Tobacco Money: Texas Cashes In on a Windfall

Texas Medicine Logo(1)  

Cover Story -June 2000   

By Johanna Franke
Associate Editor

Much has happened in the 2 years since former Texas Atty Gen Dan Morales found an oasis in the tobacco desert by settling the state's lawsuit against Big Tobacco for $17.3 billion. Texans have gotten used to the idea of all that money, and they're using it, though not totally for health-related matters.

Tobacco revenues, in some form or another, are starting to sprinkle across much of the state, but many public health groups say the next session of the Texas Legislature needs to set aside more of this money to prevent the use of tobacco. In fact, Texas ranks dead last in per-capita funding for prevention.

Meanwhile, as Big Tobacco's reputation becomes more stained, fewer Texans are lighting up, which means fewer tobacco funds are rolling in, which could mean a drought for some of the state's public health programs.

Forecasting the future  

Like parents who suggest their children save some of their allowance for a rainy day, the Texas Legislature last year directed most of the initial $1.8 billion of the state's tobacco settlement into endowments similar to the state's Permanent School and Permanent University funds.

These endowments were borne by the Memorandum of Understanding (MOU) signed February 3, 1998, by Sen Bill Ratliff (R-Mount Pleasant), Rep Rob Junell (D-San Angelo), and then-Attorney General Morales. The MOU outlined health care priorities to be funded by the first tobacco settlement installment, and while it had no legal standing, it prevented protracted legal struggles for control of tobacco funds and provided a framework for the 76th Legislature to follow while allocating tobacco funds during the 1999 session.

At that point, the Texas Medical Association and the Texas Hospital Association cofounded the Coalition for A Healthy Texas, which includes representatives from more than 40 provider and consumer organizations. Throughout the session, the coalition worked to convince the legislature that all tobacco settlement dollars should be dedicated to improving Texans' health by funding direct medical care, prevention, and research. The coalition succeeded, and legislators greeted the MOU with open arms.

"What the legislature did by accepting the MOU was put an important down payment on health," said Texas Commissioner of Health William R. Archer III, MD. "They made a commitment to health."

The MOU weather map  

Working from the MOU's map of settlement funds, lawmakers enacted three tobacco-related bills during the 1999 session:

