As $300m Disappears, Legacy Glides Off Its Financial Cliff

The American Legacy Foundation – one of the country’s biggest forces behind youth anti-tobacco campaigns – is approaching the financial cliff that dooms many nonprofits, as long-term funding from its benefactors runs out.

In this case, the cliff is $300 million a year deep – thanks to the expiration of a legal obligation by major tobacco companies to fund the foundation.

But calls to Legacy’s Washington office to find out how the agency will survive the blow raised instead a different question: What kind of nonprofit looks at that kind of loss and calls it not “a moment of crisis,” but “a moment of evolution”?

A nonprofit that brings in twice as much money as it spends and puts the extra cash in stocks, bonds and real estate investments. The result: a small self-endowment of sorts that will keep Legacy running for the foreseeable future.

To be sure, that future looks less ambitious than Legacy’s first five years, and the foundation is hunting for new income streams to survive in the long term.

For many youth groups that conduct anti-smoking activities, there’s a lot at stake in Legacy’s future. The anti-smoking campaigns (including scathing TV ads) funded by Legacy have correlated with a steady decline in teen smoking rates since 1997. Besides running its own national ads, Legacy has funded local programs by community groups around the country. With so much money disappearing, some anti-smoking advocates worry that the effectiveness or intensity of teen anti-smoking efforts might fade.

Nest Egg

Legacy has received $1.4 billion over the past five years as part of the $246 billion Master Settlement Agreement in 1998 between most of the states and six tobacco companies.

The companies’ obligation to fund the National Public Education Fund – run by Legacy – expires this year.

With 80 percent of its funding coming from the education fund, Legacy began sounding alarms last month. Foundation President Cheryl Healton issued a public statement saying: “The tobacco industry claims it wants to see youth smoking rates continue to decline. [They] need to put their money where their mouths are and continue making payments … not because they’re required to but because it’s the just thing to do.”

In response, spokeswoman Jamie Drogin of the Altria Group (formerly Philip Morris) said: “We’ve honored our obligations and recently contributed $5 billion to the states. We urge the Legacy foundation to take advantage of the funds available.
We would welcome the opportunity to sit down to discuss what more we can do.”

While warning about possible program eliminations, Legacy says it has a “rainy day” fund of investments that will keep programs and grants running, as Vice President Chris Cullen put it, “in perpetuity.

“We’ve been planning on this eventuality for five years,” says Cullen, Legacy’s executive vice president for marketing and communications.

Legacy calculated a survival plan into the annual payments from tobacco companies. Its board of directors decreed that one-third of the settlement payments were to be set aside for investing, and Cullen says the foundation actually spends only about half of what it takes in. Its annual operating budget has hovered around $158 million, while it has had an annual revenue base of about $309 million.

Cullen says the unspent money has been invested in “diversified stocks, bonds and real estate.” In addition, “We sought corporate and other partners to assist us in our anti-smoking efforts,” he says.

As a result, Legacy’s assets stood at $743.3 million last year, up from $644.3 million in 2001.

Where the Money Goes

With that money, Legacy has attained notoriety for its Truth advertising campaign, featuring, among other things, harsh TV ads that essentially paint tobacco companies as killers. According to Cullen, the foundation spends some “ 70 to 75 percent” of its budget on marketing, producing and buying media time for its tough anti-smoking campaigns.

The tobacco companies have occasionally fought back, citing a section of the agreement that prohibits Legacy from casting them in a bad light. Legacy pulled two television spots in February 2000 after tobacco company objections. One showed body bags piling up outside the headquarters of Philip Morris; the other featured a teenager armed with a lie detector attempting to interview a tobacco executive.

In February, Lorillard Tobacco filed suit in North Carolina charging that Legacy had “misused” the education money by “executing a campaign of offensive statements.” But a Delaware court ruled that Lorillard had no authority to sue Legacy, compelling Lorillard to cave in on its threat to hold back its final payment to the foundation.

Amid these skirmishes, the foundation has also awarded 82 “priority population” grants (targeting minorities and gays) in 35 states (totaling $21million) and nearly $3 million in research grants.

For example, the Home for Little Wanderers (based in Boston) got $54,000 to target gay and lesbian youth for tobacco education activities, while the Portland, Ore.- based Native Rehabilitation Association of the Northwest received $52,458 for its anti-smoking efforts aimed at teenagers.

Also, $700,000 went to Columbia University during 2001-2, including money for the National Center on Addiction and Substance Abuse.

Scaling Back

Legacy vows that, for the near future at least, the outflow of cash should continue.

“This isn’t a moment of crisis for us, it’s a moment of evolution,” Cullen says. “We have to do things differently.”

He says the foundation’s operating budget will be reduced to $125 million in 2005 and $100 million in 2006 – which would be less than two-thirds of what it spends now.

There are not yet any corporations or “partners” in the “hard-cash camp” to fill the void to be left by the lost settlement money, Cullen says, but the foundation hardly seems to be panicking. It plans to move to larger Washington, D.C. headquarters this month, and there will be no downward adjustments in staff salaries (including Healton’s $259,096 annual pay).

Other, smaller funds from the tobacco settlement will flow to Legacy for the next five years: the Base Fund ($25 million a year) and the Smokeless Tobacco Settlement Fund ($7.4 million annually).

“We won’t stop doing anything as far as programs and grants are concerned, just more efficiently,” Cullen says.

The reductions at Legacy come at a time when many states are reacting to their own financial crises by tapping into another part of the tobacco settlement – funds that the companies pay to the states each year. States can use the money however they wish, and Legacy says only about 5 percent of the money is being used for tobacco control. Health care also gets a large infusion from tobacco cash in most states.

It is difficult, however, to isolate the impact of anti-smoking media campaigns, although anti-smoking advocates see enough correlation to claim that they work.

“Teen anti-smoking campaigns have been proven effective,” insists Holly Aprea, assistant for youth advocacy and partnership at the Campaign for Tobacco-Free Kids. She cites the annual “Youth Risk Behavioral Surveillance” put out by the U.S. Centers for Disease Control and Prevention, which show that youth smoking declined by 18 percent between 1999 and 2001, and by nearly 25 percent since teen smoking peaked in 1997.

But words of caution come from an article published in Health Education Research (February 2002) by researchers at Brown University’s Center for Alcohol and Addiction Studies: “Studies of youth-oriented interventions specifically have shown more mixed results, particularly for smaller, community-level media programs, but they indicate strong potential to influence underage smoking rates.”

Aprea takes a do-or-die stance. “State programs being cut back or eliminated and anti-smoking funds drying up pose a real threat,” she says, “because we’ll start to see teen smoking rates rise again.”

Contact: Chris Cullen (202) 454-5555.


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