Tobacco Settlement: States' Allocations of Payments from Tobacco 
Companies for Fiscal Years 2000 through 2005 (27-FEB-07,	 
GAO-07-534T).							 
                                                                 
In the 1990s, states sued major tobacco companies to obtain	 
reimbursement for health impairments caused by the public's use  
of tobacco. In 1998, four of the nation's largest tobacco	 
companies signed a Master Settlement Agreement, agreeing to make 
annual payments to 46 states in perpetuity as reimbursement for  
past tobacco-related health care costs. Some states have arranged
to receive advance proceeds based on the amounts that tobacco	 
companies owe by issuing bonds backed by future payments. This	 
testimony discusses (1) the amounts of tobacco settlement	 
payments that the states received from fiscal years 2000 through 
2005, the most recent year for which GAO has actual data, and (2)
the states' allocations of these payments. We also include	 
states' projected fiscal year 2006 allocations. The Farm Security
and Rural Investment Act of 2002 required GAO to report annually,
through fiscal year 2006, on how states used the payments made by
tobacco companies. GAO based this testimony on five annual	 
surveys of these 46 states' Master Settlement Agreement payments 
and how they allocated these payments.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-534T					        
    ACCNO:   A66326						        
  TITLE:     Tobacco Settlement: States' Allocations of Payments from 
Tobacco Companies for Fiscal Years 2000 through 2005		 
     DATE:   02/27/2007 
  SUBJECT:   Allocation (Government accounting) 		 
	     Financial analysis 				 
	     Funds management					 
	     Payments						 
	     Public health					 
	     Regulatory agencies				 
	     State budgets					 
	     State governments					 
	     State-administered programs			 
	     Statistical data					 
	     Tobacco industry					 
	     Advance payments					 
	     Master Settlement Agreement			 

******************************************************************
** 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-07-534T

   

     * [1]States' Annual Tobacco Settlement Payments Have Varied
     * [2]States Are Exercising Their Flexibility to Use Tobacco Settl
     * [3]Appendix I: Categories of States' Allocations

          * [4]Order by Mail or Phone

Testimony

Before the Committee on Health, Education, Labor, and Pensions, U.S.
Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 9:30 a.m. EST

Tuesday, February 27, 2007

TOBACCO SETTLEMENT

States' Allocations of Payments from Tobacco Companies for Fiscal Years
2000 through 2005

Statement of Lisa Shames, Acting Director Natural Resources and
Environment

GAO-07-534T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to contribute to your deliberation on the
need for the Food and Drug Administration to regulate tobacco products.
Tobacco use is the leading cause of preventable death in the United
 States. Most adults who use tobacco started using it between the ages of
10 and 18. A Surgeon General's report to the Congress concluded that
preventing youth from starting to use tobacco is key to reducing
tobacco-related deaths and disease. The Centers for Disease Control and
Prevention reported a few years ago that, on average, more than 440,000
deaths and $76 billion in medical expenditures are attributable to
cigarette smoking annually. Reducing tobacco-related deaths and the
incidence of disease, along with their associated costs, is a significant
public health challenge.

Beginning in the mid-1990s, states sued the major tobacco companies for
reimbursement of the cost of health impairments caused by the public's use
of tobacco. The states alleged that the industry had violated antitrust
and consumer protection laws, withheld information about the adverse
health effects of tobacco, manipulated nicotine levels to keep smokers
addicted, and conspired to keep less risky and less addictive tobacco
products out of the market. Forty six states,^1 along with the District of
Columbia and the five U.S. territories, negotiated and signed a settlement
agreement, called the Master Settlement Agreement, with four of the
largest tobacco companies--Phillip Morris, USA; R.J. Reynolds Tobacco
Company; Brown & Williamson Tobacco Corporation; and Lorillard Tobacco
company. The settlement was the largest civil settlement in U.S. history.
It committed the tobacco companies to pay the 46 states an estimated $200
billion^2 over the first 25 years of the agreement, with payments to
continue in perpetuity. In addition, it restricted the tobacco companies'
marketing and advertising practices, among other things.

