Hearing of the Senate Commerce, Science, and Transportation Committee

Federal News Service

HEADLINE: HEARING OF THE SENATE COMMERCE, SCIENCE, AND TRANSPORTATION COMMITTEE

SUBJECT: STATE SPENDING OF TOBACCO SETTLEMENT REVENUES

CHAIRED BY: SENATOR JOHN MCCAIN (R-AZ)

WITNESSES:

MIKE MOORE, ATTORNEY GENERAL OF MISSISSIPPI;

MATTHEW MYERS, PRESIDENT, CAMPAIGN FOR TOBACCO FREE KIDS;

RAYMOND C. SCHEPPACH, EXECUTIVE DIRECTOR, NATIONAL GOVERNORS ASSOCIATION;

DEBORAH HUDSON, DELAWARE STATE LEGISLATURE;

DR. CHERYL HEALTON, PRESIDENT AND CEO, AMERICAN LEGACY FOUNDATION

BODY:
SEN. JOHN McCAIN (R-AZ): Good morning. Today's hearing gives the committee an opportunity to learn more about how states are spending revenues derived from the $247 billion Master Settlement Agreement, MSA, that was reached in 1998 between the states and the nation's four largest tobacco companies. As this month marks the five year anniversary of the MSA, now is an appropriate time to revisit the effects of the agreement.

I would like to have our witnesses come forward, if you don't mind, while I'm emoting. In the U.S. alone, an estimated 400,000 people die each year as a result of a smoking related illness, which equates to approximately 1,200 smoking related deaths per day. Nearly 2,000 children start smoking each day. Sixty percent of smokers in this country begin before the age of 14, and nearly 90 percent become addicted by age 19. While the surgeon general estimates that 75 percent of smokers want to quit, only slightly over 2 percent actually succeed each year.

Globally, the World Health Organization estimates that eight out of 100 people who are currently alive will die from smoking. These statistics underscore the importance of both investing in tobacco prevention programs and preventing targeted tobacco marketing designed to lure our children. The MSA settled lawsuits filed by numerous states seeking reimbursement for decades of healthcare expenditures on tobacco related illnesses and deaths.

While the MSA does not direct how states allocate their settlement payments, one of the most recurring and dominant refrains of state officials pursuing litigation was the critical need to reduce the use of tobacco products by our youth. In fact, several of the recitals set forth in the beginning of the MSA expressly indicate the settling state's intention to dedicate significant MSA fundings to the reduction of youth smoking.

In addition, in resolutions passed in 1999 and 2001 by the members of the National Governors Association, the nation's governors committed to spending, quote, "a significant portion of the settlement funds on smoking cessation programs," unquote. However, as state legislatures have committed their settlement revenues for other purposes, the NGA's promises have eroded over time. This fact is most apparent in its 2003 resolution that omits any reference to spending settlement funds on smoking cessation programs.

The Campaign for Tobacco Free Kids is expected today to release a report that confirms that the vast majority of states are failing to live up to their promises to fund tobacco related programs. The report will show that only four states are funding tobacco prevention programs at the minimum recommended level suggested by the U.S. Centers for Disease Control, a level that typically amounts to only a fraction of the state's overall tobacco revenue. Despite the nearly $20 billion the states expect to receive from the MSA in Fiscal Year 2004, states will spend less than 3 percent of that total on tobacco prevention programs, which is less than half the CDC's recommended funding level.

We are all fully aware of the budget shortfalls that are being experienced by the states, but isn't an ounce of prevention better than a pound of cure? From both a long term economic perspective and a moral perspective, I'd like to better understand why states are to a large degree ignoring the problem of youth smoking. The surgeon general testified in the year 2000 before this committee that smoking prevention programs work, and that proper funding of these programs could cut smoking rates in half by 2010. I believe that the MSA settlement revenues may be our best chance to dramatically reduce smoking rates, especially among our children.

