NOT YET UP IN SMOKE

News that the country’s largest tobacco companies are contesting their yearly payments to states sounds like a bad development. But because Maine has done a good job of managing its tobacco money, the worst that will happen here is that funds will have to be juggled to keep anti-smoking and other health programs going.

In 1998, major tobacco companies entered into a settlement agreement with 46 states. The companies agreed to pay the states $206 billion to compensate for expected health care costs for smokers. The states are expecting $6.5 billion this year according to a formula based roughly on cigarette sales.

The country’s largest tobacco companies, including Philip Morris and Reynolds American, are contesting $1.2 billion. They argue that the 1998 settlement agreement has reduced their market share because smaller companies can sell cigarettes at lower prices because they are not subject to the agreement. Under their argument, Maine would lose about 20 percent of its funding, or about $9 million.

In a preliminary ruling earlier this month, an arbiter ruled that the settlement agreement was a significant factor in the companies’ market share loss – their share of the cigarette market declined from 99.6 percent in 1997 to 92 percent in 2003. A final decision is due March 27. The Maine Attorney General’s Office, along with AGs from other states, has filed objections to the arbiter’s ruling.

Even if the final ruling goes against the states and the companies withhold part of their payment, Maine is likely to get its full amount after further proceedings. As part of the settlement, states were required to pass laws to collect payments from tobacco companies that did not participate in the agreement. That money was to be put in escrow accounts. Maine has received high marks for enforcing its statutes and collecting this money.

Based on this, the state could make a good case to a panel of economists and is likely to get its full payment, albeit delayed by a year or more.

This could leave the state with a short-term cash-flow problem for funding programs now supported by tobacco settlement dollars. Under the terms of the settlement, Maine’s payment is set to increase by $11 million in 2008. In the meantime, a tobacco money shortfall would be partially solved by the governor’s budget proposal to restore cuts to the program’s funding made in 2005.

Even if an arbiter decided that the large tobacco companies are right and can pay less money, Maine lawmakers should not panic and cut the state’s smoking prevention programs, which have achieved good results. Instead, if there is a temporary funding shortfall, they should find ways to fill it so the programs continue as uninterrupted as possible.