Tobacco Settlement: States' Use of Master Settlement Agreement	 
Payments (29-JUN-01, GAO-01-851).				 
								 
The attorneys general of 46 states signed a settlement agreement 
in 1998 with the nation's largest tobacco companies requiring	 
them to make annual payments to states in perpetuity as 	 
reimbursement for past tobacco-related costs. Florida, Minnesota,
Mississippi, and Texas reached earlier individual settlements	 
with the tobacco companies. States are free to use the money for 
any purpose. During the past year, several organizations have	 
issued reports on states' use of their payments and spending for 
tobacco control. This report examines (1) the amount of payments 
received by the states and the states' decision-making processes 
on the allocation of payments in fiscal years 2000 and 2001 and  
(2) the types of programs that states funded with their payments 
in those two fiscal years. As of April 2001, GAO found that 45 of
the 46 states received nearly $13.5 billion of the $206 billion  
estimated to be paid by the tobacco companies over the first 25  
years of the agreement. Many states established dedicated funds  
for receipt of at least a portion of the payments. Other states  
passed legislation to ensure that payments are used to supplement
existing state funds, enacted laws governing the future use of	 
the payments, established voter approved initiatives to decide	 
how to allocate the payments, and created special commissions to 
develop recommendations and long-term plans for the payments. The
types of programs that states tended to fund were tobacco control
and health care.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-851 					        
    ACCNO:   A01306						        
  TITLE:     Tobacco Settlement: States' Use of Master Settlement     
             Agreement Payments                                               
     DATE:   06/29/2001 
  SUBJECT:   Tobacco industry					 
	     Health care services				 
	     Claims settlement					 
	     State governments					 
	     State budgets					 
	     Financial management				 

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GAO-01-851
     
A

Report to the Honorable John McCain, Ranking Minority Member, Committee on
Commerce, Science, and Transportation,

U. S. Senate

June 2001 TOBACCO SETTLEMENT

States? Use of Master Settlement Agreement Payments

GAO- 01- 851

Letter 3 Appendixes Appendix I: Scope and Methodology 46

Appendix II: Allocation of MSA Payments in California 50 Appendix III:
Allocation of MSA Payments in New York 52 Appendix IV: Master Settlement
Agreement Payments 54 Appendix V: Strategic Contribution Fund Payments 56
Appendix VI: Phase II: The National Tobacco Grower Settlement Trust
Agreement 58

Appendix VII: States? Restrictions Against Supplantation 62 Appendix VIII:
Sources of Information 68

Tables Table 1: MSA State Allocation Percentages 12 Table 2: MSA and Phase
II Payments 15

Table 3: Original Estimated and Actual MSA Payments Received by States as of
April 2001 17 Table 4: States? Dedicated Funds and Allocation of MSA

Payments in Fiscal Year 2001 24 Table 5: Percent Allocations of MSA Payments
by Category,

State Fiscal Years 2000 and 2001 27 Table 6: Percentage of MSA Payments
Dedicated to Tobacco

Control for State Fiscal Years 2000 and 2001 (excluding Missouri, Oregon,
Pennsylvania, and Tennessee) 29 Table 7: Percentage of MSA Payments for
Economic Development and Tobacco Growers in Ten Tobacco States for State
Fiscal Years 2000 and 2001 35

Table 8: Original Estimated Payments through 2025 to 46 states, the District
of Columbia, and 5 U. S. Territories 54 Table 9: Allocation Percentages for
Phase II Payments 59 Table 10: Estimated Annual Payments to the National
Tobacco

Grower Settlement Trust 61 Figures Figure 1: State Allocations of MSA
Payments (State Fiscal

Years 2000 and 2001) 7

Abbreviations

AHCCCS Arizona Health Care Cost Containment System CDC Centers for Disease
Control and Prevention CPI Consumer Price Index HCRA 2000 Health Care Reform
Act KEY Kansas Endowment for Youth MOU memorandum of understanding MSA
Master Settlement Agreement NAAG National Association of Attorneys General
NCSL National Conference of State Legislatures NGA National Governors?
Association NPM non- participating manufacturers SCF Strategic Contribution
Fund SCHIP State Children?s Health Insurance Program SPE special purpose
entity TICR Tobacco Indemnification and Community Revitalization

Commission

Lett er

June 29, 2001 The Honorable John McCain, Ranking Minority Member Committee
on Commerce, Science, and Transportation United States Senate

Dear Senator McCain: In November 1998, the attorneys general of 46 states 1
signed a comprehensive agreement with the nation?s largest tobacco companies
requiring them to make annual payments to states in perpetuity as
reimbursement for past tobacco- related costs, such as Medicaid
expenditures. This settlement- referred to as the Master Settlement
Agreement (MSA)- is the largest civil settlement in U. S. history and

commits tobacco companies to pay approximately $206 billion over the first
25 years of the agreement. 2 The four states that are not party to the MSA-
Florida, Minnesota, Mississippi, and Texas- had reached earlier, individual
settlements with the tobacco companies that call for payments totaling $40
billion over 25 years. 3

The MSA imposes no requirements on how states spend their MSA payments;
states are free to use the funds for any purpose. As a result, the receipt
of millions of MSA dollars has presented states with a unique opportunity to
finance programs in a variety of policy areas. Although the MSA does not
require states to spend settlement payments on tobacco

control programs, many antismoking and health care observers are concerned
that states are not using enough of the MSA payments to enhance their
tobacco prevention and control efforts.

1 The District of Columbia and the five U. S. territories are also party to
the agreement. 2 $206 billion is the original estimate of the total payments
from the MSA. Of this total, $204. 5 billion is the estimated total payment
to 46 states, the District of Columbia, and the five U. S. territories. An
additional $1. 8 billion is provided for other initiatives agreed to in the
MSA

including a national foundation and administrative costs of the National
Association of Attorneys General. 3 An earlier GAO report, Tobacco
Settlements: States? Use of Settlement Proceeds (HEHS- 98- 147R, April 22,
1998) studied the preliminary use of settlement payments by these four
states.

The scope of the MSA and the magnitude of the payments involved have
generated a great deal of attention. During the past year, several
organizations have issued reports on states? use of their MSA payments and/
or state spending on tobacco control, including the Campaign for Tobacco-
Free Kids, the Centers for Disease Control and Prevention (CDC), the
National Conference of State Legislatures (NCSL), and the National
Governors? Association (NGA). 4

You asked us to provide a comprehensive review of how states are using their
MSA payments- in particular, to what extent states are using these funds for
smoking prevention and cessation programs. Our report responds to your
request by examining (1) the amount of payments received by states and the
states? decision- making processes regarding allocation of the MSA payments
in state fiscal years 2000 and 2001, 5 and (2) the types of programs that
states funded with their MSA payments in those two fiscal years. As agreed
with your staff, our report focuses exclusively on the 46

states covered by the MSA and exclusively on MSA payments. 6 To address our
objectives we studied the allocation of all MSA payments through states?
fiscal year 2001. We collected and analyzed budget- related and legislative
documents and interviewed officials from each of the 46 state executive
budget offices about the plans for use of the MSA payments for the two
fiscal years in our study. In some cases, state budget officials

included staff from the state attorney general?s office, the governor?s
office and the state agency responsible for tobacco control programs in the
interview. In order to present as comprehensive a review as possible, we
collected data on all estimated MSA payments to the 46 states and the
allocations of those payments regardless of whether a decision was made

on the use of the funds or whether all funds were appropriated by the
legislature. Our study focuses only on the state shares of MSA payments. In
California and New York, the two states in which the counties receive MSA

payments, we did not track the MSA payments to counties or the allocation of
those payments. We did not collect information on payments to the

4 See appendix VIII for a list of these organizations and their reports. 5
Throughout this report, fiscal year will refer to state fiscal year. In most
states the fiscal year begins on July 1 and ends on June 30; the exceptions
are as follows: in Alabama and Michigan the fiscal year begins on October 1
and in New York the fiscal year begins on

April 1. 6 We did not report on other sources of funding for tobacco control
programs.

District of Columbia or the five territories that are also party to the MSA.
We categorized states? use of settlement payments for state fiscal years
2000 and 2001 according to selected program areas and developed a
methodology for allocating dollars to specific categories. To obtain a
comprehensive understanding of the states use of MSA payments, we

reviewed recent reports and studies and spoke with representatives from the
organizations conducting these studies. See appendix I for a more detailed
description of our scope and methodology.

Results in Brief As of April 2001, 45 of the 46 states that are a party to
the Master Settlement Agreement (MSA) received nearly $13. 5 billion of the
$206 billion estimated to be paid by the tobacco companies over the first 25
years of the agreement. 7 While this amount represents only about 1.7
percent of these states? general fund revenues for the same two- year
period, the receipt of MSA payments prompted many states to engage in a
deliberative decisionmaking process to determine long- term uses for the
payments. Many states established dedicated funds- categorized as either
special funds or endowment funds- for receipt of at least a portion of the
MSA payments. To ensure that the MSA payments are used to expand programs
and services, approximately one- third of the states also passed legislation
requiring MSA payments to be used to supplement rather than supplant
existing state funding. Nearly two- thirds of the states earmarked the MSA
payments and enacted laws governing the future use of the payments, while
others used voter- approved initiatives to decide how to allocate the MSA
payments. Some states also established special commissions to develop
recommendations and long- term plans for the payments. Four

states- Missouri, Oregon, Pennsylvania, and Tennessee- had not yet decided
how to use their MSA payments as of April 2001.

7 Missouri had not received any payments as of April 2001.

The MSA allows states to use their payments for any purposes, and states
have used their MSA payments for a variety of programs and budget
priorities, including, but not limited to, tobacco control and health care
programs. States allocated about 7 percent of the MSA payments for new or
expanded tobacco control programs. The goal of these programs is to reduce
tobacco use through various intervention strategies, including promoting
smoking cessation and preventing youth from starting to smoke. The MSA has
encouraged a commitment to tobacco control, and all 42 states that have made
decisions on the use of the MSA funds now provide funding for tobacco
control. Some of these programs are funded not by MSA payments but by
tobacco excise taxes or other sources of state funding, and the amount of
funding for these programs varies widely among states. Health- related
programs constitute the category that received the largest allocation of MSA
payments (41 percent); most states allocated a portion of their settlement
proceeds to this area. The increased spending went to a variety of health
programs; many states expanded

coverage under their Medicaid and State Children?s Health Insurance Program
(SCHIP) programs. Seven of the 13 tobacco states allocated 6 percent of the
total MSA payments for assistance to tobacco growers and economic
development projects. 8 States also viewed the MSA payments as an
opportunity to fund other needs that they had not been able to fund in the
past. They allocated 26 percent of the payments to a variety of priorities
or mandated areas including education and social services, infrastructure,

and budget reserves. Only two states reported allocating MSA payments for
tax reductions. Finally, 20 percent of the MSA payments remained unallocated
during the two fiscal years in our study.

8 The 13 tobacco states are Alabama, Georgia, Indiana, Kentucky, Maryland,
Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee,
Virginia, and West Virginia.

Figure 1: State Allocations of MSA Payments (State Fiscal Years 2000 and
2001)

Unallocated

Tobacco control



Tobacco growers

 7%



and economic

6% development in

Other Budget

 20%

tobacco states

Priorities

General



purposes/

11%

reserves

 41% 

Health Tax



4%

reductions

9%

Infrastructure

2%   Education and

social services Source: GAO analysis.

Several states issued bonds backed by their MSA payments- a process referred
to as ?securitization.? Securitization allows states to receive funds up
front rather than over time as MSA payments are made according to the

terms of the agreement. Three states, and many counties in New York State,
have already securitized a portion of the expected payment stream from the
MSA; and 10 more states reported that securitization was under
consideration. Thus far, most of the bond issues have been in the form of
tax exempt bonds, the proceeds of which often are earmarked for capital
projects or reducing existing state debt, allowing states to fund large
onetime

needs.

Background Beginning in the mid 1990s, more than 40 states and some
localities sued tobacco companies, alleging that the industry violated
antitrust and

consumer protection laws, withheld information about the adverse health
effects of tobacco, manipulated nicotine levels to keep smokers addicted,
and conspired to hold back less risky and less addictive tobacco products
from the market. In 1997 and 1998, four states- Florida, Minnesota,
Mississippi, and Texas- settled their lawsuits by negotiating independent
agreements with the tobacco industry. In November 1998, four of the nation?s
largest tobacco companies- Philip Morris Incorporated, R. J. Reynolds
Tobacco Company, Brown & Williamson Tobacco Corporation, and Lorillard
Tobacco Company (referred to as the ?original participating manufacturers?)
9 - negotiated an agreement with the attorneys general of the remaining 46
states thereby settling a number of lawsuits brought by

these states against these tobacco companies. 10 The terms of this
agreement, known as the Master Settlement Agreement (MSA), apply only to
those tobacco companies and states that are parties to the agreement. Under
the MSA, the tobacco companies are required to provide monetary relief to
states in the form of annual payments and reimbursement for attorney fees.
The MSA also imposes restrictions on the tobacco companies? marketing and
advertising practices. Furthermore, the MSA established a national
foundation to support study and programs to (1) reduce youth tobacco use and
substance abuse and (2) prevent diseases associated with tobacco use.
Tobacco companies are required to provide funding for this foundation, as
well as funding for the National Association of Attorneys General (NAAG),
which is responsible for assisting states in the implementation and
enforcement of the MSA. After the MSA was signed, each state had to take
action to receive approval

of the agreement from its respective state court in order to make the terms
of the agreement legally binding within that state. Under the MSA, once
state court approval was final, the state achieved ?state- specific
finality? status, thereby permitting that state to receive payments under
the MSA.

No state payments were to be released to any of the states, however, until
the agreement reached final approval. This occurred in November 1999 when 80
percent of the states whose shares equaled 80 percent of the total
settlement payments had achieved state- specific finality.

9 Several other tobacco companies have joined the MSA since the time of the
agreement. 10 This study reports on the 46 states that are party to the
agreement. The agreement also included the District of Columbia and the five
U. S. territories.

In addition, to receive its full share of the settlement payments, each
state was required by the MSA to enact a statute addressing the potential
competitive advantage that tobacco companies not party to the MSA may

experience. Under the MSA, if the aggregate market share of the tobacco
companies that are party to the agreement (? participating manufacturers?)
falls more than two percent below their base level of 1997 and the loss is
caused in significant part by provisions of the MSA, the MSA payments may be
reduced based on a formula that corrects for this market share loss. 11 The
MSA provided that individual states can avoid this downward

adjustment- known as the ?non- participating manufacturers? (NPM)
adjustment- to their payments by enacting and enforcing a statute that is
intended to prevent a competitive disadvantage for the participating
manufacturers. The MSA provided a model statute that, if enacted and

enforced by a state, would protect that state from any adjustment for market
share loss, although states are permitted to enact and enforce any statute
that achieves the same desired result.