Before we proceed any further, I want to mention my disappointment that the U.S. Department of Health and Human Services declined our invitation to have the CDC appear today. Perhaps that's an indication of the Department of Health and Human Services' involvement and interest in this issue.

Our witnesses today are the Honorable Mike Moore, attorney general of the state of Mississippi; Mr. Matt Myers, president Campaign for Tobacco Free Kids; Mr. Raymond C. Scheppach, the executive director of the National Governors Association; the Honorable Deborah Hudson, Delaware State Legislature; and Dr. Cheryl Healton, president and CEO of the American Legacy Foundation.

Dr. Healton, we'll begin with you.

BREAK IN TRANSCRIPT

SEN. McCAIN: Now, thank you very much. I'd like to mention that Senator Lott was the majority leader at the time we passed this bill through this committee with a vote of 13 to one. He was the one that allowed us to spend weeks on the floor of the United States Senate in an effort to get that bill passed, and I'm grateful for his support, and I understand why we had to pull the bill. And so I want to personally thank him and all others who were involved in this issue.

You know, Mr. Scheppach, my beloved friend Mo Udall used to have a saying. He said there's a politician's prayer that goes, "May the words that I utter today be tender and sweet, because tomorrow I may have to eat them." Here's what our public officials said at the time of the MSA. New Jersey Governor Christine Whitman, quote: "Every penny of these funds should be used for health purposes, including prevention programs and counter-advertising to protect kids, cessation programs and community partnerships to serve those who have already put their health at risk by smoking, in addition to existing important health programs such as Charity Care and KidCare." New Jersey now ranks 30th amongst the states.

Indiana Governor Frank O'Bannon: "This money can go a long way toward preventing Hoosier kids from ever getting hooked on tobacco and toward helping our citizens stop smoking and recover from smoking- related illness." They now rank 26th. It goes on and on. It's really disturbing because Attorney General Moore and others came to us and said, stay out of this. Don't make the states devote any money to prevention and treatment of tobacco-related illness. Trust us. Trust us. North Carolina Governor Jim Hunt: the consent decree gives North Carolina, quote, "a balanced approach to allocate tobacco settlement money. It will address our efforts to crack down on underage smoking and to protect the health and well being of North Carolinians." They now rank 33rd in the country. Dr. Healton described what's going on here.

I guess my answer-my first question to you, Mr. Scheppach, and I don't-I know you'll spout the party line just as you did in your opening statement, but how do you answer Attorney General Moore's statement if Mississippi can do it, the poorest state in the country, why is it-why is it that other states in this country can't live up to the promises and commitments they made to their citizens and they made to Congress when they made this deal?

MR. SCHEPPACH: Well, I'm sorry it wasn't somewhat better, in all honesty. I wish the percentage was 8 to 10 percent rather than 4 percent in this particular area. I do, however, say that it does take us a while. Yes, I think we do know what our effective programs are now, but I don't know that we knew that necessarily three or four years ago. Plus, this fiscal crisis has really been impacted very differentially across the states. When I say this is the worst fiscal crisis since the Second World War, I mean it. In 2001 revenues were down over 5 percent. We have never had a year of negative revenue growth for states since the Second World War. We've had quarters, but we're never had a year. We were down negative 5 percent. Medicaid growth over the boom period, 1995 through year 2000, was down to 5 percent. Those are the baselines we were working with.

Medicaid jumped in 2001 to 13 percent growth. And other healthcare, which is another 10 percent of the budget, jumped as well. So I think states were caught in a very, very difficult situation and it was differential. Places like New Jersey, New York, California, were hit extremely hard, where other states were hit less hard. So I wish it was better. My hope is that as revenues turn around and begin to grow, that larger amounts of money go into these particular programs. States have experienced, when they've taken money from trust funds in the past, that they have in fact replenished them when revenues did grow.

