November 12, 2003
Members will hear testimony regarding how the 46 states that were parties to the 1998 Master Settlement Agreement (MSA) with the nation’s four largest tobacco companies are allocating their settlement revenues since the signing of the MSA. Chairman McCain will preside. Following is a tentative witness list (not necessarily in order of appearance):
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The Honorable Mike Moore
Good Morning Chairman McCain and Members of the Senate Commerce Committee. It is my pleasure to again appear before you and address the important public health issues concerning the historic tobacco settlement. I remember very well the days, weeks, months, and years put into the historic battle with the tobacco companies. I remember the legal battles, the political battles, and the legislative battles. Mississippi filed the first case against the Tobacco Industry in May of 1994. We claimed the tobacco companies were killing 430,000 people a year, attracting 3,000 new teenage smokers every day by their marketing and advertising, and costing our state millions of dollars a year in the medical treatment for those indigent citizens in our health care programs. The industry responded that the use of their product did not cause death and disease, that nicotine was not an addictive drug and they certainly didn’t advertise and market to children. They were proven wrong on all counts. In June of 1997 a historic settlement was announced among all the states Attorneys General and the Tobacco Industry. That settlement provided Food and Drug Administration (FDA) regulation over nicotine, $368 billion for the states and various federal programs, major marketing and advertisement restrictions and much more. This Committee with the leadership of Senator McCain brought forward the settlement in legislation, held hearings, added many refinements and strengthened the original settlement. Unfortunately, that fell a few votes short of the requisite 60 votes needed to pass the Senate. In the interim between June of 1997 and June of 1998 the landscaped had changed. Mississippi, Florida, Texas, and Minnesota settled their cases, taking away some of the toughest cases against the industry. Some of the states had legal setbacks, FDA regulation looked shaky and thus leverage had shifted. In November of 1998 a settlement of $206 billion that included some of the advertising and marketing provisions of the original settlement was announced by the remaining 46 states. Known as the Master Settlement Agreement (MSA) this settlement did not require any Congressional approval and settlement dollars began to flow to all the states in the next year. A huge public health victory– we had what we needed to immediately impact the number one cause of death in this country. Since the Tobacco Settlements I have been in 44 states giving a speech called “spend the money on what the fight was about.” I have discovered that some governors and state legislators must believe that the tobacco settlement dollars fell out of heaven . . . that the dollars have no connection to the public health lawsuit that we brought. The money is being spent on one-time budget deficits, college scholarships, tobacco warehouses, roads, anything but prevention, cessation, and improving public health of this country. If tobacco really kills 430,000 people a year in America– If tobacco related disease really is the number-one cause of preventable death in America– then why is it we get $246 billion to do something about the problem and only a few states are using the money at a substantial level to make a difference. Comprehensive tobacco prevention programs work. They have worked everywhere they have been implemented. The only place they don’t work is where they have not been tried. In Mississippi, one of the poorest states in this country, we take all the money from our tobacco settlement and place it by law in our Health Care Trust Fund. These dollars can only be spent on public health matters. We spend $20 million a year on a prevention/cessation program call the Partnership for a Healthy Mississippi. It is truly a successful comprehensive program. In the first few years we have reduced the number of public high school students smoking by more than 20% and middle school students smoking by almost 50%. That means that there are 28,000 fewer kids smoking in Mississippi since the start of the program. We have dramatically reduced adult smoking by 20% and changed attitudes across our state about the importance of clean indoor air increasing the number of smoke-free homes by 63% since 2000– that means 406,000 people are no longer exposed to second-hand smoke in their homes. I have heard all the arguments by those states that have chosen not to live up to the purposes of the tobacco fight. 1. That the settlement documents don’t say we have to spend the money on tobacco prevention and cessation. To them I say the preamble of the settlement provides ample language that public health improvements, protection of our children, and the reduction of death and disease from tobacco form the basis of the agreement. When did doing the right and moral thing have to be spelled out? These same public officials promised Congress in 1999 that if Congress would prevent the Department of Health Human Services from requiring the states to reimburse the federal government the federal percentage of Medicaid from the tobacco settlement dollars they would spend appropriate amounts on tobacco prevention and cessation. Governors and legislators all over the country rallied and lobbied to keep Secretary Donna Shalala from seizing the federal share, promising they would do the right thing– I was there, I heard it, they said ‘trust us’. Congress agreed, passed the appropriate legislation and most of the states have not lived up to word. 2. I also hear ‘we have a budget problem– a hug deficit, so we need this money to fill the hole.’ This short-term thinking makes little sense when compared with the dollars saved by a long term investment in reducing deaths and disease from tobacco use and preventing our children from starting. We have had the capability to reduce the deaths, disease and the billions spent in health care costs by half. This public health campaign should have begun in every state in American in 1999 but unfortunately it has not. I congratulate all those states like Maine who just announced dramatic reductions in youth smoking this month. Florida, Massachusetts, and California all had great results but have now been cut back. I know we can do better. The Attorneys General of this country fought long and hard to achieve this important public health victory, I hope that this committee will take action to make sure that this victory does not turn into another defeat by Big Tobacco.
