Tobacco Settlement: States' Allocations of Phase II Funds	 
(03-DEC-02, GAO-03-262R).					 
                                                                 
The Farm Security and Rural Investment Act of 2002 (the 2002 Farm
Bill) required GAO to report annually on how states have used	 
funds received under the Master Settlement Agreement and the	 
Phase II agreement. This letter is the first in a series of	 
reports responding to the 2002 Farm Bill requirement.		 
Specifically, this letter provides information on (1) the amount 
of funds that have been distributed to each of the participating 
states under the Phase II agreement and (2) how the states have  
allocated these funds to tobacco growers, quota owners, and	 
others. 							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-262R					        
    ACCNO:   A05642						        
  TITLE:     Tobacco Settlement: States' Allocations of Phase II Funds
     DATE:   12/03/2002 
  SUBJECT:   Claims settlement					 
	     Funds management					 
	     Health care costs					 
	     Tobacco industry					 
	     Master Settlement Agreement (MSA)			 
	     National Tobacco Grower Settlement Trust		 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-262R

GAO- 03- 262R States* Allocations of Phase II Funds United States General
Accounting Office

Washington, DC 20548

December 3, 2002 Congressional Requesters Subject: Tobacco Settlement:
States* Allocations of Phase II Funds

The 1998 Master Settlement Agreement* the largest civil settlement in U.
S. history* required the nation*s four largest tobacco companies to make
annual payments to 46 states in perpetuity as reimbursement for health
care costs related to tobacco use, such as Medicaid expenditures. 1 The
agreement also required the tobacco companies to meet with the political
leadership of states that grow and manufacture tobacco to address their
concerns about potential reductions in tobacco production and sales
because of the agreement. As a result of these discussions, in July 1999,
14 tobaccoproducing states signed the National Tobacco Grower Settlement
Trust agreement, commonly referred to as Phase II, with the tobacco
companies. 2 The Phase II agreement requires the tobacco companies to pay
a total of $5.15 billion over 12 years to compensate tobacco growers and
quota owners for the economic consequences resulting from the Master
Settlement Agreement. 3

The Farm Security and Rural Investment Act of 2002 (the 2002 Farm Bill)
required GAO to report annually on how states have used funds received
under the Master Settlement Agreement and the Phase II agreement. (A
complete list of congressional requesters is provided at the end of this
letter.) This letter is the first in a series of reports responding to the
2002 Farm Bill requirement. Specifically, this letter provides information
on (1) the amount of funds that have been distributed to each of the
participating states under the Phase II agreement and (2) how the states
have allocated these funds to tobacco growers, quota owners, and others.

In summary, we found the following: 1 The 1998 Master Settlement Agreement
requires Philip Morris Incorporated, Brown & Williamson Tobacco
Corporation, Lorillard Tobacco Company, and R. J. Reynolds Tobacco Company
to make annual payments totaling approximately $205 billion over the
agreement*s first 25 years to 46 states and imposes no requirements on how
states spend these payments. 2 The 14 tobacco- producing states are
Alabama, Florida, Georgia, Indiana, Kentucky, Maryland,

Missouri, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee,
Virginia, and West Virginia. 3 Tobacco growers include tobacco farm owners
and tenant farmers. Quota owners are owners of

tobacco- marketing quotas or farm acreage allotments. Production and sale
of tobacco in the United States is regulated under a quota system,
established by the Agricultural Adjustment Act of 1938, which limits
domestic tobacco production by requiring growers to own or rent quota for
each pound of tobacco they want to market.

