Ohio Supreme Court Upholds Tobacco Fund Diversion

The Supreme Court of Ohio ruled, Dec. 22,  that diverting $230 million in tobacco use prevention fund proceeds to pay for non-tobacco related expenditures did not violate the retroactivity clause of the Ohio Constitution and/or the contracts clauses of the U.S. and state constitutions.

The Court’s 7-0 decision, which affirmed a ruling by the 10^th District Court of Appeals, was authored by Justice Paul E. Pfeifer.

In 1998, Ohio and 45 other states entered into a Master Settlement Agreement (MSA) with the nation’s leading tobacco manufacturers. The settlement resolved multiple lawsuits that had been filed against the tobacco companies by state attorneys general to recover health care expenses incurred by their states for tobacco-related disease. Under the MSA, Ohio was to receive about $10.1 billion in payments over a 25 year period. 

In 2000, the 123rd General Assembly passed S.B. 192, which enacted R.C. Chapter 183. The new statute established eight new funds within the state treasury into which revenue from the tobacco settlement was to be appropriated to support different governmental purposes, among which were school construction, law enforcement, biomedical research and education technology.

S.B. 192 also created a separate fund identified as the “Tobacco Use Prevention and Control Endowment Fund” and specified that the endowment fund was “not part of the state treasury.” The bill appropriated $235 million from Ohio’s first allocation of MSA funds to the Ohio Department of Health, and instructed the department’s director to “disburse monies appropriated in this appropriation item to the Tobacco Use Prevention and Control Endowment Fund created by section 183.08 of the Revised Code.” The bill stated that the proceeds of the endowment were to be appropriated by an appointed board of trustees to “reduce tobacco use by Ohioans, with special emphasis on reducing the use of tobacco by youth, minority and regional populations, pregnant women, and others who may be disproportionately affected by the use of tobacco.” From 2000 to April 2008, moneys from the endowment fund and earnings on the fund’s unspent balance supported a variety of smoking prevention and cessation programs across the state. 

On April 2, 2008, in response to a significant slowdown in the state’s economy, Gov. Ted Strickland announced a $1.5 billion stimulus plan that he said would be partially funded by diverting $230 million from the then-current $264 million balance of the tobacco use prevention endowment fund to pay for a non-tobacco related job creation program. Two days later, foundation trustees voted to encumber a significant amount of the current proceeds in the endowment fund for future tobacco cessation activities. On April 8, the trustees entered into a $190 million contract with American Legacy Foundation to provide continuing tobacco cessation programs in Ohio.

Later that same day, the 127th General Assembly passed emergency legislation diverting all but $40 million of the current balance of the endowment fund to a new “Jobs Fund” created in the state treasury. The tobacco fund trustees filed suit in the Franklin County Court of Common Pleas challenging the constitutionality of the legislature’s action. Shortly thereafter, American Legacy intervened as a plaintiff in the case, asserting that the legislature’s diversion of funds from the endowment had unlawfully interfered with the contract it had entered into with the foundation on April 8. On May 6, 2008, the General Assembly enacted H.B. 544, which formally abolished the tobacco foundation, liquidated the endowment fund and diverted most of its proceeds to the state treasury for job creation.

In late May 2008, the trial court consolidated the trustees’ and American Legacy’s claims with a new suit that had been filed by Robert Miller and David Weinmann, two former smokers who had participated in foundation-funded smoking cessation programs. In June 2009 the trial court denied American Legacy’s contract impairment claim, but ruled that the legislation enacted in 2000 had intentionally created a permanent, dedicated endowment outside of the state treasury that could only be used to fund future smoking prevention and cessation programs. Based on that holding, the court found that the action of the 127th General Assembly diverting the proceeds of the endowment fund to non-smoking related programs violated Miller and Weinmann’s constitutional rights as vested beneficiaries of the tobacco trust fund.