The MSA also placed restrictions on the tobacco companies? business
practices, primarily in marketing targeted to youth, advertising, and
lobbying. For example, the MSA banned all outdoor advertising by the tobacco
companies such as billboards and signs in arenas and stadiums, as well as
sponsorship of sporting events with a significant youth audience.

Moreover, the tobacco companies are prohibited from lobbying the state or
any political subdivision against efforts to enact certain kinds of state
laws and regulations intended to reduce underage tobacco access and use.
Tobacco companies are not prohibited from lobbying against legislation that
would raise excise taxes or restrict smoking in public places. The MSA also
required the tobacco companies to pay a total of $50 million for enforcement
activities including state enforcement of the terms of the agreement and
investigation of suspected violations of antitrust or consumer protection
laws related to tobacco products. In addition, the

MSA required the tobacco companies to fund a national foundation, the
American Legacy Foundation, dedicated to discouraging youth tobacco use and
to preventing disease associated with tobacco use through supporting study
and education. The participating tobacco companies are required to

pay a total of $1.45 billion over 5 years for the advertising and education
programs (performed directly or through grant- making) aimed at countering
youth tobacco use and informing consumers about prevention

11 A nationally recognized team of economic consultants determines whether
the decrease in market share is due to the effects of the MSA.

of tobacco- related diseases, and an additional $250 million over 10 years
for other activities of the foundation.

The MSA was preceded by a proposed national settlement between the states
and the tobacco industry reached in June 1997. This earlier more farreaching
proposal included payments to states and was a blueprint for a comprehensive
national tobacco- control policy, including federal regulation and
oversight. The June 1997 proposal could take effect only after federal
legislation was enacted. Several comprehensive tobacco

policy bills, including legislation to implement the June 1997 proposal,
were introduced in the 105th Congress. However, only the National Tobacco
Policy and Youth Smoking Reduction Act (S. 1415), introduced by

Senator McCain, saw legislative action. The bill debated on the Senate floor
provided for new authority for the Food and Drug Administration to regulate
tobacco products, measures to restrict tobacco industry marketing and
advertising, and measures to reduce underage tobacco use. The bill also
required up- front and annual payments by the tobacco

companies to provide for settlement of relevant state lawsuits. These and
other payments would be deposited into a fund for the benefit of states that
settled their lawsuits against the tobacco companies and for the benefit of
the federal government.

When S. 1415 did not pass in the summer of 1998, states resumed negotiations
with the tobacco industry that eventually resulted in the November 1998
Master Settlement Agreement. The MSA was a scaleddown version of the June
1997 proposal and did not require federal action to be implemented. This
agreement did not resolve states? uncertainty over whether the federal
government might lay claim to a portion of the

payments to the states. In May 1999, Congress moved to resolve that
uncertainty by enacting legislation that prohibited treating states? MSA
payments as federal overpayments for purposes of Medicaid. 12

12 This provision was contained in the 1999 Emergency Supplemental
Appropriations Act (P. L .106- 31).

States Have Received As of April 2001, 45 of the 46 states that signed the
Master Settlement

Agreement had received nearly $13.5 billion in payments from the tobacco
Billions to Date From

companies. 13 MSA payments to the states, some of which states will receive
the Master Settlement

in perpetuity, were originally estimated to total nearly $205 billion
through Agreement

2025. 14 There are different types of payments, the largest two of which are

?initial? payments- made in five installments through 2003- and ?annual?
payments which continue in perpetuity. Both of these types of payments are
distributed based on ?allocation percentages? for each state agreed to by
the 46 state attorneys general when they negotiated the MSA. (See appendix
IV for the types of MSA payments.) The final agreement resulted from
negotiations that began with a formula. However, unlike many other legal
settlements with a fixed level of compensation, while the MSA payments are
based on set payment amounts, these payments are adjusted for several
factors, most notably, the future sales of the tobacco industry. Each
state?s payments are adjusted annually based on the participating
manufacturers? cigarette sales and market share, as well as inflation. All
adjustments resulted in reductions of about $1.6 billion between 1999 and
2001.

Payment Shares Were The formula that provided the basis for determining the
allocation Determined Through

percentages for the MSA payments was composed of two variables each
Negotiations

weighted equally: smoking- related Medicaid expenditures and smokingrelated
non- Medicaid health care costs of each state. The smoking- related health
care cost variable included factors for each state?s population and

smoking prevalence. After this initial formula was developed, negotiations
resulted in some adjustments for state- specific concerns. For example, some
smaller states argued that they should receive a larger percentage to enable
them to fund smoking cessation programs because they did not have the same
economy of scale as larger states. The negotiations resulted

in the allocation percentages that are applied to each initial and annual
MSA payment. In general, larger states receive a higher percentage of each
payment and smaller states receive a lower percentage, however because

13 Missouri achieved state- specific finality in late April 2001 and had not
yet received any MSA payments. 14 The estimated total of $204. 5 billion
includes all types of payments to the 46 states, the District of Columbia,
and the five U. S. territories. Additional payments estimated at $1. 8
billion are to be paid for the American Legacy Foundation, administrative
costs for the

National Association of Attorneys General, and an enforcement fund.

the allocation percentages were determined by negotiations the payments are
not strictly proportional to population. Table 1 shows the final state
allocation percentages as explicitly agreed to in the MSA.

Table 1: MSA State Allocation Percentages State Percentage

Alabama 1.6161308 Alaska 0.3414187 Arizona 1. 4738845 Arkansas 0.8280661
California 12.7639554 Colorado 1.3708614 Connecticut 1. 8565373 Delaware
0.3954695 Georgia 2. 4544575 Hawaii 0.6018650 Idaho 0.3632632 Illinois
4.6542472 Indiana 2.0398033 Iowa 0.8696670 Kansas 0.8336712 Kentucky
1.7611586 Louisiana 2.2553531 Maine 0.7693505 Maryland 2.2604570
Massachusetts 4.0389790 Michigan 4.3519476 Missouri 2.2746011 Montana
0.4247591 Nebraska 0.5949833 Nevada 0.6099351 New Hampshire 0. 6659340 New
Jersey 3.8669963 New Mexico 0.5963897 New York 12.7620310 North Carolina
2.3322850

State Percentage

North Dakota 0.3660138 Ohio 5.0375098 Oklahoma 1.0361370 Oregon 1.1476582
Pennsylvania 5.7468588 Rhode Island 0.7189054 South Carolina 1.1763519 South
Dakota 0.3489458 Tennessee 2.4408945 Utah 0.4448869 Vermont 0. 4111851
Virginia 2.0447451 Washington 2.0532582 West Virginia 0.8864604 Wisconsin 2.
0720390 Wyoming 0. 2483449 Source: Master Settlement Agreement, Exhibit A.

Prior to the MSA, some counties in California and New York had independently
filed lawsuits against the tobacco industry. In these states, the counties
bear financial responsibility for a share of Medicaid costs, and the
lawsuits sought compensation for the counties? cost of treating smoking
related illnesses. In both these states, under different arrangements,
counties receive a share of MSA payments.

The state of California had entered into a memorandum of understanding (MOU)
with its counties and four major cities in August 1998- prior to the MSA- to
coordinate their lawsuits with the state?s suit and provide for the
allocation of any settlement. The terms of the MOU included an even 50/ 50
split of the financial recovery between the state and local governments,
with the local share further split between the counties and four major
cities. In California?s case, all MSA payments are made to the state and the

state distributes payments to the 58 counties and four cities. (See appendix
II for the counties? and cities? share of payments in California.)

In the case of New York, the state?s consent decree provides for allocation
of a portion of its MSA payments to the counties and New York City based on
the county share of Medicaid costs and population as well as some specific
considerations for individual counties. In New York?s case, each of

the state?s 57 counties and New York City receive payment directly from the
escrow account established by the MSA rather than the state receiving all
payments and then distributing them to the localities. (See appendix III for
the counties? and New York City?s share of payments in New York.) As

explained in the introduction to this report, this study focuses on how
states are using their MSA payments, and we did not track the counties? use
of MSA payments.

Types of MSA- Related Currently, states receive two types of payments as a
result of the MSA- Payments

annual payments and initial payments. Although there are several types of
potential adjustments to the annual payments received by each state, the two
most significant adjustments are a ?volume adjustment? and an ?inflation
adjustment.? The volume adjustment is based on increases or decreases in the
number of cigarettes shipped by the original participating manufacturers,
and the inflation adjustment is set at the actual percentage increase in the
Consumer Price Index (CPI) or 3 percent, whichever is greater. The terms of
the MSA also call for states to receive five initial payments between 1998
and 2003. These initial payments are also subject to annual volume
adjustments, but they are not adjusted for inflation after

the first payment. (See appendix IV for a summary of payment types and
amounts.)

A third type of payment, known as the Strategic Contribution Fund (SCF)
payment, will begin in 2008 and continue through 2017. The base amount of
each year?s SCF payment is $861 million and will be adjusted for volume and
inflation. SCF payments are intended to reflect the level of the
contribution each state made toward final resolution of the state lawsuits
against the tobacco companies and will be allocated to the states based on

a separate formula developed by a panel of former state attorneys general.
(See appendix V for estimated Strategic Contribution Fund payments to
states.)

Finally, tobacco growers and producers in states that grow cigarette tobacco
also receive a fourth type of payment through a separate agreement, the
National Tobacco Grower Settlement Trust Agreement, known as ?Phase II.? The
MSA required the tobacco companies to meet with the political leadership of
states with grower communities to address the economic concerns of these
communities. The Phase II agreement resulted from that requirement. (See
appendix VI for information on the Phase II agreement.) This agreement is
intended to provide compensation for financial losses due to the anticipated
decline in cigarette consumption

and payments to the trust fund are expected to total $5. 15 billion over 12
years. This report does not track Phase II payments to states or the
allocation of these payments.

Table 2 summarizes the types of payments that states will receive as a
result of the MSA and Phase II. (See appendix IV for estimated payment
amounts for the first 25 years of the MSA.)

Table 2: MSA and Phase II Payments Type of payment When payment is made How
payment is determined

Annual In perpetuity Payments distributed to states based on the MSA
allocation

(paid by April 15 of each year) percentages, with adjustments. Base payment
amount increases each year from 2000- 2018; constant after 2018.

Initial 5 payments from 1998 through 2003 Set base amount per year,
distributed to states based on the MSA

(payments after the first one are due by allocation percentages, with
adjustments. January 10 of each year)

Strategic Annual payments beginning in 2008 through Set base amount of $861
million per year, distributed to states based

Contribution Fund 2017 (paid by April 15 of each year) on a separate
formula, with adjustments. Formula is based on level of state?s contribution
to litigation or resolution of state tobacco lawsuits. National Tobacco

Paid annually over 12 years: 1999- 2010 Based on a separate agreement
between tobacco- growing states

Grower Settlement (paid as follows in years 2000- 2010: and tobacco
companies. Set base amount, with adjustments, Trust (Phase II)

25% by March 31, deposited in trust and distributed directly to tobacco
growers based

25% by June 30, on state allocation methodology. State share based on its
1998 25% by September 30,

share of production of cigarette tobacco. 25% by December 15.) Note: No
payments were distributed to states until 80 percent of the states with
shares equal to 80 percent of the total settlement payments had achieved
state- specific finality.

States Received Nearly States received their first MSA payments at different
points in time based

$13. 5 Billion From 1999 on the date the agreement became final in their
state (referred to as having

achieved ?state- specific finality?). 15 Forty- three states received their
first Through 2001

payment in state fiscal year 2000. Arkansas and Tennessee received their
first payments in fiscal year 2001. Since Missouri did not achieve
statespecific finality until late April 2001, its payments were not included
in the total payments received through April 2001. 16 The first MSA payments
were made in December 1999, and as of April 2001 all initial and annual

payments combined totaled nearly $13.5 billion. States are not scheduled to
receive any more payments until January 2002. California and New York have
received the largest amounts so far- nearly $1.8 billion each. 17 Together,
six states received more than 50 percent of all the MSA payments from 1999
through 2001: California, Illinois, Michigan, New York, Ohio, and

Pennsylvania. Table 3 shows the breakdown of expected payments by state, as
originally estimated at the time of the Master Settlement Agreement, as well
as the actual payments received as of April 2001.

15 None of the state payments were released to any of the states until 80
percent of the states with shares equal to 80 percent of the total
settlement payments had achieved state- specific finality. This occurred in
November 1999. 16 As a result, neither the payments to Missouri nor any of
the state?s allocations are included

in this report. 17 California payment amounts include payments to four
cities and the 58 counties in the state which amount to 50 percent of the
total payments. New York payment amounts include payments to the 57 counties
in the state and New York City, which amount to 49 percent of the total
payments. (See appendices II and III for distribution of payments in
California and New York.)

Table 3: Original Estimated and Actual MSA Payments Received by States as of
April 2001

Dollars in thousands

Original estimated payments Actual payments received

Percent difference estimated State through 2001 through 2001 vs. actual
payments

Alabama $254,304 $228, 618 -10. 1 Alaska 53,724 49, 120 -8. 6 Arizona
231,922 207, 996 -10. 3 Arkansas 130,300 121, 546 -6. 7 California a
2,008,461 1, 790, 356 -10. 9 Colorado 215,711 197, 225 -8. 6 Connecticut
292,134 260, 406 -10. 9 Delaware 62,229 55, 470 -10. 9 Georgia 386,219 353,
121 -8. 6 Hawaii 94,706 84, 420 -10. 9 Idaho 57,161 52, 262 -8. 6 Illinois
732,365 669, 603 -8. 6 Indiana 320,971 293, 465 -8. 6 Iowa 136,846 125, 118
-8. 6 Kansas 131,182 119, 940 -8. 6 Kentucky 277,126 247, 028 -10. 9
Louisiana 354,889 324, 476 -8. 6 Maine 121,060 110, 686 -8. 6 Maryland
355,692 325, 210 -8. 6 Massachusetts 635, 549 566, 526 -10.9 Michigan
684,797 610, 424 -10. 9 Missouri b 357,918 0 Montana 66,837 61, 110 -8. 6
Nebraska 93,624 85, 600 -8. 6 Nevada 95,976 87, 751 -8. 6 New Hampshire 104,
787 95, 807 -8. 6 New Jersey 608,488 557, 730 -8. 3 New Mexico 93,844 85,
802 -8. 6 New York c 2,008,159 1, 790, 083 -10. 9 North Carolina 366,994
327, 137 -10. 9 North Dakota 57,594 52, 658 -8. 6 Ohio 792,673 724, 742 -8.
6 Oklahoma 163,041 149, 068 -8. 6

Dollars in thousands

Original estimated payments Actual payments received

Percent difference estimated State through 2001 through 2001 vs. actual
payments

Oregon 180,589 160, 976 -10. 9 Pennsylvania 904,292 664, 190 -26. 6 Rhode
Island 113,123 103, 428 -8. 6 South Carolina 185,104 169, 241 -8. 6 South
Dakota 54,909 50, 203 -8. 6 Tennessee 384,084 354, 356 -7. 7 Utah 70, 004
64,006 -8. 6 Vermont 64, 701 57,675 -10.9 Virginia 321,749 294, 180 -8. 6
Washington 323,089 295, 401 -8. 6 West Virginia 139,489 127, 534 -8. 6
Wisconsin 326,044 290, 634 -10. 9 Wyoming 39,079 34, 834 -10. 9

Tot al b $15,095,621 $13,477, 162 -10. 7

a California payment amounts include payments to four cities and the 58
counties in the state which amount to 50 percent of the total payments. b
Total excludes original estimated payments to Missouri.

c New York payment amounts include payments to the 57 counties in the state
and New York City which amount to 49 percent of the total payments. Source:
GAO analysis of data from the National Association of Attorneys General.

