	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. 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. 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 to a wide variety of activities, with health-related  activities the largest among them. States allocated the largest portion of their payments—about $16.8 billion,  or 30 percent of the total payments—to health-related activities. 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. On the  other hand, for health care, the states allocated from 20 to 38 percent of  the total payments. 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. 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. Infrastructure. Education. Debt Service on Securitized Funds. Tobacco Control. 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. This category includes  retirement of debt owed on capital projects.
Why GAO Did This Study

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.

What GAO Found

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.