FRANKFORT—Kentucky could lose half, all, or none of its tobacco settlement payment next year due to a Sept. 11 ruling that found the state “nondiligent” in upholding statutes requiring escrow payments by nonparticipating cigarette manufacturers.
The decision, in which an arbitration panel named Kentucky among six states found “nondiligent,” leaves the state uncertain about just how much it will receive next spring for calendar year 2014, Governor’s Office of Agricultural Policy Executive Director Roger Thomas today told the Interim Joint Committee on Agriculture yesterday. Kentucky had anticipated receiving approximately $90 million in tobacco settlement dollars next year, with agriculture getting half of whatever dollars are received.
“It’s pure speculation at this point…” said Thomas. “It all depends on these various state MSA courts and what their rulings are on motions to vacate.”
“It could be $45 million, it could be $5 million, it just depends on the actions of the state MSA courts…” Thomas said. There is even a possibility that the state’s payment due in March 2014 will not be reduced, pending court actions, he said.
Since tobacco settlement payments fund Kentucky’s popular Agricultural Development Fund, Thomas told the committee the outcome would “have a very dramatic effect” on state agricultural programs. Still, he emphasized that it is too early to say exactly what the Sept. decision will mean for 2014 and throughout the next budget cycle.
“(But) it’s easy to see we have our challenges before us,” he said.
According to the arbitration panel, Kentucky, Missouri, Maryland, New Mexico, Pennsylvania and Indiana did not adequately enforce collections from nonparticipating manufacturers, or NPMs, who were not original signers to a 1998 multi-billion-dollar master tobacco settlement agreement between the four largest tobacco companies (at that time) and 46 states. NPMs are expected by law to make escrow payments.
The original signers—which lost market share in 2003—blamed the loss on inadequate enforcement of NPMs, according to a Nov. 7 article on the issue on the web site Law360. Those original signers, or “participating manufacturers,” felt sales by nonparticipating companies had increased more than they should have because Kentucky and the other states did not adequately enforce collections from NPMs.
To shield themselves financially, the participating manufacturers invoked what is called an “NPM adjustment” under law and withheld money from the settlement agreement. The adjustment, says the Law360 article, allows participating manufacturers to reduce payments to states “if they (the companies) lose market share to their nonparticipating colleagues because of the multistate settlement’s obligations.” States that are found to have closely followed their model laws were shielded from reductions, while those found “nondiligent” will have their tobacco settlement payments reduced.
Although Kentucky feels “like we were diligent in our enforcement,” says Thomas, the arbitration panel judged otherwise, he said.
Appreciation for the impact the Kentucky Agricultural Development Fund has had on the state’s farms was voiced by Committee Co-Chair Sen. Paul Hornback, R-Shelbyville.
“Without that foresight by those of you who sat here and (developed) HB 611… I don’t think our agriculture in this state would be nearly as far along as it is,” he said. HB 611, passed by the 2000 Kentucky General Assembly, determined how agriculture would benefit from Kentucky’s $3 billion share of the 1998 tobacco settlement.
Fellow Committee Co-Chair Rep. Tom McKee, D-Cynthiana, offered some praise of his own.
“It was an honor for me to work with you and many other legislators to help develop these programs,” McKee said to Thomas, himself a former member of the Kentucky House of Representatives. “I think if you travel the state, if you go out on the rural roads of Kentucky, you’re going to see fence that wouldn’t be there; you’re going to see cattle handling facilities that wouldn’t be there (with the ADF).”
The committee also received testimony from Kentucky Agriculture Commissioner James Comer, subcommittee reports on rural issues and horse farming from Subcommittee on Rural Issues Co-Chair Sen. Stan Humphries, R-Cadiz, and Subcommittee on Horse Farming Co-Chair Rep. Susan Westrom, D-Lexington. Representatives from Kentucky Farm Bureau were also expected to testify, as were officials from AT&T who were scheduled to speak on telecommunications and modernization.