In 1998, after years of threatened suits, failed congressional bills and endless negotiations, 46 states signed onto a national settlement with the big tobacco corporations worth $206 billion. The money would be paid out over several years to the states, which had been forced to bear much of the health care costs of treating addicted smokers. In return, the tobacco companies were freed from the threat of endless, potentially bankrupting lawsuits. The states had sold the idea to voters with the understanding that this money would be used to care for ill smokers and prevent more kids from getting hooked.
As the states' respective budget deficits continued to worsen with the bad economy, many states decided to use their tobacco payments as short-term financial fixes. Anything to avoid facing more painful budget cuts or, even worse, tax increases. By delving into the tobacco funds, they're breaking a promise to voters and guaranteeing they'll pay higher medical bills down the road.
Here's a case in point: Ohio had a budget deficit last January, one of the first warning signs that the economy was slowing down. While trying to fill the hole, Governor Bob Taft and the state legislature held onto $240 million from the settlement that was supposed to go to the state's Tobacco Use Prevention and Cessation Foundation. The organization funds community, hospital and school programs to fight smoking, especially among kids — exactly what the tobacco money was supposed to being for. The foundation only spends interest from its fund, and it will still dole out $48 million from previous years' money to its programs over the next two years. But that's $21 million less than the settlement promised them.
Smoking prevention programs do work, and states that employ them actually save money in the long run. For every one percent drop in the number of smokers in Ohio, the state will save $10 million in Medicaid costs. (Ironically, ballooning Medicaid costs have been a fiscal headache for almost every state. They were sapping Ohio's budget even before tax revenues started shrinking.)
Ohio is only giving up two years of settlement money, but plenty of other states are cashing in their entire shares to solve one year's budget problems. Wisconsin will sell its portion of the next 25 years of payments to investors as bonds. The state hopes to raise more than $1.3 billion from the sale.
No one is denying the states are facing tough budget choices right now. Most have already cut spending as much as possible. And no one wants to raise taxes just as the economy is trying to come back from the dead. But many of these states, including Ohio, have large rainy day funds they saved while times were booming. Someone needs to tell them to open their windows — it's definitely raining outside.
Of course, with the election season looming, no one wants to run as the guy who spent the rainy day savings account. But at least that would be spending money for its original purpose. Blowing 25 years of tobacco money on the first recession that comes along makes the entire settlement a lie. Tobacco companies misled smokers for years about the consequences of their products. The settlement freed them from the threat of devastating lawsuits, but with the understanding that their own money would be used to keep the next generation away from cigarettes. Now that's being abandoned in statehouses around the country for a short-term solution.
Maybe there's a patch on the market to help politicians quit this nasty habit.