Mr. Raymond C. Scheppach
Chairman McCain, Senator Hollings, and members of the committee, my name is Ray Scheppach and I’m the Executive Director of the National Governors Association. Thank you for the opportunity to represent the nation’s Governors before this committee today. The tobacco Master Settlement Agreement (MSA) was reached on behalf of the Attorneys General of forty-six states, five commonwealths and territories, and the District of Columbia on November 23, 1998. That agreement, worth $206 billion over a 25-year period, is actually worth $246 billion when combined with previous settlements on behalf of Florida, Minnesota, Mississippi, and Texas. The MSA Contains Many Important Provisions to Discourage Smoking Two major programs in the settlement are dedicated to reducing teen smoking and educating the public about tobacco-related diseases. A total of $250 million was used to fund the creation of the American Legacy Foundation, a national charitable organization, to support the study of programs to reduce teen smoking and substance abuse as well as prevent diseases associated with tobacco use. An additional $1.45 billion was utilized to create a National Public Education Fund to counter youth tobacco use and educate consumers about tobacco-related diseases. In addition, the price of tobacco has increased. Immediately after the MSA, the price of tobacco products jumped by 40 to 50 cents per pack. Additional price increases have occurred as companies attempt to maintain profit margins and make settlement payments. These price increases will substantially reduce smoking over time. The settlement agreement also has a significant number of restrictions on advertising and promotion. The settlement prohibits targeting youth in tobacco advertising, including a ban on the use of cartoon or other advertising images that may appeal to children. The settlement also prohibits all outdoor tobacco advertising, tobacco product placement in entertainment or sporting events, and the distribution and sale of apparel and merchandise with tobacco company logos. Further, the settlement places restrictions on industry lobbying against local, state, and federal laws. These restrictions on tobacco companies’ ability to market their products to children and young adults will eventually have a major impact on smoking. The MSA Did Not Require Set-Asides There is a fundamental difference between the settlement we reached and the proposals being promoted in the late 1990s involving federal legislation. For that reason, Congress acted wisely in 1999 in declaring that decisions about the MSA funds should be made at the state and local level. In the original lawsuits, states filed complaints that included a variety of claims, such as consumer protection, racketeering, antitrust, disgorgement of profits, and civil penalties for violations of state laws. Medicaid was not mentioned at all in a number of cases and was only one of a number of issues in many others. Further, the state-by-state allotments were determined, not based on Medicaid expenditures, but on an overall picture of health care costs in a given state. It is important to note that, ultimately, the master settlement agreement bore no direct relationship to any particular state lawsuit. The master settlement agreement represents a global settlement approach that encompassed states who sued for Medicaid, states that had Medicaid claims thrown out of court, and other states that simply did not sue at all. The attorneys general were attempting to obtain a fair monetary recovery for all states considering the variety of claims and requests for relief and the common goals of the multistate settlement process. The federal government was invited to participate in the state lawsuits, but declined. Therefore, states were forced to bear all of the risk initiating the suits and the entire fiscal burden of carrying forth the unprecedented lawsuits against a well-financed industry that had never lost such a case before. It was not until after state victory was ensured that the federal government began to pay renewed attention to state activities. Simply put, the master settlement agreement negotiated between the Attorneys General and the tobacco companies is separate and distinct from the agreement that was proposed in the 105th Congress. That proposal would have represented almost 50 percent more money, $368 billion compared to the current settlement of $246 billion. That agreement was much more comprehensive, representing both state and federal costs and requiring congressional approval. In the context of the negotiations over the $368 billion amount, the federal government may have had a legitimate claim to a share of the settlement, but the proposal’s inability to garner enough votes for passage in Congress fundamentally changed the debate. Without passage of supporting legislation, states were