NH House Budget relies on tobacco money to balance

The two-year state budget up for debate in the New Hampshire House today relies on $30 million from a settlement with tobacco companies that hasn’t been finalized. The Legislature rushed through SB199 in March in order to give the Attorney General’s Office authority to sign the deal. Once complete, the nation’s largest cigarette makers will distribute billions to 19 states entering into the agreement, if objections from other states don’t scuttle the deal.

While New Hampshire would use the windfall to help balance the Fiscal Year 2014-2015 budget, the state would end up paying back nearly all of money to tobacco companies over the next five years.

In 1998, 46 states settled lawsuits with the four largest tobacco companies over claims that cigarette smoking led to higher health care expenses. The Master Tobacco Settlement Agreement required the those companies, and dozens of smaller cigarette makers who later joined the agreement, to make annual payments to the states based on annual tobacco sales. Several smaller companies declined to join the settlement. The settling companies required state officials to seek escrow payments from these Non Participating Manufacturers (NPMs) to in order to prevent the NPMs from gaining a competitive advantage. Should an independent auditor find that the NPMs had gained market share as a result of the state’s failure to collect escrow payments, the states would have to refund part of their settlement checks.

The big tobacco companies have claimed that they have been owed refunds since 2003, and began withholding part of their annual allocation to states since 2006. New Hampshire Associate Attorney General Richard Head says $8 billion in contested payments is at issue. If the latest settlement goes through, the tobacco companies would distribute a portion of that $8 billion to the 19 states signing the new deal, and agree not to withhold any of their scheduled payments for the next two years. Head says this agreement would settle all claims from 2003 to 2012, and he believes could head off litigation in the future.

But most states aren’t joining the settlement, and Head says several are drafting objections. In exchange for a share of the disuted funds up front, states would start paying the NPM Adjustment back. While state treasuries would get a quick cash infusion from the settlement, they would have to pay back half of the amount almost immediately, and most of the rest of the settlement over the next four years. Head says while the amount paid in NPM Adjustments can’t go higher than the lump sum, he expects the state to receive a “very small net positive” from the deal.

The new settlement would effectivey be a no-interest loan funding the current budget, but foregoing higher tobacco settlement payments over the next five years. The Master Tobacco Settlement Agreement has paid New Hampshire about $40 million a year for the past 15 years, as part of $6 billion distributed to states annually. Head says the tobacco companies have been withholding $1.2billion a year over the NPM issue, which meant $5 million less for New Hampshire. He argues that the Granite State won’t notice the drop. Instead of withholding payments, the tobacco companies will simply owe less each year. Meanwhile, Head says that New Hampshire will get the use of the $30 million right now. He couldn’t specify exact amounts, since an independent auditor needs to determine precisely how much market state the Non Participating Manufacturers have gained.

This settlement is a key cog in the budget bill on the House floor today. While the $30 million payment could come in as soon as April, House budget writers are booking $21.6 million in FY14 and $2.5 million in FY15. Moving that revenue out of the current Fiscal Year means that it can’t be counted against a potential FY13 deficit. Governor Maggie Hassan wants to sweep surpluses from unidentified dedicated funds throughout state government, but the budget only gives her that authority if it’s to cover a deficit. Booking the tobacco settlement money in FY13 would create a surplus, sending money into the state’s Rainy Day Fund. Booking the money after June 30th would make it available to support General Fund spending.

The current year deficit might not be as large as feared when Hassan submitted her budget proposal to the Legislature. March business tax revenues released yesterday helped cut the current budget shortfall from $41 million at the end of February to $14.5 million with three months to go in the Fiscal Year.

Head says there may be good reason not to count on the tobacco settlement revenue this year, since Colorado and Maryland are already preparing legal objections to the deal.

“We’re going to contest the objecting states’ claims, but litigation is difficult to predict,” Head explains. He says the check might not arrive for two years.

That uncertainty calls into question whether budget writers should count on the tobacco settlement to balance the FY14 budget. If delayed, haf of the money would need to be paid back to cigarette makers almost as soon as it arrived, leaving much less to spend on the General Fund.

The New Hampshire House takes up the state budget, HB1 and HB2 today at 10am.