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Testimony: 

Before the Committee on Health, Education, Labor, and Pensions, U.S. 
Senate: 

United States Government Accountability Office: 

GAO: 

For Release on Delivery Expected at 9:30 a.m. EST: 

Tuesday, February 27, 2007: 

Tobacco Settlement: 

States' Allocations of Payments from Tobacco Companies for Fiscal Years 
2000 through 2005: 

Statement of Lisa Shames, Acting Director: 
Natural Resources and Environment: 

GAO-07-534T: 

GAO Highlights: 

Highlights of GAO-07-534T, a testimony before the Committee on Health, 
Education, Labor, and Pensions, U.S. Senate 

Why GAO Did This Study: 

In the 1990s, states sued major tobacco companies to obtain 
reimbursement for health impairments caused by the public’s use of 
tobacco. In 1998, four of the nation’s largest tobacco companies signed 
a Master Settlement Agreement, agreeing to make annual payments to 46 
states in perpetuity as reimbursement for past tobacco-related health 
care costs. Some states have arranged to receive advance proceeds based 
on the amounts that tobacco companies owe by issuing bonds backed by 
future payments. 

This testimony discusses (1) the amounts of tobacco settlement payments 
that the states received from fiscal years 2000 through 2005, the most 
recent year for which GAO has actual data, and (2) the states’ 
allocations of these payments. We also include states’ projected fiscal 
year 2006 allocations. 

The Farm Security and Rural Investment Act of 2002 required GAO to 
report annually, through fiscal year 2006, on how states used the 
payments made by tobacco companies. GAO based this testimony on five 
annual surveys of these 46 states’ Master Settlement Agreement payments 
and how they allocated these payments. 

What GAO Found: 

From fiscal year 2000 through 2005, the 46 states party to the Master 
Settlement Agreement received $52.6 billion in tobacco settlement 
payments. Of the $52.6 billion total, about $36.5 billion were payments 
from the tobacco companies and about $16 billion were advance payments 
which several states had arranged to receive by issuing bonds backed by 
their future payments from the tobacco companies. 

The Master Settlement Agreement imposed no restrictions on how states 
could spend their payments, and as such, the states have chosen to 
allocate them to a wide variety of activities. Some states told us that 
they viewed the settlement payments as an opportunity to fund needs 
that they were not able to fund previously due to the high costs of 
health care. States allocated the largest portion of their payments to 
health care—$16.8 billion or 30 percent—which includes Medicaid, health 
insurance, hospitals, medical technology, and research. States 
allocated the second largest portion to cover budget shortfalls—about 
$12.8 billion or about 22.9 percent. This category includes allocations 
to balance state budgets or reduce deficits that resulted from lower 
than anticipated revenues, increased mandatory spending, or essential 
expenditures. Included among the next largest categories are 
allocations for infrastructure projects, education, debt service on 
securitized proceeds, and tobacco control. 

Figure: Categories to Which States Allocated Their Tobacco Settlement 
Payments And Securitized Proceeds (Fiscal Years 2000-2005): 

[See PDF for Image] 

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

[End of figure] 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-534T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Lisa Shames at (202) 512-
3841 or ShamesL@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Committee: 

I am pleased to be here today to contribute to your deliberation on the 
need for the Food and Drug Administration to regulate tobacco products. 
Tobacco use is the leading cause of preventable death in the United 
States. Most adults who use tobacco started using it between the ages 
of 10 and 18. A Surgeon General's report to the Congress concluded that 
preventing youth from starting to use tobacco is key to reducing 
tobacco-related deaths and disease. The Centers for Disease Control and 
Prevention reported a few years ago that, on average, more than 440,000 
deaths and $76 billion in medical expenditures are attributable to 
cigarette smoking annually. Reducing tobacco-related deaths and the 
incidence of disease, along with their associated costs, is a 
significant public health challenge. 

