GAO

United States General Accounting Office

Report to the Honorable John McCain, 

Ranking Minority Member, Committee on 

Commerce, Science, and Transportation, 

U.S. Senate

June 2001 TOBACCO 

SETTLEMENT

States’ Use of Master 

Settlement Agreement 

Payments

GAO-01-851

Page 1 GAO-01-851 Tobacco Settlement

Contents

Letter 3

Appendixes Appendix I: Scope and Methodology 46

Appendix II: Allocation of MSA Payments in California 50

Appendix III: Allocation of MSA Payments in New York 52

Appendix IV: Master Settlement Agreement Payments 54

Appendix V: Strategic Contribution Fund Payments 56

Appendix VI: Phase II: The National Tobacco Grower 

Settlement Trust Agreement 58

Appendix VII: States’ Restrictions Against Supplantation 62

Appendix VIII: Sources of Information 68

Tables Table 1: MSA State Allocation Percentages 12

Table 2: MSA and Phase II Payments 15

Table 3: Original Estimated and Actual MSA Payments Received 

by States as of April 2001 17

Table 4: States’ Dedicated Funds and Allocation of MSA 

Payments in Fiscal Year 2001 24

Table 5: Percent Allocations of MSA Payments by Category, 

State Fiscal Years 2000 and 2001 27

Table 6: Percentage of MSA Payments Dedicated to Tobacco 

Control for State Fiscal Years 2000 and 2001 (excluding 

Missouri, Oregon, Pennsylvania, and Tennessee) 29

Table 7: Percentage of MSA Payments for Economic 

Development and Tobacco Growers in Ten Tobacco 

States for State Fiscal Years 2000 and 2001 35

Table 8: Original Estimated Payments through 2025 to 46 states, 

the District of Columbia, and 5 U.S. Territories 54

Table 9: Allocation Percentages for Phase II Payments 59

Table 10: Estimated Annual Payments to the National Tobacco 

Grower Settlement Trust 61

Figures Figure 1: State Allocations of MSA Payments (State Fiscal 

Years 2000 and 2001) 7
Contents

Page 2 GAO-01-851 Tobacco Settlement

Abbreviations

AHCCCS Arizona Health Care Cost Containment System

CDC Centers for Disease Control and Prevention

CPI Consumer Price Index

HCRA 2000 Health Care Reform Act

KEY Kansas Endowment for Youth

MOU memorandum of understanding

MSA Master Settlement Agreement

NAAG National Association of Attorneys General

NCSL National Conference of State Legislatures

NGA National Governors’ Association

NPM non-participating manufacturers

SCF Strategic Contribution Fund

SCHIP State Children’s Health Insurance Program

SPE special purpose entity

TICR Tobacco Indemnification and Community Revitalization 

Commission
Page 3 GAO-01-851 Tobacco Settlement

United States General Accounting Office

Washington, D.C. 20548 Letr

June 29, 2001

The Honorable John McCain, Ranking Minority Member

Committee on Commerce, Science, and Transportation

United States Senate

Dear Senator McCain:

In November 1998, the attorneys general of 46 states1

 signed a 

comprehensive agreement with the nation’s largest tobacco companies 

requiring them to make annual payments to states in perpetuity as 

reimbursement for past tobacco-related costs, such as Medicaid 

expenditures. This settlement—referred to as the Master Settlement 

Agreement (MSA)—is the largest civil settlement in U.S. history and 

commits tobacco companies to pay approximately $206 billion over the 

first 25 years of the agreement.2

 The four states that are not party to the 

MSA—Florida, Minnesota, Mississippi, and Texas—had reached earlier, 

individual settlements with the tobacco companies that call for payments 

totaling $40 billion over 25 years.3

The MSA imposes no requirements on how states spend their MSA 

payments; states are free to use the funds for any purpose. As a result, the 

receipt of millions of MSA dollars has presented states with a unique 

opportunity to finance programs in a variety of policy areas. Although the 

MSA does not require states to spend settlement payments on tobacco 

control programs, many antismoking and health care observers are 

concerned that states are not using enough of the MSA payments to 

enhance their tobacco prevention and control efforts.

1

The District of Columbia and the five U.S. territories are also party to the agreement.

2

$206 billion is the original estimate of the total payments from the MSA. Of this total, $204.5 

billion is the estimated total payment to 46 states, the District of Columbia, and the five U.S. 

territories. An additional $1.8 billion is provided for other initiatives agreed to in the MSA 

including a national foundation and administrative costs of the National Association of 

Attorneys General.

3

An earlier GAO report, Tobacco Settlements: States’ Use of Settlement Proceeds

(HEHS-98-147R, April 22, 1998) studied the preliminary use of settlement payments by these 

four states.
Page 4 GAO-01-851 Tobacco Settlement

The scope of the MSA and the magnitude of the payments involved have 

generated a great deal of attention. During the past year, several 

organizations have issued reports on states’ use of their MSA payments 

and/or state spending on tobacco control, including the Campaign for 

Tobacco-Free Kids, the Centers for Disease Control and Prevention (CDC), 

the National Conference of State Legislatures (NCSL), and the National 

Governors’ Association (NGA).4

You asked us to provide a comprehensive review of how states are using 

their MSA payments—in particular, to what extent states are using these 

funds for smoking prevention and cessation programs. Our report responds 

to your request by examining (1) the amount of payments received by 

states and the states’ decision-making processes regarding allocation of the 

MSA payments in state fiscal years 2000 and 2001,5

 and (2) the types of 

programs that states funded with their MSA payments in those two fiscal 

years. As agreed with your staff, our report focuses exclusively on the 46 

states covered by the MSA and exclusively on MSA payments.6

To address our objectives we studied the allocation of all MSA payments 

through states’ fiscal year 2001. We collected and analyzed budget-related 

and legislative documents and interviewed officials from each of the 46 

state executive budget offices about the plans for use of the MSA payments 

for the two fiscal years in our study. In some cases, state budget officials 

included staff from the state attorney general’s office, the governor’s office 

and the state agency responsible for tobacco control programs in the 

interview. In order to present as comprehensive a review as possible, we 

collected data on all estimated MSA payments to the 46 states and the 

allocations of those payments regardless of whether a decision was made 

on the use of the funds or whether all funds were appropriated by the 

legislature. Our study focuses only on the state shares of MSA payments. In 

California and New York, the two states in which the counties receive MSA 

payments, we did not track the MSA payments to counties or the allocation 

of those payments. We did not collect information on payments to the 

4

See appendix VIII for a list of these organizations and their reports.

5

Throughout this report, fiscal year will refer to state fiscal year. In most states the fiscal 

year begins on July 1 and ends on June 30; the exceptions are as follows: in Alabama and 

Michigan the fiscal year begins on October 1 and in New York the fiscal year begins on

April 1.

6

We did not report on other sources of funding for tobacco control programs.
Page 5 GAO-01-851 Tobacco Settlement

District of Columbia or the five territories that are also party to the MSA. 

We categorized states’ use of settlement payments for state fiscal years 

2000 and 2001 according to selected program areas and developed a 

methodology for allocating dollars to specific categories. To obtain a 

comprehensive understanding of the states use of MSA payments, we 

reviewed recent reports and studies and spoke with representatives from 

the organizations conducting these studies. See appendix I for a more 

detailed description of our scope and methodology.

Results in Brief As of April 2001, 45 of the 46 states that are a party to the Master Settlement 

Agreement (MSA) received nearly $13.5 billion of the $206 billion estimated 

to be paid by the tobacco companies over the first 25 years of the 

agreement.7

 While this amount represents only about 1.7 percent of these 

states’ general fund revenues for the same two-year period, the receipt of 

MSA payments prompted many states to engage in a deliberative decisionmaking process to determine long-term uses for the payments. Many states 

established dedicated funds—categorized as either special funds or 

endowment funds—for receipt of at least a portion of the MSA payments. 

To ensure that the MSA payments are used to expand programs and 

services, approximately one-third of the states also passed legislation 

requiring MSA payments to be used to supplement rather than supplant 

existing state funding. Nearly two-thirds of the states earmarked the MSA 

payments and enacted laws governing the future use of the payments, 

while others used voter-approved initiatives to decide how to allocate the 

MSA payments. Some states also established special commissions to 

develop recommendations and long-term plans for the payments. Four 

states—Missouri, Oregon, Pennsylvania, and Tennessee—had not yet 

decided how to use their MSA payments as of April 2001.

7

Missouri had not received any payments as of April 2001.
Page 6 GAO-01-851 Tobacco Settlement

The MSA allows states to use their payments for any purposes, and states 

have used their MSA payments for a variety of programs and budget 

priorities, including, but not limited to, tobacco control and health care 

programs. States allocated about 7 percent of the MSA payments for new or 

expanded tobacco control programs. The goal of these programs is to 

reduce tobacco use through various intervention strategies, including 

promoting smoking cessation and preventing youth from starting to smoke. 

The MSA has encouraged a commitment to tobacco control, and all 42 

states that have made decisions on the use of the MSA funds now provide 

funding for tobacco control. Some of these programs are funded not by 

MSA payments but by tobacco excise taxes or other sources of state 

funding, and the amount of funding for these programs varies widely 

among states. Health-related programs constitute the category that 

received the largest allocation of MSA payments (41 percent); most states 

allocated a portion of their settlement proceeds to this area. The increased 

spending went to a variety of health programs; many states expanded 

coverage under their Medicaid and State Children’s Health Insurance 

Program (SCHIP) programs. Seven of the 13 tobacco states allocated 

6 percent of the total MSA payments for assistance to tobacco growers and 

economic development projects.8

 States also viewed the MSA payments as 

an opportunity to fund other needs that they had not been able to fund in 

the past. They allocated 26 percent of the payments to a variety of priorities 

or mandated areas including education and social services, infrastructure, 

and budget reserves. Only two states reported allocating MSA payments for 

tax reductions. Finally, 20 percent of the MSA payments remained 

unallocated during the two fiscal years in our study.

8

The 13 tobacco states are Alabama, Georgia, Indiana, Kentucky, Maryland, Missouri, North 

Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, and West Virginia. 
Page 7 GAO-01-851 Tobacco Settlement

Figure 1: State Allocations of MSA Payments (State Fiscal Years 2000 and 2001)

Source: GAO analysis.

Several states issued bonds backed by their MSA payments—a process 

referred to as “securitization.” Securitization allows states to receive funds 

up front rather than over time as MSA payments are made according to the 

terms of the agreement. Three states, and many counties in New York State, 

have already securitized a portion of the expected payment stream from 

the MSA; and 10 more states reported that securitization was under 

consideration. Thus far, most of the bond issues have been in the form of 

tax exempt bonds, the proceeds of which often are earmarked for capital 

projects or reducing existing state debt, allowing states to fund large onetime needs.

Tobacco control

Tobacco growers

and economic 

development in

tobacco states

Health

Education and

social services

Infrastructure 2%

•

Tax

reductions

•

General

purposes/

reserves

Unallocated

20%

• 7%

•

6%

•

41% •

9%

• •

•

11%

4%

Other Budget

Priorities

•
Page 8 GAO-01-851 Tobacco Settlement

Background Beginning in the mid 1990s, more than 40 states and some localities sued 

tobacco companies, alleging that the industry 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 hold back less risky and less addictive tobacco products 

from the market. In 1997 and 1998, four states—Florida, Minnesota, 

Mississippi, and Texas—settled their lawsuits by negotiating independent 

agreements with the tobacco industry. In November 1998, four of the 

nation’s largest tobacco companies—Philip Morris Incorporated, R.J. 

Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation, 

and Lorillard Tobacco Company (referred to as the “original participating 

manufacturers”)

9

— negotiated an agreement with the attorneys general of 

the remaining 46 states thereby settling a number of lawsuits brought by 

these states against these tobacco companies.10 The terms of this 

agreement, known as the Master Settlement Agreement (MSA), apply only 

to those tobacco companies and states that are parties to the agreement. 

Under the MSA, the tobacco companies are required to provide monetary 

relief to states in the form of annual payments and reimbursement for 

attorney fees. The MSA also imposes restrictions on the tobacco 

companies’ marketing and advertising practices. Furthermore, the MSA 

established a national foundation to support study and programs to 

(1) reduce youth tobacco use and substance abuse and (2) prevent diseases 

associated with tobacco use. Tobacco companies are required to provide 

funding for this foundation, as well as funding for the National Association 

of Attorneys General (NAAG), which is responsible for assisting states in 

the implementation and enforcement of the MSA. 

After the MSA was signed, each state had to take action to receive approval 

of the agreement from its respective state court in order to make the terms 

of the agreement legally binding within that state. Under the MSA, once 

state court approval was final, the state achieved “state-specific finality”

status, thereby permitting that state to receive payments under the MSA. 

No state payments were to be released to any of the states, however, until 

the agreement reached final approval. This occurred in November 1999 

when 80 percent of the states whose shares equaled 80 percent of the total 

settlement payments had achieved state-specific finality.

9

Several other tobacco companies have joined the MSA since the time of the agreement.

10This study reports on the 46 states that are party to the agreement. The agreement also 

included the District of Columbia and the five U.S. territories.
Page 9 GAO-01-851 Tobacco Settlement

In addition, to receive its full share of the settlement payments, each state 

was required by the MSA to enact a statute addressing the potential 

competitive advantage that tobacco companies not party to the MSA may 

experience. Under the MSA, if the aggregate market share of the tobacco 

companies that are party to the agreement (“participating manufacturers”) 

falls more than two percent below their base level of 1997 and the loss is 

caused in significant part by provisions of the MSA, the MSA payments may 

be reduced based on a formula that corrects for this market share loss.11

The MSA provided that individual states can avoid this downward 

adjustment—known as the “non-participating manufacturers” (NPM) 

adjustment—to their payments by enacting and enforcing a statute that is 

intended to prevent a competitive disadvantage for the participating 

manufacturers. The MSA provided a model statute that, if enacted and 

enforced by a state, would protect that state from any adjustment for 

market share loss, although states are permitted to enact and enforce any 

statute that achieves the same desired result.

The MSA also placed restrictions on the tobacco companies’ business 

practices, primarily in marketing targeted to youth, advertising, and 

lobbying. For example, the MSA banned all outdoor advertising by the 

tobacco companies such as billboards and signs in arenas and stadiums, as 

well as sponsorship of sporting events with a significant youth audience. 

Moreover, the tobacco companies are prohibited from lobbying the state or 

any political subdivision against efforts to enact certain kinds of state laws 

and regulations intended to reduce underage tobacco access and use. 

Tobacco companies are not prohibited from lobbying against legislation 

that would raise excise taxes or restrict smoking in public places. The MSA 

also required the tobacco companies to pay a total of $50 million for 

enforcement activities including state enforcement of the terms of the 

agreement and investigation of suspected violations of antitrust or 

consumer protection laws related to tobacco products. In addition, the 

MSA required the tobacco companies to fund a national foundation, the 

American Legacy Foundation, dedicated to discouraging youth tobacco use 

and to preventing disease associated with tobacco use through supporting 

study and education. The participating tobacco companies are required to 

pay a total of $1.45 billion over 5 years for the advertising and education 

programs (performed directly or through grant-making) aimed at 

countering youth tobacco use and informing consumers about prevention 

11A nationally recognized team of economic consultants determines whether the decrease in 

market share is due to the effects of the MSA.
Page 10 GAO-01-851 Tobacco Settlement

of tobacco-related diseases, and an additional $250 million over 10 years 

for other activities of the foundation.

