SENATE AGRICULTURE COMMITTEE

JEFFREY A. MODISETT
Attorney General of Indiana

SEPTEMBER 18, 1997

Mr. Chairman and members of the Senate Agriculture Committee, thank you for the opportunity to address you regarding this historic moment in the public health of our nation. I salute you for your willingness to conduct these important hearings on the proposed tobacco settlement.

During this Committee's hearings last week, many of you showed not only your interest in the settlement's potential impact on tobacco growers, but also your keen interest in all facets of our society that are affected by this settlement.

In these prepared remarks, I address three aspects of the proposed settlement. First, I offer a few comments about the settlement as a whole. Second, I discuss my role as allocation subcommittee chairman. Finally, I describe what the settlement would mean to the nearly 3,000 farmers in Indiana who rely on tobacco to sustain their livelihood and contribute to their communities.

By way of introduction, my background is in law enforcement. I was an Assistant United States Attorney in Los Angeles for nearly six years. I then worked for Governor Evan Bayh, in part as his drug coordinator for the state of Indiana. I quickly learned that underage smoking was often the beginning of a lifelong addiction to nicotine and, in many cases, premature death from smoking-related disease. I also served as the Marion County prosecutor in Indianapolis for four years. In short, I consider myself a relatively conservative, law-enforcement Democrat.

On January 13, 1997, I was sworn in as Indiana Attorney General, but I had begun working on a potential lawsuit against the tobacco industry shortly after my election in November 1996. I filed suit one month into my term, on February 19, 1997. I sued the tobacco companies because they broke the laws of Indiana. Specifically, they lied, perpetrated frauds on our citizens, and illegally marketed tobacco products to our children.

On June 20, 1997, something remarkable happened. The suing states and the tobacco industry reached an agreement that exacts unprecedented concessions from an industry that had previously appeared invincible. In reaching this agreement, the state attorneys general stood on the shoulders of the giants who preceded us, such as Drs. Koop and Kessler. I believed in that agreement when I signed it in June, and I continue to believe in the agreement today.

Much has changed since June 20 and much has stayed the same. The change is evident in the whole reorientation of our thinking about tobacco regulation and the tobacco industry. Few would have believed even one year ago that the attorneys general would have been able to take on the tobacco industry and receive the array of concessions that make up the agreement. The industry now admits that their product is harmful and addictive. Unfortunately, remaining unchanged are the vending machines that push out cigarettes to minors, billboards that emphasize the supposed glamour of smoking, and the tacit agreement between the tobacco companies to change their corporate culture only when forced to do so.

The tobacco settlement may mean many things to many people. Everyone realizes it raises a host of complex issues — issues that are better addressed in the halls of Congress instead of on a jury-by-jury basis. (This, by the way, may be the only thing upon which the industry and I agree.) The attorneys general have labored intensively to force the industry into its current position. Congress must maintain that momentum.

Given the many views of the tobacco settlement, I am grateful for the opportunity to explain what I think the agreement is about. First, it is foremost about children and public health. I believe in the agreement because it helps to ensure that children will no longer be the target of tobacco-industry advertising, nicotine addicts will have assistance from industry-funded cessation programs, and consumers will be in a better position to make informed decisions about smoking. In addition, the tobacco industry will no longer be free to spread disinformation about the health effects of its products. The states will also begin receiving compensation for the health-care costs they have borne because of the tobacco-related illnesses of many of their citizens.

Second, I am troubled that some have spoken about a rush to judgment. I agree it would be imprudent for the attorneys general or anyone to ask Congress to approve the settlement without due consideration. However, we simply do not have the luxury of waiting one moment longer than we absolutely must to take comprehensive measures to reduce youth smoking . Every day we wait, 3,000 more children begin smoking. That is about 270,000 children just since we signed the agreement in June. Moreover, I am wary about giving the industry even a temporary peace from the intensive regulation it deserves. The industry's remorse has been rare and may yet be fleeting.

Third, I am aware that there has been a suggestion that the settlement does not ensure a dramatic enough increase in the price of a pack of cigarettes. The attorneys general have never believed that a price increase alone would accomplish our central aim of reducing youth smoking. That is why we pushed hard for advertising restrictions, countermarketing and cessation programs, compliance checks, retail licensure, strong FDA enforcement, and the unprecedented Youth Lookback provision. If this proposed multi-faceted attack on the problem of youth smoking is demonstrated to be insufficient in the future, steps could be taken to further increase the price of tobacco. Fourth, it is critical to remember that the states were not negotiating on behalf of the federal government and thus settled only the states' cases. The settlement encompasses many state causes of action including antitrust, consumer protection, racketeering, conspiracy, and contributing to the delinquency of a minor. These are real and substantial claims that have nothing to do with federal expenditures. Thus, the federal government could bring a lawsuit for its injuries due to the wrongful acts of the tobacco industry at any time.

A few weeks prior to the settlement, the states' negotiating team asked me to chair a committee that would recommend how to allocate tobacco-settlement proceeds. Specifically, allocation involves dividing settlement monies among the states based on objective, fair principles, free from any irrelevant or inappropriate factors or political influence. While the financial part of the agreement is important, it must be understood in the context of many other provisions directed to curb youth smoking and to promote public health. In a nutshell, we have recommended a compensatory model that is based on past harms to the states caused by the tobacco industry. The model both captures the costs states have incurred as a result of tobacco-related illness and serves as a proxy for the many other claims states have made in litigation. The formula allocates tobacco-settlement proceeds among all 50 states, the District of Columbia, and the five United States Territories.

