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Critics: MSA missed mark
Tobacco money is being misused
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Published: November 23, 2008
Updated: 11/23/2008 12:10 am
For 10 years, the landmark Master Settlement Agreement has been dogged by high expectations.
The deal between the top U.S. tobacco manufacturers, including R.J. Reynolds Tobacco Co., and 46 state attorneys general changed an industry when it was signed 10 years ago today.
The states, including North Carolina, agreed to drop their lawsuits against the industry for a $206 billion payout over 25 years, primarily to reimburse states for health-care costs related to tobacco use.
North Carolina is projected to receive close to $6.6 billion from the agreement -- an average of $327 million annually.
The payments, however, are dependent upon several variables, one being the number of cigarettes sold in the United States.
There's little doubt that great strides have been made because of the agreement.
□ The Centers for Disease Control and Prevention reported on Nov. 13 that the national smoking rate among U.S. adults dropped below 20 percent for the first time in 2007, or 43.4 million Americans.
□ The National Association of Attorneys General and the American Legacy Foundation credit the agreement with contributing directly to a 28 percent decline in U.S. cigarette consumption, or 135 billion cigarettes, in the past 10 years. The foundation has spent $600 million on its Truth campaign aimed at youth smoking prevention.
Yet, even as contentious as the tobacco marketplace is, there appears to be one place for agreement -- the MSA is flawed, and there is little hope of it being renegotiated to make fixes.
"With the enormity of the additional funding and the expectation that a significant portion of that funding would go to tobacco control, a lot of people on both sides thought we were going to enter a new Eden, and we haven't," said Thomas Glynn, the director of cancer science and trends at the American Cancer Society.
Reynolds, particularly its former chief executive Steven Goldstone, played a prominent role in the tobacco manufacturers signing off on the agreement. Goldstone had recognized that a settlement with the states would take massive legal pressure off Reynolds at a time when lawsuits were increasing.
The co-authors of Barbarians at the Gate -- in an afterward in their recently published 20th anniversary edition -- connected the necessity of the agreement with the debt-laden leveraged buyout of RJR Nabisco by Kohlberg Kravis Roberts & Co. in November 1988.
"It's also impossible to overstate the irony of this," the co-authors wrote. "The impetus for the eventual historic, huge tobacco-litigation settlement was the failure, in effect, of a $25 billion LBO. The weakened Reynolds couldn't afford to keep fighting every last lawsuit like it always had."
Reynolds was perhaps the manufacturer most affected strategically by the significant restrictions on tobacco advertising and marketing in the agreement, which further entrenched Philip Morris' Marlboro as the dominant brand.
For example, the agreement forced cigarette manufacturers to reduce their sports sponsorships to a single program in a 12-month period.
Reynolds chose NASCAR's Winston Cup series -- where it had deep roots -- until it relinquished the sponsorship in 2004 because of changing industry conditions.
Reynolds is among the major manufacturers who have set aside hundreds of millions of dollars in special escrow accounts, along with making $20.2 billion in MSA payments. Those manufacturers say that a provision in the agreement allows cigarette-makers to pay less if they have lost market share to smaller companies that weren't part of the deal.
"As a result of the payments made to states through the MSA, states have more money available than ever before that could be spent on preventing and reducing youth smoking, and addressing other health-related matters," says Tommy Payne, the executive vice president of public affairs for Reynolds. "Yet many states continue to spend those monies on other things. It seems disingenuous that while doing that, legislators continue to consider and pass exorbitant cigarette excise-tax increases."
David Sutton, a spokesman for Philip Morris, said that the manufacturer has lived up to its MSA obligations, including paying all of its $42 billion in MSA payments.
Sutton also said that the company believes the states should dedicate more MSA payments to health-care and tobacco-control programs in lieu of raising their cigarette tax.
Bruce Davidson, a tobacco analyst for Blue Oar Securities PLC of London, said that the settlement agreement makes the "state legislatures look like complete hypocrites."
"Let's bash big tobacco because it is making people ill and we will use the proceeds to pay for the health care -- not. It just happens to be another useful form of taxation to fund any and all state spending."
Payments from the agreement have gone to finance a wildlife museum in Alaska, broadband-cable networks in Virginia, boot camps in Alabama, water and sewer improvements in South Carolina and tax rebates in several states.
North Carolina has directed its settlement money to four foundations, the most prominent being the Golden LEAF Foundation, an economic-development arm of the state.
"When you look at other states, North Carolina is about the only state that has any money left," Gov. Mike Easley said.
Easley, as state attorney general in 1998, took a major risk with his political career by being a prominent negotiator for the agreement.