The MSA was preceded by a proposed national settlement between the 

states and the tobacco industry reached in June 1997. This earlier more farreaching proposal included payments to states and was a blueprint for a 

comprehensive national tobacco-control policy, including federal 

regulation and oversight. The June 1997 proposal could take effect only 

after federal legislation was enacted. Several comprehensive tobacco 

policy bills, including legislation to implement the June 1997 proposal, 

were introduced in the 105th Congress. However, only the National 

Tobacco Policy and Youth Smoking Reduction Act (S. 1415), introduced by 

Senator McCain, saw legislative action. The bill debated on the Senate floor 

provided for new authority for the Food and Drug Administration to 

regulate tobacco products, measures to restrict tobacco industry 

marketing and advertising, and measures to reduce underage tobacco use. 

The bill also required up-front and annual payments by the tobacco 

companies to provide for settlement of relevant state lawsuits. These and 

other payments would be deposited into a fund for the benefit of states that 

settled their lawsuits against the tobacco companies and for the benefit of 

the federal government. 

When S. 1415 did not pass in the summer of 1998, states resumed 

negotiations with the tobacco industry that eventually resulted in the 

November 1998 Master Settlement Agreement. The MSA was a scaleddown version of the June 1997 proposal and did not require federal action 

to be implemented. This agreement did not resolve states’ uncertainty over 

whether the federal government might lay claim to a portion of the 

payments to the states. In May 1999, Congress moved to resolve that 

uncertainty by enacting legislation that prohibited treating states’ MSA 

payments as federal overpayments for purposes of Medicaid.12

12This provision was contained in the 1999 Emergency Supplemental Appropriations Act 

(P.L .106-31). 
Page 11 GAO-01-851 Tobacco Settlement

States Have Received 

Billions to Date From 

the Master Settlement 

Agreement

As of April 2001, 45 of the 46 states that signed the Master Settlement 

Agreement had received nearly $13.5 billion in payments from the tobacco 

companies.13 MSA payments to the states, some of which states will receive 

in perpetuity, were originally estimated to total nearly $205 billion through 

2025.14 There are different types of payments, the largest two of which are 

“initial” payments— made in five installments through 2003— and “annual”

payments which continue in perpetuity. Both of these types of payments 

are distributed based on “allocation percentages” for each state agreed to 

by the 46 state attorneys general when they negotiated the MSA. (See 

appendix IV for the types of MSA payments.) The final agreement resulted 

from negotiations that began with a formula. However, unlike many other 

legal settlements with a fixed level of compensation, while the MSA 

payments are based on set payment amounts, these payments are adjusted 

for several factors, most notably, the future sales of the tobacco industry. 

Each state’s payments are adjusted annually based on the participating 

manufacturers’ cigarette sales and market share, as well as inflation. All 

adjustments resulted in reductions of about $1.6 billion between 1999 and 

2001.

Payment Shares Were 

Determined Through 

Negotiations

The formula that provided the basis for determining the allocation 

percentages for the MSA payments was composed of two variables each 

weighted equally: smoking-related Medicaid expenditures and smokingrelated non-Medicaid health care costs of each state. The smoking-related 

health care cost variable included factors for each state’s population and 

smoking prevalence. After this initial formula was developed, negotiations 

resulted in some adjustments for state-specific concerns. For example, 

some smaller states argued that they should receive a larger percentage to 

enable them to fund smoking cessation programs because they did not 

have the same economy of scale as larger states. The negotiations resulted 

in the allocation percentages that are applied to each initial and annual 

MSA payment. In general, larger states receive a higher percentage of each 

payment and smaller states receive a lower percentage, however because 

13Missouri achieved state-specific finality in late April 2001 and had not yet received any 

MSA payments.

14The estimated total of $204.5 billion includes all types of payments to the 46 states, the 

District of Columbia, and the five U.S. territories. Additional payments estimated at 

$1.8 billion are to be paid for the American Legacy Foundation, administrative costs for the 

National Association of Attorneys General, and an enforcement fund. 
Page 12 GAO-01-851 Tobacco Settlement

the allocation percentages were determined by negotiations the payments 

are not strictly proportional to population. Table 1 shows the final state 

allocation percentages as explicitly agreed to in the MSA.

Table 1: MSA State Allocation Percentages

State Percentage

Alabama 1.6161308

Alaska 0.3414187

Arizona 1.4738845

Arkansas 0.8280661

California 12.7639554

Colorado 1.3708614

Connecticut 1.8565373

Delaware 0.3954695

Georgia 2.4544575

Hawaii 0.6018650

Idaho 0.3632632

Illinois 4.6542472

Indiana 2.0398033

Iowa 0.8696670

Kansas 0.8336712

Kentucky 1.7611586

Louisiana 2.2553531

Maine 0.7693505

Maryland 2.2604570

Massachusetts 4.0389790

Michigan 4.3519476

Missouri 2.2746011

Montana 0.4247591

Nebraska 0.5949833

Nevada 0.6099351

New Hampshire 0.6659340

New Jersey 3.8669963

New Mexico 0.5963897

New York 12.7620310

North Carolina 2.3322850
Page 13 GAO-01-851 Tobacco Settlement

Source: Master Settlement Agreement, Exhibit A.

Prior to the MSA, some counties in California and New York had 

independently filed lawsuits against the tobacco industry. In these states, 

the counties bear financial responsibility for a share of Medicaid costs, and 

the lawsuits sought compensation for the counties’ cost of treating 

smoking related illnesses. In both these states, under different 

arrangements, counties receive a share of MSA payments.

The state of California had entered into a memorandum of understanding 

(MOU) with its counties and four major cities in August 1998—prior to the 

MSA—to coordinate their lawsuits with the state’s suit and provide for the 

allocation of any settlement. The terms of the MOU included an even 50/50 

split of the financial recovery between the state and local governments, 

with the local share further split between the counties and four major 

cities. In California’s case, all MSA payments are made to the state and the 

state distributes payments to the 58 counties and four cities. (See appendix 

II for the counties’ and cities’ share of payments in California.)

In the case of New York, the state’s consent decree provides for allocation 

of a portion of its MSA payments to the counties and New York City based 

on the county share of Medicaid costs and population as well as some 

specific considerations for individual counties. In New York’s case, each of 

North Dakota 0.3660138

Ohio 5.0375098

Oklahoma 1.0361370

Oregon 1.1476582

Pennsylvania 5.7468588

Rhode Island 0.7189054

South Carolina 1.1763519

South Dakota 0.3489458

Tennessee 2.4408945

Utah 0.4448869

Vermont 0.4111851

Virginia 2.0447451

Washington 2.0532582

West Virginia 0.8864604

Wisconsin 2.0720390

Wyoming 0.2483449

State Percentage
Page 14 GAO-01-851 Tobacco Settlement

the state’s 57 counties and New York City receive payment directly from the 

escrow account established by the MSA rather than the state receiving all 

payments and then distributing them to the localities. (See appendix III for 

the counties’ and New York City’s share of payments in New York.) As 

explained in the introduction to this report, this study focuses on how 

states are using their MSA payments, and we did not track the counties’ use 

of MSA payments.

Types of MSA-Related 

Payments

Currently, states receive two types of payments as a result of the MSA—

annual payments and initial payments. Although there are several types of 

potential adjustments to the annual payments received by each state, the 

two most significant adjustments are a “volume adjustment” and an 

“inflation adjustment.” The volume adjustment is based on increases or 

decreases in the number of cigarettes shipped by the original participating 

manufacturers, and the inflation adjustment is set at the actual percentage 

increase in the Consumer Price Index (CPI) or 3 percent, whichever is 

greater. The terms of the MSA also call for states to receive five initial 

payments between 1998 and 2003. These initial payments are also subject 

to annual volume adjustments, but they are not adjusted for inflation after 

the first payment. (See appendix IV for a summary of payment types and 

amounts.)

A third type of payment, known as the Strategic Contribution Fund (SCF) 

payment, will begin in 2008 and continue through 2017. The base amount of 

each year’s SCF payment is $861 million and will be adjusted for volume 

and inflation. SCF payments are intended to reflect the level of the 

contribution each state made toward final resolution of the state lawsuits 

against the tobacco companies and will be allocated to the states based on 

a separate formula developed by a panel of former state attorneys general. 

(See appendix V for estimated Strategic Contribution Fund payments to 

states.)

Finally, tobacco growers and producers in states that grow cigarette 

tobacco also receive a fourth type of payment through a separate 

agreement, the National Tobacco Grower Settlement Trust Agreement, 

known as “Phase II.” The MSA required the tobacco companies to meet 

with the political leadership of states with grower communities to address 

the economic concerns of these communities. The Phase II agreement 

resulted from that requirement. (See appendix VI for information on the 

Phase II agreement.) This agreement is intended to provide compensation 

for financial losses due to the anticipated decline in cigarette consumption 
Page 15 GAO-01-851 Tobacco Settlement

and payments to the trust fund are expected to total $5.15 billion over 12 

years. This report does not track Phase II payments to states or the 

allocation of these payments. 

Table 2 summarizes the types of payments that states will receive as a 

result of the MSA and Phase II. (See appendix IV for estimated payment 

amounts for the first 25 years of the MSA.)

Table 2: MSA and Phase II Payments

Note: No payments were distributed to states until 80 percent of the states with shares equal to 80 

percent of the total settlement payments had achieved state-specific finality.

Type of payment When payment is made How payment is determined

Annual In perpetuity

(paid by April 15 of each year)

Payments distributed to states based on the MSA allocation 

percentages, with adjustments.

Base payment amount increases each year from 2000-2018; 

constant after 2018.

Initial 5 payments from 1998 through 2003 

(payments after the first one are due by 

January 10 of each year)

Set base amount per year, distributed to states based on the MSA 

allocation percentages, with adjustments.

Strategic 

Contribution Fund

Annual payments beginning in 2008 through 

2017 (paid by April 15 of each year)

Set base amount of $861 million per year, distributed to states based 

on a separate formula, with adjustments. Formula is based on level 

of state’s contribution to litigation or resolution of state tobacco 

lawsuits. 

National Tobacco 

Grower Settlement 

Trust (Phase II)

Paid annually over 12 years: 1999-2010 

(paid as follows in years 2000-2010: 

25% by March 31,

25% by June 30,

25% by September 30,

25% by December 15.) 

Based on a separate agreement between tobacco-growing states 

and tobacco companies. Set base amount, with adjustments, 

deposited in trust and distributed directly to tobacco growers based 

on state allocation methodology. State share based on its 1998 

share of production of cigarette tobacco. 
Page 16 GAO-01-851 Tobacco Settlement

States Received Nearly 

$13.5 Billion From 1999 

Through 2001

States received their first MSA payments at different points in time based 

on the date the agreement became final in their state (referred to as having 

achieved “state-specific finality”).15 Forty-three states received their first 

payment in state fiscal year 2000. Arkansas and Tennessee received their 

first payments in fiscal year 2001. Since Missouri did not achieve statespecific finality until late April 2001, its payments were not included in the 

total payments received through April 2001.16 The first MSA payments were 

made in December 1999, and as of April 2001 all initial and annual 

payments combined totaled nearly $13.5 billion. States are not scheduled to 

receive any more payments until January 2002. California and New York 

have received the largest amounts so far—nearly $1.8 billion each.17

Together, six states received more than 50 percent of all the MSA payments 

from 1999 through 2001: California, Illinois, Michigan, New York, Ohio, and 

Pennsylvania. Table 3 shows the breakdown of expected payments by 

state, as originally estimated at the time of the Master Settlement 

Agreement, as well as the actual payments received as of April 2001.

15None of the state payments were released to any of the states until 80 percent of the states 

with shares equal to 80 percent of the total settlement payments had achieved state-specific 

finality. This occurred in November 1999. 

16As a result, neither the payments to Missouri nor any of the state’s allocations are included 

in this report.

17California payment amounts include payments to four cities and the 58 counties in the 

state which amount to 50 percent of the total payments. New York payment amounts include 

payments to the 57 counties in the state and New York City, which amount to 49 percent of 

the total payments. (See appendices II and III for distribution of payments in California and 

New York.)
Page 17 GAO-01-851 Tobacco Settlement

Table 3: Original Estimated and Actual MSA Payments Received by States as of April 2001 

Dollars in thousands

State

Original estimated payments

through 2001

Actual payments received

through 2001

Percent difference estimated

vs. actual payments

Alabama $254,304 $228,618 -10.1

Alaska 53,724 49,120 -8.6

Arizona 231,922 207,996 -10.3

Arkansas 130,300 121,546 -6.7

Californiaa

 2,008,461 1,790,356 -10.9

Colorado 215,711 197,225 -8.6

Connecticut 292,134 260,406 -10.9

Delaware 62,229 55,470 -10.9

Georgia 386,219 353,121 -8.6

Hawaii 94,706 84,420 -10.9

Idaho 57,161 52,262 -8.6

Illinois 732,365 669,603 -8.6

Indiana 320,971 293,465 -8.6

Iowa 136,846 125,118 -8.6

Kansas 131,182 119,940 -8.6

Kentucky 277,126 247,028 -10.9

Louisiana 354,889 324,476 -8.6

Maine 121,060 110,686 -8.6

Maryland 355,692 325,210 -8.6

Massachusetts 635,549 566,526 -10.9

Michigan 684,797 610,424 -10.9

Missourib 357,918 0 -

Montana 66,837 61,110 -8.6

Nebraska 93,624 85,600 -8.6

Nevada 95,976 87,751 -8.6

New Hampshire 104,787 95,807 -8.6

New Jersey 608,488 557,730 -8.3

New Mexico 93,844 85,802 -8.6

New Yorkc 2,008,159 1,790,083 -10.9

North Carolina 366,994 327,137 -10.9

North Dakota 57,594 52,658 -8.6

Ohio 792,673 724,742 -8.6

Oklahoma 163,041 149,068 -8.6
Page 18 GAO-01-851 Tobacco Settlement

a

California payment amounts include payments to four cities and the 58 counties in the state which 

amount to 50 percent of the total payments.

b

Total excludes original estimated payments to Missouri.

c

New York payment amounts include payments to the 57 counties in the state and New York City which 

amount to 49 percent of the total payments.

Source: GAO analysis of data from the National Association of Attorneys General.

Adjustments Affect State 

Payments

As noted above, payments are adjusted for a number of factors such as 

fluctuations in the volume of cigarette sales, inflation, and changes in 

participating manufacturers’ market share. The combined effect of all 

adjustments has been to lower payments by about $1.6 billion—or nearly 

11 percent below the original estimate. The 45 states that had reached 

state-specific finality and received payments were originally estimated to 

receive $15.1 billion through April 2001 but actually received nearly $13.5 

billion during this period—an overall reduction of about $1.6 billion.18 The 

adjustments varied by state, from a high of 26.6 percent in Pennsylvania to 

a low of 6.7 percent in Arkansas.

