The following article appeared in the Oct 4, 2002, edition of the MIRS Newsletter.

Dr. Lawrence W. Reed is the President of the Mackinac Center for Public Policy.

PROPOSAL 02-4: Should Michigan voters amend the Constitution to reallocate tobacco lawsuit proceeds?

This initiative would amend the state's Constitution to change the way money from the national tobacco lawsuit settlement is spent in Michigan. Currently, statute requires 75 percent of the annual proceeds to be deposited into a Michigan Merit Award Trust Fund, and 25 percent into a Tobacco Settlement Trust Fund. The law gives the Legislature discretion on where to spend money from the funds. According to a Dec. 3, 2001 Senate Fiscal Agency report, $426.7 million was appropriated from the two funds for the following items in Fiscal Year 2001-2002:

• $103 million to provide scholarships to high school and junior high students who do well on the state MEAP test
• $27.2 million to other education related programs
• $45 million to the EPIC prescription drug program for low income seniors
• $48.5 million for other health programs including Medicaid
• $45 million to subsidize private and university health research
• $4 million to the Council of Michigan Foundations for anti-smoking programs
• $159.7 million reverted to the state general fund to sustain other state spending, given lower-than-expected tax revenues

With the exception of 10 percent of tobacco settlement funds that would go to the state general fund, this proposal if approved would remove all legislative and gubernatorial discretion in the disposition of the funds. Any alteration to the mandated appropriations would have to be approved by voters in a new Constitutional amendment. The initiative would require the money to be spent as follows:

• 28 percent to nonprofit hospitals
• 15 percent to a “Tobacco-Free Futures Fund,” a non-profit organization the details of which have not been established, consisting of the American Cancer Society, American Heart Association, American Lung Association and Tobacco-Free Michigan Action Coalition. This would develop and implement anti-smoking campaigns
• 13 percent to the EPIC prescription drug program for low income seniors
• 13 percent to licensed nursing homes
• 13 percent to subsidize private and university health research, 15 percent of which must be tobacco related
• 2 percent to licensed hospices
• 2 percent to the Council of Michigan Foundations
• 1 percent to a “Healthy Michigan Foundation,” a non-profit organization the details of which are surrounded by some controversy
• 1 percent to nurse practitioners who deal mainly with Medicaid cases
• 1 percent to school health clinics
• 1 percent to a nurses scholarship program
• 10 percent to the state general fund

In 1994, a group of trial lawyers and state attorney generals devised a novel approach to suing tobacco companies. Despite the fact that people have known for decades that smoking may be harmful to your health, and labels to that effect have appeared on cigarette packages since 1966, they argued that the companies had promoted tobacco use while hiding details on the true extent of the danger. The group sought billions of dollars in compensation for state taxpayers who, through Medicaid and other health care transfer payments, had picked up the tab for the medical care of thousands of smokers.

On November 23, 1998, the attorneys general from Michigan and 45 other states agreed to a multi-billion dollar settlement in the case. (Four additional states had already settled independently.) The tobacco industry would provide states up to $206 billion over 26 years, with additional payments as long as the companies sell tobacco. (In states represented not by attorneys general but by trial lawyers—not including Michigan—the lawyers will also get billions in “contingency fees.”) The annual payments are adjusted for inflation, decrease if tobacco use declines, and include a formula to account for nonparticipating manufacturers. Payments are not contingent on how a state uses the money. The Senate Fiscal Agency estimates that Michigan's share will be around $300 million a year for the next several years.

In every state the settlement set off a scramble by politicians and special interests over how to divide the money. In his 1999 State of the State address, Michigan Governor John ENGLER proposed spending part of it on a college and trade school scholarship program. This gives $2,500 to high school graduates who do well on the Michigan Educational Assessment Program test (MEAP), and lesser amounts for junior high students who do well.

For Fiscal Year (FY) 2002-2003, $133 million of settlement money has been appropriated for scholarships to students, around $20 million of that for administration expense and the MEAP test program. The ballot proposal would eliminate this funding source for both the testing and scholarship programs.

