Florida Still Using Tobacco Money, 13 Years Later

Smoke and money go hand-in-hand.

Mark R. Howard | 7/1/2010

Mark Howard,
Executive Editor

With a tobacco story on this month’s cover, it seemed appropriate to take a look at the health of the state’s Tobacco Settlement Trust Fund, which was created by the settlement of the state’s lawsuit against American Tobacco Co. and other big cigarette manufacturers. A month from the 13th anniversary of the settlement, the suit remains a monument to political engineering by the late Gov. Lawton Chiles and his allies, who contrived a way to sue that was broad enough to pass constitutional muster but narrow enough to target exactly whom Chiles wanted to whack. Florida was one of just four states to craft its own settlement with the cigarette makers; the deal provided the state with a stream of payments and an agreement by the companies to discontinue all billboards and transit ads in the state and to limit marketing in other ways.

And what a payment stream it is. Journalists, for convenience sake, tend to attach a figure to it ($11.3 billion! $13 billion!), but no finite amount is spelled out in the settlement. Each year, as long as the companies sell cigarettes, they’re obligated to pay the state a specified sum (currently, the annual base is 5.5% of $8 billion) that’s then adjusted based on that year’s overall domestic tobacco sales and the Consumer Price Index. Each Dec. 31, PricewaterhouseCoopers, which audits the numbers and administers the payments, electronically transfers several hundred million dollars into a state account.

The annual tobacco money — less than 1% of the state budget — has gone to good use. From the state’s Tobacco Settlement Clearing Trust Fund, the money flows to smaller Tobacco Settlement Trust Funds in the Department of Children and Families, Department of Health, Elder Affairs, and Agency for Health Care Administration.

The Legislature determines how much goes where. The money goes variously for programs that provide children’s healthcare and “other health-related services,” as outlined in the settlement agreement, including providing matching funds to draw federal dollars. Funding goes to a number of programs that help keep seniors in their homes, from adult day care to home delivered meals to transportation services. KidCare, MediKids and the Children’s Medical Services Network — all aimed at providing healthcare coverage or services for lower-income children and kids with special needs — have been funded in part with tobacco money. KidCare alone has received more than half a billion dollars since 1998. Since 2003, the Department of Children and Families has received more than $1 billion that’s gone for services including child protection, programs for the developmentally disabled and for out-of-home care.

Thirteen years into the payment stream, issues have emerged, however. The creation of the Chiles endowment — a sequestered pot of tobacco money whose proceeds supplement health and human services spending — was an acknowledgement that the money represented a windfall to the state and shouldn’t be treated quite the same as a stream of tax revenue. If anything, more money should have been set aside in the endowment and less used for ongoing operations. In any event, any pot of money looks good to legislators when budgets get tight, and the Legislature was quick to raid the endowment in 2008, to the tune of $354 million. That was wrong, and the lack of any provision to replenish it is worse.

Another political football generated by the tobacco money is the state’s anti-smoking campaign. In 2003-04, after anti-smoking ads grew too strident for the tobacco companies’ tastes, the Legislature reduced spending for anti-smoking efforts from nearly $40 million to $1 million. The lawmakers then paid for it when voters passed a constitutional amendment that allocates 15% of the annual settlement funds for a statewide tobacco education and prevention program. Aside from limiting the Legislature’s flexibility, the 2006 amendment means the anti-smoking program inhales a disproportionate share of tobacco money — nearly $62 million last year. That’s one of the largest single uses; last year it was more tobacco money than KidCare got, more than the Department of Elder Affairs got, more than all other Department of Health programs got. A lot of money that could be spent on health programs for kids and elders is going for ads that I believe have a lot more resonance with well-educated non-smokers than with kids deciding whether to begin smoking.

The biggest issue emerging with the tobacco money, however, is that since 2007-08, the annual payments have been declining — from $392 million that year to $355 million in 2009-10 and an estimated $340 million in 2010-11. That trend is national, and there are two main reasons: Fewer people are smoking (in Florida, 17.5% of adults smoke, down from 21% in 2006). More significant, more smokers are turning to cigarettes made by companies that weren’t included in the lawsuit.

Those “non-participating” companies haven’t had to calculate the settlement in their cost of doing business and can sell cigarettes cheaper. They’re taking market share from the bigger firms. In Florida, for example, the market share of Dosal Tobacco Corp., which wasn’t part of the lawsuit, has risen from insignificance to nearly 15%. Dosal, appropriately, has fought attempts in the Legislature to impose fees that retroactively sweep it into the legal settlement. The only real alternative the state has if it wants more money out of Dosal is to sue. Florida’s decision to go it alone in suing the tobacco companies — rather than join the other 46 states — worked against it here. Unlike the 46, Florida didn’t end up with provisions that generate payment from non-participating companies.

And so it goes. Cigarette makers are back in court these days defending lawsuits by individual Florida smokers that are now coming to trial — these plaintiffs once were part of the Engle class-action lawsuit. So far, the companies are losing big. As the verdicts, and potential costs, mount, it will be interesting to see whether the companies look for ways to duck the obligations they agreed to when they settled the tobacco case.

Meanwhile, our state operates in policy schizophrenia: One hand keeps tobacco money firmly attached to its budgetary lip, while the other does everything it can to quit the habit.