United States Government Accountability Office

GAO Testimony 

Before the Committee on Health, 

Education, Labor, and Pensions, 

U.S. Senate

TOBACCO SETTLEMENT

States’ Allocations of 

Payments from Tobacco 

Companies for Fiscal Years 

2000 through 2005 

Statement of Lisa Shames, Acting Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 9:30 a.m. EST 

Tuesday, February 27, 2007 

 

GAO-07-534T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 27, 2007

TOBACCO SETTLEMENT 

States’ Allocations of Payments from 

Tobacco Companies for Fiscal Years 

2000 through 2005 

Highlights of GAO-07-534T, a testimony 

before the Committee on Health,

Education, Labor, and Pensions, U.S. 

Senate 

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. 

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. 

Categories to Which States Allocated Their Tobacco Settlement Payments 

And Securitized Proceeds (Fiscal Years 2000-2005)

www.gao.gov/cgi-bin/getrpt?GAO-07-534T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Lisa Shames at 

(202) 512-3841 or ShamesL@gao.gov. 
Mr. Chairman and Members of the Committee: 

I am pleased to be here today to contribute to your deliberation on the 

need for the Food and Drug Administration to regulate tobacco products. 

Tobacco use is the leading cause of preventable death in the United States. 

Most adults who use tobacco started using it between the ages of 10 and 

18. A Surgeon General’s report to the Congress concluded that preventing

youth from starting to use tobacco is key to reducing tobacco-related 

deaths and disease. The Centers for Disease Control and Prevention 

reported a few years ago that, on average, more than 440,000 deaths and 

$76 billion in medical expenditures are attributable to cigarette smoking 

annually. Reducing tobacco-related deaths and the incidence of disease, 

along with their associated costs, is a significant public health challenge.

Beginning in the mid-1990s, states sued the major tobacco companies for 

reimbursement of the cost of health impairments caused by the public’s 

use of tobacco. The states alleged that the industry had violated antitrust 

and consumer protection laws, withheld information about the adverse 

health effects of tobacco, manipulated nicotine levels to keep smokers 

addicted, and conspired to keep less risky and less addictive tobacco 

products out of the market. Forty six states,1

 along with the District of 

Columbia and the five U.S. territories, negotiated and signed a settlement 

agreement, called the Master Settlement Agreement, with four of the 

largest tobacco companies—Phillip Morris, USA; R.J. Reynolds Tobacco 

Company; Brown & Williamson Tobacco Corporation; and Lorillard 

Tobacco company. The settlement was the largest civil settlement in U.S. 

history. It committed the tobacco companies to pay the 46 states an 

estimated $200 billion2

 over the first 25 years of the agreement, with 

payments to continue in perpetuity. In addition, it restricted the tobacco 

companies’ marketing and advertising practices, among other things. 

Today, I will focus on how the 46 states party to the Master Settlement 

Agreement have allocated their settlement payments. Specifically, I will 

discuss (1) the amounts of Master Settlement Agreement payments that 

the states received from fiscal years 2000 through 2005, the most recent 

 1

The four states that are not party to the Master Settlement Agreement—Florida, 

Minnesota, Mississippi, and Texas—reached earlier, individual settlements with the 

tobacco companies. 

2

This original estimate does not take into account adjustments in tobacco companies’ 

payments that have and will occur.

Page 1 GAO-07-534T 
year for which we have actual data, and (2) the states’ allocations of these 

payments. The Farm Security and Rural Investment Act of 2002 (the 2002 

Farm Bill) required GAO to report annually, from fiscal years 2002 through 

2006, on how these 46 states used their Master Settlement Agreement 

payments.3

 My testimony is based primarily on these annual reports. 

Our reports were based on our yearly surveys of the 46 states. Each year 

we asked the states to report (1) the amount of payments they received for 

the current state fiscal year, (2) the amount of payments they expected to 

receive for the next state fiscal year, and (3) their allocations of these 

payments among 13 spending categories. We independently corroborated 

the states’ data to the extent possible by analyzing budget-related and

legislative documents, and interviewing state budget officials, staff from 

state attorneys generals’ offices and governors’ offices and others as 

needed to clarify information. We performed our work in accordance with 

generally accepted government auditing standards. 

