Legislature(2003 - 2004)

02/25/2004 01:45 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 25, 2004                                                                                          
                         1:45 P.M.                                                                                              
                                                                                                                                
TAPE HFC 04 - 30, Side A                                                                                                        
TAPE HFC 04 - 30, Side B                                                                                                        
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair Williams called the House  Finance Committee meeting                                                                   
to order at 1:45 P.M.                                                                                                           
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative John Harris, Co-Chair                                                                                            
Representative Bill Williams, Co-Chair                                                                                          
Representative Kevin Meyer, Vice-Chair                                                                                          
Representative Eric Croft                                                                                                       
Representative Hugh Fate                                                                                                        
Representative Richard Foster                                                                                                   
Representative Mike Hawker                                                                                                      
Representative Reggie Joule                                                                                                     
Representative Carl Moses                                                                                                       
Representative Bill Stoltze                                                                                                     
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Mike Chenault                                                                                                    
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Representative   Pete    Kott,   Speaker   of    the   House;                                                                   
Representative  Harry  Crawford;   Sue  Stancliff,  Staff  to                                                                   
Representative    Pete   Kott;    Tom   Wright,   Staff    to                                                                   
Representative  Bill  Williams; Michael  Barnhill,  Assistant                                                                   
Attorney   General,    Commercial/Fair   Business    Section,                                                                   
Department   of  Law;   Darwin  Biwer,   Cabaret  Hotel   and                                                                   
Restaurant  Retailers;  Mike   Barnhill,  Assistant  Attorney                                                                   
General,  Commercial/Fair  Business  Section,  Department  of                                                                   
Law.                                                                                                                            
                                                                                                                                
PRESENT VIA TELECONFERENCE                                                                                                    
                                                                                                                                
Greg  Peterson, Allied  Charities,  Ketchikan; Larry  Meyers,                                                                   
Deputy Director,  Tax Division,  Department of Revenue;  Dave                                                                   
Lambert, Fairbanks; Greg Petersen, Allied Charities;                                                                            
Dale Fox,  Executive Director,  Cabaret Hotel and  Restaurant                                                                   
Retailers  (CHARR);  Gary  Superman,   (CHARR),  Nikiski;  Ed                                                                   
Moeglein,  Alaska Nonprofit  Charitable Organization  (ANCO),                                                                   
Soldotna;  George   Wright,  Volunteer  ANB   on  Legislative                                                                   
Committee.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
HJR 20    Proposing  amendments  to the  Constitution of  the                                                                   
          State  of  Alaska  repealing   the  prohibition  on                                                                   
          dedicated funds.                                                                                                      
                                                                                                                                
          CS HJR 20(JUD) was REPORTED out of Committee with                                                                     
          one fiscal note and individual recommendations.                                                                       
                                                                                                                                
HB 503    An  Act  relating  to the  tobacco  product  Master                                                                   
          Settlement   Agreement;   and  providing   for   an                                                                   
          effective date.                                                                                                       
                                                                                                                                
          HB 503 was REPORTED out of Committee with a "do                                                                       
          pass" recommendation and with a zero fiscal note.                                                                     
                                                                                                                                
HB 509    An Act  relating to establishing the  Alaska Gaming                                                                   
          Commission.                                                                                                           
                                                                                                                                
          HB 509 was heard and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
HB 375    An Act making appropriations  for the operating and                                                                   
          loan  program  expenses  of state  government,  for                                                                   
          certain programs,  and to capitalize  funds; making                                                                   
          appropriations   under   art.   IX,   sec.   17(c),                                                                   
          Constitution of the  State of Alaska; and providing                                                                   
          for an effective date.                                                                                                
                                                                                                                                
          HB 375 was heard and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
HB 377    An Act making appropriations  for the operating and                                                                   
          capital   expenses   of  the   state's   integrated                                                                   
          comprehensive mental  health program; and providing                                                                   
          for an effective date.                                                                                                
                                                                                                                                
          HB 377 was heard and HELD in Committee for further                                                                    
          consideration.                                                                                                        
                                                                                                                                
HOUSE JOINT RESOLUTION NO. 20                                                                                                 
                                                                                                                                
          Proposing  amendments  to the  Constitution of  the                                                                   
          State  of  Alaska  repealing   the  prohibition  on                                                                   
          dedicated funds.                                                                                                      
                                                                                                                                
Co-Chair  Harris  MOVED  to  report CS  HJR  20(JUD)  out  of                                                                   
Committee  with   the  accompanying  fiscal  note   and  with                                                                   
individual recommendations.                                                                                                     
                                                                                                                                
Representative  Fate  OBJECTED   to  state  that  there  were                                                                   
questions  raised   that  had   not  been  answered   in  the                                                                   
committee.  He expected that his  questions would be answered                                                                   
during  the  House  floor  debate, but  said  he  would  have                                                                   
preferred the  committee forum for further discussion  of the                                                                   
measure. Representative Fate WITHDREW his OBJECTION.                                                                            
                                                                                                                                
