KHI News Service

Dip in tobacco money complicates the budget problem

House wants a 17.5 percent cut to children’s programs to make up the difference

By Mike Shields, Phil Cauthon | May 06, 2011

An unforeseen decline in the dollars collected by the state from the nation’s major tobacco companies contributed to the impasse this week as lawmakers failed to hammer out final details of a budget.

About 20 children’s programs depend on the Children's Initiatives Fund for financing. Included among them are Early Head Start, child care, and services for youngsters who are mentally ill.

The fund — generally referred to as CIF — gets its money from tobacco settlement payments, which Kansas and 45 other states negotiated in 1998 with four major tobacco companies, the so-called Master Settlement Agreement, or MSA.


Children's Initiative Fund, Senate proposed adjustments

Download .PDF


Children's Initiative Fund, House proposed adjustments

Download .PDF

Kansas’ share

Kansas' share of the MSA — .83 percent of the total — was projected to exceed $1.5 billion over 25 years.

In exchange for the payments, those tobacco companies avoid legal liability for future, health-related lawsuits. Since 1998, a total of 20 companies — "participating manufacturers" — have also joined the MSA and have made payments according to the settlement terms.

There are also about 20 "non-participating manufacturers" whose tobacco products are sold and taxed in the U.S. — they are the cheaper, less common cigarettes such as "Echo" or "Decade." Though many distributors, such as Wal-Mart, will not carry cigarettes from non-participating makers, those cigarettes are still on the market legally.

To prevent those companies from gaining a market advantage by avoiding the payments, the settlement requires them to pay into an escrow account.

If and when future health-related lawsuits are filed against these companies — there have been none yet — the money in this account would be used to pay awards.

Decreasing amounts

Kansas' tobacco revenues and interest earnings peaked in fiscal 2009 at $72.3 million. Projections for fiscal 2011 and fiscal 2012 were originally $60.5 million each year. Legislators used those projections in appropriating money to the various children's initiatives for fiscal 2011, which ends June 30.

More recent estimates indicate the state will actually receive about $3.1 million less than anticipated in fiscal 2011 and about $5.2 million less than earlier expected in fiscal 2012.

That downturn complicated the budget wrangling this week between House and Senate negotiators.

The state received more than expected in income tax collections, $22 million. The Senate proposed replacing the tobacco money shortfall with part of that windfall.

The House proposed instead cutting the children’s programs 17.5 percent, so they could leave in place a larger contingency reserve.

The House plan is being resisted by children’s advocates.

“It would be one thing, if the money weren't there,” said Shannon Cotsoradis, chief executive of Kansas Action for Children. “But the House is saying we're going to have money in the bank yet we're going to cut programs for our youngest and most vulnerable.”

Budget negotiations deadlocked—Big obstacle is deciding how much money to hold in reserve

Future payments expected to fall

The reasons why the tobacco payments are dropping off stem from the many variables in the complex Master Settlement Agreement.

Much of the shortfall, officials say, is due to two tobacco companies — RJ Reynolds and Lorillard — recently withholding all or part of their payments to states.

The tobacco companies said the withholding was justified under a clause in the agreement that ensures the participating manufacturers' market share won’t drop below a certain level. If it does, payments to states can be reduced according to formulas set out in the agreement.

The withheld payments are part of an ongoing legal dispute with the states.

Kansas Legislative Research

Kansas tobacco revenues and interest earnings, 1999 to present.

View larger photo

Other variables

The amounts tobacco companies pay also can fluctuate based upon a number of other variables that are hard to predict, further complicating states' ability to build budgets around the payments.

Among the variables at work, each of the following can contribute to lower payments to states:
• Decreasing tobacco company revenues,
• One or more tobacco companies declaring bankruptcy,
• Increasing market share of the non-participating manufacturers.

These variables have contributed to fluctuations in the fund since it began in 1999, from a low of $46.9 million in FY 2007 to the $72.3 million high two years later.

In the past, the projections have better kept pace with the fluctuations and prevented the kind of last-minute budget maneuvers currently underway at the Statehouse.

Melissa Ness — spokesperson for the Children's Cabinet, which recommends to Legislators how best to spend the tobacco money — said projecting how much tobacco money there will be in months ahead is comparable to projecting tax receipts and other state revenue.

"If you look at the last year, we haven't been the best about estimating what our revenues are going to look like," Ness said. "As we look at declining (tobacco) revenues — and now adding in the fact that there is a dispute (with two big cigarette makers) — it's something that the Cabinet has been very aware of for the last several years.


Overview: The Children’s Initiatives Fund

Download .PDF

"Our focus is on having a process that can demonstrate and evaluate outcomes so that if there are times — like we're seeing now — where we have to make cuts or in the future if we have to make larger cuts, we can rethink the scope of (the initiatives) and who gets the money."

Ness and Children's Cabinet Executive Director, Jim Redmon, said they recommend that the Legislature, if necessary, spread the cuts equally across the various Children’s Initiative Fund programs.

But two programs should be spared, they said. Infants and Toddlers and Childcare Services are subject to federal regulations that would result in financial penalties for the state if they were reduced.

Related story: Budget negotiations deadlocked—Big obstacle is deciding how much money to hold in reserve