Page 2 GAO- 03- 262R States* Allocations of Phase II Funds

 During 1999- 2001, the first 3 years of the Phase II agreement, a total
of about $1 billion was distributed to the 14 states. This amount was
approximately $71 million less than the $1.06 billion originally estimated
to be available for distribution during these years. This difference was
primarily a result of allowable adjustments that accounted for a reduction
in the volume of cigarettes shipped nationally and to Puerto Rico by the
four tobacco companies.  Each participating state developed a plan for
allocating its share of the

Phase II funds. States allocated all of the funds available to them to the
following three categories: (1) direct payments to tobacco growers and
quota owners, (2) state administrative expenses, and (3) reserve accounts
to cover future payments to tobacco growers and quota owners. Most of the
funds were allocated for direct payments to tobacco growers and quota
owners. For example, in 2001, the participating states allocated 92
percent of their total Phase II funds for direct payments to tobacco
growers and quota owners. In contrast, these states allocated 2.4 percent
of their share of the Phase II funds for state administrative expenses in
2001. The remaining funds were placed in reserve accounts for future
payments to tobacco growers and quota holders.

Background

Production and sale of tobacco are subject to substantial government
regulation in the United States. Under a complex system established in
1938, tobacco is grown and marketed under a quota system administered by
the U. S. Department of Agriculture that limits domestic production by
requiring growers to own or rent quota for each pound of tobacco marketed.
The ability to market tobacco is, therefore, dependent on the ownership of
tobacco quota. Quota may be sold or leased, but it generally cannot be
transferred outside the county in which it was originally allocated.
Tobacco production has therefore remained principally in Southeastern
states such as Kentucky and North Carolina. Because most tobacco farming
and manufacturing jobs are concentrated in this region, any declines in
tobacco consumption could have adverse economic impacts on the region. The
Phase II agreement was intended to help mitigate such consequences and
provide aid to tobacco growers and quota owners in the participating
states.

Requirements of the Phase II Agreement The Phase II agreement requires the
four major tobacco companies to make quarterly payments to the National
Tobacco Grower Settlement Trust (Phase II trust). Table 1 shows the
estimated contributions to the trust by the tobacco companies for each
year of the agreement.

Page 3 GAO- 03- 262R States* Allocations of Phase II Funds

Table 1: Total Estimated Annual Tobacco Company Contributions to the
National Tobacco Grower Settlement Trust

Year Amount

1999 $380,000,000 2000 280,000,000 2001 400,000,000 2002- 08 500,000,000
2009- 10 295,000,000

Total $5,150,000,000

Source: National Tobacco Grower Settlement Trust agreement.

Each state*s share of the Phase II funds is based on a fixed percentage,
as stated in the Phase II agreement. This percentage was calculated either
on the basis of each state*s share of the total 1998 tobacco quota for
production of cigarette tobacco or, in states where no quota existed, 4
the 1998 production of tobacco for cigarettes. The largest producers of
cigarette tobacco in the country* Kentucky and North Carolina* receive
about 68 percent of Phase II payments. Table 2 shows the fixed percentage
of annual Phase II funds allocated to each state according to the
agreement.

Table 2: Allocation Percentages for Phase II Funds State Percentage

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 Pennsylvania
0.43 South Carolina 6.94 Tennessee 7.57 Virginia 6.58 West Virginia 0.28

Total 100.0

Source: National Tobacco Grower Settlement Trust agreement.

The Phase II trust is administered by JP Morgan (the trustee). The trustee
is responsible for receiving the Phase II contributions from the tobacco
companies, investing these funds, and holding the assets of the trust. On
or before December 31 of each year, the Phase II funds are distributed
from the trust to tobacco growers and

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

Page 4 GAO- 03- 262R States* Allocations of Phase II Funds

quota owners through a disbursing agent* Mellon Investor Services, L. L.
C, according to the states* approved plans (discussed below). 5

The Phase II agreement also requires an annual independent audit of the
trust and the payment disbursement process. For 1999 through 2001,
PricewaterhouseCoopers conducted the annual audits for the Phase II trust
and disbursement process. It is currently conducting the 2002 audit.

