FRANKFORT, Ky. — The state has settled a decade-long argument of disputed claims and litigation connected with tobacco settlement funds that are part of the landmark Master Settlement Agreement (MSA) reached in 1998.
The MSA is an agreement between 52 states and U.S. territories worth about $229 billion. It came about between those states and the four major tobacco companies of the day to settle claims over Medicaid payments and other harms the states had suffered as a result of marketing practices by those tobacco companies.
That money was doled out according to percentages of tobacco usage and population, which meant Kentucky would receive about $100 million annually. That money has decreased slightly over the years as the number of people using tobacco products has decreased, but it has nonetheless been included in budgets over the years.
As part of the agreement, states would collect an escrow tax and keep records of the amount of escrow tax collected from non-participating or new tobacco companies that were not a part of the original MSA, and there have been dozens pop up since the agreement was first signed.
According to Kentucky Attorney General Jack Conway, beginning in 2003 tobacco companies challenged a number of states, claiming they had not diligently enforced the escrow statute.
Conway addressed the General Assembly’s Tobacco Settlement Agreement Fund Oversight Committee last week, explaining terms of the recent agreement to settle these claims.
"Most of the money that tobacco companies thought they were owed went into a disputed payments account held in reserve," he said.
Each year, the administrator of the MSA funds would determine how much money would be put into this account and withheld from those states thought to be non-diligent in collection of those escrow dollars.
Several states decided to settle these disputes. Of those left, last September an arbitration board found six states, including Kentucky, to be non-diligent in these collections, putting its annual MSA payment at risk.
Conway told the committee he really believed Kentucky had been unfairly singled out in the dispute and the annual payment likely would have been cut in half.
"We quickly realized this was not going to work for Kentucky and (the state) would really suffer if this money dried up on us," he said.
Last fall, the Attorney General’s Office filed suit, complaining the ruling was arbitrary and capricious; meanwhile, Conway began to negotiate with the tobacco companies to reach an agreement.
Last month, he and Gov. Steve Beshear announced the state’s settlement.
"The settlement ends a long-running dispute and restores certainty to Kentucky’s annual payments from the 1998 Master Settlement Agreement," Conway said. "Under the terms of the settlement, we avoid the possibility of costly litigation and the potential loss of the entire annual MSA payment."
Roger Thomas, director of the Governor’s Office of Agricultural Policy, which oversees the portion of MSA funds that are reinvested in the state’s agriculture sector, told legislative members last week how important those MSA dollars are – not only to agriculture but to other programs in which the money is used.
Under the terms of the settlement, Kentucky receives $110.4 million in disputed and related payments and will avoid a long and expensive legal battle. Combined with the $48.3 million in payments already received this fiscal year, the total MSA payments for FY14 total is $158.7 million, which is $67.9 million more than budgeted for FY14, according to a joint news release from Conway’s and the governor’s offices.
The release went on to say that estimated receipts for FY15 are $26.6 million less than budgeted, and FY16 are $15.9 million more. Overall, Kentucky should receive $57.2 million more in MSA payments over the next three years than budgeted.
"Our first priority with this money is to fully restore $42.5 million in 2014 budget cuts in areas like lung cancer research, county agriculture funds and early childhood oral and mental health assistance, while maintaining this level of funding in 2015," Beshear said. "This agreement will ensure funding availability for future investments in these programs that continue to have a positive impact on the Commonwealth."