Beginning in the mid-1990s, states sued the major tobacco companies for 
reimbursement of the cost of health impairments caused by the public's 
use of tobacco. The states alleged that the industry had violated 
antitrust and consumer protection laws, withheld information about the 
adverse health effects of tobacco, manipulated nicotine levels to keep 
smokers addicted, and conspired to keep less risky and less addictive 
tobacco products out of the market. Forty six states,[Footnote 1] along 
with the District of Columbia and the five U.S. territories, negotiated 
and signed a settlement agreement, called the Master Settlement 
Agreement, with four of the largest tobacco companies--Phillip Morris, 
USA; R.J. Reynolds Tobacco Company; Brown & Williamson Tobacco 
Corporation; and Lorillard Tobacco company. The settlement was the 
largest civil settlement in U.S. history. It committed the tobacco 
companies to pay the 46 states an estimated $200 billion[Footnote 2] 
over the first 25 years of the agreement, with payments to continue in 
perpetuity. In addition, it restricted the tobacco companies' marketing 
and advertising practices, among other things. 

Today, I will focus on how the 46 states party to the Master Settlement 
Agreement have allocated their settlement payments. Specifically, I 
will discuss (1) the amounts of Master Settlement Agreement payments 
that the states received from fiscal years 2000 through 2005, the most 
recent year for which we have actual data, and (2) the states' 
allocations of these payments. The Farm Security and Rural Investment 
Act of 2002 (the 2002 Farm Bill) required GAO to report annually, from 
fiscal years 2002 through 2006, on how these 46 states used their 
Master Settlement Agreement payments.[Footnote 3] My testimony is based 
primarily on these annual reports. 

Our reports were based on our yearly surveys of the 46 states. Each 
year we asked the states to report (1) the amount of payments they 
received for the current state fiscal year, (2) the amount of payments 
they expected to receive for the next state fiscal year, and (3) their 
allocations of these payments among 13 spending categories. We 
independently corroborated the states' data to the extent possible by 
analyzing budget-related and legislative documents, and interviewing 
state budget officials, staff from state attorneys generals' offices 
and governors' offices and others as needed to clarify information. We 
performed our work in accordance with generally accepted government 
auditing standards. 

In summary, from fiscal year 2000 through fiscal year 2005, the states 
received $52.6 billion in Master Settlement Agreement payments from the 
tobacco companies in amounts that varied from state to state and from 
year to year. Of the $52.6 billion, about $36.5 billion were payments 
from the tobacco companies and about $16 billion were advance payments 
(securitized proceeds) that 15 states arranged to receive by issuing 
bonds backed by their future payments from the tobacco companies. The 
annual payments from the tobacco companies' are adjusted based on 
several factors that include fluctuations in the volume of cigarettes 
sales, inflation, and other variables, such as the participating 
companies' shares of the tobacco market. Also, each state's share of 
the tobacco companies' annual payments is a fixed percentage based on 
smoking-related health care costs, which reflect population and smoking 
prevalence. 

The Master Settlement Agreement imposed no restrictions on how states 
could spend these settlement payments and, as such, the states have 
allocated their payments to a wide variety of activities. Some states 
told us that they viewed the settlement payments as an opportunity to 
fund needs that they were not able to fund previously due to the high 
costs of health care. States allocated the largest portion of their 
payments--30 percent or $16.8 billion--toward health care activities 
such as Medicaid, health insurance, hospitals, medical technology, and 
research. States allocated the second largest portion of their 
payments--about 23 percent or $12.8 billion--to help balance state 
budgets or reduce deficits that resulted from lower than anticipated 
revenues, increased mandatory spending, or essential expenditures. 

In descending order, the next largest categories where states used 
their tobacco settlement payments were general purposes, infrastructure 
projects, education, debt service on securitized funds, and tobacco 
control. 

States' Annual Tobacco Settlement Payments Have Varied: 

The 46 states reported receiving a total of nearly $52.6 billion in 
payments in varying annual amounts from fiscal year 2000 through fiscal 
year 2005. Of the nearly $52.6 billion, about $36.5 billion were 
payments from the tobacco companies and about $16 billion were 
securitized proceeds that 15 states arranged to receive, as shown in 
table 1. 

Table 1: Master Settlement Agreement Payments and Securitized Proceeds 
Received by the 46 States (Fiscal Years 2000-2005): 

Fiscal year: 2000-2001; 
Payments: $13,200,000,000; 
Securitized proceeds: $928,900,000; 
Total: $14,128,900,000. 

Fiscal year: 2002; 
Payments: 6,238,393,496; 
Securitized proceeds: 3,838,376,465; 
Total: 10,076,769,961. 