In summary, from fiscal year 2000 through fiscal year 2005, the states 

received $52.6 billion in Master Settlement Agreement payments from the 

tobacco companies in amounts that varied from state to state and from 

year to year. Of the $52.6 billion, about $36.5 billion were payments from

the tobacco companies and about $16 billion were advance payments 

(securitized proceeds) that 15 states arranged to receive by issuing bonds 

backed by their future payments from the tobacco companies. The annual 

payments from the tobacco companies’ are adjusted based on several 

factors that include fluctuations in the volume of cigarettes sales, inflation,

and other variables, such as the participating companies’ shares of the 

tobacco market. Also, each state’s share of the tobacco companies’ annual

payments is a fixed percentage based on smoking-related health care 

costs, which reflect population and smoking prevalence. 

The Master Settlement Agreement imposed no restrictions on how states 

could spend these settlement payments and, as such, the states have 

 3

GAO, Tobacco Settlement: States’ Allocations of Phase II Funds, GAO-03-262R 

(Washington, D.C.: Dec. 3, 2002); GAO, Tobacco Settlement: States’ Allocations of Fiscal 

Years 2002 and 2003 Master Settlement Agreement Payments, GAO-03-407 (Washington,

D.C.: Feb. 28, 2003); GAO, Tobacco Settlement: States’ Allocations of Fiscal Year 2003 and

Expected Fiscal Year 2004 Payments, GAO-04-518 (Washington, D.C.: Mar. 19, 2004); GAO,

Tobacco Settlement: States’ Allocations of Fiscal Year 2004 and Expected Fiscal Year

2005 Payments, GAO-05-312 (Washington, D.C.: Mar. 21, 2005); and GAO, Tobacco 

Settlement: States’ Allocations of Fiscal Year 2005 and Expected Fiscal Year 2006 

Payments, GAO-06-502 (Washington, D.C.: April 11, 2006). 

Page 2 GAO-07-534T 
allocated their payments 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—30 percent or

$16.8 billion—toward health care activities such as Medicaid, health 

insurance, hospitals, medical technology, and research. States allocated 

the second largest portion of their payments—about 23 percent or $12.8 

billion—to help balance state budgets or reduce deficits that resulted from 

lower than anticipated revenues, increased mandatory spending, or 

essential expenditures. 

In descending order, the next largest categories where states used their 

tobacco settlement payments were general purposes, infrastructure 

projects, education, debt service on securitized funds, and tobacco 

control. 

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. 

States’ Annual 

Tobacco Settlement 

Payments Have Varied 

Table 1: Master Settlement Agreement Payments and Securitized Proceeds 

Received by the 46 States (Fiscal Years 2000-2005) 

Fiscal year Payments Securitized proceeds Total

2000-2001 $13,200,000,000 $928,900,000 $14,128,900,000

2002 6,238,393,496 3,838,376,465 10,076,769,961

2003 6,306,329,459 6,482,764,469 12,789,093,928

2004 5,340,128,223 4,374,698,723 9,714,826,946

2005 5,453,132,303 389,977,667 5,843,109,970

Total $36,537,983,481 $16,014,717,324 $52,552,700,805

Sources: GAO-01-851, GAO-03-407, GAO-04-518, GAO-05-312, GAO-06-502, state budget offices or their designees, and GAO

analysis. 

Note: This table does not include payments to cities and counties in California and New York. 

The tobacco companies’ annual payments are adjusted based on several 

factors contained in the Master Settlement Agreement that include 

fluctuations in the volume of cigarette sales, inflation, and other variables,

such as the participating companies’ share of the tobacco market. 

Declining tobacco consumption alone would result in lower Master 

Page 3 GAO-07-534T 
Settlement Agreement payments than originally expected. Tobacco 

consumption has declined since the Master Settlement Agreement was 

signed in 1998—by about 6.5 percent in 1999 alone—mostly due to onetime increases in cigarette prices by the tobacco companies after the 

agreement took effect. Analysts project that, in the future, tobacco 

consumption will decline by an average of nearly 2 percent per year.4

 As a 

result, tobacco consumption is estimated to decline by 33 percent between 

1999 and 2020. 

However, the Master Settlement Agreement also includes an inflation 

adjustment factor that some analysts have estimated increases payments 

more than any decreases caused by reduced consumption. The inflation 

adjustment equals the actual percentage increase in the Consumer Price 

Index for the preceding year or 3 percent, whichever is greater. The effect 

of these compounding increases is potentially significant, especially given 

that the payments are made in perpetuity. Assuming a 3-percent inflation 

adjustment and no decline in base payments, settlement amounts received 

by states would double every 24 years. 