forced to proceed with their own lawsuits and negotiate settlements based on nonfederal claims. Congress Acted Definitively to Give States Spending Authority On May 21, 1999, President Clinton signed into law a measure (P.L. 106-31) recognizing that decisions about how to spend the tobacco settlement dollars were most appropriately made at the state level, where Governors and legislators could be the most responsive to the unique needs and circumstances of their citizens. Championed by a large bipartisan group of Senators led by Sen. Kay Bailey Hutchison (R-Tex.) and Sen. Bob Graham (D-Fla.), the provision was successfully added to the FY 1999 Emergency Supplemental Appropriations bill. State Spending Over the 2000 to 2003 period, states have received $37.5 billion from the Master Settlement Agreement. Over this period there has been substantial stability in the allocation of revenues. About 36 percent went to health services and long-term care. About four percent went to tobacco use prevention. Another 12 percent went to research, education, and services for children. Also, states allocated three percent to tobacco farmers for crop diversification efforts to reduce their states’ dependence on tobacco production. The remainder went to endowments, budget reserves, and other programs. The one area that witnessed a major change over the three year period was the percent allocated to endowments and budget reserves, which went from 29 percent in 2000 to 18 percent in 2003 and then two percent in 2004. This was caused by the worst state fiscal crisis since World War II. Regardless of this crisis, 37 states continued to spend funds on health services and about 33 maintained their commitment to tobacco use prevention. Throughout the last two years, due partly to the budget crisis as well as concerns regarding the bankruptcy of tobacco firms, 16 states have securitized their tobacco settlement revenues. The proceeds from this securitization were about $13 billion. Innovative Programs The tobacco settlement funds allowed states to develop a significant number of innovative programs in biotechnology and economic development, smoking cessation, early childhood, and preventive health care. This period of innovation and experimentation, which helped states develop “best practices”, will pay dividends for a long time. States are proud of the smoking cessation initiatives and other programs they’ve developed with the tobacco settlement funds. There are several innovative programs designed to prevent maternal smoking that are showing great promise. Smoking during pregnancy is currently responsible for 20 percent of all low-birth weight babies, 8 percent of preterm births, and 5 percent of all perinatal deaths. Several states have invested a portion of its tobacco settlement to target smoking cessation among pregnant women. These include both classes and one-on-one counseling on the dangers of smoking; effective protocols for breaking the smoking habit; statewide quit lines, and media campaigns aimed at women of childbearing age. Besides traditional cessation education and counseling, these services address a range of barriers to cessation, including weight gain, by providing support such as free enrollment in sports clubs. Other states have used portions of the settlement to develop unique approaches to enhance education opportunities for low-income and disadvantaged students; strengthening foster care and child welfare initiatives; and expanding options for early childhood development and Healthy Start programs. Many states have used tobacco settlement funds to make critical investments in pharmaceutical assistance programs for seniors and home and community-based care programs for people with disabilities. As many as 16 states have invested funds in biomedical research or research on cancer and other tobacco-related illnesses. The dividends that these investments pay will benefit all the other states as well. Finally, the largest investment has been in traditional health care. States have invested billions in funds for indigent care programs, primary care, increasing insurance coverage for the working poor, for hospital charity care, community health centers as well as Medicaid and the State Children’s Health Insurance Program (S-CHIP). Fiscal Condition of the States The most important issue facing the states today is the dismal fiscal situation. States are enduring the worst fiscal stress since World War II, and although the national economy is beginning to recover, state revenue growth has not responded, and historically has lagged federal recoveries by upwards of 18 months. In fact, the current state crises are likely to endure well into fiscal year 2005. These fiscal conditions are driven by two major factors, sagging revenues and exploding Medicaid costs. States have responded sensibly to these difficult conditions. Although the need for