover, no Attorney General has taken any enforcement 
action against us with respect to these provisions. If any State 
believes that there is any evidence suggesting that there is any 
question about our compliance, we stand ready to address those 
concerns. In fact, we recently received an inquiry from the California 
Attorney General on the topic of smoking in movies. In response, we 
provided information on our policy and practices 1related to this topic 
and included copies of letters--referenced below--that we sent to the 
heads of movie studios encouraging them to take action on this issue.
---------------------------------------------------------------------------
    \1\ The Master Settlement Agreement creates a few narrow exceptions 
to this rule, for media that are not intended to be distributed to the 
public or are intended to be viewed in Adult-Only Facilities or 
instructional media for adult smokers regarding non-conventional 
cigarettes.
---------------------------------------------------------------------------
    The fact that we do not pay for product placement, and the fact 
that we deny all requests to use our brands and brand imagery in movies 
and television shows, does not mean, of course, that our products never 
appear in movies or television shows. The fact of the matter is that 
some producers and directors of motion pictures and television shows do 
use or depict Philip Morris USA brands in their works without seeking 
or obtaining our permission. This is a frustrating situation for us, 
since our position is clear we do not want our brands or brand imagery 
to be depicted in movies and television shows. Among other things, such 
usages of our brands and brand imagery perpetuate the misunderstanding 
in the minds of some that we pay for or otherwise encourage these 
depictions, when, in fact, we are legally barred from doing so, and 
have followed a strict policy for more than a decade that prohibits 
such activity. However, irrespective of our views or our business 
practices, current law clearly allows the ``fair use'' of our brands or 
brand imagery-even without our permission which hinders our ability to 
take proactive steps to prevent usages of our brands or brand imagery 
in movies and television shows.
    Nevertheless, we have joined others in encouraging the motion 
picture industry to reduce or eliminate smoking scenes from movies 
targeted towards kids, and, in addition, to cease using cigarette 
brands or brand imagery in all movies. As Howard Willard III, Senior 
Vice President of Philip Morris USA's Youth Smoking Prevention 
Department, stated in an October 17, 2003 letter to a group of motion 
picture producers:\2\
---------------------------------------------------------------------------
    \2\ Letter from Howard Willard to heads of major U.S. motion 
picture studios, dated October 17, 2003. Copies attached.

        I am writing to express Philip Morris USA's support of the 
        proposal by 25 State Attorneys General encouraging the motion 
        picture industry to reduce or eliminate smoking scenes in 
        movies that are directed towards kids. In addition, consistent 
        with Philip Morris USA's policy of denying permission for the 
        use of our products or trademarks in films, we also want to 
        strongly encourage the motion picture industry to voluntarily 
        refrain from portraying or referring to cigarette brands or 
---------------------------------------------------------------------------
        brand imagery in any movies.

        Youth smoking prevention is a serious commitment for Philip 
        Morris USA. Our Youth Smoking Prevention (YSP) Department has a 
        dedicated staff of 20 people and a budget in excess of $100 
        million. We focus our efforts in the following four areas: (i) 
        communications and education for parents to help and encourage 
        them to talk to their kids about not smoking; (ii) grants to 
        support youth smoking prevention and positive youth development 
        programs; (iii) support for youth access prevention programs 
        and (iv) research to help us understand the latest developments 
        in youth smoking prevention.

        In May 2003, an American Legacy Foundation study found that 
        smoking was depicted in 64 percent of PG-13 and 37 percent of 
        PG movies included in their analyses.\3\ Research suggests that 
        youth exposure to smoking in movies has an impact on their 
        attitudes and behaviors related to smoking. For example, 
        researchers found that children who had the highest exposure to 
        smoking in movies were almost three times more likely to start 
        smoking than were children who had the lowest exposure to 
        smoking in movies.\4\ I have attached a brief summary of this 
        and other relevant research on this issue.
---------------------------------------------------------------------------
    \3\ American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.
    \4\ Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online http://
image.thelancet.com/extras/03art1353web.pdf (June 10, 2003).