Today, I will focus on how the 46 states party to the Master Settlement
Agreement have allocated their settlement payments. Specifically, I will
discuss (1) the amounts of Master Settlement Agreement payments that the
states received from fiscal years 2000 through 2005, the most recent year
for which we have actual data, and (2) the states' allocations of these
payments. The Farm Security and Rural Investment Act of 2002 (the 2002
Farm Bill) required GAO to report annually, from fiscal years 2002 through
2006, on how these 46 states used their Master Settlement Agreement
payments.^3 My testimony is based primarily on these annual reports.

^1The four states that are not party to the Master Settlement
Agreement--Florida, Minnesota, Mississippi, and Texas--reached earlier,
individual settlements with the tobacco companies.

^2This original estimate does not take into account adjustments in tobacco
companies' payments that have and will occur.

Our reports were based on our yearly surveys of the 46 states. Each year
we asked the states to report (1) the amount of payments they received for
the current state fiscal year, (2) the amount of payments they expected to
receive for the next state fiscal year, and (3) their allocations of these
payments among 13 spending categories. We independently corroborated the
states' data to the extent possible by analyzing budget-related and
legislative documents, and interviewing state budget officials, staff from
state attorneys generals' offices and governors' offices and others as
needed to clarify information. We performed our work in accordance with
generally accepted government auditing standards.

In summary, from fiscal year 2000 through fiscal year 2005, the states
received $52.6 billion in Master Settlement Agreement payments from the
tobacco companies in amounts that varied from state to state and from year
to year. Of the $52.6 billion, about $36.5 billion were payments from the
tobacco companies and about $16 billion were advance payments (securitized
proceeds) that 15 states arranged to receive by issuing bonds backed by
their future payments from the tobacco companies. The annual payments from
the tobacco companies' are adjusted based on several factors that include
fluctuations in the volume of cigarettes sales, inflation, and other
variables, such as the participating companies' shares of the tobacco
market. Also, each state's share of the tobacco companies' annual payments
is a fixed percentage based on smoking-related health care costs, which
reflect population and smoking prevalence.

The Master Settlement Agreement imposed no restrictions on how states
could spend these settlement payments and, as such, the states have
allocated their payments to a wide variety of activities. Some states told
us that they viewed the settlement payments as an opportunity to fund
needs that they were not able to fund previously due to the high costs of
health care. States allocated the largest portion of their payments--30
percent or $16.8 billion--toward health care activities such as Medicaid,
health insurance, hospitals, medical technology, and research. States
allocated the second largest portion of their payments--about 23 percent
or $12.8 billion--to help balance state budgets or reduce deficits that
resulted from lower than anticipated revenues, increased mandatory
spending, or essential expenditures.

^3GAO, Tobacco Settlement: States' Allocations of Phase II Funds,
[5]GAO-03-262R (Washington, D.C.: Dec. 3, 2002); GAO, Tobacco Settlement:
States' Allocations of Fiscal Years 2002 and 2003 Master Settlement
Agreement Payments, [6]GAO-03-407 (Washington, D.C.: Feb. 28, 2003); GAO,
Tobacco Settlement: States' Allocations of Fiscal Year 2003 and Expected
Fiscal Year 2004 Payments, [7]GAO-04-518 (Washington, D.C.: Mar. 19,
2004); GAO, Tobacco Settlement: States' Allocations of Fiscal Year 2004
and Expected Fiscal Year 2005 Payments, [8]GAO-05-312 (Washington, D.C.:
Mar. 21, 2005); and GAO, Tobacco Settlement: States' Allocations of Fiscal
Year 2005 and Expected Fiscal Year 2006 Payments, [9]GAO-06-502
(Washington, D.C.: April 11, 2006).

In descending order, the next largest categories where states used their
tobacco settlement payments were general purposes, infrastructure
projects, education, debt service on securitized funds, and tobacco
control.

States' Annual Tobacco Settlement Payments Have Varied

The 46 states reported receiving a total of nearly $52.6 billion in
payments in varying annual amounts from fiscal year 2000 through fiscal
year 2005. Of the nearly $52.6 billion, about $36.5 billion were payments
from the tobacco companies and about $16 billion were securitized proceeds
that 15 states arranged to receive, as shown in table 1.

