Where Tobacco Settlement Funds Really Went

July 22, 2002 -- When the tobacco companies agreed to pay a $200 billion settlement to states for medical costs due to smoking, and to help prevent kids from starting, it was a legal victory against "Big Tobacco."

"We need to finish this job and move on with saving children's lives," Christine Gregoire, the Washington State Attorney General, said after the settlement was announced three years ago. "This is not about the money … We are getting this industry off the backs of our kids."

Gregoire was not alone in that declaration. At the time, attorneys general from around the nation vowed to use the funds to fight teen smoking. But once the settlement money landed in state coffers, that wasn't always the case. While some states have spent the money on programs to fight teen smoking, others went on a spending spree.

Today four major anti-smoking groups say states are squandering billions of dollars that was supposed to be used to keep children and teenagers away from cigarettes. Because of state budget shortfalls, states are cutting already under-funded tobacco prevention programs by $102.3 million, or 13 percent, according to a report issued today by the American Lung Association, American Cancer Society, American Heart Association, and Campaign for Tobacco-Free Kids.

The groups say that these budget reductions compound another problem: few states were keeping their promise to use tobacco settlement funds for tobacco prevention programs.

A Feeding Frenzy

In the state of New York, for example, Niagara County spent $700,000 in tobacco settlement funds for a sprinkler system at a public golf course. The county also spent $24 million for a county jail and office building.

In Wrangell, Alaska, $3.5 million of the tobacco settlement money was used to renovate shipping docks.

In Los Angeles, former Mayor Richard Riordan proposed using $100 million in tobacco money to defend cops who are accused of planting drugs and guns on suspects. He was turned down.

But these are just some examples of the feeding frenzy that has happened over the tobacco money. Now, anti-smoking groups are saying the public has been duped.

"The states' failure to use these funds to actually protect our children is unconscionable," said Matt Myers, executive vice president and general counsel of the National Center for Tobacco Free Kids, a Washington-based anti-tobacco lobbying group. States that have decided to divert those funds are already seeing increased smoking rates among children, he said.

N.C. Tobacco Farmers Benefit

North Carolina gave $200,000 in tobacco money to the Carolina Horse Park, an equestrian center near Pinehurst, N.C. The center defends the grant, saying it will boost economic development. But local taxpayer groups think the allocation was wasteful.

"It's pretty much people wear funny hats and drink and eat, [and] watch horses go around," said Don Carrington, a member of the John Locke Foundation, a nonprofit think tank based in Raleigh, N.C.

"It's amazing we would use the tobacco settlement to support an operation like that. It should not be publicly funded," Carrington said.

The strangest twist: Money that was pledged to keep kids from smoking even went to tobacco farmers.

North Carolina spent $42 million of the settlement funds to market tobacco and modernize the tobacco curing process.

"That just doesn't make sense," said John Kirkwood, CEO of the American Lung Association. "Why would we want to subsidize tobacco farmers when we are trying to reduce smoking?"

Many states facing a budget crunch have gone to Wall Street, selling off their rights to future tobacco payments in exchange for a quick fix.

‘A Classic Bait and Switch’?

Fifteen states chose to take the money now instead of later by selling bonds to investors. The problem is for every dollar they would have gotten in the future they got just 40 cents today.

"It means that even as Medicaid costs from smoking rise, the states will no longer have the tobacco funds to pay for them," Myers said. "What they've done is mortgaged their future."

Even some tobacco companies say they feel burned.

"What they said they were going to use the money for and what they actually used it for is very different," said Tom Payne, of R.J. Reynolds Tobacco Company. "It's a classic bait and switch."

Short-Sighted Spending?

The state of California studied the issue, and found that for every dollar it spent on smoking prevention, it saved $3.62 on health care.

And yet the new report from the anti-tobacco groups says that California has committed just a "modest" amount of its money to anti-smoking programs.

These groups say only four states are doing enough with the money: Minnesota, Mississippi, Maine and Maryland. On the other end, the groups say that Michigan, Missouri and Tennessee have committed zero money from the settlement to fight smoking.

So what about the promises made by those attorneys general three years ago?

Gregoire, of Washington State, says she is disappointed, but that the attorneys general have no control over how states spend the money.

"We watched what's been happening around the nation with despair," Gregoire said. "The only thing more addictive than nicotine ... is money to the legislatures of this nation and that has been very disheartening to those of us who worked so hard to bring this money back to our respective states."

ABCNEWS' Bob Woodruff reported this story on ABCNEWS' Good Morning America.