Top tobacco states spend tobacco settlement differently

June 2006

Al Cross is director of the Institute for Rural Journalism and Community Issues and an assistant professor of journalism at the University of Kentucky, where he directs reporting projects by undergraduate students – including one on the future of tobacco and tobacco-dependent communities, which provided some information for this article.

By Al Cross

No state has put as much of its tobacco-settlement funds into agriculture – half the total – as Kentucky, the state with the most tobacco growers. And the growers, or those who once grew the crop, continue to be the focus of officials who hand out the money.

The $206 million invested so far in Kentucky agriculture has helped shake farmers’ historic allegiance to tobacco, encouraged diversification and upgraded the state’s cattle industry, the largest in the Eastern U.S.
But the state has put virtually none of the money directly into research and development of biotechnology, which has been a major focus of settlement spending in North Carolina, the top tobacco-producing state.

Meanwhile, some legislators worry that the state is spending the settlement money too loosely, and the head of the office that oversees the spending acknowledges that it needs a larger compliance staff.
When hundreds of millions of dollars in settlement money began to rain down on the states in 2000, there was heavy political pressure on Kentucky legislators and the governor to funnel it into the pockets of farmers -- who were going through a series of cuts in the tobacco-production quotas set by the federal government on the basis of cigarette companies’ buying intentions.

At the time, the political leverage of tobacco in Kentucky far outweighed its contribution to the state’s economy (less than 2 percent of the gross state product) because the economic interest in tobacco was so widely scattered among small growers, fractional quota holders and part-time tobacco workers.

Though Kentucky ranks second in tobacco production, it is first in the number of growers and quota holders. A poll by The (Louisville) Courier-Journal in 1997 showed that 18 percent of Kentucky adults had an economic interest in tobacco, and about 160,000 Kentucky households will share in the “buyout” payments that are part of the repeal of the federal program of quotas and price supports.

Those numbers made tobacco growers’ political interests almost sacrosanct in the 2000 General Assembly. Former Gov. Brereton Jones, a Democrat, proposed that much of the money be put into a trust fund to cover health costs of the state’s uninsured, but that idea got nowhere. (Meanwhile, North Carolina was investing its money and spending only the earnings.)

The legislature and Democratic Gov. Paul Patton soon agreed that half the state’s settlement money should be devoted to improving its agricultural economy, with the rest going to health, early-childhood development and other programs. (The legislature has since used the fund for water and sewer projects, more than $20 million this year.)

There were turf battles over who would control spending about $100 million a year, the largest discretionary pot of money in the state executive branch. In the end, a new state board representing agriculture, business and other interests was given control of the money, but 35 percent of it was allocated to counties based on their economic dependency on tobacco, and the spending priorities and immediate oversight were placed in the hands of local boards representing agricultural interests.

The feeling at the time was “We need immediate bang to help our farmers,” said Keith Rogers, who has been executive director of the Governor’s Office of Agricultural Policy, which oversees settlement spending, since late 2003. In 2000, Rogers was a tobacco, grain and livestock farmer, and district director for 2nd District U.S. Rep. Ron Lewis, R-Cecilia.

Rogers said the University of Kentucky and other state schools might have been interested in getting the money for research in agriculture or biotechnology, but kept quiet because they also wanted to see farmers get direct help and didn’t want to be seen as competing with them.

Farmers’ political clout was illustrated again in 2005, when the legislature reserved $114 million in settlement money to make the final “Phase II” settlement payments due to farmers from cigarette companies. The companies eventually lost in court, and the money went back into the Agricultural Development Fund.

But with the buyout, and the departure of many growers from the industry, tobacco appears to have lost much of its political clout in Kentucky. It has declined from its historic position as Kentucky’s No. 1 agricultural product to fourth, and the buyout and loss of price supports have encouraged many growers to leave the industry.