"There is plenty of money that goes into Medicaid and into the Health and Wellness Trust Fund that is being used effectively for smoking cessation and prescription medications," Easley said.
"Just as people can be addicted to cigarettes, communities have been addicted to tobacco production. We are using these funds to expand the economic base in these cities and towns, many of which are in rural areas."
Some anti-smoking groups express buyer's regret with the agreement.
They wished they had pushed harder for mandated levels of the payments going to tobacco-cessation and youth smoking-prevention programs. They express disappointment that the passed-on cost of the agreement to consumers hasn't led to a bigger reduction in smokers.
According to the Campaign for Tobacco-Free Kids, the states have received $203.5 billion in tobacco-generated revenue in the past 10 years -- $79.2 billion from the tobacco settlement and $124.3 billion from tobacco taxes.
"But they have spent only 3.2 percent of their tobacco money -- $6.5 billion -- on tobacco prevention and cessation programs," according to a report, "A Decade of Broken Promises," which was released last week by five health-advocacy groups.
However, the payments were designated primarily to reimburse the states for previous and future health-care costs related to tobacco use, said Rob McKenna, the attorney general for Washington and the tobacco committee co-chairman for the National Association of Attorneys General.
"If the tobacco companies and state attorneys general had desired that MSA funds to be spent on tobacco prevention/cessation programs, the agreement would have specifically stipulated that spending allocation," said Bill Godshall, the executive director of SmokeFree Pennsylvania. "But it didn't, and the state attorneys general and tobacco companies jointly defended their settlement in court against our legal challenges."
Godshall said that the overall annual settlement payments of about $9 billion a year "don't come close" to covering the total health-care costs incurred by the state and local governments for treating cigarette-related diseases. He estimated those costs at up to $50 billion annually.
"That's why we continue advocating higher state cigarette taxes to make up that difference," Godshall said.
The CDC has estimated that if each state sustained the recommended level of funding for tobacco prevention and cessation programs for five years, an estimated 5 million fewer people would smoke in the United States, and hundreds of thousands of premature deaths would be prevented.
North Carolina is ranked 32nd by the CDC in such spending. It is projected to spend 17.3 percent of the recommended amount in fiscal year 2009, or $18.5 million rather than $106.8 million.
"In these economically challenged times, states cannot afford to misuse tobacco-settlement funds," said Bernadette Toomey, the president and chief executive of the American Lung Association. "The crushing financial burden each state must carry to address the very real costs associated with tobacco-related death and disease will only diminish when smoking rates begin to decline."
The president of Golden LEAF, Dan Gerlach, defends the use of payments for economic development, such as worker training for the Dell Inc. computer-assembly plant in Forsyth County.
Golden LEAF has received $707 million from the agreement and has awarded 733 grants totaling $366.5 million to nonprofit and government organizations.
Gerlach said he understands the passion of health-advocacy groups toward wanting more money for their programs.
"But you can't throw communities historically dependent upon tobacco under the bus along the way," Gerlach said. "We're doing our job to invest the Golden LEAF funds wisely, whether it's for an aircraft parts plant in Eastern North Carolina, getting laptops into the hands of less-advantaged students, the viticulture region of the Yadkin Valley or the life-sciences research park in Winston-Salem."
Melva Fager Okun, the senior program manager for N.C. Prevention Partners, said she "would certainly like to see a higher percentage of the funds go to health initiatives, with the majority going to adult and teen smoking prevention and cessation efforts."
The group is closing on its goal of every hospital in the state operating as a tobacco-free campus.
"Tobacco-related illnesses and lost productivity cost the state just under $5 billion a year," Okun said.
"I feel we could and should wisely invest more than $40 million in MSA dollars to help people successfully quit the use of tobacco, and to assure that children do not initiate this potential lifetime addiction."
■ Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
Prevention spending
The Centers for Disease Control and Prevention said that no state is projected to spend its recommended amount on tobacco-prevention programs in fiscal year 2008-09. The numbers are based on annual figures.
State Smoking caused State revenues Tobacco prevention CDC annual health-care costs from tobacco spending fiscal 2008-09 spending target
California $9.1 billion $1.8 billion $78.1 million $441.9 million
Florida $6.3 billion $820 million $60.2 million $210.9 million
Georgia $2.2 billion $393 million $3.2 million $116.5 million
Kentucky $1.5 billion $294 million $3.7 million $57.2 million
New York $8.2 billion $2.1 billion $81.9 million $254.3 million
North Carolina $2.5 billion $390 million $18.5 million $106.8 million
South Carolina $1.1 billion $114 million $1 million $62.2 million
Virginia $2.1 billion $310 million $13.6 million $103.2 million
United States $95.9 billion $24.6 billion $718.1 million $3.7 billion
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