Some legislators wonder if tobacco
settlement money spent too loosely
By Jeffrey W. Fichner
Rural Journalism class, University of Kentucky, Spring 2005
As Kentucky continues to pump millions of public dollars from cigarette
manufacturers into diversifying and developing the state’s
agricultural economy, some legislators say the money is being spent
Agriculture gets half of the money the state receives from the
national settlement between cigarette makers and states, about $60
million a year. The largest discretionary fund in state government,
it is easing Kentucky farmers’ transition from a tobacco-dependent
Through June 2005, Kentucky has invested more than $179 million
of public money into its agricultural economy.
The No. 1 tobacco-producing state, North Carolina, set aside half
its settlement money to “positively affect the long-term economic
advancement of the state,” with emphasis on tobacco-dependent
counties. But instead of spending the money as it is received, as
Kentucky’s lawmakers did, North Carolina puts its money into
a foundation and uses only the earnings.
North Carolina’s foundation has committed $166 million,
mostly to state universities for biotechnology projects that could
add value to the state’s agricultural output. Of the 2,147
grants or forgivable loans made in Kentucky, only one, a grant for
$255,000, has gone into biotechnology.
In Kentucky, the governor and 2000 General Assembly “saw
the ability to address the tobacco issue and help farmers start
the transition of diversifying instead of waiting until tobacco
was gone and farmers were in trouble,” said Kara Keeton, spokeswoman
for the Governor’s Office of Agricultural Policy.
The office serves as staff for the state Agricultural Development
Board, which the legislature created to distribute the diversification
The board and the legislature have responsibility for spending
65 percent of the money, on regional and statewide projects; the
other 35 percent is distributed to county-level programs endorsed
by county agricultural development councils. A county’s share
is based on its past dependence on tobacco.
The board has established 11 model programs, such as cattle genetics
improvement, as one way to classify county applications into groups.
The money allocated to county projects cannot be touched by state
agencies, but the legislature has tapped the 65 percent share to
help address other problems around the state, such as need for water
lines – and, to a lesser extent, sewer lines.
This year, the state will spend about $4.1 million on debt service
for bonds issued to lay water and sewer lines. In the next fiscal
year, beginning in July 2006, the payments will be $5,358,000 per
year, Keeton said.
“There is significantly more county money [available] than
state money, because the legislature can address problems and use
money out of state funds,” said Keeton. In addition to the
water and sewer projects, $9 million in state money “goes
to conservation efforts around the state,” she said.
Legislators have oversight only
The legislature created the Tobacco Settlement Agreement Fund Oversight
Committee to oversee spending of the money.
“We don’t have the power to veto anything the Agricultural
Development Board does, but we share input on approved projects
and express disapproval or approval,” said Sen. Vernie McGaha
of Russell Springs, the Republican co-chairman of the committee.
“Overall, I think we have been very successful with a lot
of things we have done and we will continue to do agriculture and
do it better,” said Rep. Carolyn Belcher of Owingsville, the
Democratic co-chairman of the committee.
Not every committee member, however, is satisfied. Rep. James
Comer of Tompkinsville, a Republican, and Sen. Joey Pendleton of
Hopkinsville, a Democrat, dislike the first-come, first-serve policy
that many counties use to hand out funds for some programs.
“I don’t think it is the right way to handle it,”
Pendleton said. “We need better screening of the money to
get it to where it needs to be.”
Comer said the first-come, first-serve policy is very controversial.
“Some people have to work and have kids, and when the line
for applications opens at 8:30 a.m., all the money is gone by the
time many can get there.”
On local applications, Comer said, “More and more counties
around my area are putting a box to check whether you have received
any settlement money before or not. If you haven’t, you get
first priority over those who have already received settlement money.”
Keeton said the state board has set a limit of $15,000 on funds
a person can receive for all model programs except agricultural
diversification, which requires a small business plan from the applicant,
and a $5,000 limit – or four bulls – in the cattle-genetics
program. The diversification program also prohibits first-come,
Some committee members worry about how state money is being used
by the people who receive it. They want to be sure that it is first
going to help tobacco farmers diversify away from tobacco, and want
to also see the money going to help the condition of Kentucky’s
“I don’t want to just hand out checks,” Pendleton
said. “I want to know if there is a buy-in for people receiving
the money and want them to help the future of agriculture.”