In 2005, the state Agricultural Development Board rejected a grant application from tobacco growers, saying that funding tobacco would run contrary to the board’s goal of diversification. Not long afterward, the legislature raised the cigarette tax from 3 cents a pack, the nation's second-lowest state tobacco tax, to 30 cents a pack – and Republican Gov. Ernie Fletcher, a physician, wanted even more.

Rogers said the initial strategy of immediate, direct payments to farmers was not just a tactical, political maneuver, but logical public-policy strategy – because it gave farmers an incentive to diversify, improve the quality of their livestock or invest in value-added processing of their products.

“We had to have a change of attitude and mindset in the Kentucky farmer to ever move beyond tobacco,” and it has worked, Rogers said. He said that when he started work for the state, “I was shocked by the change I saw” in farmers’ attitudes since 1997, the year before the settlement and the first congressional votes on a buyout.

Not only did the money provide incentives, each of the county-level programs – diversification, storage, fencing, forage, cattle handling, cattle genetics and on-farm water supplies – require farmers who get matching grants or forgivable loans to take training in the subject. Rogers said the programs are helping about 12,000 farmers per year.

Some legislators have complained about local management of the programs, and said Rogers’ office lacks the staff to properly audit the spending. Rogers agreed, and asked the legislature for more staff this year, but the request was denied.

Rogers said that auditors have found scattered instances of local groups not following rules for allocation of the money, but that he knows of only one legal action – the indictment of a former agricultural extension agent and a farmer for defrauding a local group handling settlement funds. They pleaded guilty.

At least two other counties had problems following the rules, and in one, Casey, the local cattlemen’s association will no longer get to handle the money, Rogers said, unless an upcoming audit shows it followed the rules this year. He said controversy over handling the money led to the departure of all the county’s extension agents, who act as staff to the local settlement boards.

The chairman of the Casey County board charged that the cattlemen, who were awarded $130,180, refused to check for compliance by farmers who received matching grants, refused to seek refunds from farmers whose contracts were voided; awarded cattle-related money to people who had no cattle; and violated state policy by awarding money on a first-come, first-served basis.

The largest share of Kentucky’s settlement money has gone to its cattle industry. Among the state model programs, which are funded at the county level, in which $96 million has been spent, cattle handling facilities and cattle genetics have received $19 and $12 million, respectively. The largest single category, forage, at $21 million, largely benefits cattle producers. So does livestock fencing, at $9 million, and on-farm water enhancement, at $1.2 million. Cattle producers also benefit from the storage program for hay, straw and commodities, which has spent $17 million.

The Kentucky Beef Network, which helps farmers produce and market their cattle, has received more than $8.5 million from state-level allocations. The largest outlays in that category have been $23 million to the Kentucky Agricultural Finance Corp., which makes loans, and $9.3 million for an ethanol plant in Hopkinsville. The Kentucky Horticulture Council has received $6.2 million.

Concerned that it was not getting enough applications from 19 tobacco-dependent counties in northeastern Kentucky, the board gave the University of Kentucky almost $1.3 million for an Entrepreneurial Coaches Institute to develop entrepreneurship in the area. The university’s only other grant has been $28,984 “to study the potential for farmer profit of supplying biomass products to a proposed Eastern Kentucky power plant.”

The only biotechnology grant in Kentucky has been $255,000 to ApoImmune, an early-stage biopharmaceutical company. Rogers said last winter that the board might add research to its new strategic plan, but that has not happened. However, the Kentucky Agricultural Finance Corp. recently loaned $3.6 million of settlement money to help a subsidiary of Owensboro Medical Health System buy the Owensboro facilities of bankrupt Large Scale Biology Corp., where tobacco plants are to produce proteins for vaccines.

Rogers’ predecessor, John-Mark Hack, said efforts to fund research in Kentucky faced big obstacles – the desire “to see money in farmers’ hands,” organized resistance to biotechnology, lack of a biotechnology industry like that in North Carolina, and now a state board that is “more dominated by people coming from a traditional farm background and less from an agribusiness background.”