Adjustments Affect State As noted above, payments are adjusted for a number
of factors such as

Payments fluctuations in the volume of cigarette sales, inflation, and
changes in participating manufacturers? market share. The combined effect of
all

adjustments has been to lower payments by about $1. 6 billion- or nearly 11
percent below the original estimate. The 45 states that had reached state-
specific finality and received payments were originally estimated to receive
$15.1 billion through April 2001 but actually received nearly $13.5 billion
during this period- an overall reduction of about $1.6 billion. 18 The
adjustments varied by state, from a high of 26. 6 percent in Pennsylvania to

a low of 6.7 percent in Arkansas. 18 Missouri reached state- specific
finality in late April 2001 and did not receive any MSA payments through
April 2001.

Consumption has declined since the Master Settlement Agreement was signed in
November 1998- by about 6.5 percent in 1999 alone- mostly due to one- time
increases in cigarette prices that the tobacco companies implemented after
the MSA took effect. 19 Analysts project that in the future total cigarette
consumption will decline by an average of nearly 2 percent

per year. 20 As a result, cigarette consumption is estimated to decline by
33 percent between 1999 and 2020. Declining consumption will result in lower
MSA payments than originally expected. Offsetting the sales volume decline
is the adjustment for inflation. The inflation adjustment equals the actual
percentage increase in the CPI for the preceding year or 3 percent,
whichever is greater. The effect of

compounding, especially given that the payments are made in perpetuity, is
significant. Assuming a 3- percent inflation adjustment and no decline in
base payments, settlement amounts received by states would double every 24
years. Some analysts estimate the positive inflationary adjustments to be
greater than any negative adjustments for consumption. Adjustments were also
made for losses in participating manufacturers? market share. The NPM
adjustment encourages states to enact a model statute in order to receive
their full share of MSA payments. Because they had not enacted a model
statute by the end of 2000, 16 states had amounts withheld from their
January 2001 payments. 21 An independent auditor initially determines how
much, if any, market share has been lost and

reduces the MSA payments for this loss. However, amounts withheld from the
payments are held in escrow pending a final determination by an independent
team of economists as to whether the market share loss was a

result of the MSA. As of April 2001, all states had enacted model statutes,
so the NPM adjustment will not affect future payments.

19 WEFA, Inc., A Forecast of U. S. Cigarette Consumption (2000- 2020) for
Alabama 21st Century Authority (September 12, 2000). 20 A number of factors
affect cigarette consumption such as pricing, advertising, health warnings,
restrictions on smoking in public places, nicotine dependence, youth
consumption, population trends, and disposable income. Cigarette consumption
in the

United States peaked in 1981 and has been declining since. 21 These states
were Alabama, Arizona, California, Connecticut, Delaware, Hawaii, Kentucky,
Massachusetts, Michigan, New York, North Carolina, Oregon, Pennsylvania,
Vermont, Wisconsin, and Wyoming.

Excise Taxes Provide MSA payments are not the only source of tobacco-
related revenue. State

Another Source of Tobacco excise taxes on tobacco products represent a
state- controlled source of Related Revenues

tobacco- related revenue for all 50 states, although cigarette tax rates
vary widely- from a low of 2. 5 cents a pack in Virginia to a high of $1.11
in New York. The 46 MSA states collected nearly $7 billion in revenues in
2000 from excise taxes on cigarettes, which were not directly affected by
the MSA. Between January 1999 and January 2001, four of the 46 MSA states-
Louisiana, Maryland, New Hampshire, and New York- increased their tax rates
on cigarettes. These increases drove the average cigarette tax rate in the
46 states up by about 5 percent over two years, from 39.8 cents in January
1999 to 41.8 cents in January 2001.

Many States Most state legislatures viewed the MSA payments as a discrete
funding Earmarked MSA

stream and engaged in a structured decision- making process to determine
long- term uses for these revenues. Although most states will continue to
Payments for Specific appropriate MSA payments through an annual or a
biennial budget process, Purposes

those appropriations will be guided by long- term legislation earmarking the
use of the funding stream for specific purposes. As part of the
decisionmaking process, some states established planning commissions and
working groups to develop recommendations that resulted in a strategic plan
for the state?s use of the funds. In six states voter- approved initiatives
restricted the use of the funds. Forty- two of the 46 states have made
decisions about the allocation of MSA payments, and in 30 of these states
the legislature enacted laws to ensure that these payments are restricted or
used for specific purposes. Of the states with these legislative goals,
almost all established dedicated funds that separate the MSA payments from
other state funding sources. New York did not establish dedicated funds but

enacted restrictions on the use of the payments which are deposited directly
into the state?s general fund. Six states (Alaska, California, Georgia,
Illinois, New Jersey, and Rhode Island) had not earmarked the payments
deposited into the state?s general fund; in these states decisions on uses
of the MSA payments were made as part of the annual appropriations process.

States Engaged in DecisionMaking The states have engaged in a decision-
making process involving

Processes Focused considerable deliberations over the long- term use of MSA
payments. In on MSA Payments

some states, a permanently established board or a special committee makes
recommendations and oversees the use of a portion of the payments. Other
states, including Maryland and Ohio, engaged in a comprehensive planning
process to develop initial recommendations for

use of the MSA payments. In Maryland, the Governor convened three task
forces, each focused on one of three areas- smoking cessation, health, and
agricultural initiatives. Composed of legislators, experts in the field, and
community and business representatives in each of these areas, these groups
developed recommendations for each program area. Each task force prepared an
implementation plan and presented a final report to the Governor that was
used to develop a 10- year budget proposal. In Ohio, a bipartisan task force
composed of representatives from the legislature and

the Governor?s administration developed recommendations that resulted in
legislation creating a long- term plan for allocation of the MSA payments.
The plan allocates the payments for specific purposes through fiscal year
2012 and establishes three new commissions and foundations. The plan also
requires the state?s Tobacco Oversight Accountability Panel to develop
benchmarks for each of seven dedicated funds that were created.

Some States Used Ballot In seven states ballot initiatives were proposed by
the legislature to restrict Referenda to Determine

the use of some portion of the MSA payments, and in six of the states these
Allocations

proposals were approved by voter referendum. In Arizona and Arkansas laws
were enacted, and in Louisiana, Montana, Oklahoma, and Utah constitutional
amendments proposed by the legislature were approved. 22 All of the ballot
initiatives proposed the creation of dedicated funds to restrict at least a
portion of the MSA payments. In some of the states the ballot initiatives
were supported by local health advocacy organizations.

In four of these states (Arkansas, Louisiana, Montana, and Oklahoma),
portions of the endowment funds are earmarked for tobacco control and health
care programs. In Arizona, the ballot initiative dedicated the full amount
of MSA payments to expanding eligibility for the state?s health insurance
program. In Utah, an endowment fund was established, but the

fund was not dedicated to any particular purpose. These initiatives become
effective between fiscal years 2000 and 2002, and in some states, the
proportion of MSA payments allocated for specific purposes increases over
the first few years of the agreement in order to reach a specified level of
funding.

In Oregon, two ballot initiatives proposed by the legislature were defeated
by the voters in the November 2000 election. Both proposals would have 22 In
Louisiana, the ballot initiative was proposed and passed in the November
1999 election; the other five states? ballot initiatives were passed in the
November 2000 election.

dedicated all MSA payments to special funds allowing only the earnings on
the principal to be spent. One of the initiatives would have earmarked the
MSA payments for the state?s health insurance program, maximizing funding
for the State Children?s Health Insurance Program (SCHIP) in particular, and
the other proposed allocating funds for health care and

tobacco control as well as other social services. As both proposals were
defeated, the decision over allocation of MSA payments was referred back to
the legislature. Four States Had Not Made

Oregon, Pennsylvania, Tennessee and Missouri had not reached decisions
Decisions on the Use of

about the use of the payments as of April 2001. In Oregon, after the defeat
MSA Payments of the two ballot initiatives the Governor?s budget recommended
earmarking the MSA payments for health care and tobacco control programs and
establishing a dedicated fund for the majority of the

payments. In Pennsylvania, the Governor submitted budget recommendations for
the use of the payments, but the legislature had not acted on these
proposals. The Governor?s proposed ?Health Investment Plan? for the MSA
payments presented principles developed with public input to guide use of
the MSA payments and recommended dedicating the payments for health care and
tobacco control programs. In Tennessee, the legislature earmarked the
payments for two purposes- agriculture and health- and established two ad
hoc committees to develop recommendations on the specific uses of the funds.
The committees held public hearings, developed proposals for program
oversight and funding,

and presented their final reports in February 2001 for consideration by the
General Assembly. These three states have placed their payments in holding
accounts until final decisions are made. Missouri achieved statespecific
finality in late April 2001 and had not received any MSA payments during the
period of our study.

Many States Established Thirty- six of the 46 MSA states established
dedicated funds to separate at Dedicated Funds for MSA

least a portion the MSA payments from other state funds and dedicate their
Payments use for specific purposes. In many cases, both the principal and
investment earnings of these funds are available for expenditure, while in
other cases only the earnings may be used. For simplicity, in this report we
refer to the former as special funds and the latter as endowment funds. 23
Endowment

funds are intended to ensure a long- term source of funding for programs. In
many cases, boards and/ or commissions oversee these funds. In some cases
these bodies make recommendations for the use of the funds and in other
cases they have the authority to make decisions and distribute the funds in
keeping with the dedicated uses of the funds. Although over threefourths of
the states established dedicated funds for their MSA payments, only about 35
percent of the total payments were allocated to these funds during fiscal
year 2001. Of this 35 percent, about 28 percent were in special funds and
the remaining 7 percent in endowment funds. Table 4 shows the funds
established by each of the states and how the fiscal year 2001 MSA

payments in each state were allocated among fund types. 23 Many states refer
to these earmarked funds as trust or endowment funds. However, the states
are inconsistent in their definitions of this term. For example, the same
type of fund may be referred to as a trust fund in one state and an
endowment fund in another state. In a couple of states, the fund structures
do not fit precisely into one of our fund categories. In these cases, we
categorized the funds according to our determination of closest fit. For
example, New Mexico allocated a percentage of its settlement monies to a
?permanent fund,? which cannot be spent for any purpose without new
legislation. We categorized it as an endowment because the principal of this
fund cannot be spent.

Tabl e 4: St at es? Dedicated Funds and Allocation of MSA Payments in Fiscal
Year 2001 Dedicated fund type Percent allocation of receipts State Special
Endowment Special Endowment General

Alabama X 66 0 34 Alaska 0 0100 Arizona X 66 0 34 Arkansas X X 75 25 0
California 0 0100 Colorado X X 46 54 0 Connecticut X 12 0 88 Delaware X 100
0 0 Georgia 0 0100 Hawaii X X 40 25 35 Idaho X X a 100 0 Illinois 0 0100
Indiana X 20 0 80 Iowa X 100 0 0 Kansas X 28 0 72 Kentucky X 100 0 0
Louisiana X X 55 45 0 Maine X 100 0 0 Maryland X 100 0 0 Massachusetts X X
30 70 0 Michigan X 100 0 0 Missouri b bb Montana X 0 40 60 Nebraska X X 19
81 0 Nevada X X 90 10 0 New Hampshire X 100 0 0 New Jersey 0 0100 New Mexico
X X 40 60 0 New York 0 0100 North Carolina X 100 0 0 North Dakota X 100 0 0
Ohio X X 99 1 0 Oklahoma X 0 49 51 Oregon b bb

Dedicated fund type Percent allocation of receipts State Special Endowment
Special Endowment General

Pennsylvani a b bb Rhode Island 0 0100 South Carolina X X 100 0 0 South
Dakota X X a 100 0 Tennessee X b bb Utah X 0 5050 Ver mont X X 100 a 0
Virginia X 60 0 40 Washington X 3 0 97 West Virginia X X 50 50 0 Wisconsin X
12 0 88 Wyoming X X a 100 0

Tot al c 32 19 n/ a n/ a n/ a

a Includes interest earnings from other dedicated funds. b Four states had
not made decisions on the use of payments as of April 2001. Tennessee
established an endowment fund but did not allocate payments to this fund. c
36 states established at least one type of dedicated fund; 15 of those
states established both special

and endowment funds. Source: GAO analysis.

In establishing dedicated funds, several state legislatures opted to
delegate decision- making authority over use of the funds to boards and/ or
commissions. For example, Virginia created the Tobacco Indemnification

and Community Revitalization Commission (TICR). The Commission is composed
of state legislators, agency heads, representatives of the agricultural
community, and other citizens. While the MSA payments to the TICR fund may
only be used for payments to tobacco farmers and economic development in
tobacco communities, the Commission

determines the specific allocations from the fund. In Oklahoma, voters
approved the creation of the Tobacco Settlement Endowment Trust Fund and a
Board of Directors distributes the earnings of the fund among specified
programs. Ohio created two new foundations that receive MSA payments, the
Tobacco Cessation and Control Foundation and the Southern Ohio Agricultural
and Community Development Foundation. Each of these foundations is governed
by a separate board of trustees.

States Use MSA The Master Settlement Agreement does not require states to
use the

Payments for Many payments for any particular purpose and states had varying
views of the

settlement payments. Because claims for compensation for past health
Purposes care costs, including Medicaid, were the basis for many of the
initial lawsuits filed by the states, many states gave high priority to the
use of

MSA payments for health related funding and tobacco control programs. Some
states also told us that they viewed the settlement payments as an
opportunity to fund needs that they were not able to fund previously due to
the costs of health care. States? other priorities and mandates included

education, infrastructure projects and funding budget reserves to be saved
for future needs. As a result, the states? total allocations fund a variety
of programs. Figure 1 shows the major categories of states? use of MSA
payments. Our analysis of states? use of MSA payments shows that during
fiscal years 2000 and 2001 states allocated seven percent of their payments
to tobacco

control efforts and another six percent for tobacco growers and economic
development projects. The single largest category of funding was for health
related purposes. Other major areas of funding included education and

social services, infrastructure and general purposes including budget
reserves. Finally, a substantial amount of the MSA payments was not
allocated during the two fiscal years. States reported on a total of $11.6
billion in estimated MSA payments for fiscal year 2000 and 2001. (See
appendix I for definitions of the allocation categories and a description of
our methodology.) Table 5 shows the percentage of each state?s individual
allocation to these categories.