Fiscal year: 2003; 
Payments: 6,306,329,459; 
Securitized proceeds: 6,482,764,469; 
Total: 12,789,093,928. 

Fiscal year: 2004; 
Payments: 5,340,128,223; 
Securitized proceeds: 4,374,698,723; 
Total: 9,714,826,946. 

Fiscal year: 2005; 
Payments: 5,453,132,303; 
Securitized proceeds: 389,977,667; 
Total: 5,843,109,970. 

Total; 
Payments: $36,537,983,481; 
Securitized proceeds: $16,014,717,324; 
Total: $52,552,700,805. 

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

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

[End of table] 

The tobacco companies' annual payments are adjusted based on several 
factors contained in the Master Settlement Agreement that include 
fluctuations in the volume of cigarette sales, inflation, and other 
variables, such as the participating companies' share of the tobacco 
market. Declining tobacco consumption alone would result in lower 
Master Settlement Agreement payments than originally expected. Tobacco 
consumption has declined since the Master Settlement Agreement was 
signed in 1998--by about 6.5 percent in 1999 alone--mostly due to one- 
time increases in cigarette prices by the tobacco companies after the 
agreement took effect. Analysts project that, in the future, tobacco 
consumption will decline by an average of nearly 2 percent per 
year.[Footnote 4] As a result, tobacco consumption is estimated to 
decline by 33 percent between 1999 and 2020. 

However, the Master Settlement Agreement also includes an inflation 
adjustment factor that some analysts have estimated increases payments 
more than any decreases caused by reduced consumption. The inflation 
adjustment equals the actual percentage increase in the Consumer Price 
Index for the preceding year or 3 percent, whichever is greater. The 
effect of these compounding increases is potentially significant, 
especially given that the payments are made in perpetuity. Assuming a 3-
percent inflation adjustment and no decline in base payments, 
settlement amounts received by states would double every 24 years. 

Also, several tobacco companies' interpretation of the provision that 
addresses participants' market share led them to lower their payments 
in 2006. Under this provision, an independent auditor determined that 
participating tobacco companies lost a portion of their market share to 
non-participating companies. An economic research firm determined that 
the Master Settlement Agreement was a significant factor in these 
market share losses. Based on these findings, several participating 
companies reduced their fiscal year 2006 payments by about a total of 
about $800 million. Many states have filed suit to recover these funds. 

Each state's share of the tobacco companies' total annual payments is a 
fixed percentage that was negotiated during the settlement. These 
percentages are based on two variables related to each state's smoking- 
related health care costs, which reflect each state's population and 
smoking prevalence. In general, the most populous states receive a 
larger share of the tobacco companies' total annual payments than the 
less populous states. For example, California and New York each receive 
about 13 percent, while Alaska and Wyoming each receive less than 1 
percent. However, these percentages are not strictly proportional to 
population. 

In addition to the annual payments states receive, the Master 
Settlement Agreement requires that a Strategic Contribution Fund 
payment begin in 2008 and continue through 2017. The base amount of 
each year's Strategic Contribution Fund payment is $861 million, which 
will be adjusted for volume and inflation and shared among the states. 
Strategic Contribution Fund payments are intended to reflect the level 
of the contribution each state made toward final resolution of their 
lawsuit against the tobacco companies. They will be allocated to the 
states based on a separate formula developed by a panel of former state 
attorneys general. 

States Are Exercising Their Flexibility to Use Tobacco Settlement 
Payments for a Wide Variety of Activities: 

The Master Settlement Agreement imposed no restrictions on how states 
could spend their settlement payments and, as such, the states have 
allocated their payments[Footnote 5] to a wide variety of activities, 
with health-related activities the largest among them. As part of their 
decision making on how to spend their payments, some states established 
planning commissions and working groups to develop recommendations and 
strategic plans for allocating their states' payments. In six states, 
voter-approved initiatives restricted use of the funds and, in 30 
states, the legislatures enacted laws restricting their use. 

Overall, we identified 13 general categories to which states have 
allocated their Master Settlement Agreement payments, as shown in table 
2. Appendix I provides more details on the categories to which states 
allocated their payments. 