Oregon 180,589 160,976 -10.9

Pennsylvania 904,292 664,190 -26.6

Rhode Island 113,123 103,428 -8.6

South Carolina 185,104 169,241 -8.6

South Dakota 54,909 50,203 -8.6

Tennessee 384,084 354,356 -7.7

Utah 70,004 64,006 -8.6

Vermont 64,701 57,675 -10.9

Virginia 321,749 294,180 -8.6

Washington 323,089 295,401 -8.6

West Virginia 139,489 127,534 -8.6

Wisconsin 326,044 290,634 -10.9

Wyoming 39,079 34,834 -10.9

Totalb $15,095,621 $13,477,162 -10.7

Dollars in thousands

State

Original estimated payments

through 2001

Actual payments received

through 2001

Percent difference estimated

vs. actual payments

18Missouri reached state-specific finality in late April 2001 and did not receive any MSA 

payments through April 2001. 
Page 19 GAO-01-851 Tobacco Settlement

Consumption has declined since the Master Settlement Agreement was 

signed in November 1998—by about 6.5 percent in 1999 alone—mostly due 

to one-time increases in cigarette prices that the tobacco companies 

implemented after the MSA took effect.19 Analysts project that in the future 

total cigarette consumption will decline by an average of nearly 2 percent 

per year.20 As a result, cigarette consumption is estimated to decline by 33 

percent between 1999 and 2020. Declining consumption will result in lower 

MSA payments than originally expected.

Offsetting the sales volume decline is the adjustment for inflation. The 

inflation adjustment equals the actual percentage increase in the CPI for 

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

compounding, especially given that the payments are made in perpetuity, is 

significant. Assuming a 3-percent inflation adjustment and no decline in 

base payments, settlement amounts received by states would double every 

24 years. Some analysts estimate the positive inflationary adjustments to be 

greater than any negative adjustments for consumption.

Adjustments were also made for losses in participating manufacturers’

market share. The NPM adjustment encourages states to enact a model 

statute in order to receive their full share of MSA payments. Because they 

had not enacted a model statute by the end of 2000, 16 states had amounts 

withheld from their January 2001 payments.21 An independent auditor 

initially determines how much, if any, market share has been lost and 

reduces the MSA payments for this loss. However, amounts withheld from 

the payments are held in escrow pending a final determination by an 

independent team of economists as to whether the market share loss was a 

result of the MSA. As of April 2001, all states had enacted model statutes, so 

the NPM adjustment will not affect future payments.

19WEFA, Inc., A Forecast of U.S. Cigarette Consumption (2000-2020) for Alabama 21st 

Century Authority (September 12, 2000).

20A number of factors affect cigarette consumption such as pricing, advertising, health 

warnings, restrictions on smoking in public places, nicotine dependence, youth 

consumption, population trends, and disposable income. Cigarette consumption in the 

United States peaked in 1981 and has been declining since.

21These states were Alabama, Arizona, California, Connecticut, Delaware, Hawaii, Kentucky, 

Massachusetts, Michigan, New York, North Carolina, Oregon, Pennsylvania, Vermont, 

Wisconsin, and Wyoming.
Page 20 GAO-01-851 Tobacco Settlement

Excise Taxes Provide 

Another Source of Tobacco 

Related Revenues 

MSA payments are not the only source of tobacco-related revenue. State 

excise taxes on tobacco products represent a state-controlled source of 

tobacco-related revenue for all 50 states, although cigarette tax rates vary 

widely—from a low of 2.5 cents a pack in Virginia to a high of $1.11 in New 

York. The 46 MSA states collected nearly $7 billion in revenues in 2000 from 

excise taxes on cigarettes, which were not directly affected by the MSA. 

Between January 1999 and January 2001, four of the 46 MSA states—

Louisiana, Maryland, New Hampshire, and New York—increased their tax 

rates on cigarettes. These increases drove the average cigarette tax rate in 

the 46 states up by about 5 percent over two years, from 39.8 cents in 

January 1999 to 41.8 cents in January 2001.

Many States 

Earmarked MSA 

Payments for Specific 

Purposes

Most state legislatures viewed the MSA payments as a discrete funding 

stream and engaged in a structured decision-making process to determine 

long-term uses for these revenues. Although most states will continue to 

appropriate MSA payments through an annual or a biennial budget process, 

those appropriations will be guided by long-term legislation earmarking the 

use of the funding stream for specific purposes. As part of the decisionmaking process, some states established planning commissions and 

working groups to develop recommendations that resulted in a strategic 

plan for the state’s use of the funds. In six states voter-approved initiatives 

restricted the use of the funds. Forty-two of the 46 states have made 

decisions about the allocation of MSA payments, and in 30 of these states 

the legislature enacted laws to ensure that these payments are restricted or 

used for specific purposes. Of the states with these legislative goals, almost 

all established dedicated funds that separate the MSA payments from other 

state funding sources. New York did not establish dedicated funds but 

enacted restrictions on the use of the payments which are deposited 

directly into the state’s general fund. Six states (Alaska, California, Georgia, 

Illinois, New Jersey, and Rhode Island) had not earmarked the payments 

deposited into the state’s general fund; in these states decisions on uses of 

the MSA payments were made as part of the annual appropriations process.

States Engaged in DecisionMaking Processes Focused 

on MSA Payments

The states have engaged in a decision-making process involving 

considerable deliberations over the long-term use of MSA payments. In 

some states, a permanently established board or a special committee 

makes recommendations and oversees the use of a portion of the 

payments. Other states, including Maryland and Ohio, engaged in a 

comprehensive planning process to develop initial recommendations for 
Page 21 GAO-01-851 Tobacco Settlement

use of the MSA payments. In Maryland, the Governor convened three task 

forces, each focused on one of three areas—smoking cessation, health, and 

agricultural initiatives. Composed of legislators, experts in the field, and 

community and business representatives in each of these areas, these 

groups developed recommendations for each program area. Each task 

force prepared an implementation plan and presented a final report to the 

Governor that was used to develop a 10-year budget proposal. In Ohio, a 

bipartisan task force composed of representatives from the legislature and 

the Governor’s administration developed recommendations that resulted in 

legislation creating a long-term plan for allocation of the MSA payments. 

The plan allocates the payments for specific purposes through fiscal year 

2012 and establishes three new commissions and foundations. The plan 

also requires the state’s Tobacco Oversight Accountability Panel to develop 

benchmarks for each of seven dedicated funds that were created.

Some States Used Ballot 

Referenda to Determine 

Allocations

In seven states ballot initiatives were proposed by the legislature to restrict 

the use of some portion of the MSA payments, and in six of the states these 

proposals were approved by voter referendum. In Arizona and Arkansas 

laws were enacted, and in Louisiana, Montana, Oklahoma, and Utah 

constitutional amendments proposed by the legislature were approved.22

All of the ballot initiatives proposed the creation of dedicated funds to 

restrict at least a portion of the MSA payments. In some of the states the 

ballot initiatives were supported by local health advocacy organizations.

In four of these states (Arkansas, Louisiana, Montana, and Oklahoma), 

portions of the endowment funds are earmarked for tobacco control and 

health care programs. In Arizona, the ballot initiative dedicated the full 

amount of MSA payments to expanding eligibility for the state’s health 

insurance program. In Utah, an endowment fund was established, but the 

fund was not dedicated to any particular purpose. These initiatives become 

effective between fiscal years 2000 and 2002, and in some states, the 

proportion of MSA payments allocated for specific purposes increases over 

the first few years of the agreement in order to reach a specified level of 

funding.

In Oregon, two ballot initiatives proposed by the legislature were defeated 

by the voters in the November 2000 election. Both proposals would have 

22In Louisiana, the ballot initiative was proposed and passed in the November 1999 election; 

the other five states’ ballot initiatives were passed in the November 2000 election.
Page 22 GAO-01-851 Tobacco Settlement

dedicated all MSA payments to special funds allowing only the earnings on 

the principal to be spent. One of the initiatives would have earmarked the 

MSA payments for the state’s health insurance program, maximizing 

funding for the State Children’s Health Insurance Program (SCHIP) in 

particular, and the other proposed allocating funds for health care and 

tobacco control as well as other social services. As both proposals were 

defeated, the decision over allocation of MSA payments was referred back 

to the legislature.

Four States Had Not Made 

Decisions on the Use of 

MSA Payments

Oregon, Pennsylvania, Tennessee and Missouri had not reached decisions 

about the use of the payments as of April 2001. In Oregon, after the defeat 

of the two ballot initiatives the Governor’s budget recommended 

earmarking the MSA payments for health care and tobacco control 

programs and establishing a dedicated fund for the majority of the 

payments. In Pennsylvania, the Governor submitted budget 

recommendations for the use of the payments, but the legislature had not 

acted on these proposals. The Governor’s proposed “Health Investment 

Plan” for the MSA payments presented principles developed with public 

input to guide use of the MSA payments and recommended dedicating the 

payments for health care and tobacco control programs. In Tennessee, the 

legislature earmarked the payments for two purposes—agriculture and 

health—and established two ad hoc committees to develop 

recommendations on the specific uses of the funds. The committees held 

public hearings, developed proposals for program oversight and funding, 

and presented their final reports in February 2001 for consideration by the 

General Assembly. These three states have placed their payments in 

holding accounts until final decisions are made. Missouri achieved statespecific finality in late April 2001 and had not received any MSA payments 

during the period of our study.
Page 23 GAO-01-851 Tobacco Settlement

Many States Established 

Dedicated Funds for MSA 

Payments

Thirty-six of the 46 MSA states established dedicated funds to separate at 

least a portion the MSA payments from other state funds and dedicate their 

use for specific purposes. In many cases, both the principal and investment 

earnings of these funds are available for expenditure, while in other cases 

only the earnings may be used. For simplicity, in this report we refer to the 

former as special funds and the latter as endowment funds.23 Endowment 

funds are intended to ensure a long-term source of funding for programs. In 

many cases, boards and/or commissions oversee these funds. In some 

cases these bodies make recommendations for the use of the funds and in 

other cases they have the authority to make decisions and distribute the 

funds in keeping with the dedicated uses of the funds. Although over threefourths of the states established dedicated funds for their MSA payments, 

only about 35 percent of the total payments were allocated to these funds 

during fiscal year 2001. Of this 35 percent, about 28 percent were in special 

funds and the remaining 7 percent in endowment funds. Table 4 shows the 

funds established by each of the states and how the fiscal year 2001 MSA 

payments in each state were allocated among fund types.

23Many states refer to these earmarked funds as trust or endowment funds. However, the 

states are inconsistent in their definitions of this term. For example, the same type of fund 

may be referred to as a trust fund in one state and an endowment fund in another state. In a 

couple of states, the fund structures do not fit precisely into one of our fund categories. In 

these cases, we categorized the funds according to our determination of closest fit. For 

example, New Mexico allocated a percentage of its settlement monies to a “permanent 

fund,” which cannot be spent for any purpose without new legislation. We categorized it as 

an endowment because the principal of this fund cannot be spent.
Page 24 GAO-01-851 Tobacco Settlement

Table 4: States’ Dedicated Funds and Allocation of MSA Payments in Fiscal Year 2001

Dedicated fund type Percent allocation of receipts

State Special Endowment Special Endowment General

Alabama X 66 0 34

Alaska 0 0 100

Arizona X 66 0 34

Arkansas X X 75 25 0

California 0 0 100

Colorado X X 46 54 0

Connecticut X 12 0 88

Delaware X 100 0 0

Georgia 0 0 100

Hawaii X X 40 25 35

Idaho X X a 100 0

Illinois 0 0 100

Indiana X 20 0 80

Iowa X 100 0 0

Kansas X 28 0 72

Kentucky X 100 0 0

Louisiana X X 55 45 0

Maine X 100 0 0

Maryland X 100 0 0

Massachusetts X X 30 70 0

Michigan X 100 0 0

Missouri b bb

Montana X 0 40 60

Nebraska X X 19 81 0

Nevada X X 90 10 0

New Hampshire X 100 0 0

New Jersey 0 0 100

New Mexico X X 40 60 0

New York 0 0 100

North Carolina X 100 0 0

North Dakota X 100 0 0

Ohio X X 99 1 0

Oklahoma X 0 49 51

Oregon b bb
Page 25 GAO-01-851 Tobacco Settlement

a

Includes interest earnings from other dedicated funds.

b

Four states had not made decisions on the use of payments as of April 2001. Tennessee established 

an endowment fund but did not allocate payments to this fund.

c

36 states established at least one type of dedicated fund; 15 of those states established both special 

and endowment funds.

Source: GAO analysis.

In establishing dedicated funds, several state legislatures opted to delegate 

decision-making authority over use of the funds to boards and/or 

commissions. For example, Virginia created the Tobacco Indemnification 

and Community Revitalization Commission (TICR). The Commission is 

composed of state legislators, agency heads, representatives of the 

agricultural community, and other citizens. While the MSA payments to the 

TICR fund may only be used for payments to tobacco farmers and 

economic development in tobacco communities, the Commission 

determines the specific allocations from the fund. In Oklahoma, voters 

approved the creation of the Tobacco Settlement Endowment Trust Fund 

and a Board of Directors distributes the earnings of the fund among 

specified programs. Ohio created two new foundations that receive MSA 

payments, the Tobacco Cessation and Control Foundation and the 

Southern Ohio Agricultural and Community Development Foundation. 

Each of these foundations is governed by a separate board of trustees.

Pennsylvania b bb

Rhode Island 0 0 100

South Carolina X X 100 0 0

South Dakota X X a 100 0

Tennessee X b bb

Utah X 0 50 50

Vermont X X 100 a 0

Virginia X 60 0 40

Washington X 3 0 97

West Virginia X X 50 50 0

Wisconsin X 12 0 88

Wyoming X X a 100 0

Totalc 32 19 n/a n/a n/a

Dedicated fund type Percent allocation of receipts

State Special Endowment Special Endowment General
Page 26 GAO-01-851 Tobacco Settlement

States Use MSA 

Payments for Many 

Purposes

The Master Settlement Agreement does not require states to use the 

payments for any particular purpose and states had varying views of the 

settlement payments. Because claims for compensation for past health 

care costs, including Medicaid, were the basis for many of the initial 

lawsuits filed by the states, many states gave high priority to the use of 

MSA payments for health related funding and tobacco control programs. 

Some states also 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 costs of health care. States’ other priorities and mandates included 

education, infrastructure projects and funding budget reserves to be saved 

for future needs. As a result, the states’ total allocations fund a variety of 

programs. Figure 1 shows the major categories of states’ use of MSA 

payments. 