Table 5: Percent Allocations of MSA Payments by Category, State Fiscal Years
2000 and 2001 Other budget priorities Assistance for

tobacco growers and economic

Education General

Tobacco development in

and social Tax

purposes/ State control a

tobacco states Health services reductions Infrastructure

reserves Unallocated b Total

Alabama 0. 2 7. 1 37. 6 46. 4 0. 0 0. 0 8. 7 0. 0 100. 0 Alaska 6. 1 0. 0
91. 2 2. 6 0. 0 0. 0 0. 0 0. 0 100. 0 Arizona 0. 0 0.0 80.0 0. 0 0.0 20.0 0.
0 0.0 100. 0 Arkansas 5. 7 0. 0 35. 8 0. 0 0. 0 5. 7 0. 0 52. 9 100. 0
California 0. 0 0.0 100. 0 0.0 0. 0 0.0 0. 0 0.0 100. 0 Colorado 10. 6 0.0
22.1 13.4 0. 0 0.7 0. 0 53. 2 100.0 Connecticut 1. 9 0. 0 29. 6 22. 4 38. 2
0. 0 7. 8 0. 0 100. 0 Delaware 5.0 0. 0 24. 9 0.0 0. 0 0.0 26.2 43.9 100. 0
Georgia 4. 6 23. 1 31. 8 0. 0 0. 0 0. 0 0. 0 40. 5 100. 0 Hawaii 15. 2 0. 0
21. 3 0. 0 0. 0 0. 0 24. 4 39. 0 100. 0 Idaho 5.8 0. 0 0.0 0. 0 0.0 0. 0 0.0
94.2 100. 0 Illinois 4. 8 0.0 15.0 0. 3 51. 7 4.1 24.1 0. 0 100.0 Indiana
12. 0 0.0 29.7 0. 0 0.0 3. 4 0.0 54.8 100. 0 Iowa 7.6 0. 0 37. 1 0.0 0. 0
0.0 52.5 2. 8 100.0 Kansas 0.4 0. 0 0.0 27.6 0. 0 0.0 72.0 0. 0 100.0
Kentucky 2.0 50.0 8. 7 39. 3 0.0 0. 0 0.0 0. 0 100.0 Louisiana 0. 5 0. 0 65.
7 27. 5 0. 0 3. 1 3. 3 -0. 1 100. 0 Maine 19. 4 0. 0 69. 8 8. 8 0. 0 0. 0 0.
9 1. 2 100. 0 Maryland 5. 5 3. 5 53. 3 16. 3 0. 0 0. 0 24. 8 -3. 4 100. 0
Massachusetts 5. 2 0. 0 90. 3 0. 0 0. 0 4. 5 0. 0 0. 0 100. 0 Michigan 0. 0
0. 0 28. 0 57. 7 0. 0 0. 0 0. 0 14. 3 100. 0 Missouri c 0.0 0. 0 0.0 0. 0
0.0 0. 0 0.0 100. 0 100.0 Montana 11. 5 0.0 16.4 2. 6 0.0 0. 0 69. 5 0.0
100. 0 Nebraska 19. 8 0.0 80.2 0. 0 0.0 0. 0 0.0 0. 0 100.0 Nevada 10. 0 0.0
35.0 55.0 0. 0 0.0 0. 0 0.0 100. 0 New

3.2 0. 0 0.0 96.4 0. 0 0.0 0. 5 0.0 100. 0 Hampshire New Jersey 8.8 0. 0 71.
8 9.6 0. 0 2.2 7. 6 0.0 100. 0

New Mexico 2.6 0. 0 22. 9 0.0 0. 0 0.0 71.4 3. 1 100.0 New York 4.5 0. 0 58.
1 0.0 0. 0 0.0 37.4 0. 0 100.0 North Carolina 0.0 75.0 25.0 0. 0 0.0 0. 0
0.0 0. 0 100.0

Other budget priorities Assistance for

tobacco growers and economic

Education General

Tobacco development in

and social Tax

purposes/ State control a

tobacco states Health services reductions Infrastructure

reserves Unallocated b Total

North Dakota 0. 0 0. 0 10. 0 45. 0 0. 0 45. 0 0. 0 0. 0 100. 0 Ohio 31. 3 3.
0 2. 0 1. 8 0. 0 18. 4 2. 7 40. 8 100. 0 Oklahoma 1.3 0. 0 64. 6 2.7 0. 0
0.0 31.3 0. 0 100.0 Oregon d 0.0 0. 0 0.0 0. 0 0.0 0. 0 0.0 100. 0 100.0
Pennsylvani a d 0.0 0. 0 0.0 0. 0 0.0 0. 0 0.0 100. 0 100.0 Rhode Island 0.0
0. 0 0.0 0. 0 0.0 0. 0 100.0 0. 0 100.0 South Carolina 1.1 0. 0 98. 9 0.0 0.
0 0.0 0. 0 0.0 100. 0 South Dakota 1.4 0. 0 0.0 0. 0 0.0 0. 0 0.2 98.4 100.
0 Tennessee d 0.0 0. 0 0.0 0. 0 0.0 0. 0 0.0 100. 0 100.0 Utah 8.3 0. 0 19.
7 4.1 0. 0 0.0 50.0 17.9 100. 0 Vermont 29.9 0. 0 68. 2 0.0 0. 0 0.0 0. 0
1.9 100. 0 Virginia 10. 0 50. 1 0. 0 0. 0 0. 0 0. 0 39. 9 0. 0 100. 0
Washington 33. 4 0.0 66.3 0. 0 0.0 0. 0 0.2 0. 0 100.0 West Virginia 4. 4 0.
0 95. 6 0. 0 0. 0 0. 0 0. 0 0. 0 100. 0 Wisconsin 8. 1 0. 0 75. 4 0. 0 0. 0
0. 0 16. 5 0. 0 100. 0 Wyoming 100. 0 0. 0 0. 0 0. 0 0. 0 0. 0 0. 0 0. 0
100. 0

Total state 6.8 5. 6 41. 3 9.3 3. 6 2.5 10.6 20.2 100. 0

allocations Total number 36 7 35 19 2 10 23 21 of states a See table 6 for
more information on states with previous funding for tobacco control prior
to the MSA

and states in which an unspecified amount of MSA funding was provided for
tobacco control. b Unallocated category may include adjustments for over-
allocation of MSA payments. c Missouri had not received any MSA payments. d
Had not decided how to spend MSA payments.

Source: GAO analysis.

States? Allocations for According to our analysis, in fiscal years 2000 and
2001, 36 states allocated Tobacco Control Varied

$790 million of their MSA payments to tobacco control programs. The goal
Widely of these programs is to reduce tobacco use through various
intervention strategies including promoting smoking cessation and preventing
youth from starting to smoke. The amounts of the state allocations to these
programs varied widely. In approximately one- third of the states, the

development of a strategic plan for tobacco control is now required. In
allocating MSA payments for tobacco control programs, most states applied
guidelines established by the Centers for Disease Control and Prevention
(CDC) to some extent. Tobacco control is one area where looking only at MSA
payments can be misleading. While all of the 42 states which were decided on
the use of the payments now provide state funding for tobacco control
programs, two of these states, Arizona and California, fund these programs
through state cigarette excise taxes rather than through their MSA payments.
Sixteen other states reported that they provided state funding for tobacco
control prior to the MSA. Further, although over one- quarter of the states
with decisions on MSA payments allocated at least 10 percent of their MSA
payments to tobacco control, most of these states had spent little or
nothing on tobacco control programs prior to the settlement. Some states
allocated payments for

tobacco control but did not specify the amount for these programs. Table 6
summarizes the percentage of the states? allocation of their MSA payments to
tobacco control programs.

Table 6: Percentage of MSA Payments Dedicated to Tobacco Control for State
Fiscal Years 2000 and 2001 (excluding Missouri, Oregon, Pennsylvania, and
Tennessee)

Previous No

Less Amount

funding a funding than 5 6- 10 11- 20 21- 100 unspecified b

Alabama x x Alaska c x x Arkansas c x x Arizona c x x California d x x
Colorado x Connecticut x Delaware c x x Georgia x Hawaii x Idaho c x x
Illinois x Indiana x Iowa x Kansas x Kentucky x

Previous No

Less Amount

funding a funding than 5 6- 10 11- 20 21- 100 unspecified b

Louisiana x Maine x Maryland c x x Massachusetts c, d x x Michigan x x
Montana x Nebraska x Nevada x New Hampshire x New Jersey x New Mexico c x x
New York c x x North Carolina x North Dakota x Ohio x Oklahoma c x x Rhode
Island x South Carolina c x x South Dakota c x x Utah c x x Ver mont x
Virginia x Washington c x x West Virginia x Wisconsin c x x Wyoming x

Total 18 2179 64 4

a State funding for tobacco control prior to the MSA. b State in which an
unspecified amount of MSA funding for tobacco control was included in
allocations for health programs or in the general fund. c State is using MSA
payments to supplement current tobacco control funding.

d State had model tobacco control program as defined by CDC prior to the
MSA. (Oregon also has a model program.) Source: GAO analysis.

MSA Payments Allowed States to For the most part, the states that dedicated
larger percentages of their MSA

Establish or Expand Tobacco payments to tobacco control were states that
spent little or nothing on such

Control Programs programs prior to the settlement. The MSA provided 24
states that reported

they had not provided any state funds for tobacco control 24 prior to the
agreement the opportunity to initiate funding for these programs. 25
Fourteen states said that the MSA payments have allowed them to develop

and implement more comprehensive tobacco control programs. (See Table 6 for
these 14 states.) Ten states dedicated over 10 percent of their MSA payments
to tobacco control. Of these states, only Washington had dedicated state
funds to tobacco control prior to the MSA. Three of these states, Hawaii,
Ohio, and Virginia have established foundations to develop new tobacco
control programs. Wyoming has dedicated its settlement payments to an

endowment fund and all of the interest in fiscal years 2000 and 2001 was
allocated to tobacco control.

Washington, New York and Maryland are examples of states that used tobacco
settlement payments to significantly expand existing programs. Washington
allocated over 33 percent of its MSA payments to create a new $100 million
trust fund dedicated to prevent and reduce tobacco use by youth; it had
previously provided less than $1 million for enforcement activities.
Maryland provided $18.1 million, or 5.5 percent, of its settlement

payments in fiscal year 2001 to fund a comprehensive tobacco control program
and plans to meet the CDC guidelines in the future. Prior to the settlement,
Maryland had allocated approximately $1. 8 million in state

funds for its tobacco control program. New York allocated $30 million or 4.5
percent of its MSA payments in fiscal year 2001 to expand its tobacco
control program which was previously funded with $2.5 million in state
funds. New York also nearly doubled its cigarette excise tax to $1.11 from
56 cents a pack with the proceeds of the tax increase designated for
expansion of the state?s health insurance and tobacco control programs.

24 Most states had small programs in place, which were funded exclusively
with federal grants from agencies such as CDC and the Substance Abuse and
Mental Health Services Administration (SAMHSA). In addition, states funded
enforcement activities required under

the Substance Abuse Prevention and Treatment Block Grant program, pursuant
to 42 U. S. C. sect. 300x- 26. 25 Additionally, in Tennessee, although there was
no final decision on the use of the MSA payments, 50 percent of the state?s
total payments were earmarked for health, and the health advisory committee
recommended that a portion of that amount be allocated to tobacco control
programs.

States Applied CDC Guidelines A CDC report entitled Best Practices for
Comprehensive Tobacco Control

to Varying Degrees

Programs sets out nine essential elements for a comprehensive program and
provides CDC?s recommendations for an appropriate level of funding for each
component based on specific characteristics of each state. 26 Budget
officials in 35 of the 46 MSA states told us that their state considered the
CDC guidelines in determining how to allocate settlement funds. In another
four states in which budget officials said that their state did not apply
the guidelines, the pre- existing tobacco control programs

have been cited as model programs by the CDC (Arizona, California,
Massachusetts, and Oregon). The CDC reports that six states in our study
(Arizona, Indiana, Maine, Massachusetts, Ohio, and Vermont) are meeting

or exceeding the lower estimate of their recommended funding range by
combining state and federal resources and private grants. In addition,
Hawaii (at 98 percent) came close to meeting the Best Practices lower
funding recommendations.

Of the states with model tobacco control programs, Arizona, California, and
Oregon did not supplement their programs with allocations from the MSA
payments. Officials in Arizona said that the state already spent $37.3
million from tobacco excise tax revenues in fiscal year 2001.

California was the first state to establish a comprehensive tobacco control
program funded by tobacco excise taxes in 1989 and the excise tax provided
$114.6 million for tobacco control in fiscal year 2001. Oregon spends
approximately $8.5 million annually for tobacco control, and the governor
has also proposed that part of the settlement be used to expand tobacco
control programs. Massachusetts did provide additional funding for tobacco
control and allocated a total of $31 million in MSA payments in fiscal years
2000 and 2001 to supplement its program, bringing the total annual
allocation to $63.3 million in fiscal year 2001.

States Allocated Largest Thirty- five states allocated a portion of their
MSA payments for healthrelated

Share of MSA Payments to purposes not specifically related to tobacco
control for a total of

Health Care nearly $4.8 billion in fiscal years 2000 and 2001. These
allocations include

funding for Medicaid and SCHIP, mental health, substance abuse, public
health, medical research, medical technology, and long- term care. The
extent to which these states allocated MSA payments for health purposes
varied considerably: 16 states allocated more than half of their payments to
26 Centers for Disease Control and Prevention, Best Practices for
Comprehensive Tobacco Control Programs- August 1999.

health care and in several of these states health allocations composed more
than 90 percent of the state?s total MSA payments. California was the only
state that allocated all of its payments to health programs in fiscal years

2000 and 2001. (See Table 5 for the share of each state?s allocation to
health care.) Eighteen states reported that they have used MSA payments to
increase enrollment in existing health insurance programs for low- income
individuals, usually through Medicaid or SCHIP. 27 In addition, several of
these states have allocated their MSA payments to implement SCHIP for

the first time (e. g., Hawaii, Montana, and Utah). Other states allocated
payments for Medicaid and SCHIP but used these amounts for purposes other
than expanding health insurance coverage, such as increasing services for
existing beneficiaries, increasing reimbursement rates to providers, and
providing prescription drug coverage for senior citizens.

