Vermont pursues tobacco settlement funds

Vermont is slated to receive $1.7 million from tobacco companies in April 2014, closing out a seven-year dispute over tobacco settlement funds from a decade ago.

Rather than accept a lump-sum percentage of the money some tobacco companies have been withholding since 2003, as 22 other jurisdictions have done, the Vermont Attorney General’s Office is pursuing the full amount due through litigation — one year’s worth at a time.

With the 2003 sales year’s dispute nearing resolution, the slow quest for the balance of funds from 2004 is in its earliest stages. Vermont Assistant Attorney General Evelyn Marcus, who’s in charge of the litigation, said she can only hope the next round doesn’t take a decade.

Disputed payments

From year to year, some tobacco companies dispute the amount of money they owe 52 states and other jurisdictions (including Washington, D.C., and the five territories) as a condition of the 1998 Master Settlement Agreement. The MSA, as it’s known, bound the participating tobacco manufacturers to annual payments totaling $206 billion over 25 years, plus promotional restrictions aimed at curbing youth smoking.

Those restrictions, the companies maintain, put them at a competitive disadvantage over the tobacco companies that did not participate in the MSA.

The audit firm PricewaterhouseCoopers is in charge of determining what the market shares are for all manufacturers, Marcus explained. “So they determine if there was a loss for the participating manufacturers in any given year,” she said.

An independent economic firm then determines whether MSA participation was a “significant factor” in the participating companies’ market share loss, if there was one.

If the MSA is deemed to have cost them business, the participating manufacturers are allowed to hold back a portion of the scheduled annual payments to states. Each state is allotted a different portion of the total settlement funds, so that disputed portion of the payment — known as the NPM or Non-Participating Manufacturer Adjustment — varies widely for each state.

For Vermont, it totaled $4.7 million out of the scheduled $24.2 million settlement payment from the 2003 sales year. Three million dollars of the NPM Adjustment ultimately was paid, leaving $1.7 million in the balance.

The MSA tobacco companies can set that disputed amount aside, but states still have the chance to claim it plus any interest the money earned in the interim — which apparently is just what Vermont intends to do.

Diligent enforcement

At the heart of the whole disputed payment argument is a clause in the MSA requiring a roughly 2-cent deposit on every cigarette (or roll-your-own equivalent) sold in the state by the non-participating tobacco companies — those manufacturers that did not agree to the MSA back in 1998.

There’s twofold logic behind the deposit:

For the participating manufacturers, the per-cigarette deposit theoretically levels the playing field against their competitors, who didn’t agree to bear the cost of settlement payments and promotional restrictions.

For the states, the deposit keeps the non-participating manufacturers from dropping their prices to bargain basement rates to gain an edge on the companies bound to the MSA. After all, a boost in sales from low prices may drag Vermont two steps back on any ground it had gained in dissuading people from smoking in the first place.

If states can demonstrate that they’ve diligently enforced the per-cigarette deposit requirement of the NPMs, then they can qualify to claim their share of the annual settlement payment that was held back.

It is in both parties’ best interest, therefore, to enforce that deposit rule — especially for states reluctant to lose any portion of the settlement they fought for.

“The amount for all states from (sales year) 2003 — if every state had been shown to be non-diligent — would have been approximately $1.1 billion,” Marcus said.

When the 2003 NPM Adjustment was held back, Vermont went to bat for its enforcement efforts. The tobacco companies stopped short of patting the state on the back. But, in November 2011, they stopped contesting the diligence of Vermont and 11 other jurisdictions that stood their ground.

Next steps

With the 2003 sales year dispute all but behind them, it’s on to 2004 for the jurisdictions that did not agree to settle for 54 cents on the dollar rather than fight for all the money that’s been held back since sales year 2003.

Before the next lawsuit can get started to defend another year’s enforcement record, however, the discovery process must take place. Vermont has agreed to prove its diligence as a part of a multi-state arbitration, but it’s unclear when and how those proceedings would commence.

Despite the fact that the 2003 sales year arbitration panel has not even defined “diligence,” Marcus is hopeful because she is confident in the state’s tobacco policies and protocols.

In addition to rigorous enforcement of the qualifying statute, Vermont passed additional legislation in 2003 requiring all tobacco companies authorized to sell in the state to be listed in a public directory. Under state law, any cigarette or roll-your-own tobacco not in the directory “is considered contraband and is subject to seizure and destruction.”

“Our record for 2004 is even better than our record for 2003, and so we’re going to make our diligence case,” Marcus said.

As for where the $1.7 million (plus interest) from 2003 will go once it arrives, Vermont’s Chief Fiscal Officer Steve Klein says its fate is uncertain.

“When they pay it, it will be deposited into the Tobacco Trust Fund. Whether it gets appropriated out of the fund is up to the Legislature,” Klein said.

The fund was created to pay for smoking cessation and prevention programs in Vermont. Once $30 million strong, it’s expected to  drop to less than $150,000 in a year, having been tapped several years in a row to help the state close Medicaid budget gaps.

A clause in the 2014 fiscal year budget requires that any interest from the Tobacco Trust Fund be directed to the Tobacco Settlement Litigation Fund at the end of the fiscal year.

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. 

Hilary Niles

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  • Excellent article on a very complicated subject. As a municipal credit analyst, I’ve been following this story since March 2005, when I was the first to publicly expose this dispute, which was being kept confidential by the attorneys general of all of the states that signed the settlement.

  • Jim Barrett

    While Vermont rakes in millions in taxes each year on the sale of tobacco products that they claim kills people and on the other hand chastises everyone who would dare to smoke. There is already a black market in smoke sales because this state wants to bury you with taxes (EXCUSES) .

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