Payments By Companies to Fall Short: Decline in Cigarette Sales May Cause Cuts to States

November 27, 1999
From staff and wire reports
Harrisburg Patriot News

"If we achieve our goal, this $11.3 billion in Pennsylvania will be closer to $5 billion . . . and this is good for public health. Hopefully, this settlement will put itself out of business."
- Bill Godshall, SmokeFree Pennsylvania

Participating states are likely to receive less money from the master tobacco settlement than initially thought because of declines in cigarette shipments during the past two years.

Under the "volume adjustment" provision of the settlement, 46 participating states, including Pennsylvania, stand to receive cuts of 10 percent or more from payout estimates. The reductions stem from reduced tobacco shipments and sales declines because of price increases and anti-tobacco campaigns that started after cigarette makers settled lawsuits with the states last year. The situation puts some state budget-crunchers in limbo as they plan to spend money they do not yet have.

"Frankly, the prudent thing to do is not to spend specific dollars until they see what they will be," said Laurie Loveland, a lawyer who helped negotiate the tobacco settlement for the North Dakota attorney general's office. "I think it's a mistake for state legislatures to become addicted to tobacco money."

Tobacco companies agreed to pay about $206 billion during 25 years to settle lawsuits against them by Pennsylvania and 45 other states over the costs states incurred to threat sick smokers.

Initial payments are expected to be released in the next few weeks to most participating states and wouldn't be affected by the coming adjustments.

But starting with next April's installment, Loveland said, payments will be adjusted according to the number of cigarettes shipped in the United States in 1998 and 1999.

Tobacco companies will report the shipment numbers to the accounting firm Price-Waterhouse-Coopers shortly before the April payments are to be made. If shipment numbers go down, the accountants will adjust the payments accordingly, Loveland said. For every full percentage number the shipments decrease, the payments will be decreased 0.98 percent, she said.

The shipment figures are not released to the public, said tobacco industry spokesman Scott Williams, and states cannot yet get a firm grasp on what their payments will be. "The state may be just making an estimate on what they think the money's going to be. There's no hard figures on that yet," Williams said. Shipments are tied to cigarette sales, and sales have been down.

Price increases and marketing restrictions have meant an 8.6 percent reduction in the number of cigarettes sold this year, the U.S. Department of Agriculture's Economic Research Service has estimated. Last year, sales were down about 3 percent.

The loss will be countered somewhat by inflation: The settlement agreement also factors in inflation of 3 percent or the current inflation figure, whichever is higher.

Pennsylvania's settlement receipts are being held for the time being because of a challenge to its participation in the settlement pending before the state Supreme Court. But state officials are developing plans to use the money to improve Pennsylvanian's public health. Under the national agreement, Pennsylvania is to receive $11.3 billion during the next 25 years.

A 10 percent cut could reduce Pennsylvania's projected payment for the year 2000 from $368 million to a little more than $330 million.

A spokesman for state Secretary of Administration Thomas G. Paese said yesterday that state officials are aware of the volume adjustments.

Scott Elliott said the Ridge administration's plan - now expected to be released in conjunction with the governor's 2000-01 budget proposal - is being built on percentages, rather than raw dollars, to handle reduced payouts.

"We recognize that these numbers aren't set in stone." Elliott said.

One leading anti-tobacco advocate said the decreased payout underscores the need for more of Pennsylvania's settlement money to be spent on anti-smoking campaigns.

"We should do what we can to reduce smoking," said Bill Godshall, executive director of the Pittsburgh-based SmokeFree Pennsylvania," because our payments will be determined primarily by what those national figures do."

Godshall also said the funding cuts should be hailed rather than mourned because it means fewer people are smoking. That, he added, is the surest way to cut smoking-related medical costs and to generate long-term savings.

"Just focusing on the settlement payments is penny-wise and pound foolish," Godshall said.

"If we achieve our goal, this $11.3 billion in Pennsylvania will be closer to $5 billion . . . and this is good for public health. Hopefully, this settlement will put itself out of business."

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