Daily Independent (Ashland, KY)

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June 12, 2014

State reaches settlement with tobacco companies

FRANKFORT — Kentucky will receive its future budgeted payments from the Master Tobacco Settlement, plus an additional $57 million over three years, after Attorney General Jack Conway negotiated a settlement ending litigation over disputed payments dating back to 2003.

Gov. Steve Beshear and Conway announced the settlement Thursday with Beshear calling it “a victory not only for Kentucky farmers but also for critical health care and early childhood services.”

In 1998, what were then known as the “Big Four” tobacco companies (Phillip Morris, Lorillard, R.J. Reynolds and Brown and Williamson) agreed to pay $200 billion to states to free the companies from legal liability for health costs incurred by the states from diseases caused by smoking. Kentucky’s share was estimated at the time to be roughly $3.45 billion over 25 years. The agreement also prohibited the tobacco companies from advertising its products to young people.

As part of the agreement, however, states agreed to “diligently” collect payments from smaller companies which didn’t participate in the agreement, placing those collections in escrow against the possibility of future liability claims. The large, participating companies would also be protected against losing a percentage of market shares to smaller companies through those collections.

Ten years ago, the remaining three participating companies (Brown and Williamson merged with R.J. Reynolds) won an arbitration hearing which found Kentucky and five other states weren’t “diligently” collecting the escrow payments and the participating companies had lost market share and so the affected states’ annual MSA payment would be reduced.

During that time, the disputed payments were placed in another fund until the legal fight was concluded. Conway filed suit in Franklin Circuit Court appealing the arbitrator’s ruling. But he also quietly began negotiating an out-of-court settlement about seven months ago.

Thursday, Conway said the settlement produced by those negotiations provides “certainty to Kentucky’s annual payments” and avoids an expensive legal fight.

The agreement means that Kentucky will receive the budgeted amount from MSA in the current budget and in future years. Those amounts can vary because they are calculated based on expected sales.

But it will also receive $57 million from the disputed payment account on top of the annual payment. Conway said the agreement secures future payments while recovering a portion of the disputed amount for the past decade — about 45 cents on the dollar — and save money which would otherwise have been spent on the legal fight.

“Under the terms of the settlement,” Conway said, “we avoid the possibility of costly litigation and the potential loss of the entire MSA payment.”

Roger Thomas, executive director of the Governor’s Office of Agriculture Policy, said that while Kentucky believes it met the terms of diligent escrow payments, the “unpredictable nature of the arbitration process” left state officials with no guarantees it would eventually prevail.

“This settlement provides Kentucky with certainty and fiscal stability in these vital areas for the foreseeable future,” Thomas said.

The MSA payments are designated by law for agricultural diversity; smoking cessation programs; early childhood development and other health programs such as lung cancer research.

Beshear said that means the settlement won’t ease the expected General Fund shortfall forecast by his office this week. Instead the money will be used to restore more than $42 million for county agriculture funds, research into lung cancer and funding for early childhood development.

Since states began receiving MSA payments, Kentucky has invested more than $400 million in 4,800 county, state and regional projects designed to increase net farm income, Beshear said.

RONNIE ELLIS writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com. Follow CNHI News Service stories on Twitter at www.twitter.com/cnhifrankfort.

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