When Vermont started dipping into its Tobacco Trust Fund to help close gaps in the state’s Medicaid budget, it seemed just a matter of time until the money would be replaced by settlement funds that were being temporarily withheld by the tobacco companies.
“Now, we’re not sure that money will ever materialize,” said Jim Reardon, commissioner of the Department of Finance and Management. “So it’s on a downward spiral.”
In the meantime, the trust fund — the earned interest from which fuels the state’s programs for smoking prevention and cessation — will be left with a projected $149,411 by the end of fiscal year 2014, about a year from now. That will be down from nearly $10 million a year ago, and even further from a steady $30 million balance when the fund was at its strongest, FY06 through the start of FY09.
Tina Zuk, government relations director for the Vermont chapter of the American Heart Association / American Stroke Association, says she doesn’t think the depletion of the funds has been wholly intentional on the Legislature’s part. But it proved too tempting a pot of money when the recession hit. “And without a plan for how to shore up (the trust fund) in the future, it wasn’t a wise move,” she said.
“Well anything can always be avoided,” Reardon admits. “But you’ve got to make certain decisions.” The state wanted to fund certain programs, but faced huge budget gaps from the economic downturn, he said.
Now, without additional revenue, tobacco control efforts could need to be added to the list of programs to be saved.
Trust fund
Vermont helped lead a coalition of state attorneys general in the 1990s who sued the country’s four largest tobacco companies. The Master Settlement Agreement of 1998 was reached between 46 states, plus Washington, D.C., and five U.S. territories, negotiating collectively with the tobacco companies. They agreed to pay the states an estimated total of $206 billion over the course of 25 years and to restrict their promotional activities, in large part to reduce youth smoking.
The state’s share was projected to total $806 million over 25 years, with an additional $156 million in “strategic contribution payments” the state would receive between 2008 and 2017. That additional boost is a bonus Vermont earned for its leadership role in the lawsuit.
That totals $962 million, but Zuk said Vermont chose not to rely on those estimates long term, in large part because the tobacco industry had proven less than trustworthy in the past.
By setting up a restricted trust fund, eventually Vermont’s tobacco control programs would have their own, self-sustaining source of revenue. A task force recommended that one-third of the settlement money go to the trust fund, one-third go directly to the control programs and one-third go to help fund tobacco-related health care costs, she said.
Notwithstanding other arrangements, that is.
“They use the word ‘notwithstanding’ a lot in budgets,” said John Shullenberger, a lawyer with Sirotkin and Necrason. He represents the American Cancer Society and works with the Coalition for a Tobacco Free Vermont, of which Zuk’s organizations are members.
The settlement was set up with specific designations and only the interest from the trust fund was ever intended to be spent, Shullenberger said. But the Legislature started diverting settlement money away from the fund and tapping into its principle balance when other parts of the state budget started getting squeezed.
Withheld payments
Additional downward pressure on the trust fund has stemmed from the tobacco companies withholding portions of their projected payments. This is allowed by a clause in the agreement that relates to the competitive disadvantage the companies would suffer compared to other tobacco companies that had not participated in the master settlement. At least $10 million has been withheld to date.
The Coalition for a Tobacco Free Vermont stresses that progressively lower payments as a result of these withholdings place “an additional stress on the future appropriations from the MSA.” It’s a possibility that renders their concern about diversions from the trust fund all the more urgent.
And with a projected balance of less than $150,000 in just 12 months for a trust fund that was intended to sustain tobacco control programs in perpetuity, plus a scheduled end to Vermont’s additional strategic contribution payments in 2017, that concern has become quite urgent.
Options
Vermont is not unique in either its depletion of MSA funds or its struggle to recover withheld payments. Some other states are negotiating lump-sum settlements with the tobacco companies, Reardon said. Others are more inclined to fight for what they believe they’re entitled to.
The latter prospect promises to be “arduous,” Shullenberger said. As a fail-safe measure, the coalition worked to have an assurance that any withheld payments that come through in FY14 will go straight to the trust fund to shore up long-term funding. Such a windfall is far from likely, however.
Another option would be to take more money from the settlement to shore up the trust fund, although that would render Medicaid more vulnerable.
The coalition maintains that a tobacco tax hike, and a promise to earmark some of the state’s tobacco tax revenues for the trust fund, is the best option to save the trust fund. Currently, no tobacco tax funds go to prevention and control.
A proposal to that effect failed in the Legislature last session, Zuk said, because “the governor made a deal with leadership in the Senate and House not to raise any new taxes this year.”
She points out that once the trust fund is gone, the state not only will have to figure out a way to fund efforts to reduce smoking rates, it also will have to address Medicaid’s long-term solvency — because once the tobacco trust fund is gone, there will be one less piggy bank left to raid.
Correction: An earlier version of this story misstated Zuk’s title.
This article was corrected on June 25, 2013, to include the District of Columbia and U.S. territories in the number of jurisdictions party to the MSA.