Commonwealth Receives Over $100 Million in Tobacco Settlement Money

FRANKFORT, KY (April 19, 2006) – As required under the 1998 Master Settlement Agreement (MSA) between the major tobacco manufacturers and 52 states and territories, Kentucky this week will receive an annual payment of over $100 million in tobacco settlement money, Attorney General Greg Stumbo announced today.

“Kentucky received $95,747,197.75 on Monday and a second distribution today is expected to raise that by $6,445,840 for a total of over $102 million. This does not include the roughly $13 million that was put in the disputed account by Reynolds and Lorillard. We plan to file a motion today to recover that amount,” Stumbo said. “My office continues to work hard to make sure that the Commonwealth receives its fair share of the tobacco settlement payments, which provide funding for several important agricultural, health and education programs that benefit Kentucky citizens.”

Under the MSA, the tobacco companies agreed to make annual payments in perpetuity to the Settling States, to fund a national foundation dedicated to significantly reducing the use of tobacco products by youth and to abide by certain restrictions on promotional and lobbying activity. Kentucky’s share of the settlement is approximately $3.45 billion over the first twenty five years. Payments are determined according to a formula that is calculated, in part, by the number of cigarettes sold by companies that have agreed to join the settlement.

The total received by Kentucky since the initial MSA payment in 1999 is more than $835 million for “Phase I.” An additional $600 million was received under “Phase II,” the Tobacco Growers Trust Agreement, which was created as a result of an MSA provision to address affected tobacco growing communities in 14 states.

Most of the MSA payment was to be paid by the three largest cigarette manufacturers, Philip Morris, Reynolds American, and Lorillard. Philip Morris made its payment in full but Reynolds American and Lorillard put into a disputed account about $750 million from their payment based on their claim that they are entitled to reduce their payments because of a provision in the MSA called the Non-Participating Manufacturer (“NPM Adjustment.”). If a state diligently enforces the escrow statute, it is not subject to this reduction in payment. The Office of Attorney General is planning to take action to obtain a judgment that Kentucky properly enforced this law and therefore should receive its full share of the withheld amounts, which comes to over $13 million.

Cigarette sales nationally are down 21% since the agreement went into effect and the public health provisions of the MSA that restrict cigarette advertising and promotion in numerous ways have changed the way cigarettes are marketed in the United States. The number of cigarettes sold in the United States in 2005 was the lowest since 1951 although the U.S. population has doubled and per capita cigarette consumption in the United States is at its lowest level since the 1930s. This decline will have significant long-term effects on the health care costs related to smoking in the future.

Although a portion of the payment was withheld, Participating Manufacturers still paid the States that are signatories to the Agreement over $5.7 billion this week, bringing the total payments made under the MSA thus far to all such States to more than $47 billion. $95.7 million was received in the first part of the distribution to Kentucky on Monday April 17, with another $6.4 million expected to be distributed today.