        At Philip Morris USA we are committed to helping prevent youth 
        smoking. We welcome the opportunity to work with others who 
        share our goal. We have significant resources available in our 
        YSP programs and YSP research groups that could provide you 
        with support as you tackle this issue. Please contact me if we 
---------------------------------------------------------------------------
        can be of assistance.

    In short, we believe it is appropriate for the motion picture and 
television industry to reduce or eliminate depictions of cigarettes and 
smoking from movies and shows aimed at kids, and to refrain from using 
cigarette brands and brand imagery in any movies.
Changes in Cigarette Advertising, Marketing and Promotional 
        Expenditures
    During the hearing, a number of comments were made regarding 
changes in industry expenditures on cigarette advertising, marketing 
and promotional efforts since the MSA was signed. Contrary to what some 
at the hearing implied, Philip Morris USA has dramatically reduced its 
expenditures on newspaper, magazine, and point of sale advertising in 
every year since the MSA was signed in 1998. Traditional brand image 
advertising represented less than 8 percent of the Company's total 
expenditures in 2001, the most recent year for which the FTC has 
published aggregate industry expenditures, continuing a four-year 
decline from 21 percent of spending in 1998. And these downward trends 
have continued through to the present.
    The $11.5 billion figure reported by the FTC that was cited at the 
hearing is an aggregate industry figure for an FTC designated expense 
category that includes not only expenditures on brand advertising 
(which for us has been dramatically reduced) but also expenditures on 
price promotions. Philip Morris USA has expanded the breadth and depth 
of its price promotions following its commitment to the MSA in order to 
compete effectively in the marketplace, particularly in light of the 
deep discount prices charged by competitors that did not sign the MSA 
and recent drastic increases in state excise taxes. A significant 
percentage of our marketing and promotional expenditures are for price 
promotions. Yet, despite our use of price promotions to remain 
competitive, the price of our products is still among the highest in 
the industry. Recently, some tobacco control advocates have implied 
that the substantial level of expenditures on price promotions 
constitutes an increase in brand advertising. That is simply not the 
case. We not only disagree with that characterization; we believe it 
reflects a misunderstanding of current industry dynamics, which require 
manufacturers to compete on price to remain competitive in a rapidly 
changing industry.
    For its part, Philip Morris USA is meeting that challenge 
responsibly. For example, Philip Morris USA's marketing and promotional 
expenditures include promotional allowances we pay to retailers who 
agree to take significant steps to help reduce youth access to tobacco 
products and to otherwise responsibly merchandise the cigarette 
category. Philip Morris USA offers retailers the highest level of 
promotional incentives for a non self-service environment, no displays 
or signage on the counter and implementing the We Card program, which 
trains retail employees to comply with minimum age laws.
    As the testimony at the hearing made clear, the extra costs imposed 
by the MSA on participating manufacturers--which have been exacerbated 
by dramatic increases in State excise taxes in the past several years--
have spurred considerable growth over the last few years of the ``deep 
discount'' segment of the domestic cigarette market. Manufacturers that 
don't compete effectively on price will continue to lose share to those 
manufacturers that have not agreed to comply with the terms of the MSA. 
This trend clearly undermines the goals of those who want to reduce the 
visibility of cigarette advertising, because those manufacturers are 
not bound by the MSA's marketing restrictions.
    Not only have we reduced the amount that we spend on traditional 
cigarette brand advertising, we have also significantly changed the 
nature of our marketing and advertising practices to further reduce the 
profile of our advertising. Part of this change is compelled by the 
MSA, which prohibits participating manufacturers such as Philip Morris 
USA from marketing its brands through billboards, mass transit, and 
most other forms of outdoor advertising, and which imposes other 
important restrictions on the way we communicate with adult smokers. 
But the changes we have experienced go above and beyond what the MSA, 
or other applicable laws require, and include restrictions that we have 
voluntarily adopted to better align our practices with society's 
expectations. For example, three years ago Philip Morris USA withdrew 
all of our advertising from the back covers of all magazines. We have 
also set voluntary standards that prohibit us from advertising in any 
magazine with significant youth readership in particular, in any 
publication in which readers younger than 18 years of age constitute 15 
percent or more of the total readership of the magazine or that is read 
by more than two million persons younger than 18 years of age. These 
readership standards are the same as those contained in the tobacco 
rules proposed by the Food and Drug Administration. However, having 
severely restricted the amount of print advertising we run, our current 
print advertising practices go well beyond these standards.
Conclusion
    We thank the Committee for the opportunity to submit these written 
remarks, and we would be happy to provide further detail or 
clarification regarding our practices and positions.
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003
Hon. Dennis Eckhart,
Senior Assistant Attorney General,
Office of the Attorney General,
State of California,
Sacramento, CA.