  • House Bill 1161 created a permanent fund and advisory committee to handle the investment, management, and distribution of tobacco settlement receipts earmarked for reimbursing counties and public hospitals for indigent health care. It codified the Texas Supreme Court order to provide counties and hospital districts with initial cash distributions worth $300 million and interest payments to be used to cover the costs of indigent care. (See the Texas Department of Health [TDH] Web site at for a spreadsheet showing the distribution of tobacco settlement proceeds to local political subdivisions.)
  • HB 1676 created five permanent endowments to provide stable long-term funding of prevention and treatment programs. The funds, managed by the Texas Comptroller's Office, do not bind the legislature to future appropriations. Legislators may increase or decrease additional state appropriations as needed. The funds are:
  1. The $200 million Permanent Fund for Tobacco Education and Enforcement within TDH. Interest from the fund would pay for programs to reduce tobacco use, including smoking cessation, public awareness campaigns, enforcement of sales and distribution laws, and specific programs for populations, such as minorities, traditionally targeted through advertising by tobacco companies.
  2. The $100 million Permanent Fund for Children and Public Health is appropriated to TDH for a foundation to demonstrate cost-effective prevention and intervention strategies to improve health outcomes, address disparities in minorities' health, and provide grants to local communities to address public health priorities. Interest from the endowment will fuel the programs. (See " TMA Applies for Innovation Grants .")
  3. The $100 million Permanent Fund for Emergency Medical Services (EMS) and Trauma Care generates interest appropriated to TDH for programs or grants for emergency medical services and trauma care.
  4. The $50 million Permanent Fund for Rural Health Facility Capital Improvement provides low-interest loans to a city, county, hospital district, or hospital authority that owns or operates a rural public hospital. The loans can be used only for capital improvements to existing public health facilities, to construct new such facilities, or to purchase capital equipment for a public health facility. The Center for Rural Health Initiatives administers the project.
  5. The $25 million Community Hospital Capital Improvement fund's earnings are appropriated to TDH for grants, loans, or loan guarantees to urban public or nonprofit community hospitals with 125 or fewer beds.
  • HB 1945 created a $595 million fund for research at universities and three grant funds, managed jointly by the Texas Comptroller's Office and The University of Texas (UT) System, that will be distributed to medical schools and other higher-education institutions based on formulas and competitive grants. They are:
  1. The $595 million Permanent Fund for Health-Related Institutions benefits the UT Health Science Center at San Antonio, $200 million; UT M.D. Anderson Cancer Center, $100 million; UT Southwestern Medical Center at Dallas, $50 million; Baylor College of Medicine, $25 million; Texas A&M University System Health Science Center, $25 million; Texas Tech University Health Sciences Center (TTUHSC) in El Paso, $25 million; other TTUHSC components, $25 million; University of North Texas Health Science Center at Fort Worth, $25 million; UT-El Paso, $25 million; UT Health Center at Tyler, $25 million; UT-Houston Health Science Center, $25 million; UT Medical Branch at Galveston, $25 million; and the regional academic health center in the Lower Rio Grande Valley, $20 million. These funds may be used only for research and other programs that benefit public health. (See " Texas Institutions Plan Tobacco Proceeds Expenditures .")
  2. The $350 million Permanent Fund for Higher Education is administered and managed by the UT System. Funds may be appropriated only for medical research or health education, or treatment programs at certain higher-education institutions.
  3. The $45 million Permanent Fund for Higher Education Nursing, Allied Health and Other Health-Related Education Programs generates investment returns that are appropriated to the Texas Higher Education Coordinating Board (THECB) for grants to public higher-education institutions that offer upper-level academic instruction and training in nursing, allied health, or other health-related education. (See "THECB Awards New Tobacco Settlement Grants.")
  4. The $25 million Permanent Fund for Minority Health, administered by THECB, provides grants to higher-education institutions and to partnerships of minority organizations, colleges, and universities for research or educational programs that address minority health issues. (See "THECB Awards New Tobacco Settlement Grants.")

Storm of criticism  

Although the tobacco settlement money was intended to be used for health programs, some states have chosen to use some of it for other purposes. Texas is one of them.

The thunder and lightning of criticism began almost immediately after several states began using tobacco money for non-health programs. US Health and Human Services Secretary Donna Shalala sharply accused several states of "breaking their pledge to use billions of dollars from the national tobacco settlement for health programs."

Richard F. Corlin, MD, speaker of the American Medical Association House of Delegates, criticized Los Angeles Mayor Richard Riordan's proposal to use $300 million of that city's tobacco settlement funds to settle expected lawsuits stemming from a police corruption scandal. "It is corrupt in and of itself to steal the tobacco settlement money to pay off the price of political problems and police corruption," Dr Corlin said.

In Texas, counties and cities account for most of the tobacco settlement funds that have gone astray because the initial $300 million payment -- distributed in 1999 to 131 hospital districts, 167 counties, and 5 cities on the basis of their population -- did not restrict how they could spend the money. They are not required to report how they're using the first round of funds.

Results of an informal 28-county survey published in the October 13, 1999, issue of The Wall Street Journal , show several Texas counties are using their tobacco dollars for construction and renovation projects. According to the Journal , Fort Bend County is using half of its $3.9 million share of the settlement to renovate a former Wal-Mart as office space. Falls County is using $100,000 of its $312,812 share to upgrade county roads. Limestone County plans to spend part of its $223,765 share to renovate a 1924 courthouse.

Senator Ratliff, chair of the Senate Finance Committee, says critics should lay off these counties. "I think the counties are getting a bad rap for that. The reason Representative Junell and I did not specify that this money had to be used for local indigent care was that we were convinced by county representatives that they had already been spending a lot of money on indigent care and had been neglecting other areas, like roads and bridges that carry school buses."