There being NO OBJECTION, CS HJR  20(JUD) was REPORTED out of                                                                   
Committee  with   the  accompanying  fiscal  note   and  with                                                                   
individual recommendations.                                                                                                     
                                                                                                                                
HOUSE BILL NO. 509                                                                                                            
                                                                                                                                
     An Act relating to establishing the Alaska Gaming                                                                          
     Commission.                                                                                                                
                                                                                                                                
Co-Chair Harris  MOVED to  ADOPT the Work  Draft for  HB 509,                                                                   
23-LS1768\S.                                                                                                                    
                                                                                                                                
SUE STANCLIFF,  STAFF TO REPRESENTATIVE PETE  KOTT, explained                                                                   
that HB 509 establishes the Alaska  Gaming Commission.  It is                                                                   
intended to  establish regulatory  oversight of all  forms of                                                                   
gaming in  Alaska, including current  forms and  future forms                                                                   
that may  be authorized  by the  legislature under  AS 05.15.                                                                   
Gaming currently  includes bingo,  lotteries, raffles,  pull-                                                                   
tabs,  pull-tab gaming,  and fishing  derbies. The  oversight                                                                   
presently  rests in  the Tax  Division of  the Department  of                                                                   
Revenue.                                                                                                                        
                                                                                                                                
The  bill  includes protections  for  legalized  gaming.  Ms.                                                                   
Stancliff  discussed the  bill's provisions  relating to  the                                                                   
commission.    She  explained  that the  commission  may  not                                                                   
administer charitable  gaming or any other gaming  unless the                                                                   
activity  is   authorized  and   enacted  into  law   by  the                                                                   
legislature.                                                                                                                    
                                                                                                                                
Ms.  Stancliff  explained  the  changes  in  the  work  draft                                                                   
Version S from the Labor  & Commerce Committee Substitute.                                                                      
Version S  removes the  requirement that  two members  of the                                                                   
commission  are  involved  in   charitable  gaming  and  hold                                                                   
permits under AS 05.15.                                                                                                         
                                                                                                                                
The  Labor  &  Commerce  CS  changed  the  structure  of  the                                                                   
commission  by reducing  the  number from  4  to 3  of the  7                                                                   
members with the same political  affiliation, nonaffiliation,                                                                   
or party.   Version S removed "nonaffiliation"  [page 2, line                                                                   
12]. Version  S retains  the appointment  of one member  from                                                                   
each of  the four judicial districts.   One member  must have                                                                   
law  enforcement  experience  and  one must  be  a  certified                                                                   
public accountant in Version S.                                                                                                 
                                                                                                                                
Co-Chair  Harris asked  for clarification  of the  membership                                                                   
requirement.  Ms.  Stancliff  was  not  able  to  answer  how                                                                   
"experience  in  law  enforcement," was  interpreted  by  the                                                                   
drafter.                                                                                                                        
                                                                                                                                
In response to  a question by Co-Chair Harris,  Ms. Stancliff                                                                   
explained  the membership  could  include,  for example,  one                                                                   
member  who   is  nonpartisan,  undeclared,   Libertarian  or                                                                   
Republican Moderate.                                                                                                            
                                                                                                                                
Ms.  Stancliff  stated that  the  staggering  of terms  isn't                                                                   
defined in  the bill because it  is defined in  AS 39.05.055,                                                                   
Subsection 5.                                                                                                                   
                                                                                                                                
Ms. Stancliff continued discussing  changes in Version S.  On                                                                   
page 4,  lines 16-17,  the language  emphasizes that  any new                                                                   
gaming must be authorized by the legislature.                                                                                   
                                                                                                                                
Ms. Stancliff  noted a change  to the original bill  prior to                                                                   
its hearing in  House Labor & Commerce.  Language  on Page 7,                                                                   
line 4 was removed that stated  an officer or employee of the                                                                   
Office of the  Governor could not purchase a  gaming product,                                                                   
receive a gaming prize or participate in a gaming activity.                                                                     
                                                                                                                                
Ms. Stancliff referred to Amendment 1, which reads:                                                                             
                                                                                                                                
     Page 4, line 31:                                                                                                         
          Delete "and other employees of the commission are"                                                                    
          Insert "is"                                                                                                           
                                                                                                                                
     Page 8, line 25,through page 9, line 4:                                                                                    
          Delete all material and insert:                                                                                       
     "*Sec. 7. AS 39.25.110 is amended by adding a new                                                                        
     paragraph to read:                                                                                                         
                          (40) the executive director of the                                                                    
     Alaska Gaming Commission."                                                                                                 
                                                                                                                                