Adjustments Allowed by the Agreement The annual Phase II contributions
made by the tobacco companies to the trust are subject to adjustments for
(1) inflation, (2) volume of cigarettes shipped, and (3) tax offsets. The
inflation adjustment increases the annual contribution by an amount equal
to the increase in the Consumer Price Index for the preceding year, or 3
percent, whichever is greater. The volume adjustment reduces or enhances
the annual contribution depending on whether the number of cigarettes
shipped in a calendar year declined or increased relative to the base
volume. 6 The tax offset reduces the annual contribution if any change in
law, regulation, or other governmental provision leads to a new, or
increase in existing, federal or state excise tax on cigarettes or any
other tax related to the purchase of tobacco or the production of
cigarettes.

The amount of Phase II funds available for distribution to tobacco growers
and quota owners within each of the 14 states is further adjusted for
interest earned on the investments made by the trustee and for the
administrative expenses incurred to service the trust. In any year, the
trust*s administrative expenses cannot exceed the lesser of (1) the pre-
tax interest and other pre- tax earnings on amounts paid to the trust or
(2) 5 percent of the amount paid to the trust by the tobacco companies
during that year. Parties eligible for trust expense compensation include,
but are not limited to, the trustee, the disbursing agent, legal counsel
for the trust, and the accounting firm that conducts the annual audit for
the trust. Each state contributes its share of the trust*s administrative
expenses in proportion to the percentage of the state*s Phase II
allocation, as stated in the agreement. For example, North Carolina
receives 37.95 percent of the annual Phase II funds and is responsible for
contributing 37.95 percent of the trust*s administrative expenses. Table 3
shows the total amount of trust administrative expenses paid by each state
for 1999 through 2001.

5 Phase II payments differ from Master Settlement Agreement payments
because they are made directly to tobacco growers and quota owners instead
of the states. 6 The base volume is equal to 475, 656, 000, 000
cigarettes.

Page 5 GAO- 03- 262R States* Allocations of Phase II Funds

Table 3: Trust Administrative Expenses Paid by Each State, 1999 through
2001 State 1999 a 2000 2001 Total

Alabama $807 $967 $1,614 $3,388 Florida 18,243 21,862 36,479 76,584
Georgia 94,444 113,180 188,852 396,476 Indiana 18,727 22,443 37,448 78,618
Kentucky 478,842 573,835 957,495 2, 010,172 Maryland 10,009 11,995 20,015
42,019 Missouri 6, 781 8,126 13,559 28,466 North Carolina 612,676 734,223
1, 225,116 2, 572,015 Ohio 21,956 26,312 43,904 92,172 Pennsylvania 6, 942
8,319 13,881 29,142 South Carolina 112,041 134,269 224,040 470,350
Tennessee 122,212 146,457 244,378 513,047 Virginia 106,229 127,304 212,418
445,951 West Virginia 4,521 5,417 9,039 18,977

Total $1,614,430 $1,934,709 $3,228,238 $6,777,377

a Data provided for 1999 is for the period beginning August 19, 1999,
(Commencement of Operations) and ending December 31, 1999.

Source: Audit reports on the 1999, 2000, and 2001financial statements of
the National Tobacco Grower Settlement Trust, PricewaterhouseCoopers.

State*s Planning Process for Phase II Distributions Before a state*s share
of Phase II funds may be released from the trust, the state must submit an
annual plan to the trustee by June 1 that identifies eligible payment
recipients as either tobacco growers or quota owners. 7 Each state*s plan
is developed by its Certification Entity* the makeup of which varies by
state. 8 The trustee reviews the plan and accepts it or informs the
state*s Certification Entity that a revised plan must be submitted. In the
event that a state*s Certification Entity does not submit a plan that is
consistent with the terms of the trust agreement, the trustee is not
permitted to distribute any Phase II funds to tobacco growers and quota
owners within that state. The trustee holds these funds in a set- aside
account until the Certification Entity complies with this requirement.