Cameron County officials say they have spent $20 million over the past 10 years, or 10% of their property tax collections, on indigent health care, The Wall Street Journal reported. They plan to use their $4.5 million tobacco payment on new county adult probation, engineering, and health department buildings. They also will use tobacco dollars for drainage improvements at a substandard housing development.

"There may be some counties that were not doing anything in indigent care and still raked off the money. I'm not going to tell you that wasn't so," Senator Ratliff said. "But we felt like that was legitimately a local decision as to what their priorities were."

From now on, though, tobacco money distribution will be determined by how much a local government spends on unreimbursed health care. Representatives from hospital districts and counties will staff an advisory committee that will decide which expenditures might qualify as health care expenses -- medical supplies, diagnostic and treatment services, laboratory work, and case management -- and which ones probably won't, such as administrative matters.

Cloudy skies for prevention  

Though they needed a downpour, efforts to prevent tobacco use only received a drizzle of settlement funds during the first biennium of the settlement, says Mike Dany, chief executive officer of the American Cancer Society (ACS)-Texas Division, Inc.

Instead of the US Centers for Disease Control and Prevention's (CDC's) most recent recommendation that Texas spend $100 million on comprehensive tobacco prevention, the programs overseen by TDH are receiving only the interest from the $200 million Permanent Fund for Tobacco Education and Enforcement. This amounts to about $9.6 million from the first settlement installment, leaving Texas at the bottom of all the states in per-capita funding of prevention efforts.

Mississippi ranks first with per-capita funding of $11.36, or 165.1% of the CDC's recommendation for spending on prevention there. The other 49 states trail behind, with Texas' per-capita funding pulling up the rear at $0.51, only 9.6% of the CDC's recommendation for prevention spending for the Lone Star State.

"The lawsuit was based on the harm that tobacco had created in the state in terms of cost," Mr Dany said. "The intent of the original suit was to try to put monies into prevention so this wouldn't be a future problem, and tobacco prevention was underfunded."

Robert Emmick, Jr, MD, chair of TMA's Council on Public Health and an emergency medicine specialist in Bryan, also is concerned about this lack of funding.

"Of course, we preferred a higher level of funding, but now we'll wait and analyze the pilot project results once they're available," he said.

Mr Dany says smoking prevention pilot projects conducted by TDH in about 20 Texas communities will not generate worthwhile results for the next legislative session because they are using only parts of a comprehensive program shown to be successful in other states.

"Studies show that the way you attack smoking rates is a comprehensive program that includes media, community youth programs, cessation programming, and enforcement," he said. "Not one approach in itself has been shown to work. It takes all those things in combination."

Mr Dany points to the success of Florida's tobacco pilot program, which uses community partnerships, education, enforcement, and research to evaluate every aspect of the program. The program's most critical elements include its youth-driven counter-marketing effort, local partnerships active in all 67 Florida counties, in-school and after-school instructional support at every grade level, youth smoking cessation programs, and a youth advocacy group called Students Working Against Tobacco.

A recent survey of more than 20,000 Florida middle and high school students showed a 2-year decline in cigarette use that represents 79,760 fewer young smokers and approximately 26,230 fewer premature deaths attributable to smoking.

"When our programs don't have these kinds of results by next session, those who have not been favorable to tobacco prevention funding will say, 'See, this stuff doesn't work,'" Mr Dany said.

But Dr Archer says Florida still has more work to do.

"In addition to their middle and high school student smoking rate declines, they saw a possible increase in college students that they didn't anticipate," he said. "And, when they disaggregated the data, they found the impact was not there in minority kids."

Texas, he says, is on the right track.

"The legislature wants very much to understand the different dimensions of the tobacco prevention program, and they really want us to be scientists and look at what works," he said. "What we're trying to do is determine which of those components have the most impact, and then, when put together, what component combinations will have the most impact."

Dr Archer added that the number of Texas middle school students who reported using tobacco declined from 30.6% in 1998 to 22.6% in 1999. He attributes these numbers to less access to tobacco and to a state law that revokes driver's licenses from kids who smoke. High school student smoking rates remained the same, he says.

