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Iowa at war with tobacco companies over $110 million in payments

Cigarette Sales
Posted at 10:21 AM, Feb 12, 2022
and last updated 2022-02-12 11:21:44-05

The state of Iowa is fighting with tobacco companies over $110 million the attorney general’s office says is due to the state.

The office of Iowa Attorney General Tom Miller recently asked the state’s Executive Council for permission to hire a team of private attorneys to pursue the matter, telling the council the issue is “novel and complex” and the attorney general’s office lacks both the staff and resources to handle the case.

Iowa is one of 46 states that in 1998 approved a settlement agreement with four major tobacco industry manufacturers over allegations tied to the public costs associated with tobacco-related illnesses. Under the terms of the so-called “master settlement agreement,” the states will continue to receive annual payments from the companies in perpetuity, with the size of those payments based on the number of cigarettes sold in the United States.

At the time, Iowa was expecting to receive annual payments of $50 million to $80 million. Initially, 22% of the revenue was deposited in the Endowment for Iowa’s Health Account. Later, most of the money was earmarked for debt service on bonds, with the remainder deposited into the Rebuild Iowa Infrastructure Fund.

The size of each year’s payments are subject to change, with one set of potential adjustments tied to the companies’ loss of market share to tobacco companies that didn’t participate in the settlement.

But that particular adjustment cannot be made to the payments unless an arbitration panel determines Iowa failed to diligently enforce the tobacco laws tied to the settlement during the previous calendar year. Under the agreement, states are required to collect cigarette-sales payments from non-participating manufacturers and direct those payments to escrow accounts.

The question of enforcement was arbitrated for the years 2003 and 2004, and the state eventually prevailed. But according to the attorney general’s office, the participating manufacturers “have continued to withhold” a portion of the state’s payments each April, alleging that Iowa did not diligently enforce the law during the previous 12 months.

The attorney general’s office says the manufacturers are currently withholding $110 million from the state.

Last year, an arbitration panel ruled the State of Iowa had diligently enforced the law and said Iowa had “continuously and persistently” enforced the state’s tobacco laws. At the time, Miller noted the decision focused only on sales data from 2004 and warned that tobacco companies could launch further legal challenges for subsequent years.

The state is now in the process of arbitrating payments for the years 2005, 2006 and 2007 – but the attorney general’s office says it expects those cases, “will take years” to finalize. In the meantime, the manufacturers continue to withhold money from the state’s annual payments, so the amount that’s at issue continues to grow.

The attorney general’s office intends to hire two law firms — one based in Montana, and the other in Florida — to represent Iowa in pursuing the matter and says the firms have successfully represented the state of Montana in the same type of case.

The firms would be working on a contingency-fee basis that, according to the attorney general’s office, “would start at” 15% of any actual recovery. The total potential compensation for the firms was not specified in the attorney general’s request to the Executive Council, but 15% of $110 million totals $16.5 million.

In 2012, 17 other states and the manufacturers announced a settlement of the manufacturers’ claims that those states had failed to satisfy their obligation to “diligently enforce” the law.

The manufacturers had claimed those states failed to adequately enforce the escrow obligations of the companies that weren’t signatories to the settlement. As part of that settlement, the manufacturers released $4 billion in disputed payments and the 17 states – which did not include Iowa — agreed to credit the manufacturers for $1.65 billion in future payments.

Iowa Capital Dispatch is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3) public charity. Iowa Capital Dispatch maintains editorial independence. Contact Editor Kathie Obradovich for questions: Follow Iowa Capital Dispatch on Facebook and Twitter.

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