Some legislators wonder if tobacco settlement money being spent too loosely

By Jeffrey W. Fichner
Rural Journalism class
University of Kentucky

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 too loosely.

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 past.

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 money.

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, first-serve.

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 agricultural economy.

“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 straight loans.

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,” said Keeton.
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 it back.”

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 farmers.”

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,” said Keeton.

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 said.

“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 seeking comment.

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 first.”

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 water enhancement.

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,” said Keeton.

The plant hoped to just 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.

Development funds are also going to state universities to help diversify the state’s agriculture.

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 facilitators.

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 and equipment.

As of March 2005, each program has received the following funding:
Agricultural Diversification, $9,804,596
Cattle Genetics Improvement, $9,985,105
Cattle Handling Facilities, $15,707,269
Dairy Diversification, $133,700
Farm Livestock Fencing Improvement, $5,158,410
Forage Improvement and Utilization, $17,608,134
Goat Diversification, $2,887,274
Hay, Straw & Commodity Storage, $12,955,431
On-Farm Water Enhancement, $984,515;
Shared-Use Equipment, $350,452
Technology, $149,000



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University of Kentucky
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122 Grehan Building, Lexington, KY 40506-0042

Phone 859-257-3744, fax 859-323-3168

Questions about the web site: Contact Al Cross, Institute director, al.cross@uky.edu

Last Updated: Feb. 2, 2006