SEN. MCCAIN: I thank you, Mr. Scheppach, and I understand that you-what your job is and I appreciate you coming here today, unlike the Department of Health and Human Services. But I just-and I don't-it's not useful for me to keep kicking you around, but the resolution adopted by your members in 1999 states, in 199, "The nation's governors are committed to spending a significant portion of the settlement funds on smoking cessation," unquote. In 2001 NGA resolution the same commitment is repeated. In 2003, silence. This is what gives politicians a bad name.

Ms. Hudson, securitization. I understand that you think that that's a good idea. Is that right?

MS. HUDSON: I do not.

SEN. MCCAIN: You do not. Isn't this-and maybe the other witnesses, although I'm about out of time, isn't this sort of a commitment to keep the use of tobacco products as a viable way of continuing revenue?

MS. HUDSON: Well, I just think that the states should have done what Delaware did and put it into accounts and spend it for health. Securitization is so risky and it really hasn't been that successful and it doesn't necessarily solve the problem in that it'll be spent in the right way when they do have it to spend. I also think it would be good if states would pass a clean indoor air bill so that there wouldn't be an opportunity to smoke in indoor public places that would go with all this. And many states are doing that.

SEN. MCCAIN: Thank you.

Dr. Healton, you want to comment on that?

MS. HEALTON: On securitization?

SEN. MCCAIN: Yes.

MS. HEALTON: Well, I think securitization is the penultimate example of robbing the fund and making the chance that a poor decision during a fiscal crisis can be changed in the future. I think that's the great tragedy, and I also think-I don't know the exact percentage, but it's fiscally foolish given the amount that's being paid on the dollar at this juncture, given the liability situation and the litigation situation for the tobacco industry.

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SEN. McCAIN: In all due respect to the great state of Mississippi, isn't it true that Mississippi, as has been noted, is the poorest state in America and it is the poorest people generally speaking, lowest income people, that are addicted to smoking? So therefore what's been achieved in Mississippi is truly remarkable when put in that context. Is that right, Mr. Myers?

MR. MYERS: That's exactly right, your Honor-I mean-your Honor, Mr. Chairman. (Laughter.) You like that too.

SEN. McCAIN: You're talking to Senator Lott.

(Laughter.)

MR. MYERS: That's exactly right. And when we talk about crushing Medicaid burden, that's what we have to understand: is that states like Mississippi and Maine and several others have proved that we can literally lift that burden off our poorest citizens who can least afford it. And that's a burden that falls on every taxpayer because it translates into billions of Medicaid dollars that are needlessly spent. We can do something about state budgets if we lower smoking rates among the poorer citizens and programs like the program in Mississippi, the program that originally existed in Florida, were doing just that.

BREAK IN TRANSCRIPT

SEN. McCAIN: Mr. Scheppach, I don't want-again I don't want to continue this debate because I think facts will take care of this argument, but these two statements of '99 and 2001 clearly they are talking about healthcare as related to, and education as related to tobacco. That's why policy position tobacco settlement funds policy. I mean when you read the entire statement in 1999, 2001, you would draw the obvious conclusion we're not talking about taking care of Medicare, we're talking about tobacco related illnesses. That's certainly the way that I read this statement.

Now, you can draw out, oh healthcare, so it's okay for us to spend the money on our Medicaid programs, but that's not the way that reads in its context, at least from my viewpoint and that of others. And I also again want to repeat. I know that you are here to defend your organization and I appreciate that, but I can't let it go, and just say well, we said that it would be healthcare. It's clear that this statement is about health related illness, tobacco related illnesses and could be-I don't see how you could interpret it any other way, and in interest of fairness, please respond if you would like to.

MR. SCHEPPACH: Yes, I mean you have the advantage in report language and other things of knowing what the debate was, I think I was there at the time and listened to the debate, we did a lot of analysis on the effectiveness of cessation programs at the time, and the feeling was you couldn't put $8 or $10 billion a year of additional money in cessation programs and make them effective. So I think we were talking more broadly.

