Recent Research: GAO Looks at State Tobacco Settlement Distributions

Despite all the press generated each time a state commits multimillion portions of its tobacco settlement distribution toward R&D and technology-based economic development (TBED), readers may be surprised to learn economic development activities captured only 4 percent of the total payments in 2005, according to a new report from the Government Accountability Office (GAO). Unfortunately, the report reflects one of the agonizing realities of how poorly federal agencies understand what states are doing to support the nation's innovation system: Much of what is generally accepted by the field as investments to encourage or support the knowledge-based economy is buried in several other categories of the report, including health related, education and even general purposes.

Released today, Tobacco Settlement: States' Allocations of Fiscal Year 2005 and Expected Fiscal Year 2006 Payments presents the state-by-state breakdown of how 46 states have used monies paid by the major tobacco firms as a result of the Master Settlement Agreement (MSA). The report is based on an annual survey of state budget offices, who self-classify expenditures. The definitions provided in the GAO survey instrument, though, lead to information that does not present a complete picture of the settlement's impact on tech-based economic development.

In FY 2005, states received $5.8 billion, down significantly from the $9.3 billion average for the first five years of the agreement because of a sharp drop in securitized proceeds from the sales of bonds backed by future MSA payments. Since the agreement was signed, 15 states have securitized all or part of their payments, many to deal with large budget shortfalls.

While states may apply MSA payments toward any purpose, health-related expenses continued to capture the largest share of the funding at 32 percent in 2005. Debt service on securitized proceeds took another 24 percent of the total in 2005 but is expected to grow to 29 percent in 2006.

The GAO report identifies economic development expenditures in only six states, including:

• Georgia - $47,123,333 for the One Georgia Authority;
• Indiana - $46,300,000 for the Value Added Research Fund, Rural Development Administration Fund, Rural Development Council Fund, Technology Development Grant Fund, 21st Century Research and Technology Fund, and the Commission on Hispanic and Latino Affairs;
• Kentucky - $48,151,809 for the Governor’s Office for Agricultural Policy, Conservation: Environmental Stewardship;
• North Carolina - $27,200,505 for Aerospace Alliance Initiative awards, Economic Catalyst awards, diversification initiatives, agri-economic development, workforce development, and conservation of natural resources;
• Ohio - $44,625,958, only $15,584,593 of which is identified as economic development for "Programs to increase the variety, quantity, and value of nontobacco agricultural products, strategic investment in communities adversely impacted by a reduction in tobacco demand, education and training for tobacco growers."
• Virginia - $180,541,723, only $45,157,742 of which is identified for economic development projects, infrastructure, education, job training, research, administration of the Tobacco Indemnification and Community Revitalization Commission

The GAO's definition of health related expenses captures many states' biomedical research investments, which expands the number of states with TBED-related activities supported by the MSA. Unfortunately, the report does not break out the health-related activities by use, not allowing the reader to know, for example, what portion of Arkansas's $30,235,237 2005 MSA payment went for biomedical research. Other states with biomedical research listed in the description of health-related expenses include Connecticut, Georgia, Hawaii (biomedical research center construction), Kentucky, Michigan, Nebraska, New Mexico, Ohio and Pennsylvania.

Other TBED activities listed in different categories in the report could easily fall within a TBED portfolio or the health research category above. In Education for instance, one will find Illinois' $13.8 million for centers of academic excellence in medical research. Illinois' technology centers and technology marketing efforts, however, are buried within the state's general purpose item with administrative fees, audit expenses and Court of Claims awards. Scholarship programs to encourage high school students to earn college degrees in-state also fall under this category.

The report is available at: http://www.gao.gov/new.items/d06502.pdf

Links to these papers and nearly 4,000 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.