If there are restrictions on how money from the tobacco settlement can be used, many other states are acting as if they are oblivious to them…
Pennsylvania, from today’s Pittsburgh Post-Gazette…

[Governor Ed Rendell], a Democrat, wants to use $35 million a year from the state’s $400 million annual tobacco settlement payment to make debt payments on a $500 million bond issue. The bond money would go for construction of biomedical research labs in Pittsburgh, Philadelphia, State College, Hershey and other towns.

West Virginia, from today’s Charlestown Gazette-Mail…

Exact numbers will be unveiled today on the impact an $807 million cash infusion will have on stabilizing the state’s critically underfunded teachers’ pension fund, a spokeswoman for Gov. Joe Manchin said Monday.
Manchin will announce this afternoon the finalization of the sale of $911 million in tobacco settlement bonds that went to market earlier this month.
The state sold the rights to roughly its next 25 years of annual payments from a 1998 settlement of a multistate lawsuit against the nation’s major cigarette manufacturers on June 14.
After putting $100 million into a required reserve fund and paying expenses for the various bond underwriters and bond counsel, initial estimates were that the state would net $807 million from the bond issue. By law, all the money will go to pay down a $4 billion-plus unfunded liability in the Teachers’ Retirement System.

Michigan, from a June 12 report from WZZM-TV (ABC 13)…

The Michigan Senate approved a measure today that would eliminate half of state government’s budget deficit by selling part of Michigan’s future tobacco lawsuit settlement.
The legislation will reach Governor Granholm’s desk soon because it is part of an overall deal to balance this year’s budget without a tax increase or funding cuts to public schools.
The bill would provide about 415 million dollars up front to help with immediate financial problems, but the state will give up its rights to what would be larger settlement payments due in future years.

Ohio, from the May 28 Canton Repository…

The Republican-controlled Legislature appears poised to pass Gov. Ted Strickland’s plan for using Ohio’s tobacco settlement money to pay for the construction of new schools and create tax relief for elderly homeowners.
However, some senators have said they’d rather see the expected $5 billion go toward higher education, while others are concerned about how the Democratic governor’s plan would be administered.
Collecting the settlement in 40 years of installments would net the state an estimated $18 billion. But a lump sum payout through a process called securitization — where the state would sell the right to its future settlement payments to investors in return for an immediate influx of cash — would allow Ohio to speed up planned school construction.
Ohio would be the 19th state to take a lump sum; California, New York and Michigan are among those that have already used payments to plug budget holes.

Etc.
It doesn’t seem like diverting the tobacco money to government operating expenses should be a legal problem under the existing settlement terms, as long as a small percentage of the money goes to “reserve funds” and “bond management expenses” (see the WV example).
The details we know about this story don’t add up just yet.