Also, several tobacco companies’ interpretation of the provision that 

addresses participants’ market share led them to lower their payments in 

2006. Under this provision, an independent auditor determined that 

participating tobacco companies lost a portion of their market share to 

non-participating companies. An economic research firm determined that 

the Master Settlement Agreement was a significant factor in these market 

share losses. Based on these findings, several participating companies 

reduced their fiscal year 2006 payments by about a total of about $800 

million. Many states have filed suit to recover these funds. 

Each state’s share of the tobacco companies’ total annual payments is a 

fixed percentage that was negotiated during the settlement. These 

percentages are based on two variables related to each state’s smokingrelated health care costs, which reflect each state’s population and 

smoking prevalence. In general, the most populous states receive a larger

share of the tobacco companies’ total annual payments than the less 

populous states. For example, California and New York each receive about 

13 percent, while Alaska and Wyoming each receive less than 1 percent. 

However, these percentages are not strictly proportional to population. 

 4

Cigarette consumption peaked in 1981 and has been declining since. 

Page 4 GAO-07-534T 
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. The base amount of each year’s Strategic 

Contribution Fund payment is $861 million, which will be adjusted for 

volume and inflation and shared among the states. Strategic Contribution 

Fund payments are intended to reflect the level of the contribution each

state made toward final resolution of their lawsuit against the tobacco 

companies. They will be allocated to the states based on a separate 

formula developed by a panel of former state attorneys general. 

The Master Settlement Agreement imposed no restrictions on how states 

could spend their settlement payments and, as such, the states have 

allocated their payments5

 to a wide variety of activities, with health-related

activities the largest among them. As part of their decision making on how

to spend their payments, some states established planning commissions 

and working groups to develop recommendations and strategic plans for 

allocating their states’ payments. In six states, voter-approved initiatives 

restricted use of the funds and, in 30 states, the legislatures enacted laws 

restricting their use. 

States Are Exercising 

Their Flexibility to 

Use Tobacco 

Settlement Payments 

for a Wide Variety of 

Activities 

Overall, we identified 13 general categories to which states have allocated

their Master Settlement Agreement payments, as shown in table 2.

Appendix I provides more details on the categories to which states 

allocated their payments. 

 5

When states allocate payments, they may include carry-over funds from prior years and

interest earned; therefore, in any one year, states’ payments and securitized proceeds may

not equal payments allocated for spending. 

Page 5 GAO-07-534T 
Table 2: Amount and Percentage of States’ Allocations of Master Settlement 

Agreement Payments and Securitized Proceeds by Category, Fiscal Years 2000-

2005 

Dollars in millions and percent 

Category Dollars Percent

Health $16,807 30.0

Budget shortfalls 12,806 22.9

Unallocated 6,639 11.9

General purposes 3,955 7.1

Infrastructure 3,350 6.0

Education 3,078 5.5

Debt service on securitized funds 3,005 5.4

Tobacco control 1,943 3.5

Economic development for tobacco regions 1,490 2.7

Social services 961 1.7

Reserves/rainy day funds 810 1.4

Tax reductions 616 1.1

Payments to tobacco growers 521 0.9

Total $55,981 100.1

Source: GAO analysis of data from state budget offices and their designees. 

Note: Percentages do not total to 100 due to rounding. Also, states’ allocations do not match the 

payment amounts on an annual basis because states have carried over funds from one year to the 

next and earned interest on their payments. 

States allocated the largest portion of their payments—about $16.8 billion,

or 30 percent of the total payments—to health-related activities. To a 

closely related category—tobacco control—states allocated $1.9 billion, or 

3.5 percent of their total payments. 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. Figure 1 illustrates the 

relative magnitude of the categories receiving allocations. 

Page 6 GAO-07-534T 
Figure 1: States’ Allocations of Master Settlement Agreement Payments and

Securitized Proceeds by Category, as a Percent of Total Allocations, Fiscal Years 

2000-2005 

Source: GAO analysis of data from state budget offices and their designees.

Unallocated (11.9%)

Budget shortfalls (22.9%)

Infrastructure (6.0%)

Debt service on securitized funds (5.4%)

Education (5.5%)

General purposes (7.1%)

Health (30.0%)

Othera (7.8%)

Tobacco control (3.5%)

Note: Percentages do not total to 100 due to rounding. 

a

The “other” category includes economic development for tobacco regions, social services, 

reserves/rainy day funds, tax reductions, and payments to tobacco growers. 