Arizona, California and New York are examples of states that used MSA
payments to significantly expand state health care programs. In all three
states the health care expansion is expected to cost more than the state?s
total MSA payments, and the state plans to use other funding sources to
fully fund the programs. In Arizona the voter referendum dedicated all of

the state?s MSA payments to a large expansion of the Arizona Health Care
Cost Containment System (AHCCCS)- Arizona?s Medicaid program. Beginning in
fiscal year 2002, eligibility for AHCCCS will be expanded to all people with
incomes below 100 percent of the federal poverty level, increasing access
for as many as 380,000 people. This expansion is expected eventually to cost
as much as $140 million per year. California used all of its MSA payments, a
total of $900 million, to expand the state?s

public health insurance programs. This expansion will encompass several
programs and include services for all individuals eligible for SCHIP,
enhanced Medicaid coverage for working families, and increased payment rates
for providers who participate in the state?s public health insurance
programs, including Medicaid. Similarly, New York enacted a new Health Care
Reform Act (HCRA 2000) and dedicated $388 million to create a new,
comprehensive program for the uninsured. This program, called ?Healthy

New York,? which will eventually receive 70 percent of the state?s annual
MSA payments, also encompasses several initiatives including expansion

27 These states were Alabama, Arizona, Arkansas, California, Connecticut,
Delaware, Georgia, Hawaii, Kentucky, Maine, Massachusetts, Montana, New
Jersey, New Mexico, New York, South Carolina, Utah, and Washington.

of SCHIP to include parents of children already covered by the program;
increases in Medicaid eligibility to include families with incomes below 150
percent of the federal poverty level and individuals with incomes below 100
percent of the federal poverty level; and health insurance subsidies for
certain individuals, families, and small businesses.

Some Tobacco States Seven of the 13 tobacco states allocated $651 million of
their MSA

Provide Assistance for payments for assistance to tobacco growers and/ or
economic development Tobacco Growers and projects. Because most tobacco
farming and manufacturing jobs are

Economic Development concentrated in regions in just a few states, declines
in tobacco

consumption could result in job losses in all sectors of the economy of
Projects these areas. 28 To help mitigate these economic consequences, these
states allocated a total of 14 percent of their MSA payments to fund
projects aimed at stabilizing the economy of the tobacco regions within the
state and 7 percent for direct payments to tobacco growers. North Carolina,

Kentucky and Virginia, which produce 74 percent of the country?s tobacco
crop, allocated MSA payments for both of these purposes. Of the six tobacco
states that did not allocate payments for either of these purposes, Indiana
and West Virginia produce a relatively small share of the country?s

tobacco, South Carolina plans to allocate payments for these purposes in the
future, and the remaining three states had either not received MSA payments
or not made a decision on the use of their payments. Table 7 shows the
percentage of each state?s MSA payments allocated for each of these purposes
in fiscal years 2000 and 2001. 29 28 An earlier GAO report, Tobacco: Issues
Surrounding a National Tobacco Settlement (GAO/ RCED- 98- 110, April 15,
1998), studied the potential effects of a tobacco settlement on the economy
of this region.

29 Tobacco growers also receive additional payments as part of a separate,
?Phase II,? agreement with the tobacco industry. See appendix VI for
information on this agreement.

Table 7: Percentage of MSA Payments for Economic Development and Tobacco
Growers in Ten Tobacco States for State Fiscal Years 2000 and 2001

Percent of funds for direct Percent of funds for

payments to tobacco State economic development

growers

Alabama 7 0 Georgia 23 0 Indiana 0 0 Kentucky 35 15 Maryland 0 4 North
Carolina 50 25 Ohio 3 0 South Carolina 0 0 Virginia 15 35 West Virginia 0 0

Average For 10 tobacco 14 7 states Notes: 1. Table excludes three tobacco
states that had either not received funds (Missouri) or had not made

decisions regarding allocations (Pennsylvania and Tennessee). 2. North
Carolina allotted 25 percent of its settlement payments to a trust fund
aimed at assisting tobacco growers- all or part of which will be used to
make direct payments to these growers. However, the state had not yet
allocated specific amounts for specific purposes.

3. Georgia?s funding for economic development includes funds that may be
used to compensate farmers in the event of crop loss due to drought.

Economic Development Projects Six tobacco states allocated MSA payments for
economic development in Tobacco States projects, mostly in the tobacco
regions of these states, in order to ease the

burden of declining tobacco production. North Carolina and Kentucky, the two
largest producers of tobacco, each allocated substantial amounts of their
MSA payments for economic development, whereas Ohio and Alabama, which
produce a much smaller amount of tobacco, allocated a relatively small
percentage of their payments for this purpose. The tobacco states have taken
different approaches to assisting the regions that will be most affected by
declines in tobacco consumption.

Several tobacco states used MSA payments to offer educational assistance
such as scholarships to community colleges and job training for tobacco
growers to help them transition to other careers. Several states also funded
research projects to identify new uses for tobacco or other cash crops that
farmers could grow instead of tobacco. In addition, several states used

MSA payments to provide economic incentives to help develop the economy of
rural tobacco regions. For example, Alabama securitized a portion of the MSA
payments to finance economic development projects including construction of
an automobile manufacturing plant. While some initiatives focused on tobacco
regions, some were broader. Some states used MSA payments for statewide
agricultural priorities that affect tobacco

growers indirectly. Georgia, for example, used payments for rural sewer and
water projects. Kentucky and North Carolina both allocated substantial
amounts for economic development in tobacco regions. Kentucky established
the Agricultural Development Fund which received 35 percent, or $87 million,
of the state?s MSA payments. Kentucky plans to provide a variety of

economic assistance programs to the state?s agricultural community,
including programs that will provide business development and technical
assistance to farmers and distribute funds for farm diversification,
cooperative development, marketing, and new product development. North

Carolina allocated 50 percent of its MSA payments, a total of $168 million,
to projects directed at areas whose economy is dependent upon tobacco
production. Specifically, the state created the Golden LEAF (Long- term
Economic Advancement Foundation) to provide economic assistance to tobacco-
dependent regions of North Carolina. The Golden LEAF will fund a

range of programs including education, job training and employment,
scientific research to develop new uses for tobacco or alternative cash
crops, and recruitment of new industries to rural areas of the state. In
December 2000, the foundation awarded $5 million in grant funds for 39
projects.

Direct Payments to Tobacco Four tobacco states allocated MSA payments for
direct payments to Growers

tobacco growers. Maryland is the only state that offered to pay farmers
specifically to stop growing tobacco; Kentucky and Virginia provided
subsidies or direct payments to tobacco farmers with no strings attached.
North Carolina has not yet allocated specific amounts for direct payments,
but its program will not require farmers to cease or reduce tobacco
production. Maryland and Virginia provide an illustration of two states with
different

levels of tobacco production and different approaches to using their MSA
payments for assistance to tobacco farmers. Maryland convened a special task
force that developed a long- term plan with two main components: a tobacco
buyout and a tobacco transition program. Both of these programs are designed
to encourage farmers to cease tobacco production but to

remain in the agriculture business. Only the buyout program was operational
in fiscal years 2000 and 2001, and Maryland allocated a total of $11.5
million for this program. Payments will be based on the growers? recent
tobacco production and participants will receive payments based on this
level of production for a period of ten years to ease the transition to
other crops. The state?s program requires participants to agree both to
permanently cease production of tobacco for cigarettes and other personal
consumption, and to keep the land in agricultural production for ten years.
The property must also carry a deed prohibiting, in perpetuity, the
production of tobacco for cigarettes and personal consumption. In contrast,
Virginia focused on compensation rather than reducing

production. Virginia allocated 35 percent of its MSA payments, a total of
$102 million, for direct payments to tobacco growers. These subsidies are
not designed to encourage growers to end tobacco production but are intended
to compensate tobacco growers for their business losses such as investments
in specialized tobacco equipment and lost production

opportunities associated with declines in the demand for tobacco. MSA
Payments Were Also

State budget officials said that they used MSA payments to fund other Used
for Many Other Budget

needs and priorities in addition to tobacco control, health care, and
Priorities

assistance to tobacco farmers and communities. For example, education and
infrastructure were areas of long- term need that required additional
funding that had not been available in some states prior to the MSA. In
other cases, states did not make decisions on the use of all of their MSA
payments during the period of our study. In fiscal years 2000 and 2001,
states left 20 percent of their total MSA payments unallocated and allocated
another 26 percent for other priorities such as education and social
services, infrastructure projects, and general purposes including budget

reserves, attorneys fees and amounts not earmarked for any specific purpose.
(See Table 5 for each state?s allocations to each of these categories.)
Education and Social Services States allocated over $1 billion of their MSA
payments to education and social services including programs for children
and senior citizens. Of this amount, 12 states allocated $848 million in MSA
payments to education.

This category included allocations for preschool and daycare programs,
elementary and secondary education (grades kindergarten through 12) and
higher education. Louisiana and Maine allocated MSA payments to preschool
and daycare programs, such as Head Start. Nine states

(Colorado, Connecticut, Kentucky, Louisiana, Maryland, Montana, New
Hampshire, North Dakota, and Ohio) allocated funds to local districts for a

range of purposes including upgrading technology, increasing teachers?
salaries, enhancing teacher training and augmenting special education
programs. Seven states (Connecticut, Kentucky, Louisiana, Maryland,
Michigan, Nevada, and Ohio) allocated funds for higher education programs at
colleges, universities, and community colleges and some of these allocations
included funding for new college scholarship programs.

In the area of elementary and secondary education, New Hampshire allocated
96 percent of its MSA payments, $92 million, to elementary and secondary
education in order to comply with a state court decision on funding of the
state?s public schools. In 1997, the New Hampshire Supreme Court ruled that
the state?s reliance on local property taxes to fund nearly 90 percent of
the cost of public education placed a disproportionate burden

on residents in districts with low property values. Prior to the MSA, the
state had attempted to address the court decision by increasing statewide
property taxes, but the court subsequently ruled that the plan to phase in
the property tax increase in certain districts with higher property values
was unconstitutional. As a result, New Hampshire relied on MSA payments as a
source of additional funding for local school districts.

Michigan focused on higher education and created a program that will
allocate 75 percent of its MSA payments beginning in fiscal year 2002 to
provide college scholarships for high school students who achieve certain
scores on statewide examinations. Officials told us that this program was a
long- time priority for Michigan?s Governor, but prior to the MSA payments
the state did not have sufficient resources available to fund the program.
Students received grants for the first time in fall 2000, totaling $60
million. Under the program, high school juniors and seniors who pass an

assessment test may receive a one- time $2, 500 grant to pay for college.
Also, students currently in grades 7 and 8 who pass the test may receive a
$500 grant when they go to college in addition to the $2, 500 grant.
Students have up to seven years from the time they graduate to claim their
grants.

Kansas (28 percent) and Alabama (45 percent) each allocated a substantial
portion of their MSA payments to children?s programs. These states funded
programs for children in a variety of areas, including health and education,
for services such as immunizations, after- school activities, mentoring
efforts, and research, but they did not specify the precise amounts

allocated to each of these areas. Kansas established the Kansas Endowment
for Youth (KEY) Fund which will be invested to provide a permanent source of
funding for children?s programs. In fiscal years 2000 and 2001, the state
allocated a total of $55 million from this fund for at- risk

youth, prenatal care, parent education, pediatric biomedical research, and
school violence prevention. Beginning in fiscal year 2001, Kansas will
direct all of its MSA payments to KEY and a set percentage of the fund will
be

allocated for children?s programs each year . Similarly, Alabama allocated
over $100 million of its MSA payments to its Children First Trust Fund.
According to a state official, the Governor and legislature felt there was a
need for new programs serving children and adolescents, but because

Alabama earmarks nearly all of its revenue, little funding was available for
new programs. The MSA payments provided the state with a new funding source.
Alabama?s trust fund was used to pay for programs including school safety,
foster care, juvenile justice, teen pregnancy, literacy, and

drug and alcohol abuse. Infrastructure Ten states allocated $294 million for
physical infrastructure purposes. States dedicated MSA payments to four
types of physical infrastructure:

health care, long- term care and retirement facilities, education
facilities, water and transportation projects, and municipal and state
buildings. Arizona, Arkansas, Colorado, Indiana, and Massachusetts allocated
payments to construction and renovation of health facilities such as
hospitals, medical research facilities, home health centers, and retirement
facilities for veterans. In addition, Arkansas, New Jersey, and Ohio
allocated payments for constructing, upgrading, and/ or remodeling schools

and universities. Louisiana and North Dakota allocated MSA payments for
transportation and water projects. Finally, Illinois and Louisiana used
payments to improve municipal and state buildings.

Both North Dakota and Ohio are examples of states that plan to allocate
millions annually to infrastructure projects. North Dakota enacted
legislation placing 45 percent of the state?s annual MSA payments in a water
management trust fund dedicated for projects related to the state?s longterm
water development and management needs. Also, the fund will be used to repay
bonds the state issued to finance several flood control projects, the
Southwest Pipeline project, and a lake outlet project. Ohio

used 18 percent of its allocations, or $138 million, for school construction
which has been a recent priority in Ohio. The state created two dedicated
funds- an endowment to provide a permanent source of revenue for capital
projects for education and a trust fund to begin funding construction and
renovation projects for elementary and secondary schools.

Tax Reductions Only Connecticut and Illinois used MSA payments explicitly to
fund tax reductions, but the total amounts they allocated for this purpose
were large

4 percent of the total MSA allocations for all states. Connecticut used a
total of 38 percent, or $50 million per year, of its MSA payments for
property tax reductions. Illinois used 50 percent of its MSA payments, $316
million, for an earned income tax credit and a one- time property tax

reduction. For both states, these were part of a series of recent tax
reductions.

Funds Allocated for Budget States allocated $1.2 billion for budget reserves
and other general

Reserves and Other General purposes. Of this amount, $602.8 million was
allocated for state budget

Purposes reserves or rainy day funds, which act as state savings accounts,
allowing states to save for a future economic downturn or emergency. Nine
states

(Delaware, Hawaii, Illinois, Louisiana, Montana, New Jersey, New Mexico, New
York, Oklahoma) allocated MSA payments to reserves. Budget officials in five
of these states told us that their state made one- time deposits to a rainy
day or reserve fund and does not plan to allocate further payments for this
purpose. New York made a one- time allocation of 37 percent of its MSA
payments to the state?s Debt Reduction Reserve Fund.

Hawaii and New Mexico took unique approaches to making allocations to budget
reserves. Hawaii plans to allocate 40 percent of its MSA payments each year
to a new rainy day fund that was established as a result of MSA

payments; prior to the settlement, the state did not have a rainy day fund.
New Mexico created a special long- term reserve fund that is distinct from a
rainy day fund. New Mexico devotes 50 percent of its MSA payments to a

special ?permanent fund,? which is intended to be a long- term savings fund
for the benefit of future generations. New legislation would be required to
access this fund. New Mexico had other permanent funds with assets totaling
more than $12 billion.