The state appealed.  On review, the 10^th District Court of Appeals reversed the trial court’s judgment. The appeals court held that the 127th General Assembly did not violate either the retroactivity clause of the Ohio Constitution or the contracts clauses of the state or federal constitutions in enacting H.B. 544, because it had acted within the legislature’s plenary power to appropriate and reorganize state funds to meet changing fiscal needs and priorities. The appeals court also found that the endowment fund was not an irrevocable charitable trust and the appellees had no vested rights that could be violated. The plaintiffs sought and were granted Supreme Court review of the 10^th District’s ruling.

In the Supreme Court's Dec. 22nd decision, Justice Pfeifer noted that the case turns on whether the legislative action to liquidate the endowment fund is clearly prohibited by the Ohio Constitution. “No constitutional amendment was adopted in Ohio restricting the use of the tobacco settlement money,” Justice Pfeifer wrote. “In the absence of a constitutional provision, the General Assembly had the power to change the use of the settlement money by enacting H.B. 544 and S.B. 192.”

Justice Pfeifer also cited a 1939 Supreme Court case, State ex rel. Public Institutional Bldg. Auth. v. Griffith, concerning another limitation on the General Assembly’s plenary legislative power, which he called “expansive” but not “all-inclusive” and noted it does not include the ability to bind future General Assemblies. “No General Assembly can guarantee the continuity of its legislation or tie the hands of its successors,” according to Griffith.

“In Griffith, we stated that although payments made by patients in state-run hospitals might be used by the Department of Public Welfare to run the hospitals it operated, those payments were ‘public funds, at all times subject to legislative control.’”

Appellants contended that Section 4 of H.B. 544 was intended to apply retroactively. The majority opinion referred to Section 28, Article II of the Ohio Constitution, which states that the “General Assembly shall have no power to pass retroactive laws,” and cited several Supreme Court cases that prevent a statute from applying retroactively unless specifically designated by the legislature. The majority opinion concluded that “Section 4 does not indicate that the General Assembly expressly intended the act to apply retroactively. Instead, the language demonstrates the General Assembly’s intention that the act by applied prospectively.”

Justice Pfeifer also addressed appellants’ argument that funds already appropriated by a General Assembly are beyond the reach of future legislation. “This argument makes sense only if the foundation is a trust, which we conclude it is not. It is axiomatic that an appropriation to a state agency is not an expenditure; thus appropriation of money to the foundation does not place the money beyond the reach of the General Assembly.”

The majority opinion concluded, with respect to the retroactivity question, “No irrevocable trust was created; indeed, no trust was created. Instead, we conclude that in 2000, a state agency was created that was abolished in 2008. We conclude that the law enacted in 2000 did not create a right that was terminated by H.B. 544 and, therefore, that H.B. 544 is not an unconstitutionally retroactive law.”

Appellants also argued that H.B. 544 violated the contract clause of the Ohio and federal constitutions.  The court concluded that the contract clause was not violated because no contract was formed.

In conclusion, Justice Pfeifer wrote that: “The General Assembly has plenary legislative power. In the exercise of that power, the General Assembly evaluated Ohio’s budget priorities and enacted S.B. 192 and H.B. 544. It is not for us to judge the wisdom of the General Assembly but to determine whether the exercise of its power comports with or violates the Ohio Constitution. We conclude that S.B. 192 and H.B. 544 do not violate the Ohio Constitution.”

Justice Pfeifer’s opinion was joined by Justices Evelyn Lundberg Stratton, Maureen O’Connor, Terrence O’Donnell and Judith Ann Lanzinger as well as Eighth District Court of Appeals Judge Sean C. Gallagher, sitting in place of Chief Justice Eric Brown, and Fourth District Court of Appeals Judge William H. Harsha III, sitting in place of Justice Robert R. Cupp. Judges Gallagher and Harsha issued separate concurring opinions.

Judge Gallagher noted that had the General Assembly properly established a trust with specific recipients in mind to benefit from the tobacco proceeds “no two-year encumbrance problem would exist.”

Judge Harsha pointed to Section 22, Article II of the Ohio Constitution as prohibiting “the legislature from subsequently creating an irrevocable public trust with those funds” once the tobacco proceeds were placed in the state treasury.