The seven largest categories of allocations, in descending order, are 

health, budget shortfalls, general purposes, infrastructure, education, debt

service on securitized funds, and tobacco control. States’ allocations to 

these categories have varied considerably from year to year—with some 

categories showing wide fluctuations. For example, for budget shortfalls, 

the states allocated from 2 to 44 percent of the total payments. On the 

other hand, for health care, the states allocated from 20 to 38 percent of 

the total payments. Figure 2 shows these annual changes for these seven 

categories. 

Page 7 GAO-07-534T 
Figure 2: States’ Allocations of Combined Master Settlement Agreement Payments and Securitized Proceeds to Seven

Categories, Fiscal Years 2000 through 2005; and Expected Allocations for Fiscal Year 2006 

Percentage

20

36

4

44

2 2

7

9

4

2

5 6 5 6

8 7

38 37

24

32 32

20

2

24

9

29

13 13

2

10

7 7

5

1

6

3 2 2

5 5

0

5

10

15

20

25

30

35

40

45

2006 (expected)

2005

2004

2003

2002

2000-01

Debt service Tobacco control

on securitized

funds

Health Budget shortfalls General purposes Infrastructure Education

Fiscal year

Source: GAO-06-502 and GAO analysis of data from state budget offices and their designees.

a a

a

We did not obtain data for budget shortfalls and debt service on securitized funds for fiscal years 

2000-01. 

Information about how states have allocated their Master Settlement 

Agreement payments follows. 

Health. 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. Over this period, the amounts states allocated to health care 

ranged from about $1.9 billion in fiscal year 2005 to nearly $4.8 billion in 

fiscal years 2000-2001 combined. 

Page 8 GAO-07-534T 
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. Of the 36 states, 5 states allocated 

two-thirds or more of their payments to health care; 19 states allocated 

one-third to two-thirds; and 12 states allocated less than one-third. Ten 

states did not allocate any of their payments to health care activities. In 

fiscal year 2005, Pennsylvania, Illinois, Michigan, and Maryland allocated 

larger amounts to health care than the other states. Pennsylvania allocated 

over $326 million of its payments to health care programs for adult health

insurance, uncompensated care, medical assistance for workers with 

disabilities, and community medical assistance. Illinois allocated nearly 

$204 million of its payments to health care, citing Medicaid drugs as a key 

program that would receive funds. Michigan allocated over $185 million of

its payments to areas such as elder pharmaceutical assistance and 

Medicaid support programs. Maryland allocated nearly $100 million of its 

payments to areas such as Medicaid; cancer prevention, screening, and 

treatment; heart and lung disease; and drug addiction. 

Budget Shortfalls. From fiscal years 2000 through 2005, states allocated 

about $12.8 billion of their Master Settlement Agreement payments to 

budget shortfalls. Over this period, the amounts the states allocated to 

budget shortfalls ranged from a high of about $5.1 billion, or 44 percent of 

the total payments in fiscal year 2004, to $261 million, or 4 percent in fiscal

year 2005. In fiscal year 2005, only 4 of the 46 states allocated some of 

their Master Settlement Agreement payments to budget shortfalls. Of these 

states, only Missouri allocated more than one-third of its total payments––

about $72 million––to budget shortfalls. 

General Purposes. From fiscal years 2000 through 2005, states allocated 

about $4 billion of their Master Settlement Agreement payments to general 

purposes, including law enforcement, community development activities, 

technology development, emergency reserve funds, and legal expenses for 

enforcement of the Master Settlement Agreement. Over this period, the 

amounts states allocated to general purposes ranged from $623 million, or 

about 5 percent of the total payments they allocated in fiscal years 2000-

2001 combined, to about $1.1 billion, or 8 percent in fiscal year 2003. 