Sixteen states allocated $623 million of the MSA payments for other general
purposes. This category includes allocations to the state?s general fund-
not earmarked for any particular purpose- and some allocations for other
specific purposes such as attorneys? fees. In most cases, if MSA payments
were deposited into the general fund, states could not tell us the purposes
for which the payments were used. Iowa, Kansas, Oklahoma, and

Wisconsin made one- time transfers to their general funds, and some of these
deposits were a substantial portion of the states? MSA payments. For example
Kansas made a one- time transfer of $70 million, or 56 percent, to cover
revenue shortfalls. Other states decided to allocate set amounts annually to
their general fund and to make decisions about the use of these payments on
a year by year basis. For example, Virginia allocated

40 percent of its MSA payments each year- over $115 million in fiscal years
2000 and 2001- to its general fund. Rhode Island allocated all of its MSA
payments, $100 million in fiscal years 2000 and 2001, to its general fund,
and the state plans to continue this practice in the future.

Some states? allocations for general purposes reflected payments for
attorneys who worked on tobacco lawsuits; in most cases, these amounts
represented a relatively small percentage of MSA allocations. Maryland is
unusual among these states in that it has reserved 25 percent of all MSA

payments pending resolution of a dispute over attorneys? fees. State
officials told us that prior to the MSA, Maryland entered into a contract
with a private attorney for a fee equal to 25 percent of the state?s share
of the settlement. Because the MSA provides for payment of attorneys? fees,

this agreement has been contested and the funds have been set aside until
the case is resolved. Unallocated MSA Payments More than $2 billion of the
MSA payments in fiscal years 2000 and 2001

remained unallocated as of April 2001. The 15 states with unallocated funds
cited different reasons. In some states there is a year lag between the time
the state receives the MSA payments and the time it allocates them for
specific purposes. These states followed a practice of allocating only the
MSA payments received in the previous fiscal year. In other states, a
portion of the MSA payments remained unallocated after the appropriations
process, leaving these amounts available for appropriation

in future years pending decisions by each state?s governor and legislature.
In Hawaii state law established a ceiling on the amount of MSA payments
available for use; as a result, only a portion of the dollars could be

distributed to specific funds during fiscal years 2000 and 2001. Since the
state?s total MSA payments exceeded the limit, nearly $34 million in
unallocated MSA payments will be available for appropriation in the future.

Idaho, South Dakota, and Utah decided to distribute large portions of their
settlement payments to endowment funds not designated for any particular
purpose. South Dakota created a People?s Trust Fund into which all of the
state?s MSA payments are deposited. The legislation creating the People?s
Trust Fund did not dedicate the fund for any particular purpose, but only
the interest is available to be spent. Similarly, Idaho enacted legislation
requiring that all MSA payments be deposited into the Millennium Trust Fund,
which is invested but does not have any specified purpose. Each year, the
earnings on the fund may be appropriated without restrictions. This
endowment fund is simply intended to provide a continuous source of funding
for state programs.

Three states- Oregon, Pennsylvania, and Tennessee- had not made final
decisions about the allocation of their MSA payments as of April 2001. In
addition, Missouri had not received any MSA payments because it did not
reach state- specific finality until late April 2001.

Several States Considered MSA payments have also been used to back bonds,
which is known as

Issuing Bonds Backed by

?securitization.? Securitization is a type of structured financing based on
MSA Payments the cash flow of receivables or rights to future payments.
Securitization structures are different from traditional public finance and
are sold differently from traditional municipal bonds. In the process of
securitizing,

state and local governments sell their tobacco settlement revenue stream to
a special purpose entity (SPE) established for the purpose of issuing bonds
backed by these funds and paying the debt service on the bonds. The SPE is
designed to be legally separate and ?bankruptcy remote? from the government
entity. This means that the credit rating for these bonds is separate from
the state or local government?s rating and is based on the

credit worthiness of the tobacco industry and the structure of the
financing. The government entity does not bear financial responsibility for
the bonds, and the purchasers of the bonds bear any risk that the bonds will
not be repaid. The interest paid on the bonds issued through securitizing
the MSA payments may be either subject to federal and state

income taxes or exempt from such taxes, depending on a number of factors
including the intended use of the proceeds.

Securitization allows states to receive funds up front rather than over time
as MSA payments are made according to the terms of the agreement. States
have securitized to finance one- time expenses such as capital projects,
paying down existing state or local debt, or establishing an endowment with
a large initial amount. States have considered their overall needs in
deciding whether to securitize the tobacco settlement revenues. Three
states- Alabama, Alaska, and South Carolina- and many counties in New York
state have already securitized a portion of the expected revenue

stream, and ten additional states told us that securitization was under
consideration. Budget officials in other states said that their states have
rejected the option of securitizing these assets but that securitization may

be considered again in the future. Alabama and South Carolina, two tobacco
states, securitized a portion of their MSA payments to finance economic
development projects. Alabama was the first state to securitize MSA payments
through an SPE in September 2000. The Alabama 21st Century Authority was
created to issue

bonds for the purpose of promoting economic and industrial development, and
it issued $50 million of tax- exempt bonds to fund an automobile
manufacturing plant. In South Carolina, the Tobacco Settlement Revenue
Management Authority was created to issue bonds to establish four dedicated
funds for specific purposes. Two of the funds, which will receive 25 percent
of the proceeds of the bond issue, will be used to provide economic
assistance. One will be used primarily to develop the state?s water and
wastewater infrastructure and one will be used to compensate individuals for
losses in tobacco production. In addition, 73 percent of the proceeds of the
bond issue in South Carolina will be used to fund a variety

of health care programs. South Carolina?s bond issue is the largest
securitization of MSA payments to date and the first to issue taxable bonds
for a portion of the transaction. New York City was the first locality to
securitize MSA payments followed by several of the largest counties in New
York State including Erie, Monroe,

Nassau and Westchester. In addition, 17 counties in New York participated in
a pooled transaction, and additional counties plan to participate in a
future pooled transaction. All but two of these counties (Nassau and
Westchester) have used the proceeds of the securitization to pay down their
debt. 30 For these counties, reducing their total debt has in turn allowed
them to improve their individual credit ratings. Westchester County did not
issue bonds to pay down existing debt but rather decided on a one- time
securitization transaction to pay off its ten- year transitional obligation
to subsidize the county medical center. New York City

established the Tobacco Settlement Asset Securitization Corporation (TSASC)
which issued bonds to finance capital projects including school
construction. The City has been constrained by the state?s constitutional
debt limit for some time and has capital needs that are greater than the
debt limit allows. Selling the MSA payment stream to TSASC and issuing bonds
for a portion of the future payments allowed the City to proceed with its
capital program. 30 In New York State, the debt limit is governed by the
state constitution and is based on a percent (10 percent in New York City)
of the full value of taxable real property within a municipality averaged
over the current and four preceding fiscal years.

Many States Established To ensure that MSA payments were used to expand or
establish new

Restrictions Against programs, 16 states enacted legislation including a
requirement that MSA

Supplantation payments be used to supplement rather than to replace or
supplant existing

state funding. The restrictions on supplantation are intended to help ensure
that existing state funding will not be reduced and that MSA payments will
increase the total amount of funding for selected programs. 31 These
restrictions apply to the portion of the state?s MSA payments that are
deposited in dedicated funds established by states. The majority of these
provisions apply to funds earmarked for health care and tobacco control
programs. In a few states, these provisions apply to other uses such as
education, social services, and agriculture. For example, in Maryland the
provision applies to all MSA payments that are earmarked for three purposes-
smoking cessation, health, and agriculture. In Louisiana the legislation
requires that MSA payments allocated for education be used to supplement
rather than replace existing state funding. (See appendix VII

for a summary of the states? restrictions against supplantation.) While the
remaining states did not enact specific provisions, budget officials in 15
of these states reported to us that it was their policy not to supplant
preexisting funding with MSA payments.

Conclusions and During state fiscal years 2000 and 2001, most states
allocated at least some Observations

portion of their MSA payments for tobacco control and health care while also
considering other state budget needs. Many tobacco states responded to the
demands for assistance to tobacco growers and economic development by
providing funding in those areas. Other needs such as education,
infrastructure and budget stabilization were also priorities in several
states, and a large portion of the MSA payments was not allocated in the two
fiscal years of our study.

Consistent with the long- term nature of the MSA payments, states developed
plans for the payments including enacting laws and establishing dedicated
funds earmarking their future use. Although these plans are intended for the
long term, they may be affected by fluctuations in state budget conditions.
When the states first began receiving and planning for the use of their MSA
payments for fiscal years 2000 and 2001, they were

31 An earlier GAO report, Federal Grants: Design Improvements Could Help
Federal Resources Go Further (GAO/ AIMD- 97- 7, December 18, 1996), studied
supplantation restrictions in the federal grant system.

budgeting during a period of projected surpluses. Most states had the
budgetary resources to fund mandated needs from other state revenues to
allow them to dedicate the settlement payments for expansions in health

care, tobacco control, and other new projects. As the forecasts for state
budgets begin to change, states may be faced with more difficult choices in
determining the uses of their MSA payments for the near future. The
earmarking of the payment stream may have the effect of subsidizing state

programs if states reduce their own funding in these areas. States that
included provisions against supplantation when they created dedicated funds
for the MSA payments, or established endowment funds that prevent the use of
the principal, have developed some protection against using the payments to
subsidize state programs. States? future decisions over the use of the MSA
payments will likely require balancing state- specific priorities and needs
within the context of overall budget conditions.

As agreed with your office, unless you release this report earlier, we will
not distribute it until 30 days from the date of this letter. At that time,
we will send copies to relevant congressional committees and subcommittees
and other interested parties. We will also make copies available to others
upon request. If you or your staff have any questions concerning this
letter, please contact me at (202) 512- 9573. Key contributors to this
assignment were Thomas James, Amelia Shachoy, John Forrester, Carol Henn,
Rosellen McCarthy, Brady Goldsmith, and Thomas Yatsco.

Sincerely yours, Paul L. Posner Managing Director Federal Budget Issues,
Strategic Issues

Appendi Appendi xes x I

Scope and Methodology This review focused on states? use of payments
received under the Master Settlement Agreement (MSA) for state fiscal years
2000 and 2001. We collected and analyzed budget- related and legislative
documents and interviewed officials from the executive budget offices on the
plans for use of the MSA payments in the 46 states that were a party to the
MSA. In some cases, our discussions included officials from the state
attorney general?s office, the governor?s office and the state agency
responsible for tobacco control programs. We also reviewed previous GAO
reports and other recent reports and studies, and we spoke with
representatives from the organizations conducting these studies. 1 We spoke
with experts to obtain background information on specific issues covered in
this report, such as

the legal provisions of the MSA and securitization of MSA payments. We
conducted our work from July 2000 through April 2001 in accordance with
generally accepted government auditing standards. We obtained information on
the states? plans for MSA payments through state fiscal year 2001. We
conducted our work and collected information for fiscal year 2001 while the
fiscal year was in progress and states were at various stages in the process
of planning for the use of their payments. Because we completed our
fieldwork in April, we did not obtain final information for the fiscal year,
which for most states ends on June 30. 2 In order to present as
comprehensive a review as possible, we report on the total amounts planned
for by states even if final decisions were not made or

all amounts were not appropriated by the legislature. We refer to these
total amounts planned for and reported by states as ?allocations.? State
allocations for fiscal years 2000 and 2001 totaled $11. 6 billion. While we
did gather budget documentation on states? plans, we did not verify the
accuracy of the data reported by states.

1 See appendix VIII for a list of other reports. 2 In most states, the state
fiscal year begins on July 1 and ends on June 30; the exceptions are:
Alabama and Michigan, where the fiscal year begins on October 1, and New
York, where the fiscal year begins on April 1.

For informational purposes, we also obtained data on actual MSA payments
made by the tobacco companies to states, which totaled $13. 5 billion
through April 2001. 3 Most states developed plans and allocated dollars
based on estimated payments for the fiscal year. Because the payments made
by the tobacco companies are subject to adjustments that are not determined
until the payments are made, actual payments received

by the states differed from estimated payment amounts and from the states?
allocations of $11.6 billion. The major difference between the $13.5 billion
in payments received and the $11.6 billion in states? allocations is the
payments to the counties in California and New York. These payments were
reported in the total payments to those states 4 but were not included in
the

total allocations for those states. Our study tracked only the states? use
of MSA payments and not the allocations of counties? share of the payments.
Categorization of States? To standardize the information reported by the 46
states, we developed Allocations

categories for the program areas to which states allocated their MSA
payments. (See the definitions of these categories below.) We used states?
descriptions of their programs to categorize the $11.6 billion in
allocations according to these definitions. In cases where no final decision
had been

made on the allocation of the payments, we reported these amounts in the

?unallocated? category. In cases where the total amount had not been
appropriated by the legislature but the funds had been earmarked for a
particular purpose (e. g., health), we reported the allocation amounts in
the category for which they had been earmarked. We used this method to
categorize all allocations including those to dedicated funds and states?
general funds. Except where noted in examples of individual state?s

allocations, for the purposes of our analysis, we combined the states?
allocations for fiscal years 2000 and 2001 and reported on the total for the
two- year period.

Definitions for Categories of Economic Development for Tobacco Regions: This
category comprises States? Allocations amounts allocated for economic
development projects in tobacco states such as infrastructure projects,
education and job training programs, and

3 We obtained this data from the National Association of Attorneys General
(NAAG) which monitors the actual payments made to states as determined by an
Independent Auditor. 4 See table 3: Original Estimated and Actual MSA
Payments Received by States as of April 2001 for these amounts.

research on alternative uses of tobacco and alternative crops. This category
includes projects specifically designed to benefit tobacco growers as well
as economic development that may serve a larger population within a tobacco
state.

Education: This category comprises amounts allocated for education programs
such as day care, preschool, Head Start, early childhood education,
elementary and secondary education, after- school programs, and higher
education.

General Purposes: This category comprises amounts allocated for attorneys
fees and other items, such as law enforcement community development, that
could not be placed in a more precise category. This category also includes
allocations to the state?s general fund that were not earmarked for any
particular purpose.

Health: This category comprises amounts allocated for direct health care
services, health insurance including Medicaid and the State Children?s
Health Insurance Program (SCHIP), hospitals, medical technology, public
health services, and health research.

Infrastructure: This category comprises amounts allocated for capital
projects such as construction and renovation of health care, education and
social services facilities, water and transportation projects, and municipal
and state government buildings.

Social Services: This category comprises amounts allocated for social
services such as programs for the aging, assisted living, Meals on Wheels,
drug courts, child welfare and foster care. This category also includes
allocations to special funds established for children?s programs.

Payments to Tobacco Growers: This category comprises amounts allocated for
direct payments to tobacco growers including subsidies and crop conversion
programs.

Reserves/ Rainy Day Funds: This category comprises amounts allocated to
state budget reserves such as rainy day and budget stabilization funds not
earmarked for specific programs. Allocations to reserves that are earmarked
for specific areas are categorized under those areas (e. g., health).

Tax Reductions: This category comprises amounts allocated for tax reductions
such as property tax rebates and earned income tax credits.

