CHICAGO — The Ohio Supreme Court ruled unanimously Wednesday that lawmakers did not violate the state constitution when they diverted $258 million of tobacco settlement funds to help balance the fiscal 2009-10 budget.
With the state facing a potential $8 billion deficit going into its next budget cycle, the ruling allows outgoing Gov. Ted Strickland, Governor-elect John Kasich, and the legislature to breathe a small sigh of relief. An adverse ruling would have punched a budget hole in the current biennium.
“In response to the worst economy since the Great Depression, the General Assembly redirected some $260 million from anti-smoking programs to crucial economic and medical assistance programs,” said Attorney General Richard Cordray, who represented the state. “After two years of tumultuous litigation, we can finally get this money out to assist struggling Ohioans.”
Wednesday’s ruling stems from a lawsuit filed by tobacco fund trustees two years ago challenging the state’s dissolution of a tobacco prevention and control endowment fund. They claimed the legislature lacked the constitutional authority to touch the $258 million held by the protected trust.
Strickland wanted to free the money to help fund a non-tobacco job creation program as part of a $1.5 billion economic stimulus program.
American Legacy, which had entered into the trust to manage anti-smoking programs, also became a plaintiff. The lawsuit was consolidated with another filed by two former smokers who participated in Ohio’s anti-smoking programs.
The district court ruled last year that the state’s creation of the special endowment in 2000 in effect protected those funds. It found that the legislature’s diversion of the funds violated the former smokers’ constitutional rights as vested beneficiaries of the fund. The money has been held in escrow since the challenge began.
The 10th District Court of Appeals reversed the lower court’s ruling, finding that the endowment was not an irrevocable trust that afforded the former smokers a vested right. The state’s high court agreed.
“No constitutional amendment was adopted in Ohio restricting the use of the tobacco settlement money,” Justice Paul Pfeifer wrote in an opinion by the Supreme Court. “In the absence of a constitutional provision, the General Assembly had the power to change the use of the settlement money” when it enacted the new legislation freeing the funds.
The state’s share of funds under the 1998 Master Settlement Agreement between most major tobacco companies and 46 states was $10 billion. Ohio issued $5.5 billion of tobacco bonds in 2007.
Moody’s Investors Service rates the state’s general obligation bonds Aa1 with a negative outlook. Fitch Ratings rates them AA-plus with a stable outlook and Standard & Poor’s maintains a AA-plus rating. Analysts have warned that Ohio increasingly has relied on a number of one-time measures, like use of the tobacco funds, to offset revenue declines.
The state is preparing for a major political shift in January as Kasich, a Republican, takes office. He beat Strickland, a Democrat, in the November contest. Republicans will also control both chambers of the legislature in January after gaining a majority in the House.