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Pa.'s share of tobacco settlement money could be sharply reduced

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By Adam Smeltz and Matthew Santoni
Wednesday, Oct. 2, 2013, 7:51 p.m.

Pennsylvania's annual share of a multibillion-dollar settlement with tobacco companies could shrink by 60 percent next year, potentially endangering health research and stop-smoking programs or leading to tax increases.

Since an initial settlement with three of the country's largest cigarette makers in 1998, tobacco companies have made annual payments to states to help cover the medical costs of treating tobacco users and fund programs to help users quit.

The participating companies, in turn, are shielded against lawsuits from the states.

But a dispute over payments going back as far as 2003 went to a panel of arbitrators, who ruled last month that Pennsylvania's payments could be reduced by 60 percent, shrinking from $300 million to about $120 million a year.

The state Office of Attorney General is appealing the arbitrator's decision and filed a 12-page motion Sept. 24.

“It's certainly our hope and our goal to reverse the (decision) either in whole or in part and try to ensure that this necessary funding is in place,” said Adrian R. King Jr., the first deputy attorney general. He said his office is prepared to pursue further court action if its current motion fails.

According to the Pennsylvania Office of the Budget, the reduction would start in April but immediately freeze $25.6 million in refunds to hospitals for uninsured patients' care, $8.5 million in tobacco prevention and cessation programs and discretionary spending for some health research grants.

The settlement payments essentially repay the state for its spending on those programs and other mandatory spending health care programs, said state spokesman Jay Pagni, so some discretionary money would have to be shifted to the mandatory programs.

Programs under the state Department of Aging would not be affected, the budget office reported. Nor would Pennsylvanians older than 60 who are receiving home and community-based services; Medical Assistance recipients receiving long-term care in nursing facilities; or many people in the Medical Assistance for Workers with Disabilities program.

“We're in the horns of a dilemma,” said state Sen. Jim Ferlo, D-Highland Park.

If the funding shortfall continues, he said, Gov. Tom Corbett will need to address it in his 2014 budget proposal. Lawmakers could plug the gap by making taxation on tobacco more equitable and starting to tax smokeless tobacco and cigars, he said.

Cigarette smokers pay “a tremendous amount” in taxes, Ferlo said.

“We either have to eliminate the funding of programs, which is going to be a great hardship, or create more equity” in tobacco taxation, he said.

The payment dispute with tobacco companies centers on whether Pennsylvania has fully followed the settlement agreement. Settlement participants Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. have challenged whether the state collected money from the sales of products made by competitors that did not join the pact.

A provision in the settlement entitles participating companies to a reduction in their payments if they lose market share to competitors that did not join the agreement.

Specifically, the sides are tussling over whether Pennsylvania must collect taxes on roll-your-own cigarette tobacco. The arbitration panel of three former federal judges appears to think the state should do so. The Attorney General's Office says it should not.

Matthew Santoni and Adam Smeltz are staff writers for Trib Total Media. Santoni can be reached at 412-380-5625 or Smeltz can be reached at 412-380-5676 or The Associated Press contributed to this report.

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