services has increased rapidly, state spending has only increased by 1.6 percent over the last two years, and our estimates for 2004 are that state spending will actually decrease by 2-3 percent. State spending will have been essentially flat for three years. On the spending side, the program that has been responsible for the deteriorating fiscal condition is Medicaid, the state-federal health care entitlement for the poor, the elderly, and the disabled. Now larger than Medicare in terms of total population, total expenditures, and annual growth rate, Medicaid has become the “Pac-Man” of state budgets, gobbling up every additional dollar of revenue. Medicaid’s growth rate has averaged 10 percent per year during the past two decades and now represents 21 percent of the average state budget, up from 12.5 percent in 1990. The major reason for Medicaid‘s continued growth is that it quietly serves to supplement the Medicare program for the many services Medicare beneficiaries can not obtain anywhere else. Medicaid pays for the prescription drugs and long-term care that Medicare does not cover, and subsidizes the significant cost-sharing burdens that Medicare places on its poorest beneficiaries. It is shocking to note that of Medicaid’s 50 million beneficiaries, the six million people eligible for both programs (the “dual eligibles”) account for 42 percent of Medicaid’s budget. Therefore, 42 percent of a $280 billion budget is being spent on people who are already receiving the FULL Medicare benefits package. State budgets simply cannot sustain this growing cost shift. The 2001-2004 state fiscal crisis has had major impacts on: · The allocation of funds from the Master Settlement Agreement; · The cost of tobacco products in the states; and · Total spending on health care. First, settlement dollars that originally were to be placed in rainy day funds or specific endowment funds were utilized to balance state budgets. Second, a larger number of states were forced to securitize part or all of their funds. Third, funds for tobacco prevention from the MSA were reduced. Fourth, a large number of states enacted significant increases in excise taxes on cigarettes which should have a huge impact on smoking cessation over the next 20 years. The proceeds from some of these taxes went into other endowment funds that are being used for smoking cessation. Finally, with Medicaid spending growing at 10 percent per year all states enacted changes to moderate the growth in Medicaid. Tobacco Prevention and Control is Important to the States The federal and state governments have always had the responsibility of ensuring and protecting the public health of its citizens. Smoking, as the leading cause of preventable death and disease, results in $150 billion in direct and indirect medical costs per year. In 2001, 22.8 percent of the population were reported to be smokers, a reduction from 25 percent reported in 1993. Progress continues to be made in meeting national goals related to reduction in the percentage of the population who smoke. States are leaders in these efforts – through direct program efforts and changes to public policy. · Twenty states increased funding in fiscal year 2003 for tobacco prevention. · Forty three states have laws restricting smoking in public places, 45 restrict smoking in government buildings, and 25 have laws restricting smoking in private work places. · Five states have comprehensive laws with statewide restrictions on indoor smoking in restaurants, bars, and other public places. · Between 1990 and 2000, cigarette sales fell 20 percent. Since January 2002, 28 states and the District of Columbia have implemented or enacted new cigarette tax increases. These increases are as high as $1.01 per pack in Connecticut and are more than 50 cents per pack in a dozen states. This raises the median tax rate to 58 cents per pack, an increase from 28 cents in July 2002. Conclusion The nation’s Governors feel strongly that the states are entitled to all of the funds awarded to them in the tobacco settlement agreement without federal restrictions. The master settlement agreement is fundamentally different from the earlier proposals considered by Congress. It is a global settlement of myriad claims. Given the long history of state expenditures for smoking related illnesses and the fiscal pressures facing states, the financial flexibility provided to states in the MSA is not only appropriate, but vitally necessary. The state fiscal crisis will continue, and without flexible use of MSA funds to target emerging priorities, states will be forced to cut education spending and make painful cuts in Medicaid expenditures for prescription drugs and long-term care as well as other public health and health promotion activities. I thank you again for the opportunity to appear before the committee, and I would be happy to answer any questions you may have.