Tobacco Cont rol : This category comprises of amounts allocated for tobacco
control programs such as prevention, including youth education, enforcement
and cessation services.

Unallocated: This category comprises amounts not allocated for any specific
purpose, such as amounts allocated to dedicated funds that have no specified
purpose; amounts states chose not to allocate in the year MSA

payments were received that will be available for allocation in a subsequent
fiscal year; unallocated interest earned from dedicated funds; and amounts
that have not been allocated because the state had not made a decision on
the use of the MSA payments.

Note: In this report, we consolidated the following related categories: (1)
education and social services and (2) economic development for tobacco
states and payments to tobacco growers.

Appendi x II

Allocation of MSA Payments in California Total payments in California are
allocated 50 percent to the state and 50 percent to local governments. The
58 counties receive 90 percent of the local share, to be distributed based
on population, and the remaining 10 percent is split equally among four
cities: Los Angeles, San Diego, San Francisco, and San Jose.

Entity Percentage

State of California 50. 000 Alameda 1.934 Alpine 0.002 Amador 0.045 Butte
0.275 Calaveras 0.048 Colusa 0.025 Contra Costa 1. 215 Del Norte 0.035 El
Dorado 0.191 Fresno 1.009 Glenn 0.037 Humboldt 0.180 Imperial 0.165 Inyo
0.028 Kern 0.822 Kings 0.153 Lake 0.077 Lassen 0.042 Los Angeles County 13.
402 City of Los Angeles 1. 250 Madera 0.133 Marin 0.348 Mariposa 0.022
Mendocino 0.121 Merced 0.270 Modoc 0.015 Mono 0.015 Monterey 0.538 Napa
0.167

Entity Percentage

Nevada 0.119 Orange 3.645 Placer 0.261 Plumas 0.030 Riverside 1.770
Sacramento 1.574 San Benito 0.055 San Bernardino 2. 145 San Diego County 3.
777 City of San Diego 1. 250 San Francisco County 1. 095 City of San
Francisco 1. 250 San Joaquin 0. 727 San Luis Obispo 0. 328 San Mateo 0.982
Santa Barbara 0. 559 Santa Clara 2.264 City of San Jose 1.250 Santa Cruz
0.347 Shasta 0.222 Sierra 0.005 Siskiyou 0.066 Solano 0.515 Sonoma 0.587
Stanislaus 0.560 Sutter 0.097 Tehama 0.075 Tr i ni t y 0.020 Tul ar e 0.472
Tuolumne 0.073 Ventura 1.012 Yo l o 1.213 Yuba 0.088

Tot al 100.00

Source: GAO analysis of data provided by California State Office of the
Attorney General.

Appendi x II I Allocation of MSA Payments in New York Total payments in New
York are allocated 51 percent to the state and 49 percent to the 57 counties
and New York City. Allocation to the counties is based on the county share
of Medicaid costs and population along with some specific considerations for
individual counties.

Entity Percentage

New York State 51. 176 Albany 0.593 Allegheny 0.107 Broome 0.446 Cattaraugus
0.179 Cayuga 0.166 Chautauqua 0.308 Chemung 0.212 Chenango 0.104 Clinton
0.170 Columbia 0.126 Cortland 0.100 Delaware 0.101 Dutchess 0.500 Erie 2.194
Essex 0.075 Franklin 0.098 Fulton 0.121 Genesee 0.118 Greene 0.085 Hamilton
0.013 Herkimer 0.142 Jefferson 0.190 Lewis 0.054 Livingston 0.112 Madison
0.131 Monroe 1.536 Montgomery 0. 114 Nassau 2.739 New York City 26. 670
Niagara 0.467

Entity Percentage

Oneida 0.544 Onondaga 0.972 Ontario 0.181 Orange 0.564 Orleans 0.078 Oswego
0.239 Otsego 0.122 Putnam 0.152 Rensselaer 0.317 Rockland 0.560 St. Lawrence
0. 239 Saratoga 0.304 Schenectady 0. 319 Schoharie 0.063 Schuyler 0.038
Seneca 0.069 Steuben 0.211 Suffolk 2.673 Sullivan 0.155 Tioga 0.100 Tompk i
ns 0.170 Ulster 0.334 Warren 0.113 Washington 0.113 Wayne 0.172 Westchester
1. 926 Wyoming 0.081 Ya t e s 0.044

Tot al 100.00

Source: New York Consent Decree.

Appendi x I V

Master Settlement Agreement Payments Table 8: Original Estimated Payments
through 2025 to 46 states, the District of Columbia, and 5 U. S. Territories

Dollars in thousands

Annual payments less Initial

previously settled states Strategic contribution

Calendar year payments Annual payments reduction fund payments

1998 $2, 400,000 1999 2000 2,472,000 $4, 500,000 $3, 939,750 2001 2,546,160
5, 000, 000 4, 377,500 2002 2,622,545 6, 500, 000 5, 690,750 2003 2,701,221
6, 500, 000 5, 690,750 2004- 2007 8, 000, 000 7, 004,000 2008 8, 139,000 7,
143, 000 $861, 000 2009- 2017 8, 139, 000 7, 143,000 861, 000 2018- 2025 9,
000, 000 8, 004,000

Total $12, 741, 926 $207, 890, 000 $183, 176, 750 $8, 610, 000

Base foundation National Association of

payments (American National public education

Attorneys General Legacy Foundation) fund payments

administration payments Attorney general enforcement fund

$150 $25, 000 $250, 000 150 $50, 000 25, 000 300, 000 150 25, 000 300, 000
150 25, 000 300, 000 150 25, 000 300, 000 150 25, 000 150 25, 000

$250, 000 $1,450, 000 $1, 500 $50, 000

Note: Original estimated payments without adjustments other than the
previously settled states reduction. The annual payment continues in
perpetuity. The $300 million annual payments to the National Public
Education Fund may continue in perpetuity. Source: Master Settlement
Agreement.

Appendi x V

Strategic Contribution Fund Payments The Strategic Contribution Fund
payments (made from 2008 through 2017) are intended to reflect the level of
the contribution each state made toward final resolution of the state
lawsuits against the tobacco companies and will be allocated to states based
on a separate formula developed by a panel of former state attorneys
general.

Dollars in thousands

SCF annual State payment Percent of total

Alabama $6, 500 0. 8 Alaska 14, 739 1. 7 Arizona 26, 306 3. 1 Arkansas 6,500
0. 8 California 44, 540 5.2 Colorado 20, 271 2.4 Connecticut 28, 526 3. 3
Delaware 6,500 0. 8 Georgia 8, 062 0. 9 Hawaii 20, 359 2.4 Idaho 6,500 0. 8
Illinois 23,393 2. 7 Indiana 22,816 2. 6 Iowa 23, 428 2. 7 Kansas 15, 931
1.9 Kentucky 6,500 0. 8 Louisiana 22, 626 2. 6 Maine 11, 436 1. 3 Maryland
28, 313 3.3 Massachusetts 41, 425 4.8 Michigan 22, 189 2. 6 Missouri 13, 358
1.6 Montana 8,995 1. 0 Nebraska 6,500 0. 8 Nevada 8, 871 1. 0 New Hampshire
7, 740 0. 9 New Jersey 24, 512 2.8 New Mexico 8, 575 1. 0

Dollars in thousands

SCF annual State payment Percent of total

New York 47, 246 5. 5 North Carolina 16, 723 1. 9 North Dakota 14, 971 1. 7
Ohio 23, 953 2.8 Oklahoma 26, 860 3.1 Oregon 20, 802 2. 4 Pennsylvania 28,
045 3.3 Rhode Island 9, 432 1. 1 South Carolina 11, 470 1. 3 South Dakota
6,500 0. 8 Tennessee 6,500 0. 8 Utah 15, 720 1.8 Vermont 15, 649 1. 8
Virginia 6,500 0. 8 Washington 49, 634 5.8 West Virginia 19, 609 2. 3
Wisconsin 22,538 2. 6 Wyoming 6, 500 0. 8 Subtotal (All 46 states) 834, 066
96. 9 District of Columbia and 5 U. S. 26, 934 3.1 territories Total
$861,000 100. 0

Note: Original estimated payments without adjustments. Source: GAO analysis
of estimated Strategic Contribution Fund payments.

Phase II: The National Tobacco Grower

Appendi x VI

Settlement Trust Agreement The Master Settlement Agreement (MSA) required
the tobacco companies to meet with the political leadership of states with
grower communities to address the economic concerns of these communities.
The National Tobacco Grower Settlement Trust Agreement, referred to as Phase
II, resulted from that requirement and is intended to compensate tobacco
growers and quota owners 1 for potential reductions in their tobacco
production and sales resulting from the MSA. The Phase II agreement was
reached in July 1999 between the four major tobacco companies 2 and the

14 states that produce and manufacture tobacco used for cigarettes. The
agreement includes the 13 tobacco states that are a party to the MSA and the
state of Florida, which reached an earlier, independent settlement with the
tobacco industry. Tobacco production has remained principally in the

southeastern states. Because most tobacco farming and manufacturing jobs are
concentrated in this region, any declines in tobacco consumption could
result in job losses in all sectors of the economy of this area. The Phase
II agreement was intended to help mitigate any such consequences.

Payments to States? The Phase II agreement requires the tobacco companies to
make payments Tobacco Growers and to the National Tobacco Grower Settlement
Trust each year for a period of 12 years beginning in 1999 and continuing
through 2010. The trust is

Quota Owners administered by a trustee and payments are distributed from the
trust directly to tobacco growers and quota owners in the states that are a
party

to the agreement. Each state?s growers and quota owners receive a fixed
percentage of the payments from the trust. This percentage was calculated
either on the basis of the 1998 basic quota for production of cigarette
tobacco or, in states where no quota existed, 1998 production of tobacco

for cigarettes. 3 Three states- Kentucky, North Carolina, and Tennessee- are
the largest producers of cigarette tobacco in the country, and growers and
quota owners in those states receive over 75 percent of the Phase II
payments. Table 8 identifies the percentage of the Phase II payments
allocated to each state?s growers and quota owners.

1 Generally speaking, a quota owner has rights to produce a specified amount
of tobacco annually. 2 The four tobacco companies are Philip Morris
Incorporated, Brown & Williamson Tobacco Corporation, Lorillard Tobacco
Company, and R. J. Reynolds Tobacco Company.

3 Maryland and Pennsylvania do not participate in the quota program.

Table 9: Allocation Percentages for Phase II Payments State Percent

Alabama 0.05 Florida 1.13 Georgia 5.85 Indiana 1.16 Kentucky 29. 66 Maryland
0.62 Missouri 0.42 North Carolina 37. 95 Ohio 1.36 Pennsylvani a 0.43 South
Carolina 6.94 Tennessee 7.57 Virginia 6.58 West Virginia 0.28

Tot al 100.0

Source: National Tobacco Grower Settlement Trust Agreement.

Distribution of Each state through its ?Certification Entity? was required
to develop a plan

Payments identifying the tobacco growers and quota owners within the state
and a

methodology for distributing payments. The Phase II states are categorized
as either Class A (Georgia, Kentucky, North Carolina, South Carolina,
Tennessee and Virginia) or Class B (Alabama, Florida, Indiana, Maryland,

Missouri, Ohio, Pennsylvania and West Virginia) based on the amount of
tobacco produced in the state. In Class A states, the Certification Entity
comprises a Board of Directors with the following membership: the

governor (Chairman), the state commissioner of agriculture (ViceChairman),
the state attorney general (Secretary), one member each from the state
Senate and House of Representatives, not less than three and no more than
six citizens of the state who are tobacco growers or quota

owners in the state, one citizen with a distinguished record of public
service, and two members of the state congressional delegation. In Class B
states, the Certification Entity comprises the governor, state attorney
general, and the state commissioner of agriculture. Each state?s plans may
be revised on an annual basis; plans are due to the trustee by June 1 of
each year in 2000 through 2010. 4 The three largest tobacco states- North
Carolina, Kentucky and

Tennessee- each developed somewhat different methodologies for distributing
payments in 1999 and 2000. In North Carolina, growers and quota owners each
received 50 percent of the payments distributed within the state. Kentucky
used the following methodology to distribute payments: one- third of the
total distributions to quota owners, one- third to the owners of the land
used to grow tobacco, and one- third to the farmers

who produced the crop. In Tennessee, growers received 80 percent of the
payments and quota owners received 20 percent. All three states distributed
payments based on the prior year?s tobacco crop.

4 In 1999, these plans were due by October 1.

Payment Amounts and Adjustments Table 10: Estimated Annual Payments to the
National Tobacco Grower Settlement

Trust

Dollars in thousands

Year( s) Amounts

1999 $380, 000 2000 280, 000 2001 400, 000 2002- 2008 500, 000 2009- 2010
295, 000

Tot al $5,150, 000

Source: National Tobacco Grower Settlement Trust Agreement, Schedule A.
Note: In years 2000- 2010 payments are made in installments of 25 percent of
the total annual amount on or before March 31, June 30, September 30, and
December 15. In 1999, payments were made in three installments: 50 percent
within 10 days of the effective date of the agreement, 25 percent on or

before October 1 and 25 percent on or before December 15, 1999. Payments to
the trust were initially estimated to total approximately $5. 15 billion for
the 12- year period from 1999 through 2010. (See Table 9 for the estimated
annual Phase II payments.) Payments could not be distributed to individuals
in a state until the state had achieved ?state- specific finality? as
required by the MSA. Similar to the MSA payments, Phase II payments are
subject to a number of adjustments including adjustments for inflation and
volume of cigarette sales. 5 The inflation and volume adjustments are
calculated on the same basis as they are for the MSA payments. The

inflation adjustment equals the increase in the Consumer Price Index for the
preceding year or three percent, whichever is greater. The volume adjustment
reduces or enhances payments based on the amount by which the number of
cigarettes shipped in a calendar year declines or increases relative to the
base year.

5 The 1999 annual payments were not subject to inflation and volume
adjustments, but all subsequent years? payments are adjusted for these
factors.