The settlement left it up to the states how to spend the tobacco company money. At least in theory, the lawsuit sought compensation for past health care expenditures by states—that is, by taxpayers, but payment is not contingent on using the money for future state health care expenditures, or for anti-smoking publicity campaigns. Supporters of the initiative contend that tobacco lawsuit settlement money should be spent primarily on health care and anti-smoking efforts, and that's not an unreasonable premise given the background of the original lawsuit. The money has gone for a wide variety of programs having nothing to do with tobacco, including computer technology, road construction, prisons, and funding for a rare isotope accelerator. Legislators have used the damage payments as a “cookie jar” to pay for pet programs totally unrelated to the damaging effects of smoking. If the original suit had merit at all, the strongest case could be made for returning the settlement money to taxpayers through tax cuts.

It is certainly true that health care providers are routinely short-changed because government programs like Medicaid and Medicare do not reimburse health care providers at market rates, and often reimburse at below-cost rates. These providers, including Michigan's non-profit hospitals, must make up the cost somewhere else. They do so by shifting it to health care paid for by private insurance plans purchased by individuals and job providers. This means that everyone else must pay more because the state is not spending tobacco lawsuit dollars where it should.

While some of the complaints that prompted the creation of this measure may have merit, the problem is that the proposal's negatives predominate. If it is adopted, it will send a message to every special interest that would like to corner a steady stream of taxpayer dollars: “You can do so by spending a few hundred thousand for ads that generate a `yes' vote on a ballot initiative.”

A “Tobacco-Free Futures Fund, Inc.” would receive some $50 million annually. Around $3 million a year would go to “Healthy Michigan Foundation.” Neither of these would be subject to legislative oversight, and they would be exempt from the Open Meetings Act and Freedom of Information Act (FOIA). The “Tobacco-Free Futures Fund, Inc.” is an assembly of health-related special interest groups with a strong lobbying presence in Lansing. The initiative is silent on the makeup of the corporation's board or any details about its operations. It is also silent on the functions of the “Healthy Michigan Foundation,” an organization which did not even exist until three lobbyists for the proposal's opponents registered a Michigan corporation under that name, and thereby established a claim on $60 million over the next 20 years.

The only oversight is a provision requiring annual reports from recipients of the money to the legislative Auditor General, who in turn would prepare an annual report on where the money is spent. Since the disbursement formula would be written into the Constitution, the only way to discipline a wayward recipient would be another ballot measure. Auditor General Thomas McTAVISH wrote that the proposal “does not call for any audit procedures or critical analysis to be performed, or for any opinions to be rendered.”

While sympathetic to the complaint that state and federal government shackle health care providers with harmful reimbursement policies, it's hard for me to see that the answer to that is cluttering the Constitution with a wordy amendment that removes elected oversight and responsibility for hundreds of millions of dollars. One might wish the Legislature and the Governor had chosen to allocate the funds in ways different from what they finally opted to do, but the fact is that they were elected and the special interests that would stand to benefit from this proposal were not.

The initiative's supporters contend that spending more on anti-smoking programs will cause tobacco use to decline, in turn causing future health care expenditures by the state to also fall. However, the non-partisan House Fiscal Agency points out the initiative mandates that the proportion of the state budget spent on Medicaid and other health programs in FY 2000-2001 must not be allowed to fall. Any increase in the state budget would require a proportional increase in Medicaid. Also, if federal Medicaid payments decline (as expected), General Fund support would have to rise even more to make up the difference. This is a big reason why Governor Engler has rightfully called attention to the negative implications this proposal could have for the state's already tight budget.

(The author would like to thank Jack McHugh for his assistance in the preparation of this article. McHugh is the Mackinac Center for Public Policy's legislative analyst in Lansing and maintains the Center's award-winning Web site, which provides descriptions of bills and amendments in the Legislature and voting records of all legislators.)