Dear General Eckhart:

    I have attached copies of the letters I recently sent to the major 
movie studios expressing Philip Morris USA's support of the proposal by 
25 State Attorneys General encouraging the motion picture industry to 
reduce or eliminate smoking scenes in movies that are directed towards 
kids, as well as our request that the motion picture industry 
voluntarily refrain from portraying or referring to cigarette brands or 
brand imagery in any movies. I have been committed to communicating 
with the movie studios on this issue since our correspondence in 
August. However, prior to sending the letters we conducted a review of 
the relevant research to both better inform our communication and to 
share with the movie industry executives.
    I am hopeful that our efforts will help contribute to continued 
declines in youth smoking rates.
            Sincerely yours,
                                     Howard A. Willard III,
                                             Senior Vice President,
                                          Youth Smoking Prevention.
Attachments
                                 ______
                                 
                              Attachments
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Jonathan Dolgen,
Chairman,
Paramount Pictures,
Los Angeles, CA.

Dear Mr. Dolgen:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003
Michael D. Eisner,
Chief Executive Officer,
The Walt Disney Company,
Burbank, CA.

Dear Mr. Eisner:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Harvey Weinstein,
Co-Chairmen,
Miramax Films,
Los Angeles, CA.

Dear Mr. Weinstein:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Robert Weinstein,
Co-Chairmen,
Miramax Films,
Los Angeles, CA.

Dear Mr. Weinstein:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003
Steven Spielberg,
Chairman and Chief Executive Officer,
Dreamworks,
Glendale, CA.

Dear Mr. Spielberg:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

John Calley,
Chairman and Chief Executive Officer,
Sony Pictures Entertainment,
Culver City, CA.

Dear Mr. Calley:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Alex Yemenidijan,
Chairman and Chief Executive Officer,
MGM Pictures,
Santa Monica, CA.

Dear Mr. Yemenidijan:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Stacey Snider,
Chief Executive Officer,
Universal Pictures,
Universal City, CA.

Dear Ms. Snider:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Barry Meyer,
Chief Executive Officer,
Warner Brothers Studios,
Burbank, CA.

Dear Mr. Meyer:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Jim Gianopulos,
Co-Chairmen,
Fox Filmed Entertainment,
Los Angeles, CA.

Dear Mr. Gianopulos:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
                                       Philip Morris U.S.A.
                                     New York, NY, October 17, 2003

Tom Rothman,
Co-Chairmen,
Fox Filmed Entertainment,
Los Angeles, CA.