Appendi x VII

States? Restrictions Against Supplantation State Restrictions Against
Supplantation

Alabama 1. Alabama 21st Century Fund is funded with tobacco settlement
revenues. Funds are transferred from this fund to other funds including the
general fund from which 50 percent is to be appropriated to the Alabama
Medicaid Agency with a portion to the Medicaid Waiver Program at the
Commission on Aging. ?Sufficient safeguards shall be implemented to ensure
that these new monies will increase and not supplant or decrease existing
state support.? 2. Alabama Senior Services Trust Fund is funded with tobacco
settlement revenues. ?Any funds appropriated

pursuant to this section shall be additional funds distributed to the
Alabama Department of Senior Services or its successor and shall not be used
to supplant or decrease existing state or local support to the Alabama
Department of Senior Services or its successor. Appropriations from the
trust fund shall be used to both expand existing services and create new
services for Alabama?s elderly.? 3. Children First Trust Fund is funded with
tobacco settlement revenues and revenues received from other sources. Funds
are transferred to children?s services provided by several state agencies.
?Twenty- one percent of the fund shall be allocated to the State Board of
Education. Sufficient safeguards shall be implemented to ensure that the new
monies will increase and not supplant or decrease existing state or local
support.? ?Twenty percent of the funds shall be allocated to the Alabama
Department of Human Resources. Sufficient safeguards shall be implemented to
ensure that these new monies will increase and not supplant or decrease
existing state and local support received from any source.? ?Seventeen
percent of the revenues shall be allocated to the Department of Youth
Services. Sufficient safeguards shall be implemented to ensure that the new
monies will increase and not

supplant or decrease existing state or local support, except the portion of
funds used year to year according to needs enumerated in this section.?
Arizona The Initiative added an additional definition of eligibility for the
Arizona Health Care Cost Containment System (the state?s health insurance
program) and established the Arizona Tobacco Litigation Settlement Fund for
receipt of all

tobacco settlement revenues. ?Monies in the fund shall be used to supplement
and not supplant existing and future appropriations to the Arizona Health
Care Cost Containment System.?

Colorado Policy on use of tobacco settlement funds provides ?The majority of
the moneys received by the state from the Master Settlement Agreement shall
be dedicated to improving the health of the citizens of Colorado, including
tobacco use prevention, education, and cessation programs and related health
programs. Such moneys are intended to supplement any moneys appropriated to
health- related programs established prior to the effective date of this
part 11.? and ?A

portion of the settlement monies shall be used to strengthen and enhance the
health of all residents of Colorado by supplementing and expanding statewide
and local public health programs.? Connecticut Created the Tobacco and
Health Trust Fund to support and encourage tobacco control and substance
abuse programs, and to develop and implement programs to meet the unmet
physical and mental health needs in the state. Trust fund receives transfers
from the Tobacco Settlement Fund and may accept gifts and grants.
?Recommended disbursements from the trust fund shall be in addition to any
resources that would otherwise be appropriated by the state for such
purposes and programs.? Delaware Created the Delaware Health Fund for
receipt of all tobacco settlement revenues. ?Expenditures from the Delaware
Health Fund shall not be used to supplant any state expenditures
appropriated in fiscal year 1999 for purposes consistent with those outlined
in subsection (c) of this section.? Subsection (c) dedicates funds for the
following purposes: expanding access to health care and health insurance for
uninsured or under insured; long- term investments in health care
infrastructure; tobacco control and substance abuse; testing for detection
of costly illnesses; prescription drug program for low- income senior and
disabled citizens; payment assistance for those with expenses of chronic
illnesses; other expenditures for health- related purposes.

Hawaii Created three new funds including the tobacco prevention and control
trust fund. ?The Hawaii tobacco prevention and control trust fund may
receive appropriations, contributions, grants, endowments, or gifts in cash
or otherwise from any source, including the State, corporations or other
businesses, foundations, government, individuals, and other interested
parties; provided that any appropriations made by the State shall not
supplant or diminish the funding of existing tobacco prevention and control
programs or any health related programs funded in whole or in part by the
State.?

State Citation

Alabama 1. An Act to Provide for the Creation of a Special Fund Known as the
Alabama 21 st Century Fund, 1999 Ala. Act 99- 353 sect. 19( a)( 3), Ala. Code sect.sect.
41- 10- 629, -638 (1999). 2. An Act to Create the Alabama Senior Services
Trust Fund, 1999 Ala. Act 99- 444 sect. 1( d), Ala. Code sect. 41- 15C- 1 (1999).

3. An Act Relating to the Children First Trust Fund, 1999 Ala. Act 99- 390
sect.sect. 2- 3, Ala. Code sect.sect. 41- 15B- 2 - 15B- 2. 2 (1999).

Arizona Ariz. Rev. Stat. sect.sect. 36- 2901.01 2901.02 (2000) (added by Prop. 204,
approved Nov. 7, 2000). Colorado An Act Concerning Use of Moneys Received
Pursuant to the Tobacco Litigation Settlement, 2000 Colo. Legis. Serv.

ch. 154, sect. 1, Colo. Rev. Stat. sect. 24- 75- 1103 (2000). Connecticut An Act
Concerning Expenditures for the Programs and Services of the Department of
Public Health, 2000 Conn. Acts 00- 216, sect. 15( d)( 1), Conn. Gen. Stat. sect. 4-
28f (2000). Delaware An Act to Create the Delaware Health Fund, 72 Del.
Laws, ch. 198, sect. 1 (1999), Del. Code Ann. tit. 16, sect. 137 (1999).

. Hawaii An Act Relating to the Hawaii Tobacco Settlement Special Fund, 1999
Haw. Sess. Laws Act 304, sect. 2, Haw. Rev. Stat. sect. 328L- 5 (1999).

State Restrictions Against Supplantation

Indiana Created the tobacco master settlement fund for receipt of all
revenues and several additional funds to which funds are transferred.
Several of these funds have non- supplant provisions: (1) Indiana Tobacco
Use Prevention and Cessation Trust Fund requires funding proposals to state
?the extent to which the expenditure will supplement or duplicate existing
expenditures of other state agencies, public or private entities, or the
executive board.? Other funds-( 2) Indiana Health Care Trust Fund funds
health programs including CHIP, cancer detection, local health departments
and community centers; (3) Biomedical Technology and Basic Research Trust
Fund; (4) Indiana Local Health Department Trust Fund; (5) Indiana
Prescription Drug Fund- include the language: ?Appropriations and
distributions from the fund under this chapter are in addition to and not in
place of other appropriations or distributions made for the same purpose.?
Kansas The children?s trust, renamed the Kansas Endowment for Youth (KEY)
fund, was established to receive all tobacco

settlement funds. All moneys credited to the KEY fund must be invested to
provide an ongoing source of investment earnings available for periodic
transfer to the Children?s Initiatives Fund. ?Moneys allocated or
appropriated from the Children?s Initiatives Fund shall not be used to
replace or substitute for moneys appropriated from the state general fund in
the immediately preceding fiscal year.? Louisiana Established the Millennium
Trust Fund and the Louisiana Fund and creates the Education Excellence Fund
as a special

fund within the Millennium Trust Fund. ?No amount appropriated as required
in this paragraph shall displace, replace or supplant appropriations from
the general fund for elementary and secondary education, including
implementing the Minimum Foundation Program. This subparagraph shall mean
that no appropriation for any fiscal year from the Education Excellence Fund
shall be made for any purpose for which a general fund appropriation was
made in the previous year unless the total appropriations for the fiscal
year from the state general fund for such purpose exceed general fund
appropriations of the previous year.?

Maine The Fund for a Healthy Maine was created for receipt of all tobacco
settlement revenues. ?When allocations are made to direct services, services
to lower income consumers must have priority over services to higher income
consumers. Allocations from the fund must be used to supplement, not
supplant, appropriations from the General Fund.? Maryland Created the
Cigarette Restitution Fund for all revenues received by the state resulting
from the tobacco settlement. Expenditures from the fund shall be for tobacco
control, cancer prevention, Maryland agricultural plan for alternative crop
uses, Maryland Health Care Foundation, primary health care in rural areas,
substance abuse, and any other public purpose. ?Disbursements from the fund
to programs funded by the state or with federal funds administered by the
state shall be used solely to supplement, and not to supplant, funds
otherwise available for the programs under federal or state law as provided
in this section.? Massachusetts Established the Tobacco Settlement Fund to
receive 30% of tobacco settlement payments received by the state and 30% of
the earnings on the Health Care Security Trust as well as other sources of
funding. ?Amounts credited to said fund shall be expended, subject to
appropriation, to supplement existing levels of funding for the purpose of
funding health related services and programs including, but not limited to,
services and programs intended to control or reduce the use of tobacco in
the commonwealth. Amounts credited to said fund shall not be used to
supplant or replace other health related on non health related expenditures
or obligations of the commonwealth.? Montana Constitutional amendment
dedicated trust fund interest earnings for health care benefits, services or
coverage and

tobacco disease prevention and states ?The trust?s interest and principal
cannot be used to replace current funding for these programs.?

Nevada Created the Fund for a Healthy Nevada for receipt of 50% of all
tobacco settlement funds received by the state. Funds are to be allocated
for pharmaceuticals for senior citizens, programs for independent living for
senior citizens, tobacco control, health services for children and disabled.
?Money expended from the fund for a healthy Nevada must not be used to
supplant existing methods of funding that are available to public agencies.?

State Citation

Indiana An Act to Amend the Indiana Code Concerning State Offices and
Administration, 2000 Ind. Leg. Serv. P. L. 212000,

sect.sect. 2- 6, Ind. Code sect.sect. 4- 12- 4- 13, -5- 7, -6- 5, -7- 8, -8- 3 (2000).
Kansas An Act Concerning the Disposition of Certain Moneys for the Benefit
of Children, 1999 Kan. Sess. Laws ch. 172,

sect.sect. 1- 2, Kan. Stat. Ann. sect.sect. 38- 2101 - 2102 (1999). Louisiana La. Const.
art. VII, sect.sect. 10. 8- 10.10 (added by 1999 La. Sess. Law Serv. Act 1392, sect. 1,
approved Oct. 23, 1999).

Maine An Act to Make Supplemental Appropriations and Allocations for the
Expenditures of State Government, 1999 Me. Legis Serv. ch. 401, sect. V- 1, Me.
Rev. Stat. Ann. tit. 22, sect. 1511 (1999).

Maryland An Act Concerning the Cigarette Restitution Fund, 2000 Md. Laws ch.
18, sect. 1, Md. State Fin. & Proc. sect. 7- 317 (2000).

Massachusetts An Act Making Appropriations for Fiscal Year 2000, 1999 Mass.
Legis. Serv. ch. 127, sect. 42, Mass. Gen. Laws Ann. ch. 29, sect. 2xx (1999).

Montana An Act Submitting to the Qualified Electors of Montana an Amendment
to Article XII of the Montana Constitution, 2000 Mont. Laws Ballot Meas. 35
(approved Nov. 7, 2001).

Nevada An Act Relating to State Financial Administration and Creating the
Fund for a Healthy Nevada, 1999 Nev. Laws ch. 538, sect.sect. 3- 5, Nev. Rev. Stat.
sect.sect. 439.620 - 630 (1999).

State Restrictions Against Supplantation

North Carolina Established the Health Trust account to receive 25% of the
tobacco settlement revenues. Health and Wellness Trust Fund receives funds
from the Health Trust Account to address health needs of vulnerable and
underserved populations, and to fund programs including research, education,
and treatment of health problems, to develop a comprehensive tobacco control
plan. ?It is the intent of the General Assembly that the funds provided
pursuant to this Article to address the health needs of North Carolinians be
used to supplement, not supplant, existing state funding of health and
wellness programs.? West Virginia Created two funds for receipt of tobacco
settlement revenues. 50% of all revenues shall be deposited into the West
Virginia Tobacco Settlement Fund and appropriated for the following
purposes: the public employees insurance agency, public health programs,
state health facilities. The legislation provides ?funding for expansion of
the federal- state Medicaid program as authorized by the legislature or
mandated by the federal government.? State budget official said this
language is intended to not supplant existing funds.

State Citation

North Carolina An Act to Provide for the Creation of the Health and Wellness
Trust Fund, 2000 N. C. Sess. Laws 2000- 147, sect.sect. 1- 2, N. C. Gen. Stat. sect.sect.
143- 16. 4, 147- 86.30 (2000).

West Virigina An Act Relating to Appropriations, Expenditure of Interest,
and Authorization of Expenditures from Tobacco Settlement Funds, 1999 W. Va.
Acts ch. 281, W. Va. Code sect.sect. 4- 11A- 1 11A- 3 (1999).

Appendi x VI II

Sources of Information Show Us the Money: An Update on the States?
Allocation of the Tobacco Settlement Dollars. A Report by the Campaign for
Tobacco- Free Kids, American Cancer Society, American Heart Association and
the American Lung Association, October 1, 2000.

Centers for Disease Control and Prevention. Best Practices for Comprehensive
Tobacco Control Programs- August 1999. Atlanta, GA: U. S. Department of
Health and Human Services, Centers for Disease Control and Prevention,
National Center for Chronic Disease Prevention

and Health Promotion, Office on Smoking and Health, August 1999. Reprinted
with corrections.

Centers for Disease Control and Prevention. Investment in Tobacco Control-
State Highlights 2001. Atlanta, GA: U. S. Department of Health and Human
Services, Centers for Disease Control and Prevention, National

Center for Chronic Disease Prevention and Health Promotion, Office on
Smoking and Health, 2001.

Congressional Research Service. Tobacco Master Settlement Agreement (1998):
Overview, Implementation by States, and Congressional Issues.

Washington, D. C.: November 1999. General Accounting Office. Tobacco: Issues
Surrounding a National Tobacco Settlement. (GAO/ RCED- 98- 110, April 15,
1998)

General Accounting Office. Tobacco Settlements: States? Use of Settlement
Proceeds. (GAO/ HEHS- 98- 147R, April 22, 1998). National Association of
County and City Health Officials. Program and Funding Guidelines for
Comprehensive Local Tobacco Control Programs,

April 2000. National Conference of State Legislatures. State Allocation of
Tobacco Settlement Funds: FY 2000 and FY 2001, August 1, 2000.

National Governors Association. State Tobacco Plans- March 1, 2001, National
Governors Association, Center for Best Practices, 2001.

President?s Commission on Improving Economic Opportunity in Communities
Dependent on Tobacco Production While Protecting Public Health. Tobacco at a
Crossroad- A Call For Action: Final Report of the President?s Commission on
Improving Economic Opportunity in

Communities Dependent on Tobacco Production While Protecting Public Health.
Washington, D. C.: U. S. Department of Agriculture, May 14, 2001.

(935370) Lett er

GAO United States General Accounting Office

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Contents

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Appendix I

Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix I Scope and Methodology

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Appendix II

Appendix II Allocation of MSA Payments in California

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Appendix III

Appendix III Allocation of MSA Payments in New York

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Appendix IV

Appendix IV Master Settlement Agreement Payments

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Appendix V

Appendix V Strategic Contribution Fund Payments

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Appendix VI

Appendix VI Phase II: The National Tobacco Grower Settlement Trust Agreement

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Appendix VI Phase II: The National Tobacco Grower Settlement Trust Agreement

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Appendix VI Phase II: The National Tobacco Grower Settlement Trust Agreement

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Appendix VII

Appendix VII States? Restrictions Against Supplantation

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Appendix VII States? Restrictions Against Supplantation

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Appendix VII States? Restrictions Against Supplantation

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Appendix VII States? Restrictions Against Supplantation

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Appendix VII States? Restrictions Against Supplantation

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Appendix VIII

Appendix VIII Sources of Information

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