Our analysis of states’ use of MSA payments shows that during fiscal years 

2000 and 2001 states allocated seven percent of their payments to tobacco 

control efforts and another six percent for tobacco growers and economic 

development projects. The single largest category of funding was for health 

related purposes. Other major areas of funding included education and 

social services, infrastructure and general purposes including budget 

reserves. Finally, a substantial amount of the MSA payments was not 

allocated during the two fiscal years. States reported on a total of 

$11.6 billion in estimated MSA payments for fiscal year 2000 and 2001. (See 

appendix I for definitions of the allocation categories and a description of 

our methodology.) Table 5 shows the percentage of each state’s individual 

allocation to these categories. 
Page 27 GAO-01-851 Tobacco Settlement

Table 5: Percent Allocations of MSA Payments by Category, State Fiscal Years 2000 and 2001

Other budget priorities

State

Tobacco

controla

Assistance for

tobacco

growers

and economic

development in

tobacco states Health

Education

and social

services

Tax

reductions Infrastructure

General

purposes/

reserves Unallocatedb Total

Alabama 0.2 7.1 37.6 46.4 0.0 0.0 8.7 0.0 100.0

Alaska 6.1 0.0 91.2 2.6 0.0 0.0 0.0 0.0 100.0

Arizona 0.0 0.0 80.0 0.0 0.0 20.0 0.0 0.0 100.0

Arkansas 5.7 0.0 35.8 0.0 0.0 5.7 0.0 52.9 100.0

California 0.0 0.0 100.0 0.0 0.0 0.0 0.0 0.0 100.0

Colorado 10.6 0.0 22.1 13.4 0.0 0.7 0.0 53.2 100.0

Connecticut 1.9 0.0 29.6 22.4 38.2 0.0 7.8 0.0 100.0

Delaware 5.0 0.0 24.9 0.0 0.0 0.0 26.2 43.9 100.0

Georgia 4.6 23.1 31.8 0.0 0.0 0.0 0.0 40.5 100.0

Hawaii 15.2 0.0 21.3 0.0 0.0 0.0 24.4 39.0 100.0

Idaho 5.8 0.0 0.0 0.0 0.0 0.0 0.0 94.2 100.0

Illinois 4.8 0.0 15.0 0.3 51.7 4.1 24.1 0.0 100.0

Indiana 12.0 0.0 29.7 0.0 0.0 3.4 0.0 54.8 100.0

Iowa 7.6 0.0 37.1 0.0 0.0 0.0 52.5 2.8 100.0

Kansas 0.4 0.0 0.0 27.6 0.0 0.0 72.0 0.0 100.0

Kentucky 2.0 50.0 8.7 39.3 0.0 0.0 0.0 0.0 100.0

Louisiana 0.5 0.0 65.7 27.5 0.0 3.1 3.3 -0.1 100.0

Maine 19.4 0.0 69.8 8.8 0.0 0.0 0.9 1.2 100.0

Maryland 5.5 3.5 53.3 16.3 0.0 0.0 24.8 -3.4 100.0

Massachusetts 5.2 0.0 90.3 0.0 0.0 4.5 0.0 0.0 100.0

Michigan 0.0 0.0 28.0 57.7 0.0 0.0 0.0 14.3 100.0

Missouric 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0

Montana 11.5 0.0 16.4 2.6 0.0 0.0 69.5 0.0 100.0

Nebraska 19.8 0.0 80.2 0.0 0.0 0.0 0.0 0.0 100.0

Nevada 10.0 0.0 35.0 55.0 0.0 0.0 0.0 0.0 100.0

New 

Hampshire

3.2 0.0 0.0 96.4 0.0 0.0 0.5 0.0 100.0

New Jersey 8.8 0.0 71.8 9.6 0.0 2.2 7.6 0.0 100.0

New Mexico 2.6 0.0 22.9 0.0 0.0 0.0 71.4 3.1 100.0

New York 4.5 0.0 58.1 0.0 0.0 0.0 37.4 0.0 100.0

North Carolina 0.0 75.0 25.0 0.0 0.0 0.0 0.0 0.0 100.0
Page 28 GAO-01-851 Tobacco Settlement

a

See table 6 for more information on states with previous funding for tobacco control prior to the MSA 

and states in which an unspecified amount of MSA funding was provided for tobacco control. 

b

Unallocated category may include adjustments for over-allocation of MSA payments.

c

Missouri had not received any MSA payments.

d

Had not decided how to spend MSA payments.

Source: GAO analysis.

States’ Allocations for 

Tobacco Control Varied 

Widely 

According to our analysis, in fiscal years 2000 and 2001, 36 states allocated 

$790 million of their MSA payments to tobacco control programs. The goal 

of these programs is to reduce tobacco use through various intervention 

strategies including promoting smoking cessation and preventing youth 

from starting to smoke. The amounts of the state allocations to these 

programs varied widely. In approximately one-third of the states, the 

North Dakota 0.0 0.0 10.0 45.0 0.0 45.0 0.0 0.0 100.0

Ohio 31.3 3.0 2.0 1.8 0.0 18.4 2.7 40.8 100.0

Oklahoma 1.3 0.0 64.6 2.7 0.0 0.0 31.3 0.0 100.0

Oregond 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0

Pennsylvaniad 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0

Rhode Island 0.0 0.0 0.0 0.0 0.0 0.0 100.0 0.0 100.0

South Carolina 1.1 0.0 98.9 0.0 0.0 0.0 0.0 0.0 100.0

South Dakota 1.4 0.0 0.0 0.0 0.0 0.0 0.2 98.4 100.0

Tennesseed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0 100.0

Utah 8.3 0.0 19.7 4.1 0.0 0.0 50.0 17.9 100.0

Vermont 29.9 0.0 68.2 0.0 0.0 0.0 0.0 1.9 100.0

Virginia 10.0 50.1 0.0 0.0 0.0 0.0 39.9 0.0 100.0

Washington 33.4 0.0 66.3 0.0 0.0 0.0 0.2 0.0 100.0

West Virginia 4.4 0.0 95.6 0.0 0.0 0.0 0.0 0.0 100.0

Wisconsin 8.1 0.0 75.4 0.0 0.0 0.0 16.5 0.0 100.0

Wyoming 100.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 100.0

Total state 

allocations

6.8 5.6 41.3 9.3 3.6 2.5 10.6 20.2 100.0

Total number 

of states

36 7 35 19 2 10 23 21

Other budget priorities

State

Tobacco

controla

Assistance for

tobacco

growers

and economic

development in

tobacco states Health

Education

and social

services

Tax

reductions Infrastructure

General

purposes/

reserves Unallocatedb Total
Page 29 GAO-01-851 Tobacco Settlement

development of a strategic plan for tobacco control is now required. In 

allocating MSA payments for tobacco control programs, most states 

applied guidelines established by the Centers for Disease Control and 

Prevention (CDC) to some extent. Tobacco control is one area where 

looking only at MSA payments can be misleading. While all of the 42 states 

which were decided on the use of the payments now provide state funding 

for tobacco control programs, two of these states, Arizona and California, 

fund these programs through state cigarette excise taxes rather than 

through their MSA payments. Sixteen other states reported that they 

provided state funding for tobacco control prior to the MSA. Further, 

although over one-quarter of the states with decisions on MSA payments 

allocated at least 10 percent of their MSA payments to tobacco control, 

most of these states had spent little or nothing on tobacco control 

programs prior to the settlement. Some states allocated payments for 

tobacco control but did not specify the amount for these programs. Table 6 

summarizes the percentage of the states’ allocation of their MSA payments 

to tobacco control programs.

Table 6: Percentage of MSA Payments Dedicated to Tobacco Control for State Fiscal Years 2000 and 2001 (excluding Missouri, 

Oregon, Pennsylvania, and Tennessee)

Previous

fundinga

No

funding

Less

than 5 6-10 11-20 21-100

Amount

unspecifiedb

Alabama x x

Alaskac x x

Arkansasc x x

Arizonac x x

Californiad x x

Colorado x

Connecticut x

Delawarec x x

Georgia x

Hawaii x

Idahoc x x

Illinois x

Indiana x

Iowa x

Kansas x

Kentucky x
Page 30 GAO-01-851 Tobacco Settlement

a

State funding for tobacco control prior to the MSA.

b

State in which an unspecified amount of MSA funding for tobacco control was included in allocations 

for health programs or in the general fund. 

c

State is using MSA payments to supplement current tobacco control funding.

d

State had model tobacco control program as defined by CDC prior to the MSA. (Oregon also has a 

model program.)

Source: GAO analysis.

Louisiana x

Maine x

Marylandc x x

Massachusettsc,d x x

Michigan x x

Montana x

Nebraska x

Nevada x

New Hampshire x

New Jersey x

New Mexicoc x x

New Yorkc x x

North Carolina x

North Dakota x

Ohio x

Oklahomac x x

Rhode Island x

South Carolinac x x

South Dakotac x x

Utahc x x

Vermont x

Virginia x

Washingtonc x x

West Virginia x

Wisconsinc x x

Wyoming x

Total 18 2 17 9 6 4 4

Previous

fundinga

No

funding

Less

than 5 6-10 11-20 21-100

Amount

unspecifiedb
Page 31 GAO-01-851 Tobacco Settlement

MSA Payments Allowed States to 

Establish or Expand Tobacco 

Control Programs

For the most part, the states that dedicated larger percentages of their MSA 

payments to tobacco control were states that spent little or nothing on such 

programs prior to the settlement. The MSA provided 24 states that reported 

they had not provided any state funds for tobacco control24 prior to the 

agreement the opportunity to initiate funding for these programs.25

Fourteen states said that the MSA payments have allowed them to develop 

and implement more comprehensive tobacco control programs. (See Table 

6 for these 14 states.) 

Ten states dedicated over 10 percent of their MSA payments to tobacco 

control. Of these states, only Washington had dedicated state funds to 

tobacco control prior to the MSA. Three of these states, Hawaii, Ohio, and 

Virginia have established foundations to develop new tobacco control 

programs. Wyoming has dedicated its settlement payments to an 

endowment fund and all of the interest in fiscal years 2000 and 2001 was 

allocated to tobacco control.

Washington, New York and Maryland are examples of states that used 

tobacco settlement payments to significantly expand existing programs. 

Washington allocated over 33 percent of its MSA payments to create a new 

$100 million trust fund dedicated to prevent and reduce tobacco use by 

youth; it had previously provided less than $1 million for enforcement 

activities. Maryland provided $18.1 million, or 5.5 percent, of its settlement 

payments in fiscal year 2001 to fund a comprehensive tobacco control 

program and plans to meet the CDC guidelines in the future. Prior to the 

settlement, Maryland had allocated approximately $1.8 million in state 

funds for its tobacco control program. New York allocated $30 million or 

4.5 percent of its MSA payments in fiscal year 2001 to expand its tobacco 

control program which was previously funded with $2.5 million in state 

funds. New York also nearly doubled its cigarette excise tax to $1.11 from 

56 cents a pack with the proceeds of the tax increase designated for 

expansion of the state’s health insurance and tobacco control programs.

24Most states had small programs in place, which were funded exclusively with federal 

grants from agencies such as CDC and the Substance Abuse and Mental Health Services 

Administration (SAMHSA). In addition, states funded enforcement activities required under 

the Substance Abuse Prevention and Treatment Block Grant program, pursuant to 42 U.S.C. 

§ 300x-26. 

25Additionally, in Tennessee, although there was no final decision on the use of the MSA 

payments, 50 percent of the state’s total payments were earmarked for health, and the health 

advisory committee recommended that a portion of that amount be allocated to tobacco 

control programs.
Page 32 GAO-01-851 Tobacco Settlement

States Applied CDC Guidelines 

to Varying Degrees

A CDC report entitled Best Practices for Comprehensive Tobacco Control 

Programs sets out nine essential elements for a comprehensive program 

and provides CDC’s recommendations for an appropriate level of funding 

for each component based on specific characteristics of each state.26

Budget officials in 35 of the 46 MSA states told us that their state 

considered the CDC guidelines in determining how to allocate settlement 

funds. In another four states in which budget officials said that their state 

did not apply the guidelines, the pre-existing tobacco control programs 

have been cited as model programs by the CDC (Arizona, California, 

Massachusetts, and Oregon). The CDC reports that six states in our study 

(Arizona, Indiana, Maine, Massachusetts, Ohio, and Vermont) are meeting 

or exceeding the lower estimate of their recommended funding range by 

combining state and federal resources and private grants. In addition, 

Hawaii (at 98 percent) came close to meeting the Best Practices lower 

funding recommendations.

Of the states with model tobacco control programs, Arizona, California, 

and Oregon did not supplement their programs with allocations from the 

MSA payments. Officials in Arizona said that the state already spent 

$37.3 million from tobacco excise tax revenues in fiscal year 2001. 

California was the first state to establish a comprehensive tobacco control 

program funded by tobacco excise taxes in 1989 and the excise tax 

provided $114.6 million for tobacco control in fiscal year 2001. Oregon 

spends approximately $8.5 million annually for tobacco control, and the 

governor has also proposed that part of the settlement be used to expand 

tobacco control programs. Massachusetts did provide additional funding 

for tobacco control and allocated a total of $31 million in MSA payments in 

fiscal years 2000 and 2001 to supplement its program, bringing the total 

annual allocation to $63.3 million in fiscal year 2001.

States Allocated Largest 

Share of MSA Payments to 

Health Care

Thirty-five states allocated a portion of their MSA payments for healthrelated purposes not specifically related to tobacco control for a total of 

nearly $4.8 billion in fiscal years 2000 and 2001. These allocations include 

funding for Medicaid and SCHIP, mental health, substance abuse, public 

health, medical research, medical technology, and long-term care. The 

extent to which these states allocated MSA payments for health purposes 

varied considerably: 16 states allocated more than half of their payments to 

26Centers for Disease Control and Prevention, Best Practices for Comprehensive Tobacco 

Control Programs—August 1999.
Page 33 GAO-01-851 Tobacco Settlement

health care and in several of these states health allocations composed more 

than 90 percent of the state’s total MSA payments. California was the only 

state that allocated all of its payments to health programs in fiscal years 

2000 and 2001. (See Table 5 for the share of each state’s allocation to health 

care.) 

Eighteen states reported that they have used MSA payments to increase 

enrollment in existing health insurance programs for low-income 

individuals, usually through Medicaid or SCHIP.27 In addition, several of 

these states have allocated their MSA payments to implement SCHIP for 

the first time (e.g., Hawaii, Montana, and Utah). Other states allocated 

payments for Medicaid and SCHIP but used these amounts for purposes 

other than expanding health insurance coverage, such as increasing 

services for existing beneficiaries, increasing reimbursement rates to 

providers, and providing prescription drug coverage for senior citizens.

Arizona, California and New York are examples of states that used MSA 

payments to significantly expand state health care programs. In all three 

states the health care expansion is expected to cost more than the state’s 

total MSA payments, and the state plans to use other funding sources to 

fully fund the programs. In Arizona the voter referendum dedicated all of 

the state’s MSA payments to a large expansion of the Arizona Health Care 

Cost Containment System (AHCCCS)—Arizona’s Medicaid program. 