Ms. Stancliff explained that the  first change would move the                                                                   
charitable gaming administrative  employees in the Department                                                                   
of Revenue over  to the Commission.  The seven  positions are                                                                   
state  employees  without exempt  status.    The sponsor  was                                                                   
asked  to remove  the language  from statute  and retain  the                                                                   
status  of those  employees, making  only  the director's  an                                                                   
exempt  position.   She cited  a number  of commissions  with                                                                   
exempt employees.                                                                                                               
                                                                                                                                
Co-Chair Harris MOVED to ADOPT Amendment 1.                                                                                     
                                                                                                                                
Representative  Croft OBJECTED  for  purposes of  discussion,                                                                   
asking for clarification of the  first change on page 4, line                                                                   
31.  Ms.  Stancliff   explained  it's  a   technical  change.                                                                   
Representative Croft WITHDREW his OBJECTION.                                                                                    
                                                                                                                                
There being NO OBJECTION, Amendment 1 was adopted.                                                                              
                                                                                                                                
In  response  to  a question  by  Representative  Meyer,  Ms.                                                                   
Stancliff explained  that the correct fiscal  note version is                                                                   
a net  zero.  The  first fiscal  note was indeterminate,  but                                                                   
the fiscal  note dated 2/24/04  more accurately  reflects the                                                                   
costs.  The  commissioners are not paid but  their travel and                                                                   
per diem expenses are estimated,  as well as expenses related                                                                   
to the director, at $616 thousand under Personal Services.                                                                      
                                                                                                                                
Vice-Chair   Meyer  questioned   the   creation   of  a   new                                                                   
commission.  Ms. Stancliff explained  that charitable  gaming                                                                   
has grown  since 1996  when the  division was transferred  to                                                                   
the Department  of Revenue. This  legislation looks  ahead at                                                                   
needed regulation of expanded gaming activities.                                                                                
                                                                                                                                
Vice-Chair Meyer  asked about current gaming.   Ms. Stancliff                                                                   
noted  that 23  pieces  of legislation  affecting  charitable                                                                   
gaming have passed since the Eighteenth Legislature.                                                                            
                                                                                                                                
In response to a question by Vice-Chair  Meyer, Ms. Stancliff                                                                   
affirmed  that DOR  would move  to the  new commission,  with                                                                   
zero cost.                                                                                                                      
                                                                                                                                
Vice-Chair  Meyer  asked  the  pay  range  of  the  executive                                                                   
director. Ms.  Stancliff could  not answer specifically,  but                                                                   
indicated that  it would  be in line  with salaries  of other                                                                   
commission directors.                                                                                                           
                                                                                                                                
In  response to  a  question  by Representative  Stoltze  Ms.                                                                   
Stancliff  advised that  generating revenues  is not  a major                                                                   
responsibility  of  the  commission,  but  it  would  analyze                                                                   
gaming in other  states and make recommendations  relating to                                                                   
new revenue sources.                                                                                                            
                                                                                                                                
Representative  Stoltze asked  the parameters of  multi-state                                                                   
gaming on page 4, line 12 of the  bill.  Ms. Stancliff stated                                                                   
that multi-state  gaming  would only  occur if authorized  by                                                                   
the legislature.                                                                                                                
                                                                                                                                
Representative  Stoltze asked  if the  language under  Gaming                                                                   
Activities  on page 6  would authorize  on-line gaming.   Ms.                                                                   
Stancliff answered that it's one  of the sections the sponsor                                                                   
changed  because  the  Labor  &  Commerce  version  contained                                                                   
ambiguous  language. The  language, "in  the state,"  made it                                                                   
unclear if  gaming could be done  on-line.  The  new language                                                                   
addresses on-line gaming, which is not authorized.                                                                              
                                                                                                                                
In  response to  a question  by  Representative Stoltze,  Ms.                                                                   
Stancliff affirmed  that the new language on page  2, line 3,                                                                   
prohibits  persons  with  a liquor  license,  including  bar-                                                                   
owners, from participating in gaming.                                                                                           
                                                                                                                                
Co-Chair Harris  asked how many  other states  have legalized                                                                   
gaming  for profit.   Ms. Stancliff  responded 47,  excluding                                                                   
Utah, Hawaii, and Alaska.                                                                                                       
                                                                                                                                
Co-Chair Harris  asked if this  legislation is  modeled after                                                                   
that of  other states.  Ms. Stancliff  affirmed, the  bill is                                                                   
modeled after  Idaho and Colorado gaming statutes,  which are                                                                   
more in line  with Alaska's direction, and these  states have                                                                   
rectified their mistakes.                                                                                                       
                                                                                                                                
Co-Chair Harris asked  if the commission would  be allowed to                                                                   
impose  taxation levels  on gaming.    Ms. Stancliff  replied                                                                   
that the  legislature would have  to authorize  taxation, but                                                                   
the commission may recommend it.                                                                                                
                                                                                                                                