After the state*s plan is approved by the trustee, the Certification
Entity must submit a signed statement to the trustee that includes (1) the
names, addresses, and tax identification numbers of payment recipients;
(2) the amount that each recipient is to receive; (3) the amount to be
allocated for reasonable state administrative expenses, including a
detailed statement of such expenses; and (4) a certification that the

7 During the first year of the agreement, plans were not due until October
1. 8 The composition of the Certification Entity depends upon whether a
state is classified as Class A or

Class B. In Class A states (Georgia, Kentucky, North Carolina, South
Carolina, Tennessee, and Virginia), the Certification Entity comprises a
Board of Directors that includes the governor (chairman), the state
commissioner of agriculture (vice chairman), the state attorney general
(secretary), one member each from the state Senate and House of
Representatives, three to six citizens who are tobacco growers or quota
holders in that state, one citizen with a distinguished record of public
service, and two members of the state congressional delegation. In Class B
states (Alabama, Florida, Indiana, Maryland, Missouri, Ohio, Pennsylvania,
and West Virginia), the Certification Entity comprises the governor, state
attorney general, and the state commissioner of agriculture.

Page 6 GAO- 03- 262R States* Allocations of Phase II Funds

information provided is consistent with the state*s plan and the Phase II
agreement. In addition, the Certification Entity may instruct the trustee
to place a portion of the annual distribution for the state in a reserve
account, which will be used for future payments. 9 Reserve account funds
and the interest earned on them may be used to (1) make up for declines in
future contributions to the trust by the tobacco companies and (2) make
payments to eligible tobacco growers and quota owners who submit their
applications after the cutoff date in any given year. After the trustee
receives each state*s signed statement, it makes funds available to the
disbursing agent for distribution, on or before December 31 of each year.

Almost $1 Billion in Phase II Funds Distributed during the First 3 Years

During the first 3 years of the Phase II agreement, a total of about $1
billion was distributed to the 14 participating states* about $71 million
less than the amount estimated in the Phase II agreement. The reduction in
funds available for distribution to tobacco growers and quota owners is
primarily attributable to adjustments made to trust payments as a result
of a decrease in the volume of cigarettes shipped nationally and to Puerto
Rico by the four tobacco companies in the applicable year. Table 4 shows
the estimated and actual amounts of Phase II funds allocated to the states
for distribution.

9 Reserve accounts can contain three kinds of funds: (1) funds in set-
aside accounts that are held by the trustee until the states*
Certification Entity submits the signed statement; (2) funds in
holdseparate accounts for those states that had not achieved state-
specific finality; and (3) funds in reserve accounts to be used for future
payments to tobacco growers and quota owners. State- specific finality was
a condition in the Master Settlement Agreement requiring each state to
receive approval for the agreement from its state court in order to make
the agreement legally binding within that state.

Page 7 GAO- 03- 262R States* Allocations of Phase II Funds

Table 4: States* Estimated and Actual Phase II Distributable Amounts for
1999- 2001 State 1999 a 2000 2001 Total

