Tobacco Settlement:

States' Allocations of Phase II Funds

GAO-03-262R: Published: Dec 3, 2002. Publicly Released: Dec 3, 2002.

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The Farm Security and Rural Investment Act of 2002 (the 2002 Farm Bill) required GAO to report annually on how states have used funds received under the Master Settlement Agreement and the Phase II agreement. This letter is the first in a series of reports responding to the 2002 Farm Bill requirement. Specifically, this letter provides information on (1) the amount of funds that have been distributed to each of the participating states under the Phase II agreement and (2) how the states have allocated these funds to tobacco growers, quota owners, and others.

GAO found that, during 1999-2001, the first 3 years of the Phase II agreement, a total of about $1 billion was distributed to the 14 states. This amount was approximately $71 million less than the $1.06 billion originally estimated to be available for distribution during these years. This difference was primarily a result of allowable adjustments that accounted for a reduction in the volume of cigarettes shipped nationally and to Puerto Rico by the four tobacco companies. Each participating state developed a plan for allocating its share of the Phase II funds. States allocated all of the funds available to them to the following three categories: (1) direct payments to tobacco growers and quota owners, (2) state administrative expenses, and (3) reserve accounts to cover future payments to tobacco growers and quota owners. Most of the funds were allocated for direct payments to tobacco growers and quota owners. For example, in 2001, the participating states allocated 92 percent of their total Phase II funds for direct payments to tobacco growers and quota owners. In contrast, these states allocated 2.4 percent of their share of the Phase II funds for state administrative expenses in 2001. The remaining funds were placed in reserve accounts for future payments to tobacco growers and quota holders.

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