Beginning in fiscal year 2002, eligibility for AHCCCS will be expanded to all 

people with incomes below 100 percent of the federal poverty level, 

increasing access for as many as 380,000 people. This expansion is 

expected eventually to cost as much as $140 million per year. California 

used all of its MSA payments, a total of $900 million, to expand the state’s 

public health insurance programs. This expansion will encompass several 

programs and include services for all individuals eligible for SCHIP, 

enhanced Medicaid coverage for working families, and increased payment 

rates for providers who participate in the state’s public health insurance 

programs, including Medicaid. Similarly, New York enacted a new Health 

Care Reform Act (HCRA 2000) and dedicated $388 million to create a new, 

comprehensive program for the uninsured. This program, called “Healthy 

New York,” which will eventually receive 70 percent of the state’s annual 

MSA payments, also encompasses several initiatives including expansion 

27These states were Alabama, Arizona, Arkansas, California, Connecticut, Delaware, 

Georgia, Hawaii, Kentucky, Maine, Massachusetts, Montana, New Jersey, New Mexico, New 

York, South Carolina, Utah, and Washington. 
Page 34 GAO-01-851 Tobacco Settlement

of SCHIP to include parents of children already covered by the program; 

increases in Medicaid eligibility to include families with incomes below 150 

percent of the federal poverty level and individuals with incomes below 100 

percent of the federal poverty level; and health insurance subsidies for 

certain individuals, families, and small businesses.

Some Tobacco States 

Provide Assistance for 

Tobacco Growers and 

Economic Development 

Projects 

Seven of the 13 tobacco states allocated $651 million of their MSA 

payments for assistance to tobacco growers and/or economic development 

projects. Because most tobacco farming and manufacturing jobs are 

concentrated in regions in just a few states, declines in tobacco 

consumption could result in job losses in all sectors of the economy of 

these areas.28 To help mitigate these economic consequences, these states 

allocated a total of 14 percent of their MSA payments to fund projects 

aimed at stabilizing the economy of the tobacco regions within the state 

and 7 percent for direct payments to tobacco growers. North Carolina, 

Kentucky and Virginia, which produce 74 percent of the country’s tobacco 

crop, allocated MSA payments for both of these purposes. Of the six 

tobacco states that did not allocate payments for either of these purposes, 

Indiana and West Virginia produce a relatively small share of the country’s 

tobacco, South Carolina plans to allocate payments for these purposes in 

the future, and the remaining three states had either not received MSA 

payments or not made a decision on the use of their payments. Table 7 

shows the percentage of each state’s MSA payments allocated for each of 

these purposes in fiscal years 2000 and 2001.29

28An earlier GAO report, Tobacco: Issues Surrounding a National Tobacco Settlement

(GAO/RCED-98-110, April 15, 1998), studied the potential effects of a tobacco settlement on 

the economy of this region. 

29Tobacco growers also receive additional payments as part of a separate, “Phase II,”

agreement with the tobacco industry. See appendix VI for information on this agreement.
Page 35 GAO-01-851 Tobacco Settlement

Table 7: Percentage of MSA Payments for Economic Development and Tobacco 

Growers in Ten Tobacco States for State Fiscal Years 2000 and 2001

Notes: 

1. Table excludes three tobacco states that had either not received funds (Missouri) or had not made 

decisions regarding allocations (Pennsylvania and Tennessee).

2. North Carolina allotted 25 percent of its settlement payments to a trust fund aimed at assisting 

tobacco growers—all or part of which will be used to make direct payments to these growers. However, 

the state had not yet allocated specific amounts for specific purposes.

3. Georgia’s funding for economic development includes funds that may be used to compensate 

farmers in the event of crop loss due to drought.

Economic Development Projects 

in Tobacco States 

Six tobacco states allocated MSA payments for economic development 

projects, mostly in the tobacco regions of these states, in order to ease the 

burden of declining tobacco production. North Carolina and Kentucky, the 

two largest producers of tobacco, each allocated substantial amounts of 

their MSA payments for economic development, whereas Ohio and 

Alabama, which produce a much smaller amount of tobacco, allocated a 

relatively small percentage of their payments for this purpose. The tobacco 

states have taken different approaches to assisting the regions that will be 

most affected by declines in tobacco consumption. 

Several tobacco states used MSA payments to offer educational assistance 

such as scholarships to community colleges and job training for tobacco 

growers to help them transition to other careers. Several states also funded 

research projects to identify new uses for tobacco or other cash crops that 

farmers could grow instead of tobacco. In addition, several states used 

State

Percent of funds for

economic development

Percent of funds for direct

payments to tobacco

growers

Alabama 7 0

Georgia 23 0

Indiana 0 0

Kentucky 35 15

Maryland 0 4

North Carolina 50 25

Ohio 3 0

South Carolina 0 0

Virginia 15 35

West Virginia 0 0

Average For 10 tobacco 

states

14 7
Page 36 GAO-01-851 Tobacco Settlement

MSA payments to provide economic incentives to help develop the 

economy of rural tobacco regions. For example, Alabama securitized a 

portion of the MSA payments to finance economic development projects 

including construction of an automobile manufacturing plant. While some 

initiatives focused on tobacco regions, some were broader. Some states 

used MSA payments for statewide agricultural priorities that affect tobacco 

growers indirectly. Georgia, for example, used payments for rural sewer 

and water projects.

Kentucky and North Carolina both allocated substantial amounts for 

economic development in tobacco regions. Kentucky established the 

Agricultural Development Fund which received 35 percent, or $87 million, 

of the state’s MSA payments. Kentucky plans to provide a variety of 

economic assistance programs to the state’s agricultural community, 

including programs that will provide business development and technical 

assistance to farmers and distribute funds for farm diversification, 

cooperative development, marketing, and new product development. North 

Carolina allocated 50 percent of its MSA payments, a total of $168 million, 

to projects directed at areas whose economy is dependent upon tobacco 

production. Specifically, the state created the Golden LEAF (Long-term 

Economic Advancement Foundation) to provide economic assistance to 

tobacco-dependent regions of North Carolina. The Golden LEAF will fund a 

range of programs including education, job training and employment, 

scientific research to develop new uses for tobacco or alternative cash 

crops, and recruitment of new industries to rural areas of the state. In 

December 2000, the foundation awarded $5 million in grant funds for 39 

projects.

Direct Payments to Tobacco 

Growers

Four tobacco states allocated MSA payments for direct payments to 

tobacco growers. Maryland is the only state that offered to pay farmers 

specifically to stop growing tobacco; Kentucky and Virginia provided 

subsidies or direct payments to tobacco farmers with no strings attached. 

North Carolina has not yet allocated specific amounts for direct payments, 

but its program will not require farmers to cease or reduce tobacco 

production. 

Maryland and Virginia provide an illustration of two states with different 

levels of tobacco production and different approaches to using their MSA 

payments for assistance to tobacco farmers. Maryland convened a special 

task force that developed a long-term plan with two main components: a 

tobacco buyout and a tobacco transition program. Both of these programs 

are designed to encourage farmers to cease tobacco production but to 
Page 37 GAO-01-851 Tobacco Settlement

remain in the agriculture business. Only the buyout program was 

operational in fiscal years 2000 and 2001, and Maryland allocated a total of 

$11.5 million for this program. Payments will be based on the growers’

recent tobacco production and participants will receive payments based on 

this level of production for a period of ten years to ease the transition to 

other crops. The state’s program requires participants to agree both to 

permanently cease production of tobacco for cigarettes and other personal 

consumption, and to keep the land in agricultural production for ten years. 

The property must also carry a deed prohibiting, in perpetuity, the 

production of tobacco for cigarettes and personal consumption. In 

contrast, Virginia focused on compensation rather than reducing 

production. Virginia allocated 35 percent of its MSA payments, a total of 

$102 million, for direct payments to tobacco growers. These subsidies are 

not designed to encourage growers to end tobacco production but are 

intended to compensate tobacco growers for their business losses such as 

investments in specialized tobacco equipment and lost production 

opportunities associated with declines in the demand for tobacco. 

MSA Payments Were Also 

Used for Many Other Budget 

Priorities 

State budget officials said that they used MSA payments to fund other 

needs and priorities in addition to tobacco control, health care, and 

assistance to tobacco farmers and communities. For example, education 

and infrastructure were areas of long-term need that required additional 

funding that had not been available in some states prior to the MSA. In 

other cases, states did not make decisions on the use of all of their MSA 

payments during the period of our study. In fiscal years 2000 and 2001, 

states left 20 percent of their total MSA payments unallocated and allocated 

another 26 percent for other priorities such as education and social 

services, infrastructure projects, and general purposes including budget 

reserves, attorneys fees and amounts not earmarked for any specific 

purpose. (See Table 5 for each state’s allocations to each of these 

categories.)

Education and Social Services States allocated over $1 billion of their MSA payments to education and 

social services including programs for children and senior citizens. Of this 

amount, 12 states allocated $848 million in MSA payments to education. 

This category included allocations for preschool and daycare programs, 

elementary and secondary education (grades kindergarten through 12) and 

higher education. Louisiana and Maine allocated MSA payments to 

preschool and daycare programs, such as Head Start. Nine states 

(Colorado, Connecticut, Kentucky, Louisiana, Maryland, Montana, New 

Hampshire, North Dakota, and Ohio) allocated funds to local districts for a 
Page 38 GAO-01-851 Tobacco Settlement

range of purposes including upgrading technology, increasing teachers’

salaries, enhancing teacher training and augmenting special education 

programs. Seven states (Connecticut, Kentucky, Louisiana, Maryland, 

Michigan, Nevada, and Ohio) allocated funds for higher education 

programs at colleges, universities, and community colleges and some of 

these allocations included funding for new college scholarship programs. 

In the area of elementary and secondary education, New Hampshire 

allocated 96 percent of its MSA payments, $92 million, to elementary and 

secondary education in order to comply with a state court decision on 

funding of the state’s public schools. In 1997, the New Hampshire Supreme 

Court ruled that the state’s reliance on local property taxes to fund nearly 

90 percent of the cost of public education placed a disproportionate burden 

on residents in districts with low property values. Prior to the MSA, the 

state had attempted to address the court decision by increasing statewide 

property taxes, but the court subsequently ruled that the plan to phase in 

the property tax increase in certain districts with higher property values 

was unconstitutional. As a result, New Hampshire relied on MSA payments 

as a source of additional funding for local school districts.

Michigan focused on higher education and created a program that will 

allocate 75 percent of its MSA payments beginning in fiscal year 2002 to 

provide college scholarships for high school students who achieve certain 

scores on statewide examinations. Officials told us that this program was a 

long-time priority for Michigan’s Governor, but prior to the MSA payments 

the state did not have sufficient resources available to fund the program. 

Students received grants for the first time in fall 2000, totaling $60 million. 

Under the program, high school juniors and seniors who pass an 

assessment test may receive a one-time $2,500 grant to pay for college. 

Also, students currently in grades 7 and 8 who pass the test may receive a 

$500 grant when they go to college in addition to the $2,500 grant. Students 

have up to seven years from the time they graduate to claim their grants. 

Kansas (28 percent) and Alabama (45 percent) each allocated a substantial 

portion of their MSA payments to children’s programs. These states funded 

programs for children in a variety of areas, including health and education, 

for services such as immunizations, after-school activities, mentoring 

efforts, and research, but they did not specify the precise amounts 

allocated to each of these areas. Kansas established the Kansas 

Endowment for Youth (KEY) Fund which will be invested to provide a 

permanent source of funding for children’s programs. In fiscal years 2000 

and 2001, the state allocated a total of $55 million from this fund for at-risk 
Page 39 GAO-01-851 Tobacco Settlement

youth, prenatal care, parent education, pediatric biomedical research, and 

school violence prevention. Beginning in fiscal year 2001, Kansas will direct 

all of its MSA payments to KEY and a set percentage of the fund will be 

allocated for children’s programs each year . Similarly, Alabama allocated 

over $100 million of its MSA payments to its Children First Trust Fund. 

According to a state official, the Governor and legislature felt there was a 

need for new programs serving children and adolescents, but because 

Alabama earmarks nearly all of its revenue, little funding was available for 

new programs. The MSA payments provided the state with a new funding 

source. Alabama’s trust fund was used to pay for programs including 

school safety, foster care, juvenile justice, teen pregnancy, literacy, and 

drug and alcohol abuse.

Infrastructure Ten states allocated $294 million for physical infrastructure purposes. 

States dedicated MSA payments to four types of physical infrastructure: 

health care, long-term care and retirement facilities, education facilities, 

water and transportation projects, and municipal and state buildings. 

Arizona, Arkansas, Colorado, Indiana, and Massachusetts allocated 

payments to construction and renovation of health facilities such as 

hospitals, medical research facilities, home health centers, and retirement 

facilities for veterans. In addition, Arkansas, New Jersey, and Ohio 

allocated payments for constructing, upgrading, and/or remodeling schools 

and universities. Louisiana and North Dakota allocated MSA payments for 

transportation and water projects. Finally, Illinois and Louisiana used 

payments to improve municipal and state buildings. 

Both North Dakota and Ohio are examples of states that plan to allocate 

millions annually to infrastructure projects. North Dakota enacted 

legislation placing 45 percent of the state’s annual MSA payments in a water 

management trust fund dedicated for projects related to the state’s longterm water development and management needs. Also, the fund will be 

used to repay bonds the state issued to finance several flood control 

projects, the Southwest Pipeline project, and a lake outlet project. Ohio 

used 18 percent of its allocations, or $138 million, for school construction 

which has been a recent priority in Ohio. The state created two dedicated 

funds—an endowment to provide a permanent source of revenue for 

capital projects for education and a trust fund to begin funding 

construction and renovation projects for elementary and secondary 

schools.

Tax Reductions Only Connecticut and Illinois used MSA payments explicitly to fund tax 

reductions, but the total amounts they allocated for this purpose were large 
Page 40 GAO-01-851 Tobacco Settlement

4 percent of the total MSA allocations for all states. Connecticut used a 

total of 38 percent, or $50 million per year, of its MSA payments for 

property tax reductions. Illinois used 50 percent of its MSA payments, $316 

million, for an earned income tax credit and a one-time property tax 

reduction. For both states, these were part of a series of recent tax 

reductions.

Funds Allocated for Budget 

Reserves and Other General 

Purposes

States allocated $1.2 billion for budget reserves and other general 

purposes. Of this amount, $602.8 million was allocated for state budget 

reserves or rainy day funds, which act as state savings accounts, allowing 

states to save for a future economic downturn or emergency. Nine states 

(Delaware, Hawaii, Illinois, Louisiana, Montana, New Jersey, New Mexico, 

New York, Oklahoma) allocated MSA payments to reserves. Budget 

officials in five of these states told us that their state made one-time 

deposits to a rainy day or reserve fund and does not plan to allocate further 

payments for this purpose. New York made a one-time allocation of

37 percent of its MSA payments to the state’s Debt Reduction Reserve 

Fund.

Hawaii and New Mexico took unique approaches to making allocations to 

budget reserves. Hawaii plans to allocate 40 percent of its MSA payments 

each year to a new rainy day fund that was established as a result of MSA 

payments; prior to the settlement, the state did not have a rainy day fund. 

New Mexico created a special long-term reserve fund that is distinct from a 

rainy day fund. New Mexico devotes 50 percent of its MSA payments to a 

special “permanent fund,” which is intended to be a long-term savings fund 

for the benefit of future generations. New legislation would be required to 

access this fund. New Mexico had other permanent funds with assets 

totaling more than $12 billion. 

