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Theft raises questions about use and safety of tobacco settlement money

By Anita Kumar
Washington Post Staff Writer
Monday, November 22, 2010; 6:53 PM

RICHMOND - In the days since Virginia's former secretary of finance admitted that he stole $4 million earmarked for the state's most economically depressed areas, many have begun to question whether more than $1 billion from a settlement with the nation's largest tobacco companies has been spent properly and if the money is safe.

In the past decade, more than 1,300 projects in Virginia have been funded, including high-speed Internet access in rural areas, walking trails and improvements to the Martinsville Speedway. But some wonder whether the state is failing to fulfill its core mission of creating jobs and helping tobacco farmers.

"What you basically have is a huge amount of money very few people have any say-so over,'' said Sen. R. Edward Houck (D-Spotsylvania), one of the legislators who called for a study of the tobacco commission. "It's going to constantly raise questions."

Former governor Gerald L. Baliles (D), who led a 2008 study group that faulted the commission for spending too much on smaller projects, renewed his call last week for the group to better track its results. Gov. Robert F. McDonnell (R) said through a spokesman that he was "extremely disappointed" with the theft and is "discussing internally what steps to take in the wake of this announcement to ensure that such fraud cannot take place again."

But officials at the state Tobacco Indemnification and Community Revitalization Commission say they long ago established safeguards that would prevent future thefts and that their projects have created thousands of jobs in Southside and Southwest Virginia.

"I think we are running fine,'' said Del. Terry G. Kilgore (R-Scott), the group's chairman. "We have a lot more control over the dollars. And we have done a lot of good."

John W. Forbes, 54, secretary of finance under Gov. James S. Gilmore III (R), admitted that he stole $4 million from the commission while serving as a member. He pleaded guilty to one count of wire fraud in August while the case was under seal and will be sentenced in a federal court in Richmond on Tuesday. His guilty plea was only recently made public.

Forbes received a $5 million grant for the Literary Foundation of Virginia, which he founded as a charitable organization, but later admitted that he used $4 million of the money for a new home, personal investments, cash and to start a company, according to court documents.

"He feels completely remorseful for what's occurred," said Erich C. Ferrari, Forbes's attorney. "He's ready to accept the punishment."

A spokesman for Gilmore did not respond to a call for comment.

A work in progress

Tobacco crops once fueled the state's economy. But in recent years, some farmers have turned to soybeans, hay and cattle. Others have quit or sold their farms. The number of tobacco farms in Virginia has decreased. In 1997, Virginia tobacco farms produced 118,000 pounds of tobacco. In 2009, they produced just 46,500 pounds.

Fifty-two states and territories, including Virginia, divided $206 billion that was expected to come from the nation's four largest cigarette manufacturers over 25 years. So far, Virginia has received $1.23 billion.

State legislators agreed to split the money: 50 percent to revitalize Southside and Southwest Virginia, which includes annual payments to tobacco farmers to compensate for lost revenue; 40 percent to help pay for the state's annual smoking-related Medicaid costs; and 10 percent to prevent smoking. This year, legislators also agreed to direct a portion to fight childhood obesity.

Former state senator Charles R. Hawkins (R-Pittsylvania), who introduced the bill that created the commission and served as its chairman, said Forbes's grant in 2001 was one of the first the commission awarded.

"Everybody gave him the benefit of the doubt," he said. "John Forbes was able to create a giant hoax."

Frank Ferguson, the commission's longtime general counsel, said rules did not bar the commission from awarding the grant to the Literary Foundation, even though Forbes served simultaneously on the commission and on the foundation's board, because he indicated at the time that he was a volunteer who would receive no financial benefit from the grant. He later became the group's paid executive director.

But commission members say many other rules were tightened long before they were contacted this year by the FBI about Forbes.

"We have tried every year to refine and improve the financial and management systems,'' Sen. William C. Wampler Jr. (R-Bristol) said.

Neal E. Noyes, the commission's executive director, said changes include providing only reimbursements and not money upfront; requiring an application for every grant; and having four staffers, including the executive director, check all grant paperwork.

"The situation doesn't exist now like it did then,'' Hawkins said. "I don't know what other improvements could be done."

'It's awfully political'

But Baliles's 2008 study group recommended a slew of changes that pertain to both financial safeguards and overall performance, including finding a better way to track the commission's results and conducting an audit.

The group's report criticized the commission for doling out too much money on smaller projects and not enough on education, infrastructure and regional needs. It noted that despite the influx of money, the region suffers from declining population, low pay, high unemployment and poor education.

"There is a need to restate the case,'' Baliles said last week. "Have they had the desired transformative effect?"

A 31-member commission approves grants to 41 cities and counties and issues 45,000 checks to farmers each year. So far, $729 million has been spent on economic development and $288 million given to farmers.

"Some of the things we have done I have not exactly agreed with,'' said Kenny Barnard, a tobacco farmer from Amelia Court House, Va., who sits on the commission. Barnard, who raises cattle and grows corn, soybeans, sweet potatoes and tobacco on 1,500 acres, said he thinks the projects should be tied more closely to agriculture. "Many of the projects are decided before the commission votes. It's awfully political to me."

House Minority Leader Ward L. Armstrong (D-Henry), whose district benefits from the settlement, requested a legislative audit in 2009 after he became concerned that commission members had approved several small pet projects in their districts that he dubbed earmarks. The Republican-controlled House killed the bill, but it was passed as part of a state budget compromise in the 2010 legislative session.

"The most dangerous thing in the world is unprotected wealth,'' Armstrong said. "No one should be in the position to profit.''

The Joint Legislative Audit and Review Commission, the General Assembly's investigative arm, expects to issue a report in June. McDonnell spokesman Tucker Martin said the governor and top administration officials are also reviewing the commission and its policies to determine what changes - including legislative ones - might be necessary.

Kilgore said he is willing to meet with anyone to explain the commission's success.

The commission has spent $118 million installing 1,075 miles of fiber-optic cable, $72 million for college scholarships, $40 million on six energy research centers and $58 million in incentives for jobs and investment.

"Virginia has done a lot more than other states,'' he said. "We've created thousands of jobs and helped families."

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