Dear Mr. Rothman:

    I am writing to express Philip Morris USA's support of the proposal 
by 25 State Attorneys General encouraging the motion picture industry 
to reduce or eliminate smoking scenes in movies that are directed 
towards kids. In addition, consistent with Philip Morris USA's policy 
of denying permission for the use of our products or trademarks in 
films, we also want to strongly encourage the motion picture industry 
to voluntarily refrain from portraying or referring to cigarette brands 
or brand imagery in any movies.
    Youth smoking prevention is a serious commitment for Philip Morris 
USA Our Youth Smoking Prevention (YSP) Department has a dedicated staff 
of 20 people and a budget in excess of $100 million. We focus our 
efforts in the following four areas: (i) communications and education 
for parents to help and encourage them to talk to their kids about not 
smoking; (ii) grants to support youth smoking prevention and positive 
youth development programs; (iii) support for youth access prevention 
programs and (iv) research to help us understand the latest 
developments in youth smoking prevention.
    In May 2003, an American Legacy Foundation study found that smoking 
was depicted in 64 percent of PG-13 and 37 percent of PG movies 
included in their analyses.\1\ Research suggests that youth exposure to 
smoking in movies has an impact on their attitudes and behaviors 
related to smoking. For example, researchers found that children who 
had the highest exposure to smoking in movies were almost three times 
more likely to start smoking than were children who had the lowest 
exposure to smoking in movies.\2\ I have attached a brief summary of 
this and other relevant research on this issue.
    At Philip Morris USA we are committed to helping prevent youth 
smoking. We welcome the opportunity to work with others who share our 
goal. We have significant resources available in our YSP programs and 
YSP research groups that could provide you with support as you tackle 
this issue. Please contact me if we can be of assistance.
            Sincerely yours,
                                      Howard A. Willard III

cc: Jack Valenti, President, Motion Picture Association of America
Senior Assistant California Attorney General Dennis Eckhart, w/encl.
Denise Keane, Senior Vice President and General Counsel, Philip Morris 
USA.
References

    1. American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
(Press Release). May 31, 2003.

    2. Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
viewing smoking in movies on adolescent smoking initiation: a cohort 
study'' The Lancet 362 (2003): 281-285; published online  (June 10, 2003).
                                 ______
                                 
Summary of Research and Perspectives on the Portrayal of Tobacco in the 
           Movies in an Effort to Help Prevent Youth Smoking

Prepared by Philip Morris USA's Youth Smoking Prevention Department as 
 an enclosure to its letter to U.S. movie industry executives--October 
                                17, 2003

Prevalence of Smoking/Tobacco Use in Movies

American Legacy Foundation Analysis (2003) covered 216 movies and their 
trailers \1\
    --67 percent of the movies and 14 percent of the trailers depicted 
smoking
    --The survey found that smoking was depicted in the following:

   85 percent of R-rated movies

   64 percent of PG-13 movies

   37 percent of PG-rated movies

    --Television-aired trailers were more likely to include smoking 
imagery if the movie being promoted showed a specific brand

   If a brand appeared in the movie, there was a 45 percent 
        incidence of the trailer including tobacco imagery

   If the movie included smoking with no brand appearance, 
        there was only a 15 percent incidence of the trailer including 
        smoking

STARS Project (American Lung Association) Study (2003) reviewed 145 
movies playing between May 31, 2002 and May 26, 2003 \2\

    --106 of the 145 movies (73 percent) that made the box office 
weekly Top 10 featured tobacco use
    --The study found that tobacco use was depicted as follows:

   76 percent of R-rated movies

   82 percent of PG-13 movies

   39 percent of PG-rated movies

    --Reviewers classified segments according to perceived tobacco 
messages:

   30 percent did not portray tobacco use or depicted the 
        negative consequences of its use

   39 percent either used numerous pro-tobacco or glamorous 
        portrayals

   20 percent used specific brand depictions and/or showed a 
        minor or pregnant women use tobacco

Massachusetts Public Interest Research Group (MASSPIRG) (2002) reviewed 
PG-13 films and compared the amount of tobacco use in 1996-97 (pre-MSA) 
and 1999-2000 (post-MSA). The top 10 grossing films and top 5 video 
rentals in America during the specified years were reviewed.\3\