Sixteen states allocated $623 million of the MSA payments for other general 

purposes. This category includes allocations to the state’s general fund—

not earmarked for any particular purpose—and some allocations for other 

specific purposes such as attorneys’ fees. In most cases, if MSA payments 

were deposited into the general fund, states could not tell us the purposes 

for which the payments were used. Iowa, Kansas, Oklahoma, and 

Wisconsin made one-time transfers to their general funds, and some of 

these deposits were a substantial portion of the states’ MSA payments. For 

example Kansas made a one-time transfer of $70 million, or 56 percent, to 

cover revenue shortfalls. Other states decided to allocate set amounts 

annually to their general fund and to make decisions about the use of these 

payments on a year by year basis. For example, Virginia allocated 
Page 41 GAO-01-851 Tobacco Settlement

40 percent of its MSA payments each year—over $115 million in fiscal years 

2000 and 2001—to its general fund. Rhode Island allocated all of its MSA 

payments, $100 million in fiscal years 2000 and 2001, to its general fund, 

and the state plans to continue this practice in the future. 

Some states’ allocations for general purposes reflected payments for 

attorneys who worked on tobacco lawsuits; in most cases, these amounts 

represented a relatively small percentage of MSA allocations. Maryland is 

unusual among these states in that it has reserved 25 percent of all MSA 

payments pending resolution of a dispute over attorneys’ fees. State 

officials told us that prior to the MSA, Maryland entered into a contract 

with a private attorney for a fee equal to 25 percent of the state’s share of 

the settlement. Because the MSA provides for payment of attorneys’ fees, 

this agreement has been contested and the funds have been set aside until 

the case is resolved. 

Unallocated MSA Payments More than $2 billion of the MSA payments in fiscal years 2000 and 2001 

remained unallocated as of April 2001. The 15 states with unallocated funds 

cited different reasons. In some states there is a year lag between the time 

the state receives the MSA payments and the time it allocates them for 

specific purposes. These states followed a practice of allocating only the 

MSA payments received in the previous fiscal year. In other states, a 

portion of the MSA payments remained unallocated after the 

appropriations process, leaving these amounts available for appropriation 

in future years pending decisions by each state’s governor and legislature. 

In Hawaii state law established a ceiling on the amount of MSA payments 

available for use; as a result, only a portion of the dollars could be 

distributed to specific funds during fiscal years 2000 and 2001. Since the 

state’s total MSA payments exceeded the limit, nearly $34 million in 

unallocated MSA payments will be available for appropriation in the future. 

Idaho, South Dakota, and Utah decided to distribute large portions of their 

settlement payments to endowment funds not designated for any particular 

purpose. South Dakota created a People’s Trust Fund into which all of the 

state’s MSA payments are deposited. The legislation creating the People’s 

Trust Fund did not dedicate the fund for any particular purpose, but only 

the interest is available to be spent. Similarly, Idaho enacted legislation 

requiring that all MSA payments be deposited into the Millennium Trust 

Fund, which is invested but does not have any specified purpose. Each 

year, the earnings on the fund may be appropriated without restrictions. 

This endowment fund is simply intended to provide a continuous source of 

funding for state programs. 
Page 42 GAO-01-851 Tobacco Settlement

Three states—Oregon, Pennsylvania, and Tennessee—had not made final 

decisions about the allocation of their MSA payments as of April 2001. In 

addition, Missouri had not received any MSA payments because it did not 

reach state-specific finality until late April 2001. 

Several States Considered 

Issuing Bonds Backed by 

MSA Payments

MSA payments have also been used to back bonds, which is known as 

“securitization.” Securitization is a type of structured financing based on 

the cash flow of receivables or rights to future payments. Securitization 

structures are different from traditional public finance and are sold 

differently from traditional municipal bonds. In the process of securitizing, 

state and local governments sell their tobacco settlement revenue stream 

to a special purpose entity (SPE) established for the purpose of issuing 

bonds backed by these funds and paying the debt service on the bonds. The 

SPE is designed to be legally separate and “bankruptcy remote” from the 

government entity. This means that the credit rating for these bonds is 

separate from the state or local government’s rating and is based on the 

credit worthiness of the tobacco industry and the structure of the 

financing. The government entity does not bear financial responsibility for 

the bonds, and the purchasers of the bonds bear any risk that the bonds 

will not be repaid. The interest paid on the bonds issued through 

securitizing the MSA payments may be either subject to federal and state 

income taxes or exempt from such taxes, depending on a number of factors 

including the intended use of the proceeds.

Securitization allows states to receive funds up front rather than over time 

as MSA payments are made according to the terms of the agreement. States 

have securitized to finance one-time expenses such as capital projects, 

paying down existing state or local debt, or establishing an endowment 

with a large initial amount. States have considered their overall needs in 

deciding whether to securitize the tobacco settlement revenues. Three 

states—Alabama, Alaska, and South Carolina—and many counties in New 

York state have already securitized a portion of the expected revenue 

stream, and ten additional states told us that securitization was under 

consideration. Budget officials in other states said that their states have 

rejected the option of securitizing these assets but that securitization may 

be considered again in the future.

Alabama and South Carolina, two tobacco states, securitized a portion of 

their MSA payments to finance economic development projects. Alabama 

was the first state to securitize MSA payments through an SPE in 

September 2000. The Alabama 21st Century Authority was created to issue 
Page 43 GAO-01-851 Tobacco Settlement

bonds for the purpose of promoting economic and industrial development, 

and it issued $50 million of tax-exempt bonds to fund an automobile 

manufacturing plant. In South Carolina, the Tobacco Settlement Revenue 

Management Authority was created to issue bonds to establish four 

dedicated funds for specific purposes. Two of the funds, which will receive 

25 percent of the proceeds of the bond issue, will be used to provide 

economic assistance. One will be used primarily to develop the state’s 

water and wastewater infrastructure and one will be used to compensate 

individuals for losses in tobacco production. In addition, 73 percent of the 

proceeds of the bond issue in South Carolina will be used to fund a variety 

of health care programs. South Carolina’s bond issue is the largest 

securitization of MSA payments to date and the first to issue taxable bonds 

for a portion of the transaction. 

New York City was the first locality to securitize MSA payments followed 

by several of the largest counties in New York State including Erie, Monroe, 

Nassau and Westchester. In addition, 17 counties in New York participated 

in a pooled transaction, and additional counties plan to participate in a 

future pooled transaction. All but two of these counties (Nassau and 

Westchester) have used the proceeds of the securitization to pay down 

their debt.30 For these counties, reducing their total debt has in turn 

allowed them to improve their individual credit ratings. Westchester 

County did not issue bonds to pay down existing debt but rather decided 

on a one-time securitization transaction to pay off its ten-year transitional 

obligation to subsidize the county medical center. New York City 

established the Tobacco Settlement Asset Securitization Corporation 

(TSASC) which issued bonds to finance capital projects including school 

construction. The City has been constrained by the state’s constitutional 

debt limit for some time and has capital needs that are greater than the debt 

limit allows. Selling the MSA payment stream to TSASC and issuing bonds 

for a portion of the future payments allowed the City to proceed with its 

capital program.

30In New York State, the debt limit is governed by the state constitution and is based on a 

percent (10 percent in New York City) of the full value of taxable real property within a 

municipality averaged over the current and four preceding fiscal years. 
Page 44 GAO-01-851 Tobacco Settlement

Many States Established 

Restrictions Against 

Supplantation

To ensure that MSA payments were used to expand or establish new 

programs, 16 states enacted legislation including a requirement that MSA 

payments be used to supplement rather than to replace or supplant existing 

state funding. The restrictions on supplantation are intended to help ensure 

that existing state funding will not be reduced and that MSA payments will 

increase the total amount of funding for selected programs.31 These 

restrictions apply to the portion of the state’s MSA payments that are 

deposited in dedicated funds established by states. The majority of these 

provisions apply to funds earmarked for health care and tobacco control 

programs. In a few states, these provisions apply to other uses such as 

education, social services, and agriculture. For example, in Maryland the 

provision applies to all MSA payments that are earmarked for three 

purposes—smoking cessation, health, and agriculture. In Louisiana the 

legislation requires that MSA payments allocated for education be used to 

supplement rather than replace existing state funding. (See appendix VII 

for a summary of the states’ restrictions against supplantation.) While the 

remaining states did not enact specific provisions, budget officials in 15 of 

these states reported to us that it was their policy not to supplant preexisting funding with MSA payments. 

Conclusions and 

Observations

During state fiscal years 2000 and 2001, most states allocated at least some 

portion of their MSA payments for tobacco control and health care while 

also considering other state budget needs. Many tobacco states responded 

to the demands for assistance to tobacco growers and economic 

development by providing funding in those areas. Other needs such as 

education, infrastructure and budget stabilization were also priorities in 

several states, and a large portion of the MSA payments was not allocated 

in the two fiscal years of our study. 

Consistent with the long-term nature of the MSA payments, states 

developed plans for the payments including enacting laws and establishing 

dedicated funds earmarking their future use. Although these plans are 

intended for the long term, they may be affected by fluctuations in state 

budget conditions. When the states first began receiving and planning for 

the use of their MSA payments for fiscal years 2000 and 2001, they were 

31An earlier GAO report, Federal Grants: Design Improvements Could Help Federal 

Resources Go Further (GAO/AIMD-97-7, December 18,1996), studied supplantation 

restrictions in the federal grant system. 
Page 45 GAO-01-851 Tobacco Settlement

budgeting during a period of projected surpluses. Most states had the 

budgetary resources to fund mandated needs from other state revenues to 

allow them to dedicate the settlement payments for expansions in health 

care, tobacco control, and other new projects. As the forecasts for state 

budgets begin to change, states may be faced with more difficult choices in 

determining the uses of their MSA payments for the near future. The 

earmarking of the payment stream may have the effect of subsidizing state 

programs if states reduce their own funding in these areas. States that 

included provisions against supplantation when they created dedicated 

funds for the MSA payments, or established endowment funds that prevent 

the use of the principal, have developed some protection against using the 

payments to subsidize state programs. States’ future decisions over the use 

of the MSA payments will likely require balancing state-specific priorities 

and needs within the context of overall budget conditions.

As agreed with your office, unless you release this report earlier, we will 

not distribute it until 30 days from the date of this letter. At that time, we 

will send copies to relevant congressional committees and subcommittees 

and other interested parties. We will also make copies available to others 

upon request. If you or your staff have any questions concerning this letter, 

please contact me at (202) 512-9573. Key contributors to this assignment 

were Thomas James, Amelia Shachoy, John Forrester, Carol Henn, 

Rosellen McCarthy, Brady Goldsmith, and Thomas Yatsco.

Sincerely yours,

Paul L. Posner

Managing Director

Federal Budget Issues, Strategic Issues
Page 46 GAO-01-851 Tobacco Settlement

Appendix I

Scope and Methodology ApApenednxidexiIs

This review focused on states’ use of payments received under the Master 

Settlement Agreement (MSA) for state fiscal years 2000 and 2001. We 

collected and analyzed budget-related and legislative documents and 

interviewed officials from the executive budget offices on the plans for use 

of the MSA payments in the 46 states that were a party to the MSA. In some 

cases, our discussions included officials from the state attorney general’s 

office, the governor’s office and the state agency responsible for tobacco 

control programs. We also reviewed previous GAO reports and other recent 

reports and studies, and we spoke with representatives from the 

organizations conducting these studies.1

 We spoke with experts to obtain 

background information on specific issues covered in this report, such as 

the legal provisions of the MSA and securitization of MSA payments. We 

conducted our work from July 2000 through April 2001 in accordance with 

generally accepted government auditing standards.

We obtained information on the states’ plans for MSA payments through 

state fiscal year 2001. We conducted our work and collected information 

for fiscal year 2001 while the fiscal year was in progress and states were at 

various stages in the process of planning for the use of their payments. 

Because we completed our fieldwork in April, we did not obtain final 

information for the fiscal year, which for most states ends on June 30.2

 In 

order to present as comprehensive a review as possible, we report on the 

total amounts planned for by states even if final decisions were not made or 

all amounts were not appropriated by the legislature. We refer to these total 

amounts planned for and reported by states as “allocations.” State 

allocations for fiscal years 2000 and 2001 totaled $11.6 billion. While we did 

gather budget documentation on states’ plans, we did not verify the 

accuracy of the data reported by states. 

1

See appendix VIII for a list of other reports.

2

In most states, the state fiscal year begins on July 1 and ends on June 30; the exceptions are: 

Alabama and Michigan, where the fiscal year begins on October 1, and New York, where the 

fiscal year begins on April 1.
Appendix I

Scope and Methodology

Page 47 GAO-01-851 Tobacco Settlement

For informational purposes, we also obtained data on actual MSA 

payments made by the tobacco companies to states, which totaled $13.5 

billion through April 2001.3

 Most states developed plans and allocated 

dollars based on estimated payments for the fiscal year. Because the 

payments made by the tobacco companies are subject to adjustments that 

are not determined until the payments are made, actual payments received 

by the states differed from estimated payment amounts and from the states’

allocations of $11.6 billion. The major difference between the $13.5 billion 

in payments received and the $11.6 billion in states’ allocations is the 

payments to the counties in California and New York. These payments were 

reported in the total payments to those states4

 but were not included in the 

total allocations for those states. Our study tracked only the states’ use of 

MSA payments and not the allocations of counties’ share of the payments. 

Categorization of States’

Allocations

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

categories for the program areas to which states allocated their MSA 

payments. (See the definitions of these categories below.) We used states’

descriptions of their programs to categorize the $11.6 billion in allocations 

according to these definitions. In cases where no final decision had been 

made on the allocation of the payments, we reported these amounts in the 

“unallocated” category. In cases where the total amount had not been 

appropriated by the legislature but the funds had been earmarked for a 

particular purpose (e.g., health), we reported the allocation amounts in the 

category for which they had been earmarked. We used this method to 

categorize all allocations including those to dedicated funds and states’

general funds. Except where noted in examples of individual state’s 

allocations, for the purposes of our analysis, we combined the states’

allocations for fiscal years 2000 and 2001 and reported on the total for the 

two-year period. 

Definitions for Categories of 

States’ Allocations 

Economic Development for Tobacco Regions: This category comprises 

amounts allocated for economic development projects in tobacco states 

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

3

We obtained this data from the National Association of Attorneys General (NAAG) which 

monitors the actual payments made to states as determined by an Independent Auditor.

4

See table 3: Original Estimated and Actual MSA Payments Received by States as of April 

2001 for these amounts.
Appendix I

Scope and Methodology

Page 48 GAO-01-851 Tobacco Settlement

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 comprises 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.

General Purposes: This category comprises amounts allocated for 

attorneys fees and other items, such as law enforcement community 

development, that could not be placed in a more precise category. This 

category also includes allocations to the state’s general fund that were not 

earmarked for any particular purpose. 

Health: This category comprises 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.

Infrastructure: This category comprises 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. 

Social Services: This category comprises 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 

allocations to special funds established for children’s programs.

Payments to Tobacco Growers: This category comprises amounts 

allocated for direct payments to tobacco growers including subsidies and 

crop conversion programs. 

Reserves/Rainy Day Funds: This category comprises amounts allocated 

to state budget reserves such as rainy day and budget stabilization funds 

not earmarked for specific programs. Allocations to reserves that are 

earmarked for specific areas are categorized under those areas (e.g., 

health). 
Appendix I

Scope and Methodology

Page 49 GAO-01-851 Tobacco Settlement

Tax Reductions: This category comprises amounts allocated for tax 

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

Tobacco Control: This category comprises of amounts allocated for 

tobacco control programs such as prevention, including youth education, 

enforcement and cessation services. 