Table 1: Master Settlement Agreement Payments and Securitized Proceeds
Received by the 46 States (Fiscal Years 2000-2005)

Fiscal year        Payments Securitized proceeds           Total 
2000-2001   $13,200,000,000         $928,900,000 $14,128,900,000 
2002          6,238,393,496        3,838,376,465  10,076,769,961 
2003          6,306,329,459        6,482,764,469  12,789,093,928 
2004          5,340,128,223        4,374,698,723   9,714,826,946 
2005          5,453,132,303          389,977,667   5,843,109,970 
Total       $36,537,983,481      $16,014,717,324 $52,552,700,805 

Sources: [10]GAO-01-851 , [11]GAO-03-407 , [12]GAO-04-518 , [13]GAO-05-312
, [14]GAO-06-502 , state budget offices or their designees, and GAO
analysis.

Note: This table does not include payments to cities and counties in
California and New York.

The tobacco companies' annual payments are adjusted based on several
factors contained in the Master Settlement Agreement that include
fluctuations in the volume of cigarette sales, inflation, and other
variables, such as the participating companies' share of the tobacco
market. Declining tobacco consumption alone would result in lower Master
Settlement Agreement payments than originally expected. Tobacco
consumption has declined since the Master Settlement Agreement was signed
in 1998--by about 6.5 percent in 1999 alone--mostly due to one-time
increases in cigarette prices by the tobacco companies after the agreement
took effect. Analysts project that, in the future, tobacco consumption
will decline by an average of nearly 2 percent per year.^4 As a result,
tobacco consumption is estimated to decline by 33 percent between 1999 and
2020.

However, the Master Settlement Agreement also includes an inflation
adjustment factor that some analysts have estimated increases payments
more than any decreases caused by reduced consumption. The inflation
adjustment equals the actual percentage increase in the Consumer Price
Index for the preceding year or 3 percent, whichever is greater. The
effect of these compounding increases is potentially significant,
especially given that the payments are made in perpetuity. Assuming a
3-percent inflation adjustment and no decline in base payments, settlement
amounts received by states would double every 24 years.

Also, several tobacco companies' interpretation of the provision that
addresses participants' market share led them to lower their payments in
2006. Under this provision, an independent auditor determined that
participating tobacco companies lost a portion of their market share to
non-participating companies. An economic research firm determined that the
Master Settlement Agreement was a significant factor in these market share
losses. Based on these findings, several participating companies reduced
their fiscal year 2006 payments by about a total of about $800 million.
Many states have filed suit to recover these funds.

Each state's share of the tobacco companies' total annual payments is a
fixed percentage that was negotiated during the settlement. These
percentages are based on two variables related to each state's
smoking-related health care costs, which reflect each state's population
and smoking prevalence. In general, the most populous states receive a
larger share of the tobacco companies' total annual payments than the less
populous states. For example, California and New York each receive about
13 percent, while Alaska and Wyoming each receive less than 1 percent.
However, these percentages are not strictly proportional to population.

^4Cigarette consumption peaked in 1981 and has been declining since.

In addition to the annual payments states receive, the Master Settlement
Agreement requires that a Strategic Contribution Fund payment begin in
2008 and continue through 2017. The base amount of each year's Strategic
Contribution Fund payment is $861 million, which will be adjusted for
volume and inflation and shared among the states. Strategic Contribution
Fund payments are intended to reflect the level of the contribution each
state made toward final resolution of their lawsuit against the tobacco
companies. They will be allocated to the states based on a separate
formula developed by a panel of former state attorneys general.

States Are Exercising Their Flexibility to Use Tobacco Settlement Payments for a
Wide Variety of Activities

The Master Settlement Agreement imposed no restrictions on how states
could spend their settlement payments and, as such, the states have
allocated their payments^5 to a wide variety of activities, with
health-related activities the largest among them. As part of their
decision making on how to spend their payments, some states established
planning commissions and working groups to develop recommendations and
strategic plans for allocating their states' payments. In six states,
voter-approved initiatives restricted use of the funds and, in 30 states,
the legislatures enacted laws restricting their use.

Overall, we identified 13 general categories to which states have
allocated their Master Settlement Agreement payments, as shown in table 2.
Appendix I provides more details on the categories to which states
allocated their payments.

^5When states allocate payments, they may include carry-over funds from
prior years and interest earned; therefore, in any one year, states'
payments and securitized proceeds may not equal payments allocated for
spending.

