$30 million in tobacco cash at stake - Firms seek to cut payments to state
People are smoking less - presumably a good thing for the health of Michigan and the nation.
But the trend could be bad for Michigan's budget because it could result in a cut of $30 million for college scholarships, health care for poor people and a new program to encourage high-tech investment.
The reason: two big tobacco companies, R.J. Reynolds Tobacco Co. and Lorillard Tobacco, are citing provisions in a settlement of health-related lawsuits to withhold a portion of this year's payments to Michigan and 45 other states.
The reduction would come because the companies have lost sales as smoking declines and as some smokers turn to cheaper products. It would cost all 46 states about $775 million.
R.J. Reynolds paid the states about $1.4 billion; Lorillard paid them a little more than $550 million. Industry leader Philip Morris USA made all of its $3.4-billion payment but is seeking to have that sum reduced.
Today, the Michigan Attorney General's Office is expected to announce findings of its review of the companies' rationale. Michigan could join 16 other states in contesting the reduction in payments.
"We're working diligently to ensure that all the money earmarked for Michigan comes to Michigan," said Nate Bailey, a spokesman for Attorney General Mike Cox.
The state had been expecting to receive between $270 million and $300 million in settlement payments this year. Phillip Morris, a third company, paid its full share but said the amount should be reduced.
The settlement money supports three state programs: the Merit Award Scholarships - a $2,500 payment to college students who passed the MEAP test; Medicaid and, beginning this year, a $1-billion fund to attract and keep high-tech companies.
If the tobacco firms make the reductions stick, the Republican majority Legislature and Gov. Jennifer Granholm likely will battle over what the priority should be among the three programs.
Granholm fought for the high-tech fund and is an advocate for extending medical care to low-income Michiganders. Republican legislators previously have fended off Granholm's efforts to reduce the scholarship program.
The 1998 tobacco settlement called for the tobacco companies to pay 46 states $220 billion over 25 years to compensate for the costs of treating smoking-related illnesses.
An independent consulting firm concluded in March that the companies could fairly reduce their payments under the agreement because new restrictions on cigarette advertising, promotion and marketing that were a part of the deal significantly contributed to their loss of market share.
The companies raised prices to pay settlement costs. That led some people to quit smoking and others to seek cheaper cigarettes.
The money owed this year is actually based on the companies' loss of market share in 2003. That year, the companies saw their combined share of the market drop to about 92% from 99% in 2002.
Michigan's share of the overall settlement is roughly $8.5 billion. A good chunk of the money has gone toward the scholarship.
When former Gov. John Engler proposed the program, 75% of the tobacco settlement cash was for scholarships - enough to set up an endowment to keep the program going indefinitely.
When the state's economy faltered, the Legislature took the $132 million that had built up in the endowment fund and used it for other programs.
Michigan received $276 million in settlement revenue in the 2005 fiscal year that ended Sept. 30.
