Spending Tobacco Revenue Like There’s No Tomorrow

(Editor's note: This is an edited version of a commentary that originally appeared in The Detroit News on Dec. 4, 2009.)

Imagine a middle-aged man who becomes partially disabled and unable to work full time. He has no pension, and when Social Security kicks in it won't make ends meet. Fortunately, he receives a disability settlement that will pay a guaranteed amount over several years and possibly lesser amounts thereafter.

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Should he fritter this away by living large while the money lasts, or sock it away for the leaner times he knows are coming? If he does the former, should his long-suffering wife passively go along for the ride or clobber him?

This more or less describes the Michigan Legislature's relationship with the tobacco lawsuit settlement revenue the state began collecting after 1998 as compensation for past "damages" incurred through Medicaid and other state medical welfare payments to individuals with smoking-related illnesses. Michigan's share is some $280 million annually for 26 years, and perhaps lesser amounts thereafter.

Have our prudent and farsighted politicians recognized the temporary nature of this windfall and placed most of it in a reserve fund? No. In fact, every penny so far has been spent and they've actually borrowed against future settlement revenue to spend hundreds of millions on wrongheaded "economic development" programs, tourism industry subsidies and to avoid spending cuts.

When the settlement was announced in late 1998, it was like chum dumped into shark-infested waters: Hungry special interests began circling the state Capitol.

Setting the money away in a "rainy day" fund was never in the political cards — the political rewards for feeding the sharks were just too attractive to lawmakers. Gov. John Engler recognized this and forestalled the frenzy by proposing to use most of the revenue to pay for college scholarships for students who did well on the state's MEAP test. Most of the balance went to Medicaid health care programs.

But the sharks began nibbling around the edges. In 2005, the Legislature created the "21st Century Jobs Fund" business subsidy program, a hodge-podge of spending with little oversight. To pay for it they borrowed $400 million against future tobacco settlement proceeds.

To avoid spending cuts in the 2007 budget, the Legislature approved another $415 million in borrowing against future tobacco money. In 2008 they pulled out this same credit card, using it to buy $60 million in tourism ads (the "Pure Michigan" and related campaigns).

The result of all this borrowing is that for the next couple decades, some $80 million of the annual tobacco money will be unavailable to current and future taxpayers. Instead, debt service payments will draw off funds that otherwise could provide state services or even tax relief.

The consequences hit home in this year's budget, when the college scholarship deal devised by Engler and later "sweetened" by Gov. Jennifer Granholm got the axe. That's too bad for middle class families — and perhaps even more unfortunate for the gold-plated state university budgets that ultimately reaped this money — but the program had become an unaffordable luxury for an increasingly bankrupt state.

Unfortunately, the tobacco lawsuit money that funded the scholarships will simply be used to prop up unreformed state government spending for another year. This is hardly surprising: If politicians couldn't resist spending the windfall back in the fat years of the late 1990s, they have even less incentive to do so now.

Still, it would be nice if they at least used the money for something other than avoiding reforms for one more year. For example, the $80 million that won't go to "Promise Grant" scholarships this year would have made a nice down payment toward transitioning school employees from defined benefit pensions into 401(k)-type accounts.

Michigan taxpayers should stop suffering in silence. While someone else is spending the tobacco settlement windfall like there's no tomorrow, we must choose between going quietly along for the ride or lowering the boom.


Jack McHugh is senior legislative analyst at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.