Table 2: Amount and Percentage of States' Allocations of Master Settlement
Agreement Payments and Securitized Proceeds by Category, Fiscal Years
2000-2005

Dollars in millions and percent                          
Category                                 Dollars Percent 
Health                                   $16,807    30.0 
Budget shortfalls                         12,806    22.9 
Unallocated                                6,639    11.9 
General purposes                           3,955     7.1 
Infrastructure                             3,350     6.0 
Education                                  3,078     5.5 
Debt service on securitized funds          3,005     5.4 
Tobacco control                            1,943     3.5 
Economic development for tobacco regions   1,490     2.7 
Social services                              961     1.7 
Reserves/rainy day funds                     810     1.4 
Tax reductions                               616     1.1 
Payments to tobacco growers                  521     0.9 
Total                                    $55,981   100.1 

Source: GAO analysis of data from state budget offices and their
designees.

Note: Percentages do not total to 100 due to rounding. Also, states'
allocations do not match the payment amounts on an annual basis because
states have carried over funds from one year to the next and earned
interest on their payments.

States allocated the largest portion of their payments--about $16.8
billion, or 30 percent of the total payments--to health-related
activities. To a closely related category--tobacco control--states
allocated $1.9 billion, or 3.5 percent of their total payments. States
allocated the second largest portion of their payments--about $12.8
billion or 22.9 percent--to cover budget shortfalls. Some states told us
that they viewed the settlement payments as an opportunity to fund needs
that they were not able to fund previously due to the high cost of health
care. Figure 1 illustrates the relative magnitude of the categories
receiving allocations.

Figure 1: States' Allocations of Master Settlement Agreement Payments and
Securitized Proceeds by Category, as a Percent of Total Allocations,
Fiscal Years 2000-2005

Note: Percentages do not total to 100 due to rounding.

aThe "other" category includes economic development for tobacco regions,
social services, reserves/rainy day funds, tax reductions, and payments to
tobacco growers.

The seven largest categories of allocations, in descending order, are
health, budget shortfalls, general purposes, infrastructure, education,
debt service on securitized funds, and tobacco control. States'
allocations to these categories have varied considerably from year to
year--with some categories showing wide fluctuations. For example, for
budget shortfalls, the states allocated from 2 to 44 percent of the total
payments. On the other hand, for health care, the states allocated from 20
to 38 percent of the total payments. Figure 2 shows these annual changes
for these seven categories.

Figure 2: States' Allocations of Combined Master Settlement Agreement
Payments and Securitized Proceeds to Seven Categories, Fiscal Years 2000
through 2005; and Expected Allocations for Fiscal Year 2006

aWe did not obtain data for budget shortfalls and debt service on
securitized funds for fiscal years 2000-01.

Information about how states have allocated their Master Settlement
Agreement payments follows.

Health. From fiscal years 2000 through 2005, states allocated about $16.8
billion of their Master Settlement Agreement payments to a variety of
health care programs, including Medicaid; health insurance; cancer
prevention, screening, and treatment; heart and lung disease; and drug
addiction. Over this period, the amounts states allocated to health care
ranged from about $1.9 billion in fiscal year 2005 to nearly $4.8 billion
in fiscal years 2000-2001 combined.

In fiscal year 2005, the most recent year for which we collected actual
data, 36 of the 46 states allocated some of their Master Settlement
Agreement payments to health care. Of the 36 states, 5 states allocated
two-thirds or more of their payments to health care; 19 states allocated
one-third to two-thirds; and 12 states allocated less than one-third. Ten
states did not allocate any of their payments to health care activities.
In fiscal year 2005, Pennsylvania, Illinois, Michigan, and Maryland
allocated larger amounts to health care than the other states.
Pennsylvania allocated over $326 million of its payments to health care
programs for adult health insurance, uncompensated care, medical
assistance for workers with disabilities, and community medical
assistance. Illinois allocated nearly $204 million of its payments to
health care, citing Medicaid drugs as a key program that would receive
funds. Michigan allocated over $185 million of its payments to areas such
as elder pharmaceutical assistance and Medicaid support programs. Maryland
allocated nearly $100 million of its payments to areas such as Medicaid;
cancer prevention, screening, and treatment; heart and lung disease; and
drug addiction.