Dr. Cheryl Healton
Chairman McCain, Senator Hollings, and other distinguished Members of the Committee, I deeply appreciate this opportunity to testify on behalf of the American Legacy Foundation. Our mission is to build a world where young people reject tobacco and anyone can quit. We are the national foundation borne of the Master Settlement Agreement (MSA) and funded through dollars directed to us by the states. Our Board of Directors includes among its members two representatives each designated by the National Association of Attorneys General, the National Governors Association, and the National Conference of State Legislatures. I am thus especially pleased to serve on a panel with representatives from those organizations. Governor Napolitano of Arizona currently serves as one of the NGA representatives on our Board and she sends her special greetings to you Chairman McCain. Chairman McCain and Members of the Committee, let me say at the outset that Legacy is prohibited from lobbying pursuant to the terms of the MSA. Today, we are here not to lobby, but rather to assist the committee in its oversight responsibilities, by sharing our insights and experiences regarding the use of MSA funds. Because of the unique circumstances of our birth, the American Legacy Foundation is a creature of the states. Therefore, we feel well qualified to share our views regarding the significant progress that has been made at the state level as a result of the MSA. And, we are equally qualified to point out where states have fallen short -- despite the infusion of funds by the MSA -- because of competing fiscal priorities. The Centers for Disease Control (CDC) issued their Best Practices for Comprehensive Tobacco Control Programs guidelines in August of 1999, with a call to action on the percentage of funds that should be spent by each state for tobacco control programs. These recommendations became an important benchmark for the public health community. In 2003, the states will spend only 8% of the total tobacco settlement revenues they are expected to receive this year. That translates to just $682 million dollars that are committed to tobacco control programs of $8.7 billion total. Most states have failed to meet the minimum recommendations set forth by the CDC to promote tobacco prevention programs, let alone the ideal funding level which could aggressively address the epidemic of tobacco-related death and disability. Every day in America, 1,200 lives are lost to tobacco-related disease. On that same day, 4,400 young people under the age of 18 take their first puff of a cigarette, steering many of them down the road to a lifetime of tobacco addiction. Because lives are at stake, advocates from the tobacco control, medical and public health communities in the states are understandably disappointed that so few of the MSA dollars have been devoted to tobacco control programs. And the alarming trend shows no sign of abatement. Compounding the problem, some of the most effective state programs have already been lost or critically wounded, including California, Massachusetts, Oregon and Florida. Many feel strongly that the States have squandered an unprecedented opportunity to save lives and have argued that decisions to direct all – or virtually all - MSA dollars to other programs are especially short sighted in economic terms since smoking cessation dramatically reduces the enormous sums needed to treat sick and dying smokers in the long term and greatly curtails productivity losses. The tobacco epidemic costs the U.S. 158 billion dollars a year. Perhaps because of our board structure, Legacy is uniquely sensitive to the Solomon-like choices that often must be made by states that are facing unprecedented budget deficits and escalating demands for resources. However, we must nonetheless add our voice to the public health chorus that would remind States of the long term consequences of today’s decision to rob Peter to pay Paul – including millions of lives needlessly lost and billions of dollars spent on preventable death and disease. Because only a small portion of the original sums disbursed to the States via the MSA have been spent by the states to prevent or reduce tobacco use, Legacy has become a de facto safety net at the national level to fill many of these gaps. It is a role that will be increasingly difficult for Legacy to fulfill. Notably, at a time when state programs are disappearing, Legacy is facing its own funding cliff as a result of what was in essence a “sunset provision” in the MSA. That cliff is shown on the chart here. Specifically, Legacy was only guaranteed major payments from the states via the participating manufacturers for the first five years. Thereafter, payments would be made to Legacy only if the participating manufacturers controlled 99.05% market share of tobacco sales nationally. Because of the number of small companies not participating in the MSA, the 99.05 threshold was never met – although there were strong incentives built in to join the agreement. Last April, Legacy received what it believes will be its last major payment pursuant to the MSA. The sun is setting at a time when the industry is spending more than ever before on its marketing and advertising campaigns. In 2001 alone, the tobacco industry spent a record $11.2 billion dollars marketing their products – up by 5 billion dollars since the MSA was signed. Although Legacy does its share of counter marketing through the truthÒ campaign and other programs, the industry routinely outspends us by 200 to 1. So far, Legacy – along with others --has been able to hold its ground in this David vs. Goliath battle. But the threat of litigation haunts any successful tobacco-control advertising campaign – as you have witnessed in the