Unallocated: This category comprises 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 MSA 

payments were received that will be available for allocation in a subsequent 

fiscal year; unallocated interest earned from dedicated funds; and amounts 

that have not been allocated because the state had not made a decision on 

the use of the MSA payments.

Note: In this report, we consolidated the following related categories: (1) education and social services 

and (2) economic development for tobacco states and payments to tobacco growers. 
Page 50 GAO-01-851 Tobacco Settlement

Appendix II

Allocation of MSA Payments in California ApendxiI

Total payments in California are allocated 50 percent to the state and 50 

percent to local governments. The 58 counties receive 90 percent of the 

local share, to be distributed based on population, and the remaining 10 

percent is split equally among four cities: Los Angeles, San Diego, San 

Francisco, and San Jose.

Entity Percentage

State of California 50.000

Alameda 1.934

Alpine 0.002

Amador 0.045

Butte 0.275

Calaveras 0.048

Colusa 0.025

Contra Costa 1.215

Del Norte 0.035

El Dorado 0.191

Fresno 1.009

Glenn 0.037

Humboldt 0.180

Imperial 0.165

Inyo 0.028

Kern 0.822

Kings 0.153

Lake 0.077

Lassen 0.042

Los Angeles County 13.402

City of Los Angeles 1.250

Madera 0.133

Marin 0.348

Mariposa 0.022

Mendocino 0.121

Merced 0.270

Modoc 0.015

Mono 0.015

Monterey 0.538

Napa 0.167
Appendix II

Allocation of MSA Payments in California

Page 51 GAO-01-851 Tobacco Settlement

Source: GAO analysis of data provided by California State Office of the Attorney General.

Nevada 0.119

Orange 3.645

Placer 0.261

Plumas 0.030

Riverside 1.770

Sacramento 1.574

San Benito 0.055

San Bernardino 2.145

San Diego County 3.777

City of San Diego 1.250

San Francisco County 1.095

City of San Francisco 1.250

San Joaquin 0.727

San Luis Obispo 0.328

San Mateo 0.982

Santa Barbara 0.559

Santa Clara 2.264

City of San Jose 1.250

Santa Cruz 0.347

Shasta 0.222

Sierra 0.005

Siskiyou 0.066

Solano 0.515

Sonoma 0.587

Stanislaus 0.560

Sutter 0.097

Tehama 0.075

Trinity 0.020

Tulare 0.472

Tuolumne 0.073

Ventura 1.012

Yolo 1.213

Yuba 0.088

Total 100.00

Entity Percentage
Page 52 GAO-01-851 Tobacco Settlement

Appendix III

Allocation of MSA Payments in New York ApendxiI

Total payments in New York are allocated 51 percent to the state and 49 

percent to the 57 counties and New York City. Allocation to the counties is 

based on the county share of Medicaid costs and population along with 

some specific considerations for individual counties.

Entity Percentage

New York State 51.176

Albany 0.593

Allegheny 0.107

Broome 0.446

Cattaraugus 0.179

Cayuga 0.166

Chautauqua 0.308

Chemung 0.212

Chenango 0.104

Clinton 0.170

Columbia 0.126

Cortland 0.100

Delaware 0.101

Dutchess 0.500

Erie 2.194

Essex 0.075

Franklin 0.098

Fulton 0.121

Genesee 0.118

Greene 0.085

Hamilton 0.013

Herkimer 0.142

Jefferson 0.190

Lewis 0.054

Livingston 0.112

Madison 0.131

Monroe 1.536

Montgomery 0.114

Nassau 2.739

New York City 26.670

Niagara 0.467
Appendix III

Allocation of MSA Payments in New York

Page 53 GAO-01-851 Tobacco Settlement

Source: New York Consent Decree.

Oneida 0.544

Onondaga 0.972

Ontario 0.181

Orange 0.564

Orleans 0.078

Oswego 0.239

Otsego 0.122

Putnam 0.152

Rensselaer 0.317

Rockland 0.560

St. Lawrence 0.239

Saratoga 0.304

Schenectady 0.319

Schoharie 0.063

Schuyler 0.038

Seneca 0.069

Steuben 0.211

Suffolk 2.673

Sullivan 0.155

Tioga 0.100

Tompkins 0.170

Ulster 0.334

Warren 0.113

Washington 0.113

Wayne 0.172

Westchester 1.926

Wyoming 0.081

Yates 0.044

Total 100.00

Entity Percentage
Page 54 GAO-01-851 Tobacco Settlement

Appendix IV

Master Settlement Agreement Payments ApendxiIV

Table 8: Original Estimated Payments through 2025 to 46 states, the District of Columbia, and 5 U.S. Territories

Dollars in thousands

Calendar year

Initial

payments Annual payments

Annual payments less

previously settled states

reduction

Strategic contribution

fund payments

1998 $2,400,000

1999

2000 2,472,000 $4,500,000 $3,939,750

2001 2,546,160 5,000,000 4,377,500

2002 2,622,545 6,500,000 5,690,750

2003 2,701,221 6,500,000 5,690,750

2004-2007 8,000,000 7,004,000

2008 8,139,000 7,143,000 $861,000

2009-2017 8,139,000 7,143,000 861,000

2018-2025 9,000,000 8,004,000

Total $12,741,926 $207,890,000 $183,176,750 $8,610,000
Appendix IV

Master Settlement Agreement Payments

Page 55 GAO-01-851 Tobacco Settlement

Note: Original estimated payments without adjustments other than the previously settled states 

reduction. The annual payment continues in perpetuity. The $300 million annual payments to the 

National Public Education Fund may continue in perpetuity.

Source: Master Settlement Agreement.

Base foundation

payments (American

Legacy Foundation)

National public education

fund payments

National Association of

Attorneys General

administration payments Attorney general enforcement fund

$150

$25,000 $250,000 150 $50,000

25,000 300,000 150

25,000 300,000 150

25,000 300,000 150

25,000 300,000 150

25,000 150

25,000

$250,000 $1,450,000 $1,500 $50,000
Page 56 GAO-01-851 Tobacco Settlement

Appendix V

Strategic Contribution Fund Payments ApendxiV

The Strategic Contribution Fund payments (made from 2008 through 2017) 

are intended to reflect the level of the contribution each state made toward 

final resolution of the state lawsuits against the tobacco companies and 

will be allocated to states based on a separate formula developed by a 

panel of former state attorneys general.

Dollars in thousands

State

SCF annual

payment Percent of total

Alabama $6,500 0.8

Alaska 14,739 1.7

Arizona 26,306 3.1

Arkansas 6,500 0.8

California 44,540 5.2

Colorado 20,271 2.4

Connecticut 28,526 3.3

Delaware 6,500 0.8

Georgia 8,062 0.9

Hawaii 20,359 2.4

Idaho 6,500 0.8

Illinois 23,393 2.7

Indiana 22,816 2.6

Iowa 23,428 2.7

Kansas 15,931 1.9

Kentucky 6,500 0.8

Louisiana 22,626 2.6

Maine 11,436 1.3

Maryland 28,313 3.3

Massachusetts 41,425 4.8

Michigan 22,189 2.6

Missouri 13,358 1.6

Montana 8,995 1.0

Nebraska 6,500 0.8

Nevada 8,871 1.0

New Hampshire 7,740 0.9

New Jersey 24,512 2.8

New Mexico 8,575 1.0
Appendix V

Strategic Contribution Fund Payments

Page 57 GAO-01-851 Tobacco Settlement

Note: Original estimated payments without adjustments. 

Source: GAO analysis of estimated Strategic Contribution Fund payments.

New York 47,246 5.5

North Carolina 16,723 1.9

North Dakota 14,971 1.7

Ohio 23,953 2.8

Oklahoma 26,860 3.1

Oregon 20,802 2.4

Pennsylvania 28,045 3.3

Rhode Island 9,432 1.1

South Carolina 11,470 1.3

South Dakota 6,500 0.8

Tennessee 6,500 0.8

Utah 15,720 1.8

Vermont 15,649 1.8

Virginia 6,500 0.8

Washington 49,634 5.8

West Virginia 19,609 2.3

Wisconsin 22,538 2.6

Wyoming 6,500 0.8

Subtotal (All 46 states) 834,066 96.9

District of Columbia and 5 U.S. 

territories

26,934 3.1

Total $861,000 100.0

Dollars in thousands

State

SCF annual

payment Percent of total
Page 58 GAO-01-851 Tobacco Settlement

Appendix VI

Phase II: The National Tobacco Grower 

Settlement Trust Agreement ApendxiVI

The Master Settlement Agreement (MSA) required the tobacco companies 

to meet with the political leadership of states with grower communities to 

address the economic concerns of these communities. The National 

Tobacco Grower Settlement Trust Agreement, referred to as Phase II, 

resulted from that requirement and is intended to compensate tobacco 

growers and quota owners1

 for potential reductions in their tobacco 

production and sales resulting from the MSA. The Phase II agreement was 

reached in July 1999 between the four major tobacco companies2

 and the 

14 states that produce and manufacture tobacco used for cigarettes. The 

agreement includes the 13 tobacco states that are a party to the MSA and 

the state of Florida, which reached an earlier, independent settlement with 

the tobacco industry. Tobacco production has remained principally in the 

southeastern states. Because most tobacco farming and manufacturing 

jobs are concentrated in this region, any declines in tobacco consumption 

could result in job losses in all sectors of the economy of this area. The 

Phase II agreement was intended to help mitigate any such consequences. 

Payments to States’

Tobacco Growers and 

Quota Owners

The Phase II agreement requires the tobacco companies to make payments 

to the National Tobacco Grower Settlement Trust each year for a period of 

12 years beginning in 1999 and continuing through 2010. The trust is 

administered by a trustee and payments are distributed from the trust 

directly to tobacco growers and quota owners in the states that are a party 

to the agreement. Each state’s growers and quota owners receive a fixed 

percentage of the payments from the trust. This percentage was calculated 

either on the basis of the 1998 basic quota for production of cigarette 

tobacco or, in states where no quota existed, 1998 production of tobacco 

for cigarettes.3

 Three states—Kentucky, North Carolina, and Tennessee—

are the largest producers of cigarette tobacco in the country, and growers 

and quota owners in those states receive over 75 percent of the Phase II 

payments. Table 8 identifies the percentage of the Phase II payments 

allocated to each state’s growers and quota owners. 

1

Generally speaking, a quota owner has rights to produce a specified amount of tobacco 

annually. 

2

The four tobacco companies are Philip Morris Incorporated, Brown & Williamson Tobacco 

Corporation, Lorillard Tobacco Company, and R.J. Reynolds Tobacco Company.

3

Maryland and Pennsylvania do not participate in the quota program.
Appendix VI

Phase II: The National Tobacco Grower 

Settlement Trust Agreement

Page 59 GAO-01-851 Tobacco Settlement

Table 9: Allocation Percentages for Phase II Payments 

Source: National Tobacco Grower Settlement Trust Agreement.

State Percent

Alabama 0.05

Florida 1.13

Georgia 5.85

Indiana 1.16

Kentucky 29.66

Maryland 0.62

Missouri 0.42

North Carolina 37.95

Ohio 1.36

Pennsylvania 0.43

South Carolina 6.94

Tennessee 7.57

Virginia 6.58

West Virginia 0.28

Total 100.0
Appendix VI

Phase II: The National Tobacco Grower 

Settlement Trust Agreement

Page 60 GAO-01-851 Tobacco Settlement

Distribution of 

Payments

Each state through its “Certification Entity” was required to develop a plan 

identifying the tobacco growers and quota owners within the state and a 

methodology for distributing payments. The Phase II states are categorized 

as either Class A (Georgia, Kentucky, North Carolina, South Carolina, 

Tennessee and Virginia) or Class B (Alabama, Florida, Indiana, Maryland, 

Missouri, Ohio, Pennsylvania and West Virginia) based on the amount of 

tobacco produced in the state. In Class A states, the Certification Entity 

comprises a Board of Directors with the following membership: the 

governor (Chairman), the state commissioner of agriculture (ViceChairman), the state attorney general (Secretary), one member each from 

the state Senate and House of Representatives, not less than three and no 

more than six citizens of the state who are tobacco growers or quota 

owners in the state, one citizen with a distinguished record of public 

service, and two members of the state congressional delegation. In Class B 

states, the Certification Entity comprises the governor, state attorney 

general, and the state commissioner of agriculture. Each state’s plans may 

be revised on an annual basis; plans are due to the trustee by June 1 of each 

year in 2000 through 2010.4

The three largest tobacco states—North Carolina, Kentucky and 

Tennessee—each developed somewhat different methodologies for 

distributing payments in 1999 and 2000. In North Carolina, growers and 

quota owners each received 50 percent of the payments distributed within 

the state. Kentucky used the following methodology to distribute 

payments: one-third of the total distributions to quota owners, one-third to 

the owners of the land used to grow tobacco, and one-third to the farmers 

who produced the crop. In Tennessee, growers received 80 percent of the 

payments and quota owners received 20 percent. All three states 

distributed payments based on the prior year’s tobacco crop.

4

In 1999, these plans were due by October 1.
Appendix VI

Phase II: The National Tobacco Grower 

Settlement Trust Agreement

Page 61 GAO-01-851 Tobacco Settlement

Payment Amounts and 

Adjustments Table 10: Estimated Annual Payments to the National Tobacco Grower Settlement 

Trust

Source: National Tobacco Grower Settlement Trust Agreement, Schedule A.

Note: In years 2000-2010 payments are made in installments of 25 percent of the total annual amount 

on or before March 31, June 30, September 30, and December 15. In 1999, payments were made in 

three installments: 50 percent within 10 days of the effective date of the agreement, 25 percent on or 

before October 1 and 25 percent on or before December 15, 1999. 

Payments to the trust were initially estimated to total approximately $5.15 

billion for the 12-year period from 1999 through 2010. (See Table 9 for the 

estimated annual Phase II payments.) Payments could not be distributed to 

individuals in a state until the state had achieved “state-specific finality” as 

required by the MSA. Similar to the MSA payments, Phase II payments are 

subject to a number of adjustments including adjustments for inflation and 

volume of cigarette sales.5

 The inflation and volume adjustments are 

calculated on the same basis as they are for the MSA payments. The 

inflation adjustment equals the increase in the Consumer Price Index for 

the preceding year or three percent, whichever is greater. The volume 

adjustment reduces or enhances payments based on the amount by which 

the number of cigarettes shipped in a calendar year declines or increases 

relative to the base year. 

Dollars in thousands

Year(s) Amounts

1999 $380,000

2000 280,000

2001 400,000

2002-2008 500,000

2009-2010 295,000

Total $5,150, 000

5

The 1999 annual payments were not subject to inflation and volume adjustments, but all 

subsequent years’ payments are adjusted for these factors.
Page 62 GAO-01-851 Tobacco Settlement

Appendix VII

States’ Restrictions Against Supplantation ApendxiVI

State Restrictions Against Supplantation

Alabama 1. Alabama 21st Century Fund is funded with tobacco settlement revenues. Funds are transferred from this fund to 

other funds including the general fund from which 50 percent is to be appropriated to the Alabama Medicaid 

Agency with a portion to the Medicaid Waiver Program at the Commission on Aging. “Sufficient safeguards shall be 

implemented to ensure that these new monies will increase and not supplant or decrease existing state support.”