Budget Shortfalls. From fiscal years 2000 through 2005, states allocated
about $12.8 billion of their Master Settlement Agreement payments to
budget shortfalls. Over this period, the amounts the states allocated to
budget shortfalls ranged from a high of about $5.1 billion, or 44 percent
of the total payments in fiscal year 2004, to $261 million, or 4 percent
in fiscal year 2005. In fiscal year 2005, only 4 of the 46 states
allocated some of their Master Settlement Agreement payments to budget
shortfalls. Of these states, only Missouri allocated more than one-third
of its total payments--about $72 million--to budget shortfalls.

General Purposes. From fiscal years 2000 through 2005, states allocated
about $4 billion of their Master Settlement Agreement payments to general
purposes, including law enforcement, community development activities,
technology development, emergency reserve funds, and legal expenses for
enforcement of the Master Settlement Agreement. Over this period, the
amounts states allocated to general purposes ranged from $623 million, or
about 5 percent of the total payments they allocated in fiscal years
2000-2001 combined, to about $1.1 billion, or 8 percent in fiscal year
2003.

In fiscal year 2005, 27 of the 46 states allocated some of their Master
Settlement Agreement payments to general purposes. Of these 27 states, 4
states allocated two-thirds or more of their total payments to general
purposes; 2 states allocated one-third to two-thirds; and 21 states
allocated less than one-third. Nineteen states did not allocate any of
their payments to general purposes. Massachusetts, Tennessee, Connecticut,
and Colorado allocated the largest amounts to general purposes in fiscal
year 2005. Massachusetts allocated nearly $255 million of its payments to
general purposes for its General Fund, Tennessee allocated nearly $157
million of its payments to its General Fund, and Connecticut allocated
about $113 million of its payments to its General Fund. Colorado allocated
about $64.5 million of its payments to general purposes, but did not
specify which programs would receive funds.

Infrastructure. From fiscal years 2000 through 2005, states allocated
about $3.4 billion of their Master Settlement Agreement payments to
infrastructure-related activities, including capital maintenance on state
owned facilities, regional facility construction, and water projects. Over
this period, the amounts states allocated to infrastructure have ranged
from $31 million, or about 1 percent of the total payments in fiscal year
2005, to about $1.2 billion, or 10 percent in fiscal year 2002.

In fiscal year 2005, 5 of the 46 states allocated some of their Master
Settlement Agreement payments to infrastructure. Of these 5 states, North
Dakota was the only state that allocated more than one-third of its total
payments to infrastructure. North Dakota, Hawaii, and Kentucky allocated
the largest amounts to infrastructure in fiscal year 2005. North Dakota
allocated about $10.5 million of its payments to infrastructure for work
on water projects. Hawaii allocated approximately $10 million of its
payments to infrastructure, citing debt service on University of Hawaii
revenue bonds issued for the new Health and Wellness Center as a primary
program that would receive funds. Kentucky allocated $6.1 million of its
payments to service debt on such things as water resource development and
a Rural Development Bond Fund.

Education. From fiscal years 2000 through 2005, states allocated about $3
billion of their Master Settlement Agreement payments to education
programs, including early childhood development; special education;
scholarships; after-school services; and reading programs. Over this
period, the amounts states allocated to education ranged from between $280
million or 2 percent of the total payments in fiscal year 2004, to over
$1.1 billion, or 9 percent, in fiscal year 2002.

In fiscal year 2005, 16 of the 46 states allocated some of the Master
Settlement Agreement payments to education. Of the 16 states, only New
Hampshire allocated more than two-thirds of its total payments to
education; 4 states allocated between one-third and two-thirds to
education; and 11 states allocated less than one-third. Thirty states did
not allocate any of their payments to education-related activities.
Michigan, New Hampshire, Nevada, and Colorado allocated the largest
amounts to education in fiscal year 2005. Michigan allocated over $99
million of its payments to education for Merit Award scholarships and
tuition incentive grants for higher education students; the Michigan
Educational Assessment Program testing for K-12 students, nursing
scholarships, the Michigan Education Savings Plan, and general higher
education support. New Hampshire allocated $40 million of its payments to
areas such as an Education Trust Fund, which distributes grants to school
districts in the state. Nevada allocated about $33 million of its payments
to education programs, citing a scholarship program for Nevada students
attending Nevada's higher education institutions as a key recipient.
Colorado allocated over $16 million of its payments to education,
including its Read to Achieve program.