    --Tobacco use remains prevalent in PG-13, youth oriented movies

   82 percent of post-MSA movies

   80 percent of pre-MSA movies

    --From the perspective of total film time, tobacco use is up 50 
percent in post-MSA films

   1.35 minutes of tobacco use post-MSA

   .89 minutes of tobacco use pre-MSA

    --Most films portray smokers and smoking in a positive or neutral 
light

   83 percent of post-MSA movies with tobacco use conveyed the 
        perception that smoking is acceptable and even ``cool'' (no 
        comparison to pre-MSA made)

    --Fewer films feature negative statements about tobacco use

   Before the MSA, 31 percent of movies showed tobacco use as a 
        negative; post-MSA that number fell to 17 percent
Impact of the Depiction of Smoking/Tobacco Use in Movies
    Although there are a limited number of studies in this area, 
academic research has increased recently and preliminary findings 
indicate that exposure to cigarette smoking in movies has an impact on 
youth attitudes and behaviors related to smoking. A number of peer-
reviewed studies have suggested that children may be influenced to 
smoke by watching movies that portray smoking:

   Dalton, et at. (2003)--``After controlling for baseline 
        characteristics, adolescents in the highest quartile of 
        exposure to movie smoking were 2.71 times more likely to 
        initiate smoking compared to those in the lowest quartile. The 
        effect of exposure to movie smoking was stronger in adolescents 
        with non-smoking parents than in those whose parents smoked . . 
        . Our results provide strong evidence that viewing smoking in 
        movies promotes smoking initiation among adolescents.'' \4\

   Sargent, et al., (2002)--``Our research documents a strong 
        relationship between viewing tobacco use in movies and more 
        positive attitudes toward smoking among adolescent never-
        smokers . . . This is consistent with the idea that viewing 
        tobacco depictions in movies softens adolescents' resistance to 
        peer offers, enhances their perceptions of the positive 
        benefits of smoking, and makes them more likely to consider 
        trying smoking in the future.'' \5\

   Pechmann and Shih (1999)--``. . . smoking (versus 
        nonsmoking) scenes positively . . . enhanced their [youth] 
        perceptions of smokers' social stature, and increased their 
        intent to smoke. However, youths' opinions were malleable, and 
        showing them an antismoking advertisement before the film 
        effectively repositioned the smoking from forbidden to tainted, 
        thereby nullifying the aforementioned effects.'' \6\

   Distefan, et at. (1999)--``We conclude that there is a 
        relationship between adolescents' choice of favorite movie 
        actors and actresses and their smoking status. Favorite movie 
        stars may provide normative behavior models that are emulated 
        or used to justify subsequent smoking . . . the recent increase 
        in the portrayal of smoking in the movies is alarming, 
        particularly as it has been associated with a large increase in 
        smoking among adolescents.'' \7\
Perspectives on the Subject of the Depiction of Smoking/Tobacco Use in 
        Movies
``Movies are rated on the basis of language, violence, sexual content, 
and drugs . . . The MPAA does not consider smoking -the most widely 
used additive drug that kills the most people--in assigning ratings.''

                Stanton Glantz, Professor of Medicine at the University 
                of California, San Francisco and founder of the Smoke 
                Free Movie project, Excerpt from an Editorial entitled 
                Rate Movies with Smoking ``R'' \8\

``Substantial research indicates that exposure to cigarettes and 
smoking in movies has a measurable impact on youth . . . The appearance 
of tobacco in PG and PG-13 movies has steadily increased . . .! invite 
the film industry's cooperation in reducing the amount of tobacco and 
smoking in movies by eliminating the appearance of tobacco except where 
absolutely integral to a scene. I think it is reasonable to expect that 
cigarette brand names not appear at all . . .''

                Bill Lockyer, Attorney General, State of California, 
                Letter to Jack Valenti, President of Motion Picture 
                Association of America \9\

``. . . not everyone supports the claim that movies are an important 
influence on children's smoking behaviors. Moreover, the evidence 
supporting this claim is limited to a few observational studies; and 
all such research faces the difficult challenge of disentangling the 
effect of movies from adolescent personalities and parenting 
characteristics.''