They also worry that the state board doesn’t have enough
staff to monitor the spending.
“We want accountability for the money, and one problem is
the Governor’s Office of Agricultural Policy doesn’t
have the manpower to monitor all the money,” McGaha said.
“They rely heavily on written reports that come in because
there is no time to physically audit that concern.”
Keeton said the board and its staff are working daily to ensure
people are using the money as they stated in their applications.
“We have had situations where we worked in actual counties
to make sure money was being used properly,” Keeton said,
adding that she once went to Owensboro “and went through bank
accounts and reports to make sure funds were being spent in terms
of an applicant’s legal contract.”
Pendleton thinks for the most part money has been used properly,
but he acknowledges there have been cases where money was mismanaged
and overall management and projects have failed.
Belcher voiced confidence in the system. “We asked this
question in our last meeting and from what the Governor’s
Office of Agricultural Policy said, there are sufficient checks
and balances with the policies,” said Belcher.
Comer wishes the oversight committee had more power. “I
don’t think the oversight committee has any teeth. I just
wish we could deny a project.”
At its April meeting, the committee raised concern about a catfish
project in Western Kentucky that has received millions of settlement
dollars but is in financial trouble.
“The catfish project topped $3 million for a co-op that
only had 30 producers. That is terrible economics,” said Comer.
Comer said he was misled by letters and other reports that indicated
the project was a success. “I agree it was good to try the
catfish project, but $3 million? Wow, too much.”
McGaha also labeled the aquaculture project a failure. “Unless
a correction is made, that venture has not been wise. It looked
good, but was not.”
Forgivable loans debated
The board makes most of its funding is given through forgivable
loans, which are awarded to single entities with value-added processes,
and straight grants. Keeton said the board has made fewer than 10
To earn forgiveness on a loan, borrowers must buy Kentucky products.
“We are giving money to a single entity and want to make sure
they are buying products at a premium from Kentucky farmers,”
Comer believes forgivable loans have little risk for borrowers
and would like to see this method of funding changed. “If
I have to sign a loan and pay it back, then I’ll make darn
sure I will make it,” he said. “Too many people are
just taking a shot because they know they won’t have to pay
Keeton says forgivable loans are much better than awarding grants.
“The board gives forgivable loans as an alternative to grants
because they allow us to tie the applicant to benefiting other Kentucky
Keeton said a previously existing state agency, the Kentucky Agricultural
Finance Corporation, was already making loans, while the Agricultural
Development Board’s forgivable loans give farmers the opportunity
to do something new and help other Kentucky farmers.
“If the applicant does not comply with the terms in their
contract stating their specific way of giving back to Kentucky farmers
to earn forgiveness, then they must pay all funding back,”
Comer charged that political influence spurred funding of Pig
Improvement Corp., a foreign-owned company that he thinks is hurting
more Kentucky farmers than it is helping.
Comer said the company is vertically integrated, which means it
owns every step in the process of improving pig production. This
allows the company to produce all necessary supplies, house and
feed pigs and raise them until they are ready for processing. Instead
of helping Kentucky farmers, it has put them out of business, he
“The Agricultural Development Board gave the company $800,000
and they never had any county funding, not even Allen County, where
the company operates,” Comer said.
Comer said he found out about the project around January 2004
and was preparing to contest the approved funding at the oversight
committee’s next monthly meeting, while the legislature was
still in session and could take action.
“We are supposed to meet every month, but we did not meet
until May because the committee knew I would raise a stink,”
said Comer, adding that he believes some of his fellow legislators
used their influence to get the project approved.
The co-chairmen of the panel at the time did not respond to calls
The oversight committee is insistent on settlement money going
to help tobacco farmers first.
“Our number one direction we went in was to see that tobacco
dependent communities got the money,” said Pendleton. “I
always look at how many people a project will affect and is it helping
people diversify from tobacco.”
At April’s meeting, McGaha asked how tobacco farmers are
benefiting from specific projects. He said, “I always ask
one question, where are these tobacco farmers?”
“The whole goal is to help tobacco farmers diversify and
we have entrepreneurs out there wanting to get a piece of the pie,”
McGaha said, “but we need to meet tobacco farmers’ needs
Despite legislators’ avowed priority on tobacco farmers,
state funds have gone to help rural communities improve infrastructure
mainly through water and sewer projects. Through March 2005, $126
million in bonds had been approved for these types of projects.