Debt Service on Securitized Funds. From fiscal years 2000 through 2005,
states allocated about $3 billion of their Master Settlement Agreement
payments to servicing debt on securitized funds. This category consists of
amounts allocated to servicing the debt issued when a state securitizes
all or a portion of its Master Settlement Agreement payments. Over this
period, the amounts states allocated for this purpose have ranged from
$271 million, or about 2 percent of the total payments in fiscal year
2002, to about $1.4 billion, or about 24 percent, in fiscal year 2005. In
fiscal year 2005, four states--California, Rhode Island, South Carolina,
and Wisconsin--allocated 100 percent of their Master Settlement Agreement
payments to servicing debt on securitized funds, while New Jersey
allocated just under 100 percent. In addition, Alaska, Louisiana, and
South Dakota, allocated more than half of their payments for this purpose.
In fiscal year 2005, California and New York allocated the largest amounts
to servicing debt on securitized funds.

Tobacco Control. From fiscal years 2000 through 2005, states allocated
about $1.9 billion of their Master Settlement Agreement payments to
tobacco control programs, including prevention, cessation, and counter
marketing. Over this period, the amounts states allocated to tobacco
control ranged from $790 million, or about 6 percent of the total payments
in fiscal years 2000-2001 combined, to $223 million, or about 2 percent,
in fiscal year 2004.

In fiscal year 2005, 34 of the 46 states allocated some of their Master
Settlement Agreement payments to tobacco control programs. Of the 34
states, Wyoming allocated more than one-third of its payments to tobacco
control, while 33 states allocated less than one-third. Twelve states did
not allocate any of their payments to tobacco control-related programs.
Pennsylvania and Ohio allocated more than the other states to tobacco
control--about $44 million and $37 million, respectively--in fiscal year
2005.

Mr. Chairman, this concludes my prepared statement. I would be pleased to
respond to any questions that you or other Members of the Committee may
have.

Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this statement. For further
information about this testimony, please contact Lisa Shames, Acting
Director, Natural Resources and Environment at (202) 512-3841 or
[email protected]. Key contributors to this statement were Charles M. Adams,
Bart Fischer, Jennifer Harman, Natalie Herzog, Alison O'Neill, and Beverly
Peterson.

Appendix I: Categories of States' Allocations

To standardize the information reported by the 46 states, we developed the
following categories and definitions for the program areas to which states
allocated their payments.

Budget shortfalls: This category is comprised of amounts allocated to
balance state budgets and close gaps or reduce deficits resulting from
lower than anticipated revenues or increased mandatory or essential
expenditures.

Debt service on securitized funds: This category consists of amounts
allocated to service the debt on bonds issued when the state securitized
all or a portion of its Master Settlement Agreement payments.

Economic development for tobacco regions: This category is comprised of
amounts allocated for economic development projects in tobacco states such
as infrastructure projects, education and job training programs, and
research on alternative uses of tobacco and alternative crops. This
category includes projects specifically designed to benefit tobacco
growers as well as economic development that may serve a larger population
within a tobacco state.

Education: This category is comprised of amounts allocated for education
programs such as day care, preschool, Head Start, early childhood
education, elementary and secondary education, after-school programs, and
higher education. This category does not include money for capital
projects such as construction of school buildings.

General purposes: This category is comprised of amounts allocated for
attorneys' fees and other items, such as law enforcement or community
development, which could not be placed into a more precise category. This
category also includes amounts allocated to a state's general fund that
were not earmarked for any particular purpose. Amounts used to balance
state budgets and close gaps or reduce deficits should be categorized as
budget shortfalls rather than general purposes.

Health: This category is comprised of amounts allocated for direct health
care services; health insurance, including Medicaid and the State
Children's Health Insurance Program (SCHIP); hospitals; medical
technology; public health services; and health research. This category
does not include money for capital projects such as construction of health
facilities.

Infrastructure: This category is comprised of amounts allocated for
capital projects such as construction and renovation of health care,
education, and social services facilities; water and transportation
projects; and municipal and state government buildings. This category
includes retirement of debt owed on capital projects.

Payments to tobacco growers: This category is comprised of amounts
allocated for direct payments to tobacco growers, including subsidies and
crop conversion programs.

