Ohio Fills Budget Holes With Tobacco Funds

By , posted May 3, 2004

Following a major lawsuit against tobacco companies in the 1990s, 46 states agreed on a settlement that would result in annual payments meant to offset the burden tobacco use placed on the health care system. While there are no restrictions on how the funds can be used, the assumption was that since the states had sued to recover health care costs, the settlement money would be allocated to mitigate such expenses in the future. [1]

Making ends meet through litigation

A recent report from the United States General Accounting Office, however, reveals that many states are simply using the funds as a welcome solution to budget ills. The 46 states involved in the settlement received roughly $12.8 billion in fiscal year 2003 and expect to receive about $11.4 billion in fiscal year 2004. Of those funds, 36 percent were used to address budget shortfalls in fiscal year 2003. This number is expected to rise to 54 percent in fiscal year 2004. In contrast, health-related program spending from the settlement was 24 percent in fiscal year 2003 and is expected to drop to 17 percent in fiscal year 2004. [2]

Among the 46 states, Ohio stands out in its use of the settlement money as a budget-saver. In fiscal year 2003, Ohio allocated 76 percent of its settlement distribution to budget shortfalls. Only 4 other states devoted more to this purpose, and Ohio surpassed all of its neighbors by a significant margin. Ohio spent two percent of its settlement on health programs in 2003. [3]

A troubling trend

The use of tobacco settlement dollars to balance budgets is a cause of concern in light of an ongoing decline in tobacco consumption that will result in reduced payments.[4] In addition, budgetary issues are only expected to grow in coming years as an aging baby boomer population places additional strains on the health care system and the Medicaid program in particular. [5]

[1] Tobacco Settlement: States’ Allocations of Fiscal Year 2003 and Expected Fiscal Year 2004 Payments (Washington, D.C.: U.S. General Accounting Office, March 2004). Available at: http://www.gao.gov/.

[2] Ibid.

[3] Ibid. One could make the argument that rising Medicaid costs are large contributor to the state’s budget shortfall, and that spending to cover these expenses from the tobacco settlement should fall under the “health programs” category. However, the GAO chose not to define it as such, likely because the legislature had not specifically allocated those funds for that purpose. Regardless of the category, diverting tobacco settlement funds to cover a budget shortfall created by the Medicaid program is unsustainable as legislators continue to avoid addressing the root causes of Medicaid’s growth.

[4] Andrew McKinley, Lee Dixon and Amanda Devore, State Management and Allocation of Tobacco Settlement Revenue 2003 (Washington, D.C: The National Conference of State Legislatures, September 2003). Available at: http://www.ncsl.org/.

[5] Matthew Hisrich, “Ohio’s Approaching Fiscal Storm,” The Buckeye Institute, 19 March 2004.