Alabama Estimated

Actual $190,000 190,000 $140,000

124,059 $200,000 180,434 $530,000

494,493 Florida

Estimated Actual 4,294,000

4,294,000 3,164,000 2,803,727 4,520,000

4,077,805 11,978,000 11,175,532

Georgia Estimated

Actual 22,230,000 22,230,000 16,380,000

14,514,871 23,400,000 21,110,761 62,010,000

57,855,632 Indiana

Estimated Actual

4,408,000 4,408,000

3,248,000 2,878,162

4,640,000 4,186,065 12,296,000

11,472,227 Kentucky

Estimated Actual 112,708,000

112,708,000 83,048,000 73,591,636 118,640,000

107,033,362 314,396,000 293,332,998

Maryland Estimated

Actual 2,356,000

2,356,000 1,736,000

1,538,328 2,480,000

2,237,380 6,572,000 6,131,708 Missouri

Estimated Actual 1,596,000

1,596,000 1,176,000 1,042,093 1,680,000

1,515,644 4,452,000 4,153,737

North Carolina Estimated

Actual 144,210,000

144,210,000 106,260,000

94,160,573 151,800,000

136,949,296 402,270,000 375,319,869 Ohio

Estimated Actual 5,168,000

5,168,000 3,808,000 3,374,397 5,440,000

4,907,801 14,416,000 13,450,198

Pennsylvania Estimated

Actual 1,634,000

1,634,000 1,204,000

1,066,905 1,720,000

1,551,731 4,558,000 4,252,636 South Carolina

Estimated Actual 26,372,000

26,372,000 19,432,000 17,219,351 27,760,000

25,044,219 73,564,000 68,635,570

Tennessee Estimated

Actual 28,766,000

28,766,000 21,196,000

18,782,491 30,280,000

27,317,685 80,242,000 74,866,176 Virginia

Estimated Actual 25,004,000

25,004,000 18,424,000 16,326,128 26,320,000

23,745,095 69,748,000 65,075,223

West Virginia Estimated

Actual 1,064,000

1,064,000 784,000

694,729 1,120,000

1,010,430 2,968,000 2,769,159

Total Estimated

Actual $380,000,000 $380,000,000 b $280,000,000

$248,117,450 $400,000,000 $360,867,708 $1,060,000,000

$988,985,158

a Data provided for 1999 is for the period beginning August 19, 1999,
(Commencement of Operations) and ending December 31, 1999. b Actual
payments made to the trust by the tobacco companies in 1999 were not
subject to any adjustments.

Source: Audit reports on the 1999, 2000, and 2001 financial statements of
the National Tobacco Grower Settlement Trust, PricewaterhouseCoopers.

Page 8 GAO- 03- 262R States* Allocations of Phase II Funds States
Allocated Phase II Funds According to Their Annual Plans

As required by the Phase II agreement, each of the 14 states developed
plans for allocating its share of the funds. During the first 3 years,
state plans allocated available funds to the following three categories:
(1) direct payments to tobacco growers and quota owners, (2) state
administrative costs, and (3) reserve accounts. The states allocated most
of the available Phase II funds for direct payments to tobacco growers and
quota owners. For example, in 2001, the participating states allocated 92
percent (or about $334 million) of the total funds available for
distribution for direct payments to tobacco growers and quota owners.
However, states varied in how they distributed these funds between tobacco
growers and quota owners. For example, Alabama, Missouri, and North
Carolina distributed funds equally between both groups. In contrast,
Tennessee provided 80 percent of its funds to tobacco growers and 20
percent to quota owners. The states* total administrative expenses, which
included items such as expenses for salaries, rent, and third- party
assistance in processing applications from tobacco growers and quota
owners, were 3 percent or less of the total Phase II funds for each of the
3 years. 10 For example, in 2001, the total administrative expenses for
the 13 states for which we had data were 2.4 percent (or about $8.6
million) of their share of the Phase II funds. Finally, amounts allocated
to reserve accounts varied by state. For example, as of December 31, 2001,
funds in reserve accounts ranged from $137 for Alabama to about $10
million for North Carolina. Tables 5 through 7 show each state*s available
Phase II funds and allocation of these funds to the three categories for
the years 1999, 2000, and 2001.

Table 5: States* Allocations of 1999 Phase II Funds as of December 31,
1999 State Funds available for

distribution Payments to

growers/ quota owners

State administrative expenses

Funds remaining in reserves

Alabama $191,513 a a $191,513 Florida 4, 328,184 b b 4,328,184 Georgia
22,406,971 $7,372,915 $47,905 14,986,151 Indiana 4, 443,092 4, 075,802
110,813 256,477 Kentucky 113,605,254 108,882,043 728,197 3, 995,013
Maryland 2,374,756 1, 110,562 c 1,264,194 Missouri 1, 608,705 a a
1,608,705 North Carolina 145,358,041 81,150,317 5, 298,196 58,909,528 Ohio
5,209,142 4, 108,266 248,461 852,415 Pennsylvania 1, 647,008 a a 1,647,008
South Carolina 26,581,945 14,556,529 727,906 11,297,510 Tennessee
28,995,003 a a 28,995,003 Virginia 25,203,055 21,536,098 688,112 2,
978,846 West Virginia 1,072,471 1, 068,435 c 4,036

Notes: Data provided for 1999 is for the period beginning August 19, 1999,
(Commencement of Operations) and ending December 31, 1999.

