S.C. To Pay Millions in Tobacco Money Battle

March 19, 2010

Investigative Reports

Print Friendly, PDF & Email

The NerveThe state of South Carolina plans to spend nearly $4 million in legal costs next fiscal year to try to stop $25 million in tobacco settlement money from going up in smoke.

S.C. Comptroller General Richard Eckstrom is questioning the relatively high projected legal bill in an arbitration fight with several of the nation’s largest tobacco manufacturers.

“It looks like we’re spending a lot of money on arbitration,” Eckstrom told The Nerve in a recent interview. “Arbitration usually involves reasonable people sitting down and agreeing on things. It looks like we’re not minimizing costs.”

Eckstrom, a member of the S.C. Budget and Control Board, raised the issue at a board meeting on Feb. 23. The five-member board, meeting separately as the Tobacco Settlement Revenue Management Authority, approved the authority’s budget for the next fiscal year, which starts July 1.

That includes $92.4 million in settlement revenue from tobacco companies and $87.4 million that the state will repay for bonds issued with the backing of settlement payments.

Of the approximate $5 million in operating and administrative expenses for next fiscal year, about $3.8 million, or 76 percent of the total, is budgeted for South Carolina’s share of arbitration costs, expected expert testimony and “associated legal fees,” according to documents from the S.C. Treasurer’s Office that were included with Budget and Control Board materials.

For the last four fiscal years, tobacco companies have withheld a total of $24.8 million, or 7 percent, of the $338 million that South Carolina was supposed to have received for that period, records show.

In seeking arbitration, three of the largest tobacco manufacturers contend that South Carolina and 45 other states that are part of a 1998 settlement haven’t done enough to crack down on the sale of contraband cigarettes and to recover excise taxes from cigarette manufacturers not included in the settlement.

“That process has just begun, and because we are dealing with an open-ended, unknown standard, we don’t know exactly what the likelihood of our outcome is going to be,” Rick Harmon, senior assistant state treasurer, said during the February meeting.

AG Hires Columbia Lawyers

In a worst-case scenario, South Carolina could lose an estimated $95 million to $100 million annually in tobacco payments if it loses in arbitration, to be decided by an independent, three-judge panel, Harmon said.

But Eckstrom contended that the $3.8 million in the state’s projected arbitration costs was “very, very high” in comparison to the approximate $25 million that has been withheld to date.

“There are significant costs that are being paid,” Eckstrom said.

Harmon said the state Attorney General’s Office, which is handling the arbitration, has hired the Columbia-based firm of Richardson Plowden & Robinson to represent the state in the proceedings.

Future legal costs would be recouped from any withheld monies that eventually are released, he said.

The Richardson Plowden firm has been paid $726,900 in fees and expenses since the nationwide arbitration case began in 2006, Mark Plowden, spokesman for S.C. Attorney General Henry McMaster, said in a written response to The Nerve.

As for the firm’s projected costs next fiscal year, Plowden said, “As required, Richardson Plowden & Robinson bills on an hourly basis for work performed for this engagement, and therefore, it is not possible to calculate the fees, expenses and costs that Richardson Plowden & Robinson will be paid in the next fiscal year.”

The firm was hired because McMaster “determined that it was in the best interest of the state to retain special counsel because of the complexity of the litigation, and the nationwide scope of the arbitration,” Plowden said, adding, “The Attorney General’s Office does not have the resources to conduct the arbitration of this complex matter in addition to the office’s other responsibilities.”

The attorney general has drawn heat before over tobacco settlement legal costs.

After joining other states in the initial legal battle in the late 1990s against the tobacco companies, then-S.C. Attorney General Charlie Condon hired eight law firms that eventually were awarded a total of $82.5 million in legal fees by a national arbitration panel.

Under the 1998 settlement – the largest civil settlement in U.S. history – 46 states will receive more than $206 billion over 25 years from tobacco manufacturers to settle all legal claims over smoking-related costs incurred by the states.

South Carolina’s share was $2.3 billion, plus $357 million in economic aid to tobacco growers.

Settlement Would Repay Bonds

The S.C. Tobacco Settlement Revenue Management Authority was created by the S.C. Legislature to oversee the state’s share of the settlement funds.

The five members of the Budget and Control Board – Eckstrom, Gov. Mark Sanford, Treasurer Converse Chellis, Senate Finance Committee Chairman Hugh Leatherman and House Ways and Means Committee Chairman Dan Cooper – make up the authority.

The authority in 2001 issued $934.5 million in bonds so that the state could get part of the settlement in a lump sum instead of waiting years to receive the money.

After much wrangling, the Legislature decided to spend 73 percent of the net proceeds on health care; 15 percent on reimbursing tobacco growers and other related businesses for economic losses resulting from the settlement; 10 percent to improve infrastructure in job-poor rural counties; and 2 percent to promote economic development projects statewide.

Any settlement money South Carolina receives now has to go to repay the bonds, Harmon said at the February meeting.

Because the state has been accelerating payments in recent years, the remaining $120.6 million in principal is expected to be retired by June 30, 2013, according to Treasurer’s Office documents presented at the meeting.

The approximate $25 million withheld by the tobacco companies is not expected to affect bond payments, according to Treasurer’s Office documents.

Settlement revenue received after the bonds are retired would go to the state’s general fund, Harmon said, though neither he nor Scott Malyerck, deputy treasurer and communications director, would answer The Nerve’s written questions about the projected amount.

Harmon last week instructed The Nerve to submit a state Freedom of Information Act request to his agency for related records.

Reach Brundrett at (803) 779-5022, ext. 106, or rick@scpolicycouncil.com.