State could lose millions in tobacco money

MONTGOMERY, Alabama will have to prove it is upholding its end of the national tobacco settlement, but if lawyers cannot do so, money tobaccothe state may lose hundreds of millions of dollars that support vital social services.

With a lawsuit hearing date approaching, officials at the highest levels of Alabama’s government are expressing concern. One concern is whether Alabama responded too late to effectively defend against tobacco allegations that the state has been overpaid and who is ultimately responsible for protecting Alabama.

Chief Justice Sue Bell Cobb in October set off a series of letters between her, Gov. Bob Riley and Attorney General Troy King over who should be protecting Alabama’s interests against tobacco company allegations.

Cobb expressed “grave concerns” Oct. 5 whether Alabama can prove by past performance it deserves future payments.

“As a founding member and former chairman of the Children First Foundation, I also have grave concerns in a general sense that Alabama may not have done its due diligence in adhering to the master settlement agreement and thus jeopardize the monies received in the settlement,” Cobb wrote.

She asked Riley and King to “immediately retain counsel” to represent Alabama in arbitration and to create a “dedicated unit” within the appropriate state agency to enforce Alabama’s master tobacco settlement laws.

“This is not a time to point fingers of blame, but instead to work cohesively to insure that Alabama does not lose any of its funding from the master settlement agreement,” Cobb wrote.

They responded and only recently was outside counsel hired to begin defending Alabama at a binding arbitration hearing over billions of dollars in tobacco payments. The arbitration hearing involves dozens of tobacco companies and more than 40 states, including Alabama, early next year, possibly in February.

Tobacco companies allege nonenforcement of state laws protecting them from illegal competition that hurts their ability to make annual settlement payments, according to Securities and Exchange Commission filings.

At the arbitration hearing, tobacco companies that signed the 1998, $206 billion national lawsuit settlement agreement will say some or all states may not deserve more tobacco money.

At stake is at least $1.1 billion to dozens of states and at least $95 million in tobacco payments made to Alabama in 2003. There’s the potential Alabama could lose up to $400 million in future payments if lax enforcement is determined for 2004-08.

“These potential 2004-2008 (tobacco payment) adjustments total an additional $4.1 billion” nationwide, said Peter Levin, chief tobacco counsel for the National Association of Attorneys General, in a Nov. 30 notice to state AGs.

If Alabama cannot defend its tobacco enforcement, about one-third of the budget of Children’s Trust Fund including half the agency’s salaries would be jeopardized, director Kelley Parris-Barnes said.

“The loss would be devastating to children’s services and health care and everything surrounding children’s services,” Barnes said last week. “We let about 170 grants to communities on the local level to prevent child abuse and neglect.”

After Cobb’s alarm, King and Riley swapped letters about whose responsibility it is defend Alabama’s tobacco interests.

King wrote Riley Oct. 15 saying his chief deputy has made “repeated requests over the last many months” about resources to pay for Alabama’s arbitration hearing defense.

“Without any additional appropriation, the Alabama Department of Revenue has been enforcing the MSA since 1998,” King wrote Riley. “In 2008, I added additional counsel to assist revenue in the preparation for the 2010 arbitration proceedings and in reviewing diligent enforcement issues.”

King said Riley hasn’t identified or dedicated new resources.

The state of Kentucky has several assistant attorneys general assigned to the due diligence arbitration issue, but no special budget appropriation, said Kentucky AG spokeswoman Shelley Johnson.

Riley responded Oct. 20 saying it was King’s predecessor, Bill Pryor, who signed off on the litigation, but “diligent enforcement” of tobacco laws is King’s responsibility.

“Please develop a plan of action that we can immediately begin discussing and hopefully that we can quickly agree upon and that we can quickly implement,” Riley wrote.

King responded two days later saying it was Riley’s predecessor, Don Siegelman, who started the lawsuit, and added the revenue department is responsible for proving Alabama has been upholding the tobacco lawsuit settlement agreement, according to several laws passed since 1999 and according to then-Gov. Don Siegelman and then-Attorney General Pryor in 2000.