                Steven Woloshin, MD, MS and Lisa Schwartz, MD, MS; 
                Excerpt from an Editorial entitled Smoke-Free Movies: 
                Sense or Censorship? \10\
Recommendations from the Public Health Community
The World Health Organization,\11\ American Medical Association, 
American Legacy Foundation, and others--including the Los Angeles 
Department of Public Health and U.S. Public Interest Research Group--
have endorsed the following four policies:

        --Certify No Pay-Offs
                The producers should post a certificate in the credits 
                at the end of the movie declaring that nobody on the 
                production received anything of value (cash money, free 
                cigarettes or other gifts, free publicity, interest-
                free loans or anything else) from anyone in exchange 
                for using or displaying tobacco.

        --Require Strong Anti-Smoking Ads
                Studios and theaters should require a genuinely strong 
                anti-smoking ad (not one produced by a tobacco company) 
                to run before any film with any tobacco presence, 
                regardless of its MPAA rating.

        --Stop Identifying Tobacco Brands
                There should be no tobacco brand identification nor the 
                presence of tobacco brand imagery (such as billboards) 
                in the background of any movie scene.

        --Rate New Smoking Movies ``R''
                Any film that shows or depicts tobacco should be rated 
                ``R.'' The only exceptions should be when the 
                presentation of tobacco clearly and unambiguously 
                reflects the dangers and consequences of tobacco use or 
                is necessary to represent smoking of a real historical 
                figure.

        --The American Legacy Foundation\12\ also recommends adding:
                Eliminate the practice of portraying smoking in aired 
                movie trailers.
References Cited

   1.  American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
        (Press Release). May 31, 2003.

   2.  American Lung Association of Sacramento-Emigrant Trails. PR 
        Newswire, ``Give Most PG-13 Movies an `S' for Smoking'' May 30, 
        2003.

   3.  Ng, Crystal and Bradley Dakake of Massachusetts Public Interest 
        Research Group. Tobacco at the Movies. 2002.

   4.  Dalton, Madeline A., Sargent, James D., et al., ``Effect of 
        viewing smoking in movies on adolescent smoking initiation: a 
        cohort study'' The Lancet 362 (2003): 281-285; published online 
         (June 10, 
        2003).

   5.  Sargent, James D., Dalton, Madeline A., et. al. ``Viewing 
        tobacco use in movies: Does it shape attitudes that mediate 
        adolescent smoking?'' American Journal of Preventative Medicine 
        22 (2002):137-145.

   6.  Pechmann, Cornelia and Chuan-Fong Shih. ``Smoking in movies and 
        antismoking advertisements before movies: Effects on youth.'' 
        Journal of Marketing 63 (July 1999): 1-13.

   7.  Distefan, Janet, Elizabeth Gilpin, et al., ``Do movie stars 
        encourage adolescents to start smoking? Evidence from 
        California.'' Preventative Medicine 28 (1999): 1-11.

   8.  Glantz, Stanton. ``Rate movies with smoking ``R''. Effective 
        Clinical Practice 5 (2002):31-34.

   9.  Lockyer, Bill (Attorney General of California), letter to Jack 
        Valenti, President of the Motion Picture Association of 
        America. 'World No Tobacco Day (May 31, 2003)'' 11 June 2003.

  10.  Woloshin, Steven and Lisa M Schwartz. ``Smoke-free movies: Sense 
        or censorship?'' Effective Clinical Practice 5 (2002):31-34.

  11.  World Health Organization. (2003, January 31). ``Rationale for 
        Framework Convention on Tobacco Control.''  (cited 20 August 2003).

  12.  American Legacy Foundation. ``Big Tobacco on the Big Screen'' 
        (Press Release). May 31, 2003.

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