Table 2: Amount and Percentage of States' Allocations of Master 
Settlement Agreement Payments and Securitized Proceeds by Category, 
Fiscal Years 2000-2005: 

Dollars in millions and percent. 

Category: Health; 
Dollars: $16,807; 
Percent: 30.0. 

Category: Budget shortfalls; 
Dollars: 12,806; 
Percent: 22.9. 

Category: Unallocated; 
Dollars: 6,639; 
Percent: 11.9. 

Category: General purposes; 
Dollars: 3,955; 
Percent: 7.1. 

Category: Infrastructure; 
Dollars: 3,350; 
Percent: 6.0. 

Category: Education; 
Dollars: 3,078; 
Percent: 5.5. 

Category: Debt service on securitized funds; 
Dollars: 3,005; 
Percent: 5.4. 

Category: Tobacco control; 
Dollars: 1,943; 
Percent: 3.5. 

Category: Economic development for tobacco regions; 
Dollars: 1,490; 
Percent: 2.7. 

Category: Social services; 
Dollars: 961; 
Percent: 1.7. 

Category: Reserves/rainy day funds; 
Dollars: 810; 
Percent: 1.4. 

Category: Tax reductions; 
Dollars: 616; 
Percent: 1.1. 

Category: Payments to tobacco growers; 
Dollars: 521; 
Percent: 0.9. 

Total; 
Dollars: $55,981; 
Percent: 100.1. 

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

Note: Percentages do not total to 100 due to rounding. Also, states' 
allocations do not match the payment amounts on an annual basis because 
states have carried over funds from one year to the next and earned 
interest on their payments. 

[End of table] 

States allocated the largest portion of their payments--about $16.8 
billion, or 30 percent of the total payments--to health-related 
activities. To a closely related category--tobacco control--states 
allocated $1.9 billion, or 3.5 percent of their total payments. States 
allocated the second largest portion of their payments--about $12.8 
billion or 22.9 percent--to cover budget shortfalls. Some states told 
us that they viewed the settlement payments as an opportunity to fund 
needs that they were not able to fund previously due to the high cost 
of health care. Figure 1 illustrates the relative magnitude of the 
categories receiving allocations. 

Figure 1: States' Allocations of Master Settlement Agreement Payments 
and Securitized Proceeds by Category, as a Percent of Total 
Allocations, Fiscal Years 2000-2005: 

[See PDF for image] 

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

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

[A] The "other" category includes economic development for tobacco 
regions, social services, reserves/rainy day funds, tax reductions, and 
payments to tobacco growers. 

[End of figure] 

The seven largest categories of allocations, in descending order, are 
health, budget shortfalls, general purposes, infrastructure, education, 
debt service on securitized funds, and tobacco control. States' 
allocations to these categories have varied considerably from year to 
year--with some categories showing wide fluctuations. For example, for 
budget shortfalls, the states allocated from 2 to 44 percent of the 
total payments. On the other hand, for health care, the states 
allocated from 20 to 38 percent of the total payments. Figure 2 shows 
these annual changes for these seven categories. 

Figure 2: States' Allocations of Combined Master Settlement Agreement 
Payments and Securitized Proceeds to Seven Categories, Fiscal Years 
2000 through 2005; and Expected Allocations for Fiscal Year 2006: 

[See PDF for image] 

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

[A] We did not obtain data for budget shortfalls and debt service on 
securitized funds for fiscal years 2000-01. 

[End of figure] 

Information about how states have allocated their Master Settlement 
Agreement payments follows. 

Health. From fiscal years 2000 through 2005, states allocated about 
$16.8 billion of their Master Settlement Agreement payments to a 
variety of health care programs, including Medicaid; health insurance; 
cancer prevention, screening, and treatment; heart and lung disease; 
and drug addiction. Over this period, the amounts states allocated to 
health care ranged from about $1.9 billion in fiscal year 2005 to 
nearly $4.8 billion in fiscal years 2000-2001 combined. 