Reserves/rainy day funds: This category is comprised of amounts allocated
to state budget reserves such as rainy day and budget stabilization funds
not earmarked for specific programs. Amounts allocated to reserves that
are earmarked for specific areas are categorized under those areas--e.g.,
reserve amounts earmarked for economic development purposes should be
categorized in the economic development category.

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

Tax reductions: This category is comprised of amounts allocated for tax
reductions such as property tax rebates and earned income tax credits.

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

Unallocated: This category is comprised of amounts not allocated for any
specific purpose, such as amounts allocated to dedicated funds that have
no specified purpose; amounts states chose not to allocate in the year
Master Settlement Agreement payments were received that will be available
for allocation in a subsequent fiscal year; interest earned from dedicated
funds not yet allocated; and amounts that have not been allocated because
the state had not made a decision on the use of the Master Settlement
Agreement payments.

(360810)

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or (202)
512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

www.gao.gov/cgi-bin/getrpt?GAO-07-534T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Lisa Shames at (202) 512-3841 or
[email protected].

Highlights of GAO-07-534T , a testimony before the Committee on Health,
Education, Labor, and Pensions, U.S. Senate

February 27, 2007

TOBACCO SETTLEMENT

States' Allocations of Payments from Tobacco Companies for Fiscal Years
2000 through 2005

In the 1990s, states sued major tobacco companies to obtain reimbursement
for health impairments caused by the public's use of tobacco. In 1998,
four of the nation's largest tobacco companies signed a Master Settlement
Agreement, agreeing to make annual payments to 46 states in perpetuity as
reimbursement for past tobacco-related health care costs. Some states have
arranged to receive advance proceeds based on the amounts that tobacco
companies owe by issuing bonds backed by future payments.

This testimony discusses (1) the amounts of tobacco settlement payments
that the states received from fiscal years 2000 through 2005, the most
recent year for which GAO has actual data, and (2) the states' allocations
of these payments. We also include states' projected fiscal year 2006
allocations.

The Farm Security and Rural Investment Act of 2002 required GAO to report
annually, through fiscal year 2006, on how states used the payments made
by tobacco companies. GAO based this testimony on five annual surveys of
these 46 states' Master Settlement Agreement payments and how they
allocated these payments.

From fiscal year 2000 through 2005, the 46 states party to the Master
Settlement Agreement received $52.6 billion in tobacco settlement
payments. Of the $52.6 billion total, about $36.5 billion were payments
from the tobacco companies and about $16 billion were advance payments
which several states had arranged to receive by issuing bonds backed by
their future payments from the tobacco companies.

The Master Settlement Agreement imposed no restrictions on how states
could spend their payments, and as such, the states have chosen to
allocate them to a wide variety of activities. Some states told us that
they viewed the settlement payments as an opportunity to fund needs that
they were not able to fund previously due to the high costs of health
care. States allocated the largest portion of their payments to health
care--$16.8 billion or 30 percent--which includes Medicaid, health
insurance, hospitals, medical technology, and research. States allocated
the second largest portion to cover budget shortfalls--about $12.8 billion
or about 22.9 percent. This category includes allocations to balance state
budgets or reduce deficits that resulted from lower than anticipated
revenues, increased mandatory spending, or essential expenditures.
Included among the next largest categories are allocations for
infrastructure projects, education, debt service on securitized proceeds,
and tobacco control.

Categories to Which States Allocated Their Tobacco Settlement Payments

And Securitized Proceeds (Fiscal Years 2000-2005)

References

Visible links
5. http://www.gao.gov/cgi-bin/getrpt?GAO-03-262R
6. http://www.gao.gov/cgi-bin/getrpt?GAO-03-407
7. http://www.gao.gov/cgi-bin/getrpt?GAO-04-518
8. http://www.gao.gov/cgi-bin/getrpt?GAO-05-312
9. http://www.gao.gov/cgi-bin/getrpt?GAO-06-502
  10. http://www.gao.gov/cgi-bin/getrpt?GAO-01-851
  11. http://www.gao.gov/cgi-bin/getrpt?GAO-03-407
  12. http://www.gao.gov/cgi-bin/getrpt?GAO-04-518
  13. http://www.gao.gov/cgi-bin/getrpt?GAO-05-312
  14. http://www.gao.gov/cgi-bin/getrpt?GAO-06-502
*** End of document. ***