FOLLOWING THE TOBACCO MONEY TRAIL

BACKGROUND - Tom Sullivan, radio host of KFBK's afternoon talk show, lamented about the possible misuse of tax and other money raised from smokers and tobacco companies. He had heard that some public officials in Southern California intended to divert such money to other projects not related to tobacco prevention programs for which it was intended. He wondered how Sacramento County handled its tobacco money. The League's Executive Director Joe Sullivan called the show and told Tom the League would find out and report back. This is the story.

HISTORY BEHIND THE MONEY - In California, the major legislation involved in disbursing many millions of dollars from tobacco users and producers stems from tax increases approved by Propositions 99 and 10, and by a settlement agreement involving lawsuits by 40 states, including California, against the tobacco industry.

The law, prior to the passing of Proposition 99, which became effective January 1, 1989, imposed a state excise tax of 10 cents for each pack of cigarettes. Seventy percent of the proceeds go to the State General Fund, and the remainder to cities and counties.

In 1988 the U.S. Surgeon General confirmed that Nicotine found in cigarettes is habit forming and addictive. His report stated "We must take steps to prevent young people from beginning to smoke," and that "We must insure that every child in every school in this country is educated as to the health risks and addictive nature of tobacco use." This began the assault on the tobacco industry nation wide.

Proposition 99. California's first attack began immediately with passage of Proposition 99, which added an Amendment to the State's Constitution titled "Cigarette and Tobacco Tax. Benefit Fund." Enacted in January of 1989, it imposed an additional tax on cigarette distributors of 25 cents a pack, and imposed a tax upon distributors of other tobacco products (cigars, chewing tobacco, pipe tobacco, and snuff) equivalent to the combined rate of tax imposed on cigarettes. The latter tax is determined by the Board of Equalization and is equivalent to the total excise tax on cigarettes. It was estimated that the taxes would raise about $600 million per year. At the state level money from theses taxes are placed in a special account used as follows:

1. Health Education - Twenty percent for prevention and reduction of tobacco use, primarily among children, through school and community health education programs.

2. Hospital Services - Thirty-five percent to pay hospitals for treatment of patients who cannot afford to pay, and for whom payment will not be made by private coverage or federally funded programs. Payment is not limited to treatment of tobacco-related illness.

3. Physician Services - Ten percent to pay physicians for medical care for patients who cannot pay, as described above.

4. Research - Five percent equally divided between programs that (1) protect, restore, enhance or maintain fish, waterfowl, and other wildlife habitat areas; and (2) improve state and local park and recreation resources.

5. General Purposes - The remaining 25 percent is used for any of the specific purposes described above.

All funds are used to supplement, not replace funds of programs that were in effect at the time.

However, the state retains the monies described in subparagraphs a., d., and e. above, providing a portion of the money to the counties for only the payments to Hospital and Physician's Services described in subparagraphs b. and c. The County undergoes a three-part process to receive this funding each year. It must file an application, an expenditure plan and a contract. As each item is approved by the Board of Supervisors, and executed by the state, the money is then provided and spent for the two services. For 1989-99 it was originally estimated that the county would expend about $5 million of tobacco tax money each year.

Proposition 10. In November 1998 the voters passed the California Children and Families First Program to fund early childhood development programs by raising the excise tax on cigarettes 50 cents a pack, bringing the total state excise tax to 87 cents per pack. It also increases the excise tax on cigars, chewing tobacco, pipe tobacco and snuff. It is estimated that these taxes will bring in an additional $690 million per year. The revenue generated by the new taxes will be placed in a new special California Children and Families First Trust Fund, and revenues generated by the increase in existing taxes will be placed in the Cigarette and Tobacco Products Surtax Fund (for Proposition 99 programs). Twenty percent of the Proposition 10 money will go to the state, and 80 percent to the counties. The program will be carried out by state and county commissions. The state's commission will be composed of seven voting members appointed by the Governor (3), Speaker of the Assembly (2) and the Senate Rules Committee (2). There will also be two non-voting members. The county commissions will be composed of 5 to 9 members appointed by the County Board of Supervisors. The state must spend its money on (1) mass media campaign, 6%, (2) educational activities, 5%, (3) support for child care providers, 3%, (4) research, 3%, and (5) administration, 1%. County commissions have broad discretion on how to spend funds. Expenditures must be consistent with the purpose of the act, generally for early childhood development programs. The formula for allocating revenues to the county commissions is based on the annual number of births in each county. Sacramento County should receive about $18 million per year.