In fiscal year 2005, the most recent year for which we collected actual 
data, 36 of the 46 states allocated some of their Master Settlement 
Agreement payments to health care. Of the 36 states, 5 states allocated 
two-thirds or more of their payments to health care; 19 states 
allocated one-third to two-thirds; and 12 states allocated less than 
one-third. Ten states did not allocate any of their payments to health 
care activities. In fiscal year 2005, Pennsylvania, Illinois, Michigan, 
and Maryland allocated larger amounts to health care than the other 
states. Pennsylvania allocated over $326 million of its payments to 
health care programs for adult health insurance, uncompensated care, 
medical assistance for workers with disabilities, and community medical 
assistance. Illinois allocated nearly $204 million of its payments to 
health care, citing Medicaid drugs as a key program that would receive 
funds. Michigan allocated over $185 million of its payments to areas 
such as elder pharmaceutical assistance and Medicaid support programs. 
Maryland allocated nearly $100 million of its payments to areas such as 
Medicaid; cancer prevention, screening, and treatment; heart and lung 
disease; and drug addiction. 

Budget Shortfalls. From fiscal years 2000 through 2005, states 
allocated about $12.8 billion of their Master Settlement Agreement 
payments to budget shortfalls. Over this period, the amounts the states 
allocated to budget shortfalls ranged from a high of about $5.1 
billion, or 44 percent of the total payments in fiscal year 2004, to 
$261 million, or 4 percent in fiscal year 2005. In fiscal year 2005, 
only 4 of the 46 states allocated some of their Master Settlement 
Agreement payments to budget shortfalls. Of these states, only Missouri 
allocated more than one-third of its total payments--about $72 million-
-to budget shortfalls. 

General Purposes. From fiscal years 2000 through 2005, states allocated 
about $4 billion of their Master Settlement Agreement payments to 
general purposes, including law enforcement, community development 
activities, technology development, emergency reserve funds, and legal 
expenses for enforcement of the Master Settlement Agreement. Over this 
period, the amounts states allocated to general purposes ranged from 
$623 million, or about 5 percent of the total payments they allocated 
in fiscal years 2000-2001 combined, to about $1.1 billion, or 8 percent 
in fiscal year 2003. 

In fiscal year 2005, 27 of the 46 states allocated some of their Master 
Settlement Agreement payments to general purposes. Of these 27 states, 
4 states allocated two-thirds or more of their total payments to 
general purposes; 2 states allocated one-third to two-thirds; and 21 
states allocated less than one-third. Nineteen states did not allocate 
any of their payments to general purposes. Massachusetts, Tennessee, 
Connecticut, and Colorado allocated the largest amounts to general 
purposes in fiscal year 2005. Massachusetts allocated nearly $255 
million of its payments to general purposes for its General Fund, 
Tennessee allocated nearly $157 million of its payments to its General 
Fund, and Connecticut allocated about $113 million of its payments to 
its General Fund. Colorado allocated about $64.5 million of its 
payments to general purposes, but did not specify which programs would 
receive funds. 

Infrastructure. From fiscal years 2000 through 2005, states allocated 
about $3.4 billion of their Master Settlement Agreement payments to 
infrastructure-related activities, including capital maintenance on 
state owned facilities, regional facility construction, and water 
projects. Over this period, the amounts states allocated to 
infrastructure have ranged from $31 million, or about 1 percent of the 
total payments in fiscal year 2005, to about $1.2 billion, or 10 
percent in fiscal year 2002. 

In fiscal year 2005, 5 of the 46 states allocated some of their Master 
Settlement Agreement payments to infrastructure. Of these 5 states, 
North Dakota was the only state that allocated more than one-third of 
its total payments to infrastructure. North Dakota, Hawaii, and 
Kentucky allocated the largest amounts to infrastructure in fiscal year 
2005. North Dakota allocated about $10.5 million of its payments to 
infrastructure for work on water projects. Hawaii allocated 
approximately $10 million of its payments to infrastructure, citing 
debt service on University of Hawaii revenue bonds issued for the new 
Health and Wellness Center as a primary program that would receive 
funds. Kentucky allocated $6.1 million of its payments to service debt 
on such things as water resource development and a Rural Development 
Bond Fund. 

Education. From fiscal years 2000 through 2005, states allocated about 
$3 billion of their Master Settlement Agreement payments to education 
programs, including early childhood development; special education; 
scholarships; after-school services; and reading programs. Over this 
period, the amounts states allocated to education ranged from between 
$280 million or 2 percent of the total payments in fiscal year 2004, to 
over $1.1 billion, or 9 percent, in fiscal year 2002. 

