Corbett budget seeks to shift tobacco money

Back when the state's economy flourished in the late 1990s, Pennsylvania received a special bonanza when tobacco companies agreed to pay hundreds of millions of dollars annually to put troublesome lawsuits behind them.

For the past decade, state officials have used the annual tobacco payments to pay for a host of public health programs through the Tobacco Settlement Fund.

Now in the third year of lean fiscal times, Gov. Tom Corbett proposes to transfer the tobacco money to the mainstay General Fund where state tax revenues go rather than keep it in a separate fund. A sizable chunk of tobacco money would continue to support established health programs, but some $220 million would be used for a newly created Liberty Loan Fund for economic development under the governor's proposal, according to a House Democratic Appropriations Committee analysis.

The proposed transfer is generating debate about the purpose of special funds and whether it is good policy to pay for programs with a revenue source that has some connection to the issue being addressed. In this case, a share of tobacco company profits from the sale of cigarettes has been spent over the years to advance health care, including programs to persuade smokers to kick the habit.

Sen. John Blake, D-Archbald, a former chairman of the Tobacco Settlement Investment Board, is among the vocal critics of the governor's proposal.

The annual payment stems from a 1998 agreement between the tobacco industry and attorneys general in 46 states. The agreement settled claims against the tobacco industry to recover Medicaid costs associated with treating smoking-related illnesses in exchange for the states dropping lawsuits.

A 2001 state law set priorities for spending the tobacco money, but a recent report by state Auditor General Jack Wagner has determined that $1.3 billion, or 30 percent, of the tobacco company payments received have been diverted from the tobacco settlement fund since 2005 for other purposes by former Gov. Ed Rendell and lawmakers. This includes a $121 million transfer to meet pension obligations for public school employees.

The use of tobacco money has surfaced as an issue with the recent demise of the state adultBasic health care program for low-income adults. The program ended Feb. 28 after financial contributions from the surpluses maintained by the four Blue Cross insurers in Pennsylvania ran dry.

From 2001 until 2005, tobacco settlement funds were used to pay for the adultBasic program as one of the priorities under the 2001 law. A class-action lawsuit recently filed by several former adultBasic recipients asks Commonwealth Court to order that a scheduled payment of $370 million in tobacco funds be partly used to restart the program.

At a Senate Appropriations Committee hearing this week, Budget Secretary Charles Zogby said the proposed transfer of tobacco money reflects the reality that the tobacco settlement fund has already been raided many times.

"The past actions with the tobacco fund backed us into a corner," he said.

Blake said he doesn't think the Rendell era transfers from the tobacco settlement fund were good policy. But he criticized Corbett's proposal as being a unilateral move that would undermine a shared responsibility among members of the tobacco investment board for deciding how tobacco money is spent.

The move raises the risk of lawsuits by tobacco companies objecting to the end of the 2001 allocation law, Blake said. He also expressed concern that state investment in the biotech industry - now funded with tobacco dollars - could be jeopardized by the proposal.