In fiscal year 2005, 27 of the 46 states allocated some of their Master 

Settlement Agreement payments to general purposes. Of these 27 states, 4 

states allocated two-thirds or more of their total payments to general 

purposes; 2 states allocated one-third to two-thirds; and 21 states allocated 

less than one-third. Nineteen states did not allocate any of their payments 

to general purposes. Massachusetts, Tennessee, Connecticut, and 

Page 9 GAO-07-534T 
Colorado allocated the largest amounts to general purposes in fiscal year 

2005. Massachusetts allocated nearly $255 million of its payments to 

general purposes for its General Fund, Tennessee allocated nearly $157 

million of its payments to its General Fund, and Connecticut allocated 

about $113 million of its payments to its General Fund. Colorado allocated 

about $64.5 million of its payments to general purposes, but did not 

specify which programs would receive funds. 

Infrastructure. From fiscal years 2000 through 2005, states allocated 

about $3.4 billion of their Master Settlement Agreement payments to 

infrastructure-related activities, including capital maintenance on state 

owned facilities, regional facility construction, and water projects. Over 

this period, the amounts states allocated to infrastructure have ranged

from $31 million, or about 1 percent of the total payments in fiscal year 

2005, to about $1.2 billion, or 10 percent in fiscal year 2002. 

In fiscal year 2005, 5 of the 46 states allocated some of their Master 

Settlement Agreement payments to infrastructure. Of these 5 states, North 

Dakota was the only state that allocated more than one-third of its total 

payments to infrastructure. North Dakota, Hawaii, and Kentucky allocated 

the largest amounts to infrastructure in fiscal year 2005. North Dakota 

allocated about $10.5 million of its payments to infrastructure for work on 

water projects. Hawaii allocated approximately $10 million of its payments 

to infrastructure, citing debt service on University of Hawaii revenue 

bonds issued for the new Health and Wellness Center as a primary 

program that would receive funds. Kentucky allocated $6.1 million of its 

payments to service debt on such things as water resource development 

and a Rural Development Bond Fund. 

Education. From fiscal years 2000 through 2005, states allocated about $3 

billion of their Master Settlement Agreement payments to education 

programs, including early childhood development; special education; 

scholarships; after-school services; and reading programs. Over this 

period, the amounts states allocated to education ranged from between 

$280 million or 2 percent of the total payments in fiscal year 2004, to over 

$1.1 billion, or 9 percent, in fiscal year 2002. 

In fiscal year 2005, 16 of the 46 states allocated some of the Master 

Settlement Agreement payments to education. Of the 16 states, only New 

Hampshire allocated more than two-thirds of its total payments to 

education; 4 states allocated between one-third and two-thirds to 

education; and 11 states allocated less than one-third. Thirty states did not 

allocate any of their payments to education-related activities. Michigan, 

Page 10 GAO-07-534T 
New Hampshire, Nevada, and Colorado allocated the largest amounts to 

education in fiscal year 2005. Michigan allocated over $99 million of its 

payments to education for Merit Award scholarships and tuition incentive

grants for higher education students; the Michigan Educational 

Assessment Program testing for K-12 students, nursing scholarships, the 

Michigan Education Savings Plan, and general higher education support. 

New Hampshire allocated $40 million of its payments to areas such as an 

Education Trust Fund, which distributes grants to school districts in the 

state. Nevada allocated about $33 million of its payments to education 

programs, citing a scholarship program for Nevada students attending 

Nevada’s higher education institutions as a key recipient. Colorado 

allocated over $16 million of its payments to education, including its Read 

to Achieve program. 

Debt Service on Securitized Funds. From fiscal years 2000 through 2005,

states allocated about $3 billion of their Master Settlement Agreement 

payments to servicing debt on securitized funds. This category consists of 

amounts allocated to servicing the debt issued when a state securitizes all

or a portion of its Master Settlement Agreement payments. Over this 

period, the amounts states allocated for this purpose have ranged from 

$271 million, or about 2 percent of the total payments in fiscal year 2002,

to about $1.4 billion, or about 24 percent, in fiscal year 2005. In fiscal year 

2005, four states—California, Rhode Island, South Carolina, and 

Wisconsin—allocated 100 percent of their Master Settlement Agreement 

payments to servicing debt on securitized funds, while New Jersey 

allocated just under 100 percent. In addition, Alaska, Louisiana, and South

Dakota, allocated more than half of their payments for this purpose. In 

fiscal year 2005, California and New York allocated the largest amounts to 

servicing debt on securitized funds. 

Tobacco Control. From fiscal years 2000 through 2005, states allocated 

about $1.9 billion of their Master Settlement Agreement payments to 

tobacco control programs, including prevention, cessation, and counter 

marketing. Over this period, the amounts states allocated to tobacco 

control ranged from $790 million, or about 6 percent of the total payments

in fiscal years 2000-2001 combined, to $223 million, or about 2 percent, in

fiscal year 2004. 