In fiscal year 2005, 16 of the 46 states allocated some of the Master 
Settlement Agreement payments to education. Of the 16 states, only New 
Hampshire allocated more than two-thirds of its total payments to 
education; 4 states allocated between one-third and two-thirds to 
education; and 11 states allocated less than one-third. Thirty states 
did not allocate any of their payments to education-related activities. 
Michigan, New Hampshire, Nevada, and Colorado allocated the largest 
amounts to education in fiscal year 2005. Michigan allocated over $99 
million of its payments to education for Merit Award scholarships and 
tuition incentive grants for higher education students; the Michigan 
Educational Assessment Program testing for K-12 students, nursing 
scholarships, the Michigan Education Savings Plan, and general higher 
education support. New Hampshire allocated $40 million of its payments 
to areas such as an Education Trust Fund, which distributes grants to 
school districts in the state. Nevada allocated about $33 million of 
its payments to education programs, citing a scholarship program for 
Nevada students attending Nevada's higher education institutions as a 
key recipient. Colorado allocated over $16 million of its payments to 
education, including its Read to Achieve program. 

Debt Service on Securitized Funds. From fiscal years 2000 through 2005, 
states allocated about $3 billion of their Master Settlement Agreement 
payments to servicing debt on securitized funds. This category consists 
of amounts allocated to servicing the debt issued when a state 
securitizes all or a portion of its Master Settlement Agreement 
payments. Over this period, the amounts states allocated for this 
purpose have ranged from $271 million, or about 2 percent of the total 
payments in fiscal year 2002, to about $1.4 billion, or about 24 
percent, in fiscal year 2005. In fiscal year 2005, four states-- 
California, Rhode Island, South Carolina, and Wisconsin--allocated 100 
percent of their Master Settlement Agreement payments to servicing debt 
on securitized funds, while New Jersey allocated just under 100 
percent. In addition, Alaska, Louisiana, and South Dakota, allocated 
more than half of their payments for this purpose. In fiscal year 2005, 
California and New York allocated the largest amounts to servicing debt 
on securitized funds. 

Tobacco Control. From fiscal years 2000 through 2005, states allocated 
about $1.9 billion of their Master Settlement Agreement payments to 
tobacco control programs, including prevention, cessation, and counter 
marketing. Over this period, the amounts states allocated to tobacco 
control ranged from $790 million, or about 6 percent of the total 
payments in fiscal years 2000-2001 combined, to $223 million, or about 
2 percent, in fiscal year 2004. 

In fiscal year 2005, 34 of the 46 states allocated some of their Master 
Settlement Agreement payments to tobacco control programs. Of the 34 
states, Wyoming allocated more than one-third of its payments to 
tobacco control, while 33 states allocated less than one-third. Twelve 
states did not allocate any of their payments to tobacco control- 
related programs. Pennsylvania and Ohio allocated more than the other 
states to tobacco control--about $44 million and $37 million, 
respectively--in fiscal year 2005. 

Mr. Chairman, this concludes my prepared statement. I would be pleased 
to respond to any questions that you or other Members of the Committee 
may have. 

Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this statement. For further 
information about this testimony, please contact Lisa Shames, Acting 
Director, Natural Resources and Environment at (202) 512-3841 or 
ShamesL@gao.gov. Key contributors to this statement were Charles M. 
Adams, Bart Fischer, Jennifer Harman, Natalie Herzog, Alison O'Neill, 
and Beverly Peterson. 

[End of section] 

Appendix I: Categories of States' Allocations: 

To standardize the information reported by the 46 states, we developed 
the following categories and definitions for the program areas to which 
states allocated their payments. 

Budget shortfalls: This category is comprised of amounts allocated to 
balance state budgets and close gaps or reduce deficits resulting from 
lower than anticipated revenues or increased mandatory or essential 
expenditures. 

Debt service on securitized funds: This category consists of amounts 
allocated to service the debt on bonds issued when the state 
securitized all or a portion of its Master Settlement Agreement 
payments. 

