Matt Pyeatt, CNSNews.com
Wednesday, March 13, 2002

Under the terms of the 1998 Master Settlement Agreement, 46 states were to receive $206 billion from tobacco companies over the next 25 years as reimbursement for the tobacco-related medical expenses the states absorbed through Medicaid.

The settlement created the "largest new revenue streams in state history," according to Investor Responsibility Research Center, a group that says 33 states invested some of their tobacco proceeds and nearly half of those states had no restrictions on where to invest the money.

IRRC recently conducted a survey of state treasurers and found that Texas, Connecticut, New Mexico, North Carolina, North Dakota, Utah and West Virginia were investing part of their tobacco settlement in tobacco companies. Texas alone, according to IRRC, is investing more than $10 million in the tobacco industry.

"Much of these state investments end up in index funds, tracking indexes like the S&P 500, which have tobacco company representation," said Doug Cogan, director of IRRC's Tobacco Information Service.

Tens of Millions for Tobacco

"For each dollar invested in such funds, usually only about a penny goes into tobacco stocks. But given the huge size of the settlement pool, it still adds up to tens of millions of dollars flowing back into the tobacco industry."

The people wanting to increase controls on tobacco are most hurt by these investments, Cogan said.

"For the tobacco control community, which already feels short-changed by states' allocation of settlement dollars, these investments surely add insult to injury."

Only about 5 percent of tobacco settlement dollars are being used on tobacco prevention when the original target, as recommended by the U.S. Centers for Disease Control and Prevention, was 20-25 percent, he said.

The survey found that 12 of the states were not investing in the tobacco industry because of policies banning such investments. Other states, which are just settling their investment policies, are choosing not to invest in the tobacco industry.

IRRC shows that "the investment board overseeing Pennsylvania's $248 million settlement endowment voted on Jan. 17 to ban tobacco investments. Oklahoma's $80 million Tobacco Settlement Endowment Trust Fund adopted a tobacco investment ban on Feb. 14."

Bob Levy, senior fellow in constitutional studies at the libertarian Cato Institute, said it should be no surprise that some of the settlement money is ending up back in hands of the tobacco industry.

'Collusion'

"The whole settlement agreement is nothing but a collusion between the states and the tobacco companies," Levy said. "The states get their money only if the tobacco companies are healthy and making lots of money, so we should hardly be surprised if, as a result of the settlement, they are betting on the success of the tobacco companies.

"They then turn around and take advantage and multiply their bet by investing in some tobacco stocks."

Levy said the tobacco settlement was misguided.

"The Master Settlement Agreement has been quite effective for all the wrong reasons. Basically, you now have a quadropoly of the four tobacco giants and nobody else is permitted to do business, and this is all maintained as an anti-competitive cartel by the states as a result of the settlement agreement," he said.

Amid the stock market slump of the last two years, Levy said, "the tobacco companies were setting new records in terms of revenues, profits," and even the stock prices of the companies were rising. "This has been a real boon for the tobacco companies."

Levy said he had more respect for the states investing in the tobacco industries than for those that were not.

"They have a huge bet on the success of the tobacco industry, and to suggest that not investing in tobacco stocks, somehow they are immunizing themselves from criticism and making themselves responsible citizens, is absolutely absurd."

Copyright CNSNews.com

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