"We had an impact on younger kids, I think, because they are still longing for their licenses and are afraid they might not get them," Dr Archer said.

Significant pilot study results probably won't be ready by the 2001 legislative session, but Dr Archer says he expects legislators to be patient and refrain from cutting prevention programs.

"We've articulated along the way that this is a long haul," he said. "If you're wanting to impact high school students, you've got to get them before they go to high school."

During the next legislative session, TMA, the Texas division of ACS, and other health advocacy groups will propose adding to the $200 million endowment to push annual funding for tobacco prevention programs toward the CDC's recommendation of spending $100 million on prevention, Mr Dany says. They also will promote statewide expansion of prevention programs.

Preparing for a slight dry spell  

Though the ACS-Texas Division is looking toward the 77th Texas Legislature for more funding, the first $1.8 billion installment of the tobacco settlement is still not water under the bridge.

Number crunchers for the Texas Comptroller's Office are working to determine how much Big Tobacco owes in fiscal year 2000 after adjustments such as profitability, inflation, and tobacco consumption during 1999.

"We don't have final figures on the profitability adjustment yet, but it's not expected to have any impact," said James LeBas, chief revenue estimator at the Texas Comptroller's Office. "It's to the state's benefit if the tobacco industry's domestic profitability is rising faster than inflation."

The inflation adjustment factor is 3%, or the actual consumer price index change, whichever is greater that year. "The inflation factor, which works to our advantage, was 3% for 1999, but the consumption factor was -14%," Mr LeBas said.

The consumption factor is based on a decline in cigarettes shipped for domestic consumption, which may mean efforts to curb smoking are working. This means less money will be pouring in from this biennium's tobacco settlement payment. The comptroller's office has calculated a $75 million shortfall for the state (see " State Tobacco Industry Payments ").

Even more disturbing than this shortfall is the possibility of the tobacco industry going bankrupt, which would delay or end settlement payments to states (see " Bound For Bankruptcy? ").

The 2-year outlook  

Other health advocacy groups, as well as non-health-related organizations such as education and veterans groups, are starting to clamor for the next biennium's tobacco money.

Before adjustments, the tobacco industry will owe $471.25 million to the state and $605.09 million to local entities at the end of December 2001, Mr LeBas says. At the end of 2002, Big Tobacco will owe the state another $471.25 million and local entities $303.2 million.

The Senate Finance Committee was charged during the interim to identify priorities for the use of future tobacco settlement proceeds. Senator Ratliff passed this duty along to Senator West's interim committee along with a warning.

"I admonished the committee members not to see the money as a pork barrel pool that we start kicking out into individual projects around the state, but I don't think I had to," Senator Ratliff said. "I think what they'll do is come up with recommendations for statewide programs and avoid special interest-type items."

The interim committee's priorities are due back to the Senate Finance Committee by mid-summer, so that a report can be made to the lieutenant governor in September.

Making sure these priorities are health priorities without the benefit of a memorandum of understanding during the 2001 session might be tough, Dr Emmick says.

"This session, the tobacco funds will go directly into general revenue," he said. "Without an MOU, many people can think of ways besides public health and direct health care projects on which to spend the money."

But TMA and other members of the Coalition for A Healthy Texas have been working during the interim as well. A poll commissioned by the coalition in 1999 showed that more than 80% of Texans favor dedicating tobacco settlement money to meeting current and future health care needs. TMA and its coalition partners are building on this support throughout the interim session to ensure that future tobacco monies address Texas' vast health needs.

Senator Ratliff says he thinks legislators won't need much convincing to channel tobacco funds into health care.

"I think the legislature accepted Representative Junell's and my basic philosophy that the funds ought to be used for health care of some kind," he said. "So I think we will continue to see the money dedicated to health care, and there are lots of different ways to do that."


Bound for bankruptcy?
TMA Advantage: TMA applies for innovation grants
TMA Advantage: Tobacco tool kits offer patient counseling tips
THECB awards new tobacco settlement grants
State tobacco industry payments
Texas institutions plan tobacco proceeds expenditures  

June 2000 Texas Medicine Contents