State of California - and as the American Legacy Foundation currently finds itself engaged in the State of Delaware. Simply put, our foundation is working to save lives and the tobacco companies are in business to sell cigarettes. Effective efforts to reduce smoking that significantly decrease industry marketshare, have been met with long-term litigation that serves to distract us from our mission, rob us of limited resources and if successful, can ultimately silence our work and close our doors. Smoking is at its lowest level in 28 years. The American Legacy Foundation is proud of this achievement by the community as a whole, including the states. We are also proud of the role Legacy has played in securing this success through our programs, such as truth® our award-winning youth counter marketing campaign that has been cited as one of the reasons for the sharp declines in youth tobacco use. We are also proud of “Great Start,” our innovative cessation program for pregnant women, which was the brainchild of the former First Lady of Utah, Jackie Leavitt. The program worked with 20 First Ladies to spread the word to women about the benefits of quitting before and during pregnancy and staying smoke free. “Circle of Friends” is another signature foundation campaign designed to provide social support for women smokers, 70% of who want to quit but need strong social support to be successful in the long-term. I am wearing a Circle of Friends pin today, which symbolizes my support for the over 20 million women who are struggling to quit smoking. Mr. Chairman, on the anniversary of the MSA, we are at a crossroads. The encouraging trends in the number of people who have quit smoking and the number of youth who never start could end tomorrow. But they don’t have to end. The MSA still has decades left to achieve the vision of a smoke free society – and the American Legacy Foundation is committed to staying the course, to help shape a society where all young people reject tobacco and anyone can quit. The past five years have taught us a great deal about what works in the effort to get the truth about tobacco to the American people – especially our youth. We’ve also learned that it takes a partnership between states, federal agencies, and private organizations such as Legacy to address the nationwide tobacco epidemic. We are working aggressively to forge partnerships with our colleagues in tobacco-control and public health as well as states, national organizations and corporate America, who share in our conviction that working together, we can eliminate tobacco addiction and achieve healthier and longer lives for all Americans. But, these partnerships require the states to remain committed to the spirit of the MSA and require all of us to remain actively engaged. I’d like to end my testimony by issuing four challenges to the Committee and a pledge from Legacy: 1) We must re-enforce and renew our commitment as a nation, and in the individual states, to youth tobacco prevention. The American Legacy Foundation pledges to partner with the states in funding programs like truth®. Already, Legacy has spent over $3 million – with a commitment to spend $6 million - of our own foundation funds on cooperative agreements with 15 states from coast to coast, like Alaska, Arkansas, Indiana, Kentucky, New Mexico, New York and Wisconsin, to leverage state dollars with Legacy funds to provide sustainable state-led efforts. 2) We must turn our attention to the 47 million Americans who are smokers, most of whom want to quit, and the 177 million remaining Americans who need to help them quit. Over the course of the coming years, the American Legacy Foundation is committed to leading a consortium of partners in raising 100 million dollars - about $2 per smoker - to assist the states and our nation in motivating and assisting smokers to quit. 3) We must encourage new and expanded public/private partnerships between business, unions, communities, states and the federal government that will help us expand the life-saving benefits of prevention programs and smoke- free workplaces throughout the country. Legacy proudly salutes those private sector partners that have already joined us including Avon, QVC, Novartis, the Blue Cross Blue Shield Association, the Entertainment Industry Foundation and others. We need more businesses, associations and organizations to join us in these efforts. 4) Finally, Legacy urges this committee and the United States Congress to continue your oversight responsibilities, tracking the progress of the MSA and encouraging the federal government to find appropriate avenues to become a more direct partner in tobacco prevention programs at the national level. Here, as well, Legacy pledges our support and full partnership with you. We are putting our faith in the proven power of partnership to help us achieve the promise of a smoke-free future. Legacy’s role as a crucial funding and strategic counter-weight against the tobacco industry will continue, and I pledge to this committee that our efforts to partner with those states and organizations who are genuinely committed to the moral contract they made in the MSA will be redoubled in the months and years ahead. Mr. Chairman, smoking is the number one killer in America today and all of these deaths are completely preventable. The American Legacy Foundation offers our resources, depth of knowledge and fierce determination to help states, and the nation as a whole, meet these challenges. We commend you for holding today’s important oversight hearing and thank you for including The American Legacy Foundation’s on the panel.
Mr. Matthew Myers
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The Honorable Deborah Hudson
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