In fiscal year 2005, 34 of the 46 states allocated some of their Master 

Settlement Agreement payments to tobacco control programs. Of the 34 

states, Wyoming allocated more than one-third of its payments to tobacco 

control, while 33 states allocated less than one-third. Twelve states did not

allocate any of their payments to tobacco control-related programs. 

Page 11 GAO-07-534T 
Pennsylvania and Ohio allocated more than the other states to tobacco

control—about $44 million and $37 million, respectively—in fiscal year 

2005. 

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions that you or other Members of the Committee 

may have. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this statement. For further 

information about this testimony, please contact Lisa Shames, Acting 

Director, Natural Resources and Environment at (202) 512-3841 or 

ShamesL@gao.gov. Key contributors to this statement were Charles M. 

Adams, Bart Fischer, Jennifer Harman, Natalie Herzog, Alison O’Neill, and 

Beverly Peterson. 

Page 12 GAO-07-534T 
Page 13 GAO-07-534T 

Appendix I: Categories of States’ Allocations 

To standardize the information reported by the 46 states, we developed the 

following categories and definitions for the program areas to which states 

allocated their payments. 

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. 

Debt service on securitized funds: This category consists of amounts 

allocated to service the debt on bonds issued when the state securitized all 

or a portion of its Master Settlement Agreement payments. 

Economic development for tobacco regions: This category is comprised of 

amounts allocated for economic development projects in tobacco states 

such as infrastructure projects, education and job training programs, and 

research on alternative uses of tobacco and alternative crops. This 

category includes projects specifically designed to benefit tobacco 

growers as well as economic development that may serve a larger 

population within a tobacco state. 

Education: This category is comprised of amounts allocated for education 

programs such as day care, preschool, Head Start, early childhood 

education, elementary and secondary education, after-school programs, 

and higher education. This category does not include money for capital 

projects such as construction of school buildings. 

General purposes: This category is comprised of amounts allocated for 

attorneys’ fees and other items, such as law enforcement or community 

development, which could not be placed into a more precise category. 

This category also includes amounts allocated to a state’s general fund 

that were not earmarked for any particular purpose. Amounts used to 

balance state budgets and close gaps or reduce deficits should be 

categorized as budget shortfalls rather than general purposes. 

Health: This category is comprised of amounts allocated for direct health

care services; health insurance, including Medicaid and the State 

Children’s Health Insurance Program (SCHIP); hospitals; medical 

technology; public health services; and health research. This category does 

not include money for capital projects such as construction of health 

facilities. 
Infrastructure: This category is comprised of amounts allocated for 

capital projects such as construction and renovation of health care, 

education, and social services facilities; water and transportation projects; 

and municipal and state government buildings. This category includes 

retirement of debt owed on capital projects. 

Payments to tobacco growers: This category is comprised of amounts 

allocated for direct payments to tobacco growers, including subsidies and 

crop conversion programs. 

Reserves/rainy day funds: This category is comprised of amounts 

allocated to state budget reserves such as rainy day and budget 

stabilization funds not earmarked for specific programs. Amounts 

allocated to reserves that are earmarked for specific areas are categorized

under those areas—e.g., reserve amounts earmarked for economic 

development purposes should be categorized in the economic

development category. 

Social services: This category is comprised of amounts allocated for social 

services such as programs for the aging, assisted living, Meals on Wheels,

drug courts, child welfare, and foster care. This category also includes 

amounts allocated to special funds established for children’s programs. 

Tax reductions: This category is comprised of amounts allocated for tax 

reductions such as property tax rebates and earned income tax credits. 

Tobacco control: This category is comprised of amounts allocated for 

tobacco control programs such as prevention, including youth education,

enforcement, and cessation services.

Unallocated: This category is comprised of amounts not allocated for any 

specific purpose, such as amounts allocated to dedicated funds that have 

no specified purpose; amounts states chose not to allocate in the year 

Master Settlement Agreement payments were received that will be 

available for allocation in a subsequent fiscal year; interest earned from 

dedicated funds not yet allocated; and amounts that have not been 

allocated because the state had not made a decision on the use of the 

Master Settlement Agreement payments. 

Page 14 GAO-07-534T (360810) 
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