Funds remaining in reserves reflect state capital balances as of December
31, 1999, and include funds held in set- aside accounts, hold- separate
accounts, and reserve funds set aside for each state in accordance with
their

10 The Phase II agreement does not specify or limit the amount states can
spend on administrative expenses.

Page 9 GAO- 03- 262R States* Allocations of Phase II Funds

signed statements. Some of the funds in reserve accounts were distributed
in 2000 and the remaining funds were carried forward for distribution in
future years. Funds in set- aside accounts were distributed after the
state achieved state- specific finality. Funds in hold- separate accounts
were distributed after the state submitted a signed statement to the
trustee.

PricewaterhouseCoopers did not audit the states* administrative expenses.
a Payments to growers and quota owners for 1999 are incomplete because as
of December 31, 1999, four states (Alabama, Missouri, Pennsylvania, and
Tennessee) had not received state- specific finality, a requirement for
disbursing Phase II funds. Distributable amounts for these states were
transferred to hold- separate accounts in accordance with the terms in the
agreement. Alabama and Pennsylvania paid out most of their 1999 reserve
funds in 2000. Tennessee paid out all of its 1999 reserve funds in 2000.
Missouri paid out most of its 1999 reserve funds in 2001.

b Florida, which had achieved state- specific finality, chose to postpone
its 1999 Phase II distributions to tobacco growers and quota owners. The
state*s distributable amount was transferred to a separate account in
accordance with the terms outlined in the trust agreement. Florida paid
tobacco growers and quota owners about $4 million from the state*s 1999
reserve account during 2000.

c Maryland and West Virginia did not report state administrative expenses
for 1999. Source: GAO analysis of PricewaterhouseCoopers data.

Table 6: States* Allocations of 2000 Phase II Funds as of December 31,
2000 State Funds available for

distribution Payments to

growers/ quota owners

State administrative expenses

Funds remaining in reserves

Alabama $130,755 $125,803 $14,951 $722 Florida 2, 883,762 a 44,329 3,
151,219 Georgia 14,947,865 13,902,544 301,303 1, 635,636 Indiana 2,
936,166 2, 978,885 31,271 147,295 Kentucky 74,968,743 70,811,518 738,727
6, 347,267 Maryland 1,583,830 1, 541,780 37,089 24,494 Missouri 1, 154,267
b b 2,762,972 North Carolina 96,513,325 72,926,895 4, 076,736 20,586,941
Ohio 3,454,183 3, 267,967 284,281 279,152 Pennsylvania 1, 101,429 1,
141,726 85,078 6, 743 South Carolina 17,689,969 13,796,069 543,465 4,
318,157 Tennessee 19,953,469 c 757,387 19,044,621 Virginia 16,659,980
15,716,645 773,269 1, 069,335 West Virginia 705,924 706,016 d 3,944

Notes: Funds remaining in reserves reflect state capital balances as of
December 31, 2000, and include funds held in set- aside accounts, hold-
separate accounts, and reserve funds set aside for each state in
accordance with the signed statements. These amounts also reflect any
remaining funds carried over from 1999. Some of the funds in reserve
accounts were distributed in 2001 and the remaining funds were carried
forward for distribution in future years. Funds in set- aside accounts
were distributed after the state achieved state- specific finality. Funds
in hold- separate accounts were distributed after the state submitted a
signed statement to the trustee.

PricewaterhouseCoopers did not audit state administrative expenses. a
Florida chose to postpone its 2000 Phase II payments to growers and quota
owners. The state*s distributable amount was transferred to a separate
account in accordance with the terms outlined in the trust agreement.
Florida paid tobacco growers and quota owners almost $3 million from the
state*s 2000 reserve account during 2001.

b As of July 20, 2000, all states except Missouri had achieved state-
specific finality and submitted plans for distribution of the funds to the
trustee. Missouri was not eligible for payments until December 31, 2001.