In addition to public health, the attorneys general had in mind other goals in the settlement. We wanted to include provisions for tobacco farmers. For example, we sought some mechanism to soften the blow to tobacco farmers resulting from a reduction in smoking in this country. The settlement requires that the industry provide replacement funds for "events, teams, or contests" that lose tobacco sponsorship and suffer financially. I believe tobacco farmers should have the same safety net. But the industry would not discuss with us how to assist tobacco farmers and their communities as we experience this change in the tobacco culture. It was a "deal-breaker" to the industry.

On the farm where I grew up in Windfall, Indiana, we raised corn and hogs — so, I am not an expert on tobacco farming. But I have spoken to many tobacco farmers in Indiana and I have researched the history of tobacco growers in this country. It is clear to me that the industry has never been a friend to the tobacco farmer. I know that if it were not for the current quota system put in place by Congress in the 1930s that the price of tobacco (and therefore the revenue obtained by tobacco farmers) would be much lower than it is in this country today.

I am aware that Congress is now debating how much a pack of cigarettes should cost to deter teenagers from smoking. Certainly, if the current quota system were never put in place and there were no mechanism to protect smaller farmers, then tobacco manufacturers might have grown tobacco themselves or contracted with a few large producers. Either of these developments would have resulted in much cheaper cigarettes and, therefore, a lower retail price for cigarettes. This result, we can all agree, is no deterrence to our children and is bad for tobacco farmers.

Tobacco farmers are, and should be, immune from any liability for growing tobacco. In my opinion they have been as much a victim of the deceit of the tobacco industry as the general public.

Congress now has an opportunity to protect tobacco farmers without protecting the industry. The proposed settlement does not require that Congress do anything to modify the quota system. It is possible to support this settlement and protect the American tobacco farmer without significant and complex legislation. This is an issue of supply and demand. If the tobacco industry can be directed to buy a certain amount of tobacco from American farmers before being allowed to buy foreign-grown tobacco, this settlement would have little or no impact on the American farmer for years. This demand could be guaranteed either in the private marketplace or by actual congressional action through a higher domestic content law.

I have met with farmers in Indiana who are similarly situated to farmers in Senator McConnell's state. There are many more burley growers in Kentucky than Indiana, but in both states live tobacco farm families with children to educate and creditors to pay. Some farmers expected the long-term demand for their product to decrease, yet few farmers could have predicted the speed at which this settlement has brought their concerns to a head. I filed suit only in February, and at that time, the discussions we are having now would have been thought ludicrous.

Some farmers are now angrier than ever at the industry. They feel the industry has deceived them and they do not wish to produce a product that is harmful to the consumer's health. Some want the opportunity to be bought out now.

There are many others, though, in fear of what might happen without price guarantees. The quota system has shown to be a successful solidarity of the growers to guarantee them a profit. In Indiana, for example, a grower stands to earn a net gain of nearly $1,000 per acre on tobacco, compared to an average net for an acre of corn being between $50 and $75.

Mr. Chairman, I have heard you comment that now is the proper time to phase-out or buy-out the current quota system. Should you so choose, this proposed settlement does present an opportunity to make substantial changes in the current tobacco program. Like you, I support the concept of a fair and equitable long-term buy-out program. I only emphasize that this change is not mandated by the settlement itself. Because there are several ways to go about ensuring that tobacco farmers are protected, I do not think we necessarily need sweeping legislation for farmers at the same time the settlement is enacted. For this reason, I would suggest that a buy-out program be funded either with industry money that is in addition to the $368.5 billion in settlement proceeds or with other non-settlement funds. We should not take money intended for public health under the settlement to fund a buy-out. However, a state may choose to do so with its own share of allocation monies.

Such a program should guarantee those growers and quota holders the opportunity to continue farming tobacco. Clearly with global markets it could take years and maybe even generations to significantly reduce the demand for tobacco. Such a program should guarantee domestic content in cigarettes both sold domestically under the new regulations and in exported cigarettes.

Any discussion of a buy-out should also take into account the effect on the entire rural community of any significant change in the tobacco program. Just as the price supports provide extra money for tobacco farmers, the farmers in turn spend much of that money in their local economy. We cannot ignore the ripple effect of a buyout. I was delighted, Mr. Chairman, that your comments last week emphasized the need to provide money for rural towns in tobacco-growing regions that depend on tobacco farming.

Also, most farmers wish for any buy-out to be optional, not mandatory. Many see this as an opportunity to diversify, but others do not wish to be mandated to leave the quota program they have been a part of for so long. As I understand your goals, Mr. Chairman, you would like for the government to remove itself from the business of managing tobacco production and let the market set prices. From my discussions with Indiana farmers, the issue of whether the buy-out should be mandatory or optional may prove to be the most difficult. I respectfully leave that question to the Committee's considered judgment.

In conclusion, our children deserve better from us than the status quo, our citizens deserve improved public health, and our tobacco farmers deserve the assurance of protection from decreased demand for their crop.