Last of 46 State Officials Sign Tobacco Accord

The record $206-billion tobacco settlement became a certainty Friday, as the last of 46 state attorneys general signed onto the accord that eliminates the greatest single legal threat facing the tobacco industry.

The deal will provide $25 billion to both California and New York over the next 25 years, and lesser sums to the other states--triggering major battles across the nation over whether to spend the windfall for anti-smoking campaigns or for roads, schools and government operations.

The states’ approval of the deal had seemed a foregone conclusion, and as a Friday deadline loomed only Massachusetts, Connecticut and Maryland were still seen as potential holdouts. But all three came into the fold, saying the deal, while imperfect, provided more financial and public health benefits than they were likely to win in court.

The four major tobacco companies--Philip Morris, R.J. Reynolds, Brown & Williamson, and Lorillard--issued a terse statement announcing their intention to sign the agreement on Monday.

Funded by a price increase of 35 cents per pack, the agreement will eliminate 38 pending state lawsuits that seek recovery of billions of dollars of Medicaid funds spent treating sick smokers. It covers eight states that had not filed claims and five U.S. territories, including Puerto Rico. Four states with the earliest trial dates--Mississippi, Florida, Texas and Minnesota--already had settled with the industry for about $41 billion.

Along with monetary provisions, the deal restricts tobacco marketing through a ban on tobacco billboards and stadium and transit signs. It also requires cigarette makers to spend about $325 million per year to fund a new foundation to do research on smoking cessation and provide grants to the states for anti-smoking ads and education programs.

Tobacco companies still face hundreds of claims by individual smokers and dozens of big class-action suits, but in settling the Medicaid cases they appear to have put the worst behind them while winning favor on Wall Street.

Tobacco stocks have dramatically outperformed the market in recent months, amid growing anticipation of the deal. And anti-smoking groups have been quick to cite that trend as evidence the deal is weak.

John Garrison, CEO of the American Lung Assn., said the agreement “provides far too little to protect public health,” a sentiment echoed by many of his anti-smoking allies.

Anti-tobacco activists in several states have petitioned courts to intervene in the Medicaid lawsuits in hopes of preventing those states from dismissing them.

But among attorneys general, even the most hard-line ultimately decided they could not afford to reject the deal. Massachusetts, whose case was scheduled for trial in February and was considered to be among the strongest, got a reality check this week when a judge ruled it could not seek treble damages.

The state will get $7.6 billion over 25 years, and if the results had been won at trial, “I would be more than happy to declare victory,” said Atty. Gen. Scott Harshbarger.

Formally announced Monday, the deal was hammered out over several months by industry negotiators and representatives of eight state attorneys general, including California’s Dan Lungren. As the week wore on, and more and more attorneys general embraced the agreement, anti-smoking groups began laying the groundwork for upcoming fights over use of the money.

Pitched battles are expected in many states between health advocates seeking to earmark funds for anti-smoking campaigns, and tobacco lobbyists hoping to block such spending and to cement the states’ budgetary dependence on a healthy tobacco industry.

In California, this battle has been waged almost continuously since 1988, when voters raised the cigarette tax by 25 cents and earmarked part of the proceeds to fight smoking under Prop 99. Within days of the measure’s passage and continuing until now, the industry through the annual state budget process has fought mightily--and with some success--to divert tobacco tax money away from anti-tobacco efforts to other programs, including indigent health care.

Since California already has an anti-smoking program, added funding from the tobacco settlement may prove a hard sell, despite Democratic control of the governorship and Legislature.

The Campaign for Tobacco Free Kids, based in the nation’s capital, released results of a nationwide poll that it said showed that 84% of those surveyed favor spending settlement proceeds on efforts to reduce teen smoking.

But Greg Connolly, head of tobacco control for Massachusetts, predicted that “very little” of the money will be used to fight smoking. “That’s a tragedy,” he said, “and it forms a fiscal bond between the tobacco industry and their number one enemy--the states.”

The states still face a potential challenge from the federal government, which could demand a share of the reimbursement for Medicaid, a joint state and federal program. Washington Atty. Gen. Christine Gregoire, lead negotiator for the states, said discussions on that issue with White House national policy advisor Bruce Reed have not reached a resolution.

In related developments Friday, it was announced that two small cigarette makers, Commonwealth Tobacco Co. of Virginia, and former industry giant Liggett Group Inc., had also signed on to the agreement. Simultaneously, financially tottering Liggett announced a deal to sell three of its cigarette brands to industry leader Philip Morris for $300 million--a premium price that sources described as an inducement for Liggett to embrace the settlement. The four tobacco giants who negotiated the deal control 97.5% of the market. Liggett and Commonwealth between them have 1.9%.

Fearing it would be destroyed by tobacco litigation, renegade Liggett had broken from the industry’s joint defense and last year agreed to testify for the states that smoking was dangerous and addictive.

It will sell Philip Morris its Chesterfield, Lark and L&M; brands for a whopping $300 million--even though those brands represent 14% of Liggett’s business and the entire market value of its corporate parent, Brooke Group Ltd., is $225 million.

Philip Morris already has a licensing agreement with Liggett to sell those brands abroad. A source close to the transaction said Philip Morris was willing to pay “a really sweet price” to get Liggett to sign the tobacco settlement.

Small tobacco companies that sign the deal are required to abide by its marketing restrictions, but do not have to contribute to the settlement pot unless their market shares increase more than 25% from 1997 levels. That means Liggett can raise its prices 35 cents should it choose to, but can keep the increase.

* L.A.’s SHARE: There’s contention in L.A. over how to spend the city’s $312 million from the settlement. B1