Page 10 GAO- 03- 262R States* Allocations of Phase II Funds

Distributable amounts for Missouri were transferred to a hold- separate
account in accordance with the terms in the agreement.

c The PricewaterhouseCoopers 2000 audit report had no information on
payments to tobacco growers and quota owners for Tennessee. Tennessee paid
tobacco growers and quota owners about $18 million from the state*s 2000
reserve account during 2001.

d West Virginia did not report state administrative expenses for 2000.
Source: GAO analysis of PricewaterhouseCoopers data.

Table 7: States* Allocations of 2001 Phase II Funds as of December 31,
2001 State Funds available for

distribution Payments to

growers/ quota owners

State administrative expenses

Funds remaining in reserves

Alabama $180,564 $171,995 $9,154 $137 Florida 4, 101,575 a a 4,314,495
Georgia 21,174,884 19,214,580 342,490 3, 198,483 Indiana 4, 193,866 4,
113,795 24,807 192,303 Kentucky 107,203,410 103,581,075 1, 161,389 5,
273,233 Maryland 2,239,212 2, 237,377 6, 062 15,443 Missouri 1, 598,586 1,
087,200 135,637 1, 520,634 North Carolina 137,500,895 127,586,886 4,
180,000 10,167,931 Ohio 4,921,982 3, 567,599 355,106 1, 222,938
Pennsylvania 1, 553,379 1, 529,696 39,098 1, 369 South Carolina

25,164,245 20,935,864 654,814 5, 522,870 Tennessee 27,516,268 26,061,455
982,809 1, 934,945 Virginia 23,807,684 22,721,893 705,076 1, 295,593 West
Virginia 1,011,031 1, 000,000 3, 004 11,970

Notes: Funds remaining in reserves reflect state capital balances as of
December 31, 2001, and include funds held in set aside accounts, hold-
separate accounts, and reserve funds set aside for each state in
accordance with the signed statements. These amounts also reflect any
remaining funds carried over from 1999 and 2000. Some of the funds in
reserve accounts were distributed in 2002 and the remaining funds were
carried forward for distribution in future years.

PricewaterhouseCoopers did not audit state administrative expenses. a
Florida chose to postpone its 2001 Phase II payments to growers and quota
owners. The state*s distributable amount was transferred to a separate
account in accordance with the terms outlined in the trust agreement.

Source: GAO analysis of PricewaterhouseCoopers data.

Scope and Methodology

To address both objectives of this review, we obtained data and documents
for Phase II payments from and interviewed an official from the Phase II
trustee, JP Morgan, and an official from the Phase II auditor,
PricewaterhouseCoopers. We also contacted officials in selected states to
obtain information on how the Phase II distribution process is
administered within their state and to verify the information obtained
from the Phase II trustee and auditor. We also reviewed the Phase II
agreement and other pertinent documents and studies. We did not
independently verify the accuracy of Phase II data because, with the
exception of the funds

Page 11 GAO- 03- 262R States* Allocations of Phase II Funds

allocated to states* administrative expenses, these data had been audited
by the Phase II auditor.

We conducted our work between July and October 2002 in accordance with
generally accepted government auditing standards.

- - - - We are sending copies of this report to interested congressional
committees and others upon request. The report is also available on the
GAO Web site at http:// www. gao. gov. If you have questions, please call
me at (202) 512- 3841. Key contributors to this report include Gary Brown
and Kristy Williams.

Anu K. Mittal Acting Director, Natural Resources

and Environment

Page 12 GAO- 03- 262R States* Allocations of Phase II Funds

List of Requesters The Honorable Tom Harkin Chairman Committee on
Agriculture, Nutrition, and Forestry United States Senate

The Honorable Richard Lugar Ranking Minority Member Committee on
Agriculture, Nutrition, and Forestry United States Senate

The Honorable Larry Combest Chairman Committee on Agriculture House of
Representatives

The Honorable Charles Stenholm Ranking Minority Member Committee on
Agriculture House of Representatives

The Honorable Jim Bunning United States Senate

(360283)
*** End of document. ***