2. Alabama Senior Services Trust Fund is funded with tobacco settlement revenues. “Any funds appropriated 

pursuant to this section shall be additional funds distributed to the Alabama Department of Senior Services or its 

successor and shall not be used to supplant or decrease existing state or local support to the Alabama Department 

of Senior Services or its successor. Appropriations from the trust fund shall be used to both expand existing 

services and create new services for Alabama’s elderly.”

3. Children First Trust Fund is funded with tobacco settlement revenues and revenues received from other sources. 

Funds are transferred to children’s services provided by several state agencies. “Twenty-one percent of the fund 

shall be allocated to the State Board of Education. Sufficient safeguards shall be implemented to ensure that the 

new monies will increase and not supplant or decrease existing state or local support.” “Twenty percent of the 

funds shall be allocated to the Alabama Department of Human Resources. Sufficient safeguards shall be 

implemented to ensure that these new monies will increase and not supplant or decrease existing state and local 

support received from any source.” “Seventeen percent of the revenues shall be allocated to the Department of 

Youth Services. Sufficient safeguards shall be implemented to ensure that the new monies will increase and not 

supplant or decrease existing state or local support, except the portion of funds used year to year according to 

needs enumerated in this section.” 

Arizona The Initiative added an additional definition of eligibility for the Arizona Health Care Cost Containment System (the 

state’s health insurance program) and established the Arizona Tobacco Litigation Settlement Fund for receipt of all 

tobacco settlement revenues. “Monies in the fund shall be used to supplement and not supplant existing and future 

appropriations to the Arizona Health Care Cost Containment System.”

Colorado Policy on use of tobacco settlement funds provides “The majority of the moneys received by the state from the Master 

Settlement Agreement shall be dedicated to improving the health of the citizens of Colorado, including tobacco use 

prevention, education, and cessation programs and related health programs. Such moneys are intended to supplement 

any moneys appropriated to health-related programs established prior to the effective date of this part 11.” and “A 

portion of the settlement monies shall be used to strengthen and enhance the health of all residents of Colorado by 

supplementing and expanding statewide and local public health programs.”

Connecticut Created the Tobacco and Health Trust Fund to support and encourage tobacco control and substance abuse programs, 

and to develop and implement programs to meet the unmet physical and mental health needs in the state. Trust fund 

receives transfers from the Tobacco Settlement Fund and may accept gifts and grants. “Recommended disbursements 

from the trust fund shall be in addition to any resources that would otherwise be appropriated by the state for such 

purposes and programs.”

Delaware Created the Delaware Health Fund for receipt of all tobacco settlement revenues. “Expenditures from the Delaware 

Health Fund shall not be used to supplant any state expenditures appropriated in fiscal year 1999 for purposes 

consistent with those outlined in subsection (c) of this section.” Subsection (c) dedicates funds for the following 

purposes: expanding access to health care and health insurance for uninsured or under insured; long-term investments 

in health care infrastructure; tobacco control and substance abuse; testing for detection of costly illnesses; prescription 

drug program for low-income senior and disabled citizens; payment assistance for those with expenses of chronic 

illnesses; other expenditures for health-related purposes. 

Hawaii Created three new funds including the tobacco prevention and control trust fund. “The Hawaii tobacco prevention and 

control trust fund may receive appropriations, contributions, grants, endowments, or gifts in cash or otherwise from any 

source, including the State, corporations or other businesses, foundations, government, individuals, and other 

interested parties; provided that any appropriations made by the State shall not supplant or diminish the funding of 

existing tobacco prevention and control programs or any health related programs funded in whole or in part by the 

State.”
Appendix VII

States’ Restrictions Against Supplantation

Page 63 GAO-01-851 Tobacco Settlement

State Citation

Alabama 1. An Act to Provide for the Creation of a Special Fund Known as the Alabama 21 st Century Fund, 1999 Ala. Act 

99-353 § 19(a)(3), Ala. Code §§ 41-10-629, -638 (1999).

2. An Act to Create the Alabama Senior Services Trust Fund, 1999 Ala. Act 99-444 § 1(d), Ala. Code § 41-15C-1 

(1999). 

3. An Act Relating to the Children First Trust Fund, 1999 Ala. Act 99-390 §§ 2-3, Ala. Code §§ 41-15B-2 - 15B-2.2 

(1999).

Arizona Ariz. Rev. Stat. §§ 36-2901.01 − 2901.02 (2000) (added by Prop. 204, approved Nov. 7, 2000).

Colorado An Act Concerning Use of Moneys Received Pursuant to the Tobacco Litigation Settlement, 2000 Colo. Legis. Serv. 

ch. 154, § 1, Colo. Rev. Stat. § 24-75-1103 (2000).

Connecticut An Act Concerning Expenditures for the Programs and Services of the Department of Public Health, 2000 Conn. 

Acts 00-216, § 15(d)(1), Conn. Gen. Stat. § 4-28f (2000).

Delaware An Act to Create the Delaware Health Fund, 72 Del. Laws, ch. 198, § 1 (1999), Del. Code Ann. tit. 16, § 137 (1999).

.

Hawaii An Act Relating to the Hawaii Tobacco Settlement Special Fund, 1999 Haw. Sess. Laws Act 304, § 2, Haw. Rev. 

Stat. § 328L-5 (1999).
Appendix VII

States’ Restrictions Against Supplantation

Page 64 GAO-01-851 Tobacco Settlement

State Restrictions Against Supplantation

Indiana Created the tobacco master settlement fund for receipt of all revenues and several additional funds to which funds are 

transferred. Several of these funds have non-supplant provisions: (1) Indiana Tobacco Use Prevention and Cessation 

Trust Fund requires funding proposals to state “the extent to which the expenditure will supplement or duplicate existing 

expenditures of other state agencies, public or private entities, or the executive board.” Other funds—(2) Indiana Health 

Care Trust Fund funds health programs including CHIP, cancer detection, local health departments and community 

centers; (3) Biomedical Technology and Basic Research Trust Fund; (4) Indiana Local Health Department Trust Fund; 

(5) Indiana Prescription Drug Fund—include the language: “Appropriations and distributions from the fund under this 

chapter are in addition to and not in place of other appropriations or distributions made for the same purpose.”

Kansas The children’s trust, renamed the Kansas Endowment for Youth (KEY) fund, was established to receive all tobacco 

settlement funds. All moneys credited to the KEY fund must be invested to provide an ongoing source of investment 

earnings available for periodic transfer to the Children’s Initiatives Fund. “Moneys allocated or appropriated from the 

Children’s Initiatives Fund shall not be used to replace or substitute for moneys appropriated from the state general 

fund in the immediately preceding fiscal year.”

Louisiana Established the Millennium Trust Fund and the Louisiana Fund and creates the Education Excellence Fund as a special 

fund within the Millennium Trust Fund. “No amount appropriated as required in this paragraph shall displace, replace or 

supplant appropriations from the general fund for elementary and secondary education, including implementing the 

Minimum Foundation Program. This subparagraph shall mean that no appropriation for any fiscal year from the 

Education Excellence Fund shall be made for any purpose for which a general fund appropriation was made in the 

previous year unless the total appropriations for the fiscal year from the state general fund for such purpose exceed 

general fund appropriations of the previous year.”

Maine The Fund for a Healthy Maine was created for receipt of all tobacco settlement revenues. “When allocations are made 

to direct services, services to lower income consumers must have priority over services to higher income consumers. 

Allocations from the fund must be used to supplement, not supplant, appropriations from the General Fund.”

Maryland Created the Cigarette Restitution Fund for all revenues received by the state resulting from the tobacco settlement. 

Expenditures from the fund shall be for tobacco control, cancer prevention, Maryland agricultural plan for alternative 

crop uses, Maryland Health Care Foundation, primary health care in rural areas, substance abuse, and any other public 

purpose. “Disbursements from the fund to programs funded by the state or with federal funds administered by the state 

shall be used solely to supplement, and not to supplant, funds otherwise available for the programs under federal or 

state law as provided in this section.”

Massachusetts Established the Tobacco Settlement Fund to receive 30% of tobacco settlement payments received by the state and 

30% of the earnings on the Health Care Security Trust as well as other sources of funding. “Amounts credited to said 

fund shall be expended, subject to appropriation, to supplement existing levels of funding for the purpose of funding 

health related services and programs including, but not limited to, services and programs intended to control or reduce 

the use of tobacco in the commonwealth. Amounts credited to said fund shall not be used to supplant or replace other 

health related on non health related expenditures or obligations of the commonwealth.”

Montana Constitutional amendment dedicated trust fund interest earnings for health care benefits, services or coverage and 

tobacco disease prevention and states “The trust’s interest and principal cannot be used to replace current funding for 

these programs.”

Nevada Created the Fund for a Healthy Nevada for receipt of 50% of all tobacco settlement funds received by the state. Funds 

are to be allocated for pharmaceuticals for senior citizens, programs for independent living for senior citizens, tobacco 

control, health services for children and disabled. “Money expended from the fund for a healthy Nevada must not be 

used to supplant existing methods of funding that are available to public agencies.”
Appendix VII

States’ Restrictions Against Supplantation

Page 65 GAO-01-851 Tobacco Settlement

State Citation

Indiana An Act to Amend the Indiana Code Concerning State Offices and Administration, 2000 Ind. Leg. Serv. P.L. 21-

2000, §§ 2-6, Ind. Code §§ 4-12-4-13, -5-7, -6-5, -7-8, -8-3 (2000).

Kansas An Act Concerning the Disposition of Certain Moneys for the Benefit of Children, 1999 Kan. Sess. Laws ch. 172, 

§§ 1-2, Kan. Stat. Ann. §§ 38-2101 - 2102 (1999).

Louisiana La. Const. art. VII, §§ 10.8-10.10 (added by 1999 La. Sess. Law Serv. Act 1392, § 1, approved Oct. 23, 1999).

Maine An Act to Make Supplemental Appropriations and Allocations for the Expenditures of State Government, 1999 

Me. Legis Serv. ch. 401, § V-1, Me. Rev. Stat. Ann. tit. 22, § 1511 (1999).

Maryland An Act Concerning the Cigarette Restitution Fund, 2000 Md. Laws ch. 18, § 1, Md. State Fin. & Proc. § 7-317 

(2000).

Massachusetts An Act Making Appropriations for Fiscal Year 2000, 1999 Mass. Legis. Serv. ch. 127, § 42, Mass. Gen. Laws Ann. 

ch. 29, § 2xx (1999).

Montana An Act Submitting to the Qualified Electors of Montana an Amendment to Article XII of the Montana Constitution, 

2000 Mont. Laws Ballot Meas. 35 (approved Nov. 7, 2001).

Nevada An Act Relating to State Financial Administration and Creating the Fund for a Healthy Nevada, 1999 Nev. Laws 

ch. 538, §§ 3-5, Nev. Rev. Stat. §§ 439.620 - 630 (1999).
Appendix VII

States’ Restrictions Against Supplantation

Page 66 GAO-01-851 Tobacco Settlement

State Restrictions Against Supplantation

North Carolina Established the Health Trust account to receive 25% of the tobacco settlement revenues. Health and Wellness Trust

Fund receives funds from the Health Trust Account to address health needs of vulnerable and underserved 

populations, and to fund programs including research, education, and treatment of health problems, to develop a 

comprehensive tobacco control plan. “It is the intent of the General Assembly that the funds provided pursuant to this 

Article to address the health needs of North Carolinians be used to supplement, not supplant, existing state funding of 

health and wellness programs.”

West Virginia Created two funds for receipt of tobacco settlement revenues. 50% of all revenues shall be deposited into the West

Virginia Tobacco Settlement Fund and appropriated for the following purposes: the public employees insurance agency, 

public health programs, state health facilities. The legislation provides “funding for expansion of the federal-state 

Medicaid program as authorized by the legislature or mandated by the federal government.” State budget official said 

this language is intended to not supplant existing funds. 
Appendix VII

States’ Restrictions Against Supplantation

Page 67 GAO-01-851 Tobacco Settlement

State Citation

North Carolina An Act to Provide for the Creation of the Health and Wellness Trust Fund, 2000 N.C. Sess. Laws 2000-147, §§ 1-

2, N.C. Gen. Stat. §§ 143-16.4, 147-86.30 (2000).

West Virigina An Act Relating to Appropriations, Expenditure of Interest, and Authorization of Expenditures from Tobacco 

Settlement Funds, 1999 W. Va. Acts ch. 281, W. Va. Code §§ 4-11A-1 − 11A-3 (1999).
Page 68 GAO-01-851 Tobacco Settlement

Appendix VIII

Sources of Information ApendxiVI

Show Us the Money: An Update on the States’ Allocation of the Tobacco 

Settlement Dollars. A Report by the Campaign for Tobacco-Free Kids, 

American Cancer Society, American Heart Association and the American 

Lung Association, October 1, 2000.

Centers for Disease Control and Prevention. Best Practices for 

Comprehensive Tobacco Control Programs—August 1999. Atlanta, GA: 

U.S. Department of Health and Human Services, Centers for Disease 

Control and Prevention, National Center for Chronic Disease Prevention 

and Health Promotion, Office on Smoking and Health, August 1999. 

Reprinted with corrections.

Centers for Disease Control and Prevention. Investment in Tobacco 

Control—State Highlights 2001. Atlanta, GA: U.S. Department of Health 

and Human Services, Centers for Disease Control and Prevention, National 

Center for Chronic Disease Prevention and Health Promotion, Office on 

Smoking and Health, 2001. 

Congressional Research Service. Tobacco Master Settlement Agreement 

(1998): Overview, Implementation by States, and Congressional Issues. 

Washington, D.C.: November 1999.

General Accounting Office. Tobacco: Issues Surrounding a National 

Tobacco Settlement. (GAO/RCED-98-110, April 15, 1998)

General Accounting Office. Tobacco Settlements: States’ Use of Settlement 

Proceeds. (GAO/HEHS-98-147R, April 22, 1998).

National Association of County and City Health Officials. Program and 

Funding Guidelines for Comprehensive Local Tobacco Control Programs, 

April 2000.

National Conference of State Legislatures. State Allocation of Tobacco 

Settlement Funds: FY 2000 and FY 2001, August 1, 2000.

National Governors Association. State Tobacco Plans—March 1, 2001, 

National Governors Association, Center for Best Practices, 2001.

President’s Commission on Improving Economic Opportunity in 

Communities Dependent on Tobacco Production While Protecting Public 

Health. Tobacco at a Crossroad—A Call For Action: Final Report of the 

President’s Commission on Improving Economic Opportunity in 
Appendix VIII

Sources of Information

Page 69 GAO-01-851 Tobacco Settlement

Communities Dependent on Tobacco Production While Protecting Public 

Health. Washington, D.C.: U.S. Department of Agriculture, May 14, 2001.

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