SEN. McCAIN: Are you talking about treating health related illnesses too? Tobacco related illnesses?

MR. SCHEPPACH: Well, you get into problems I think of defining what is specifically tobacco related. I think you know, you've got to deal with those in the broader programs that we've got.

SEN. McCAIN: Well, I guess that I wish that I had been in there when the debate and discussion took place, because then I would have had a different position about earmarking funds and making it mandatory that it be spent for certain purposes. And I thank --

MR. MOORE: Senator, if I could respond just one second?

SEN. McCAIN: Yes, sure.

MR. MOORE: Just very quickly. I don't want anybody to be confused. In 1999 when this decision was made, the California results had been in for years and years and years about the reduction on their program. The Florida numbers had come in that year, humongous reduction. Massachusetts numbers were in. We knew in this country what worked, and the reason I know that is we modeled our program in Mississippi starting in 1998 on the successful programs of Florida and Massachusetts and California and others.

And the other point, and I'll quit, is that we're not talking about if a state receives $100 million a year, to take that $100 million and spend it on TV anti-tobacco. What we're saying is if you even spent 20 percent of that money, if you took $20 million out of that 100 and take the 80 and do whatever it is you want to do with it-if you took 20, you could have a huge impact on this problem. But what we're doing is we're taking 3 percent nationwide, and that's just not-it's not getting it.

SEN. McCAIN: Senator Nelson.

BREAK IN TRANSCRIPT

SEN. McCAIN: I want to thank-please, Mr. Scheppach.

MR. SCHEPPACH: Just one comment, Mr. Chairman. We seem to be saying that all the decrease in smoking is due to cessation programs. I think we underplay the fact that we're in a market economy and actually the Master Agreement did raise the price of cigarettes quite considerably. And second of all, I think the tax increases that states have just done are important and I suspect some of that, and that there is probably some interaction between raising of prices and cessation programs. And I think the evidence is that at least that group of children that we're trying to hit, the young teens, are fairly responsive to the tax increases, so I don't think it's a one- way street.

SEN. McCAIN: And I assume that those states that raise taxes did it because they say, gee, we'd like to stop kids from smoking so we'll raise these taxes?

MR. SCHEPPACH: Well, I think it was both, Mr. Chairman.

SEN. McCAIN: I don't think so.

Ms. Hudson, you've been strangely un-pummeled here. I would like to allow you to speak, but I would also like before you do to say that I think you should be proud of what Delaware has done. But you are here representing, as I understand, the National Conference of State Legislatures. I don't think you can be proud of what the state legislatures have done. Please go ahead.

MS. HUDSON: I am not, and that's what I wanted to say. It makes me feel very awkward here. But what I think is important is that legislators realize what we did today. We've discussed with you our successes and our failures and they need to know your frustration and disappointment with the states that are not spending the money on tobacco cessation and health related issues. And I will recommend to the National Conference of State Legislatures that they have sessions on this at their conferences and they put a really good article in their magazine to let legislators know that they really are wrong. And perhaps we need to step up our language with them and let them know just how furious we are.

SEN. McCAIN: Thank you. I hope they would invite our witnesses, all of them, including Mr. Scheppach, to these deliberations so that they can hear all sides of this issue. We try very hard in these hearings, despite the bias that I may bring to it to allow the other side to be heard. And Mr. Scheppach, I think you have earned your considerable salary this morning at this hearing.

MR. SCHEPPACH: You've never seen it, Senator, so --

SEN. McCAIN: I do thank you for appearing this morning and I mean that on behalf of the National Governors Association. Attorney General Moore, it's always a pleasure to see you again. Mr. Myers, thank you for your dedicated effort. Ms. Hudson, thank you for being here. And, Dr. Healton, I hope we can do something to keep your program alive and I'll work with others to see that that happens. I thank you all. This hearing is adjourned.