THE MONEY IN THE TOBACCO SETTLEMENT - The settlement agreement reached by the states and tobacco industries requires the industries to make payments to the states in perpetuity with payments totaling about $25 billion through 2025. California will receive about $925 million per year. The amount will be split between the state, the 58 counties and 4 cities, i.e., Los Angeles, San Francisco, San Diego and San Jose whom filed independent lawsuits. There is no restriction on the money, which will go into General Funds. To pay the settlement, tobacco companies have raised the price per package of cigarettes by 45 cents. In 1998 our Attorney General entered into a Memorandum of Understanding (MOU) with local governments to coordinate their lawsuits with the state's lawsuit and provide for monies recovered. The split was 50-50 between the state and local governments. The local share will be further split between the counties and specified cities, 90% ($11.25 billion) to the counties and 10% (1.25 billion) to the 4 cities. The counties' shares will be base on population. The estimated year 2000 payment to Sacramento County should be about $12.8 million. The money is to be put in an escrow account by the tobacco industries. However, none of the money will be distributed to the states until there is "final approval" of the agreement, defined as the earlier of (1) June 30, 2000, or (2) when 80 percent of the states involved obtain approval of their consent decrees. In the interim, the companies will make a total of $12 billion in "up-front" yearly payments of $2.4 billion to the escrow fund. The first payment was made at the end of 1998. The Governor's 1999-2000 budget assumed the receipt of $562 million.

SACRAMENTO COUNTY'S USE OF THE TOBACCO MONEY - THE ANSWER TO TOM SULLIVAN'S QUESTION - Sacramento's cigarette tax money went to its General Fund prior to 1989. In the Proposed Budget for 1999-2000, an entry of $3,710,691 under, "Cigarette Tax-Uninc. Area" represents a conservative estimate of all the tobacco tax money available to be transferred by the state to the County, notwithstanding the original estimate of about $5 million per year. The Proposition 99 tax money is made part of the Department of Medical Services' budget, and they, in turn, must file an annual report to satisfy the County and State that the money is being spent as intended.

To date, neither Proposition 10, nor the Tobacco Settlement money has reached the county. However, the County has already appointed its Proposition 10 Commissioners to handle Prop.10 money in accordance with requirements. With respect to the Tobacco Settlement money, there are forces in motion, which can affect the money that will actually come to the state. Among these are requests by American Indian Tribes to hold payments until their cases for participation, in some fashion, can be considered, and the Federal Government's move to obtain a portion of the settlement money as reimbursement for payments made to the states in the

past to cover tobacco related problems. Based on these problems, The Sacramento County's Chief Financial Officer, Geoff Davey remarked that the county will not take action with respect to Tobacco Settlement money until it's in the bank. And he advised that despite the estimate that the County will receive about $12.8 million a year, based on the "up-front" money, and other uncertainties provided by the Tobacco Industries they may only see $4 to $5 million in 2000 - 2001.

During this investigation it became clear that there is much confusion as to the handling of "Tobacco Money", and that the public does not understand why Tobacco Settlement money goes into State and other Public Agencies General Funds. The reason is simple. The money is to reimburse General Funds nation-wide for money expended for many years from General Funds to cover Tobacco related programs and problems, thereby preventing use of the money for public safety and other community related projects such as parks, libraries, and community centers serving the general public. It's payback money.

To answer Tom's question, as far as we can determine, Sacramento County is handling its Tobacco money properly, and approaches its use conservatively, to avoid budgetary over commitment.

Joe Sullivan, President