Analysis: Lack of action leads to loss of tobacco money for Missouri

JEFFERSON CITY, Mo. -- Just as prolonged smoking can lead to ill health later, the actions of Missouri officials a decade ago now are resulting in negative financial consequences for the state.

When Missouri receives an annual settlement payment from tobacco companies next month, the deposit will be less than half of its typical $130 million. That's because an arbitration panel decided Missouri officials in 2003 failed to diligently enforce the terms of the multistate tobacco settlement.

As a consequence of the reduced tobacco revenue, Missouri lawmakers now are diverting more than $69 million from the state's general revenue fund to plug budget holes in the Medicaid health care program for the poor. That's $69 million that otherwise could have gone to education, mental health care or other state services in the next budget.

This year's loss could be repeated in years to come, because arbitrators have yet to assess Missouri's enforcement efforts for 2004, 2005 and forward.

In an unusual alliance, representatives of big tobacco companies, anti-tobacco activists and the attorney general's office all say there is only one way to potentially stop the financial bleeding. Their solution is to pass legislation that essentially forces a price increase on cheap cigarettes sold by smaller tobacco manufacturers that didn't join the settlement. All 45 other states that agreed to the 1998 settlement already have done so.

"If you pass this, we have a seat at the table to negotiate a settlement and minimize our losses," Joan Gummels, the general counsel for Attorney General Chris Koster, told a legislative committee last week.

Without the legislation: "While the other states are at the table, Missouri is left out in the hallway waiting for the ax to fall," she said.

Under the 1998 settlement, the major tobacco manufacturers agreed to make annual payments to be divided among states. Missouri gets about 2.3 percent of that money.

But the settlement allows the payments to be reduced if the tobacco companies suffer a loss in their market share and states fail to diligently enforce settlement provisions intended to keep manufacturers that didn't join the pact from gaining sales. Among other things, the so-called nonparticipating manufacturers are required to pay money into state escrow funds that are supposed to cover the costs of any potential state lawsuits against them.

The arbitration panel found that in 2003, tobacco companies that weren't part of the settlement sold 432 million cigarettes in Missouri yet deposited escrow funds for just 102 million cigarettes. That's only a 24 percent collection rate. Arbitrators said the Missouri attorney general's office, which was led by current Gov. Jay Nixon, didn't file a single lawsuit seeking to compel the payments.

Arbitrators also faulted poor record-keeping and communication among the attorney general's office and the Department of Revenue, and criticized the Legislature for denying the department funding to audit the tobacco companies.

Missouri was one of six states found to have not diligently enforced laws regarding the nonparticipating tobacco companies. Those states are now splitting the revenue loss from the resulting reduction in settlement payments by major tobacco companies.

Lawyers for big tobacco companies and the attorney general's office said Missouri could perhaps avoid similar losses in the future by changing its escrow-fund law.

Under current law, the nonparticipating manufacturers must keep in escrow an amount equal to Missouri's share of the national settlement. That reflects an assumption that most cigarettes are sold nationally. But a smaller company that concentrates on a few states, and hypothetically derives 20 percent of its sales from Missouri, still has to keep a Missouri escrow of just 2.3 percent.

That allows those companies to sell cigarettes at lower prices than competitors that joined the settlement.

The big tobacco companies describe that as a "loophole" or "mistake" that should be fixed. Without changing the law, the major tobacco companies are unlikely to be willing to negotiate a lesser reduction in Missouri's settlement payment for its poor enforcement efforts a decade ago, said Keith Teel, an attorney representing Philip Morris USA, R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co.

One of those smaller tobacco companies, Cheyenne International Inc., is represented by attorney Chuck Hatfield, who was a top aide to Nixon until Hatfield left the attorney general's office in 2003. Hatfield rejects the assertion that Missouri should join the other 45 states in closing a "loophole."

"The tobacco companies and the attorneys general all understood what they were doing at the time," Hatfield told lawmakers. "Big tobacco just didn't think somebody would beat them in the marketplace, and that's what this is about."

The House and Senate budget panels each heard testimony last week on legislation that would require more money to be kept in escrow from those companies that didn't join the settlement. But as in years past, that legislation appears to be a long shot.

"I'm going to try to pass it, but I don't think I have the votes right now," said House Budget Committee chairman Rick Stream, R-Kirkwood.

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David A. Lieb has covered state government and politics for The Associated Press since 1995. Follow him at https://twitter.com/DavidALieb