John-Mark Hack, former executive director of the Governor’s
Office of Agricultural Policy, said using the money to help rural
Kentuckians access quality drinking water is worthwhile. “I
know first hand that there are folks in Kentucky without access
to potable water,” he said.
However, Hack questions sewer and water projects funded by diversification
money that aren’t in rural areas. Political influence sometimes
has an affect on these types of projects, he said.
“In the most recent budget, over $2 million was earmarked
for Louisville and Lexington sewer projects,” said Hack. “I
think there would be other resources available to fund these projects
instead of diversification money.”
The largest share of money has gone to help raisers of beef cattle.
In county money alone, more than $70 million has gone to programs
that are for or dominated by cattle raisers.
In some tobacco-dependent counties where beef has been a secondary
industry, it is becoming a leading source of agricultural income.
One example is Adair County, in the south-central part of the state.
The Adair County Cattlemen’s Association has received over
$500,000 in funding through six different county model programs,
grants from which do not necessarily relate to cattle but can be
useful to farmers in the beef industry.
The association received $110,387 for hay, straw & commodity
storage, $208,000 for cattle handling facilities, $68,860 for cattle
genetics improvement, $56,000 for farm livestock fencing improvement,
$52,000 for agricultural diversification and $24,000 for on-farm
Other big investments
Grain farmers have also benefited from the settlement money. The
most funding given to a single project, $9.7 million to help finance
an ethanol plant in Hopkinsville, has given Kentucky a big stake
in the fuel-alcohol industry and raised corn prices in the area.
“The Agricultural Development Board had already given the
project $6.5 million in grant money, so they decided to provide
an additional $3 million as a loan which must be paid back in full,”
The plant hoped to break even its first year, but ended up turning
a profit of $3.5 million and plans to complete an expansion by the
end of 2005. The new expansion will allow the plant to increase
its production capacity from 24.3 million gallons to 30 million
gallons of ethanol.
Corn is used to make ethanol, and the plant is purchasing millions
of bushels of corn from Kentucky farmers. Last year, the plant purchased
over 8 million bushels from Christian County farmers alone and the
average price per bushel increased 15 to 20 cents, said Pendleton,
the senator for the area.
The Agricultural Development Board did not receive as many applications
from 19 tobacco-dependent counties in northeastern Kentucky as it
expected, so it have the University of Kentucky $1,282,206 to design
and implement a leadership program for entrepreneur coaches and
The Entrepreneurial Coaches Institute is an effort to stimulate
entrepreneurial businesses in those counties. It was one of 16 other
entrepreneur organizations invited by the U.S. Small Business Administration
to a Washington conference to explore the best entrepreneur teaching
tactics across the country.
The board recently set aside $1 million for a new competitive
awards program in agri-tourism, which it defines it as any economic
activity that occurs on a farm for the enjoyment or education of
the public to promote agricultural products, services, or experiences,
which generate additional farm income.
Funding through the agri-tourism program is given in the form
of a forgivable loan that the applicant does not have to pay back
as long as he abides by the requirements in his contract. However,
the applicant must match the state funding.
Eight agri-tourism projects have been approved for a total of
$292,200 in funding.
Evans Orchard and Cider Mill in Georgetown received $31,900 to
help renovate an outdoor shed into a certified kitchen and sales
area. The renovated shed will allow the business to expand its cider
production and increase their store sales area.
Another business approved for agri-tourism funding is Farmer Bill’s
in Williamstown, which, like the Evans business, is near heavily
traveled Interstate 75.
Farmer Bill’s received a forgivable loan of $50,000 in to
renovate a tobacco barn into an area for the sale of produce, value-added
farm products and crafts, and to provide educational information
on Kentucky agriculture. The renovated barn will include a number
of homegrown Kentucky farm products to be sold, improving awareness
of Kentucky farm products.
This year, the board gave Kentucky Wireless Co. $15,000 of Robertson
County funds for equipment to provide high-speed wireless Internet
services in the county of 2,200 people, the state’s smallest.
The current cable technology in the county cannot support a high-speed
connection. The company hopes Internet access will help farmers
save time and increase profits by tracking information on farming