King released a letter dated April 4, 2000, signed by Siegelman and Pryor that “our state department of revenue is the agency responsible for enforcement of this act.”

“In fact, that department has never informed this office of any contrary position and has performed those duties for eleven years,” AG King wrote Riley on Oct. 22, 2009.

Riley’s office last week was asked for relevant documents in its possession about arbitration, but as of Friday it had not complied with the Open Records law request. King supplied requested correspondence involving Cobb, Riley and himself.

Riley’s revenue commissioner, Tim Russell, last week assured The Gadsden Times his office has properly upheld Alabama’s tobacco settlement statutes but he contended it’s King’s office that is responsible for defending the state in upcoming arbitration.

“We have been” upholding the agreement, Russell said. “We’re the official escrow agent, but the litigation part is overseen by the AG.”

Despite concern beginning in October, Montgomery attorney David Boyd was hired only “recently” to defend Alabama, Russell’s office said.

King spokesman Chris Bence said King’s office has no compliance budget since the revenue department is “tasked with that responsibility.” Bence said Boyd is being paid $195 an hour by the revenue department.

Revenue department attorney Wade Hope said the department doesn’t have a special appropriation to cover compliance costs but it has “a whole group of auditors in the tobacco tax section” making sure reports are filed and sales are monitored.

Hope said he works with other department tax, audit, and enforcement employees to uphold tobacco settlement laws and police tobacco companies that are required to pay into an escrow account to offset settlement losses.

“We think we’ll be able to do credible job,” Hope said. “We think we’ve enforced the statutes. In Alabama we’re pretty diligent in making sure we collect excise tax (on tobacco) sold in the state.”

Alabama and other states get tobacco settlement money because of lawsuits over the hazards and costs associated with smoking. Tobacco companies agreed to pay $206 billion over 25 years and they would get the money largely from higher prices.

States agreed to protect participating companies against market intrusion. Any tobacco company not part of the settlement has to pay to offset payment losses caused by declining sales by tobacco companies in the settlement.

Tobacco companies pay nearly $1 billion a year and are arguing that more than 40 states have not protected them against illegal competition that cuts their ability pay the states.

Tobacco companies will argue at a binding arbitration hearing probably in February that if states aren’t policing illegal competition, tobacco companies are paying more than they should be and deserve a reduction in or elimination of future payments.

Alabama got between $94 million and $131 million a year in tobacco funds since 2000, including $116.6 million last year.

The Fiscal 2010 tobacco appropriation of $106.1 million is broken down as $43 million to 11 state social service agencies, $50 million to five other agencies including $33 million to Medicaid, and $12.6 million to the General Fund.

With the Legislature coming into session in January to write fiscal 2010-2011 budgets, any loss of tobacco revenue would be a significant blow to social agencies and the overall general government budget.

In an agreement between participating states and the tobacco companies, 20 percent of state payments won’t be subject to arbitration so the potential loss to Alabama is anywhere from zero percent to 80 percent of the $119 million it got in 2003, or $95.4 million. Any deficit would be deducted from future payments.

All 50 states sued tobacco companies, but four filed separate suits and 46 others stuck with the national lawsuit. Of the 46, all but one will be theoretically liable for payment reductions in the arbitration hearings. That one state is in state court.

“Alabama may show it diligently enforced the statutes and are due this portion of the money,” R.J. Reynolds spokesman David Howard said. “States found to not be diligently enforcing are responsible for the adjusted (loss) amount.”

Children’s First’s Barnes hopes Alabama’s money doesn’t go up in smoke.

“I am not an expert and cannot speak for those, but I feel it will be aggressively defended on behalf of the state of Alabama but surely there is that potential we could lose that funding,” she said.

By Dana Beyerle, Montgomery Bureau
December 7, 2009 Gadsdentimes

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