Economic development for tobacco regions: This category is comprised of 
amounts allocated for economic development projects in tobacco states 
such as infrastructure projects, education and job training programs, 
and research on alternative uses of tobacco and alternative crops. This 
category includes projects specifically designed to benefit tobacco 
growers as well as economic development that may serve a larger 
population within a tobacco state. 

Education: This category is comprised of amounts allocated for 
education programs such as day care, preschool, Head Start, early 
childhood education, elementary and secondary education, after-school 
programs, and higher education. This category does not include money 
for capital projects such as construction of school buildings. 

General purposes: This category is comprised of amounts allocated for 
attorneys' fees and other items, such as law enforcement or community 
development, which could not be placed into a more precise category. 
This category also includes amounts allocated to a state's general fund 
that were not earmarked for any particular purpose. Amounts used to 
balance state budgets and close gaps or reduce deficits should be 
categorized as budget shortfalls rather than general purposes. 

Health: This category is comprised of amounts allocated for direct 
health care services; health insurance, including Medicaid and the 
State Children's Health Insurance Program (SCHIP); hospitals; medical 
technology; public health services; and health research. This category 
does not include money for capital projects such as construction of 
health facilities. 

Infrastructure: This category is comprised of amounts allocated for 
capital projects such as construction and renovation of health care, 
education, and social services facilities; water and transportation 
projects; and municipal and state government buildings. This category 
includes retirement of debt owed on capital projects. 

Payments to tobacco growers: This category is comprised of amounts 
allocated for direct payments to tobacco growers, including subsidies 
and crop conversion programs. 

Reserves/rainy day funds: This category is comprised of amounts 
allocated to state budget reserves such as rainy day and budget 
stabilization funds not earmarked for specific programs. Amounts 
allocated to reserves that are earmarked for specific areas are 
categorized under those areas--e.g., reserve amounts earmarked for 
economic development purposes should be categorized in the economic 
development category. 

Social services: This category is comprised of amounts allocated for 
social services such as programs for the aging, assisted living, Meals 
on Wheels, drug courts, child welfare, and foster care. This category 
also includes amounts allocated to special funds established for 
children's programs. 

Tax reductions: This category is comprised of amounts allocated for tax 
reductions such as property tax rebates and earned income tax credits. 

Tobacco control: This category is comprised of amounts allocated for 
tobacco control programs such as prevention, including youth education, 
enforcement, and cessation services. 

Unallocated: This category is comprised of amounts not allocated for 
any specific purpose, such as amounts allocated to dedicated funds that 
have no specified purpose; amounts states chose not to allocate in the 
year Master Settlement Agreement payments were received that will be 
available for allocation in a subsequent fiscal year; interest earned 
from dedicated funds not yet allocated; and amounts that have not been 
allocated because the state had not made a decision on the use of the 
Master Settlement Agreement payments. 

FOOTNOTES 

[1] The four states that are not party to the Master Settlement 
Agreement--Florida, Minnesota, Mississippi, and Texas--reached earlier, 
individual settlements with the tobacco companies. 

[2] This original estimate does not take into account adjustments in 
tobacco companies' payments that have and will occur. 

[3] GAO, Tobacco Settlement: States' Allocations of Phase II Funds, GAO-
03-262R (Washington, D.C.: Dec. 3, 2002); GAO, Tobacco Settlement: 
States' Allocations of Fiscal Years 2002 and 2003 Master Settlement 
Agreement Payments, GAO-03-407 (Washington, D.C.: Feb. 28, 2003); GAO, 
Tobacco Settlement: States' Allocations of Fiscal Year 2003 and 
Expected Fiscal Year 2004 Payments, GAO-04-518 (Washington, D.C.: Mar. 
19, 2004); GAO, Tobacco Settlement: States' Allocations of Fiscal Year 
2004 and Expected Fiscal Year 2005 Payments, GAO-05-312 (Washington, 
D.C.: Mar. 21, 2005); and GAO, Tobacco Settlement: States' Allocations 
of Fiscal Year 2005 and Expected Fiscal Year 2006 Payments, GAO-06-502 
(Washington, D.C.: April 11, 2006). 

[4] Cigarette consumption peaked in 1981 and has been declining since. 

[5] When states allocate payments, they may include carry-over funds 
from prior years and interest earned; therefore, in any one year, 
states' payments and securitized proceeds may not equal payments 
allocated for spending. 

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