Co-Chair  Harris  questioned if  the  legislature  authorizes                                                                   
full   casino  gambling,   would   the   commission  or   the                                                                   
legislature recommend and set  taxation levels. Ms. Stancliff                                                                   
replied that  this bill would  give the commission  authority                                                                   
to do what is  needed to regulate gaming, but  taxation would                                                                   
be addressed separately.                                                                                                        
                                                                                                                                
Through  discussion,  Representative  Hawker noted  that  his                                                                   
question about  enforcement is answered  on page 3,  line 25,                                                                   
which states  that the  authority of  the commissioner  is to                                                                   
enforce the charitable gaming laws.                                                                                             
                                                                                                                                
Representative Fate asked if the  "Statement of Odds" on page                                                                   
7 is "boilerplate"  language taken from other  statutes.  Ms.                                                                   
Stancliff  affirmed.   She  pointed   out  that   nothing  is                                                                   
authorized under AS 05.18.350.                                                                                                  
                                                                                                                                
Co-Chair  Harris  asked  if the  fiscal  note  dated  2/23/04                                                                   
showing $548 thousand  from program receipts  is derived from                                                                   
operators of  charitable gaming. Ms. Stancliff  affirmed, and                                                                   
discussed  the   shift  from   the  Department  of   Revenue,                                                                   
commenting  that  $616  thousand  reflects  the  department's                                                                   
personal services.                                                                                                              
                                                                                                                                
GREG PETERSON, ALLIED CHARITIES, KETCHIKAN, VIA                                                                                 
TELECONFERENCE, expressed that the current laws are working                                                                     
fine and he feels that the intent of this bill is only to                                                                       
introduce video poker machines.                                                                                                 
                                                                                                                                
DAVE  LAMBERT,   VIA  TELECONFERENCE,  FAIRBANKS,   expressed                                                                   
concern over the change in commission  membership in the work                                                                   
draft, stating  that there should  be people in  the industry                                                                   
involved  in the  meetings  and decision-making  process.  He                                                                   
discussed multi-state gaming.                                                                                                   
                                                                                                                                
ED  MOEGLEIN,   ALASKA   NONPROFIT  CHARITABLE   ORGANIZATION                                                                   
(ANCO), VIA  TELECONFERENCE, SOLDOTNA, listed all  the groups                                                                   
that  his organization  represents,  and  indicated that  the                                                                   
ANCO would  like to  meet with  legislative committees  to be                                                                   
involved with current and future gaming legislation.                                                                            
                                                                                                                                
GARY  SUPERMAN,   CABARET  HOTEL  and  RESTAURANT   RETAILERS                                                                   
(CHARR), VIA  TELECONFERENCE, NIKISKI, expressed  support for                                                                   
the legislature's shift  to look at gaming in the  state.  He                                                                   
noted  that HB  240 did  not move  through  the process  last                                                                   
year.   He  said that  passage  of this  bill  would bring  a                                                                   
rational  scrutiny of  gaming, and would  identify a  revenue                                                                   
stream if gaming were expanded.                                                                                                 
                                                                                                                                
TAPE HFC 04 - 30, Side B                                                                                                      
                                                                                                                              
Mr.  Superman continued  his  testimony.   He  agreed with  a                                                                   
previous testifier  that people involved in  gaming should be                                                                   
a part of the commission.                                                                                                       
                                                                                                                                
In  response to  a question  by  Representative Stoltze,  Mr.                                                                   
Superman clarified that he hopes  the legislature is afforded                                                                   
a wider perspective on gaming.                                                                                                  
                                                                                                                                
DALE  FOX,  EXECUTIVE DIRECTOR,  CHARR,  VIA  TELECONFERENCE,                                                                   
spoke in  support of  creating a  commission in a  legitimate                                                                   
body  to establish  oversight  in  the  same way  that  other                                                                   
states have  addressed gaming.   He  expressed that  it seems                                                                   
logical  to make a  cohesive package  out of  the many  bills                                                                   
that address gaming.                                                                                                            
                                                                                                                                
DARWIN BIWER, CHARR, JUNEAU, expressed  that CHARR is totally                                                                   
in favor  of HB  509 that  would create  the commission.   He                                                                   
recommended looking first at consolidating  pull-tabs, bingo,                                                                   
and raffles,  and the $300  million in total  reported sales.                                                                   
He noted the  current ten bills on gaming.  The CHARR regards                                                                   
HB 509  as a housekeeping bill,  not a pro-gambling  bill. He                                                                   
concluded,  "run  it  like  a  business"  and  ensure  strict                                                                   
enforcement.                                                                                                                    
                                                                                                                                
In  response to  a  question  by Representative  Hawker,  Mr.                                                                   
Biwer stated that  CHARR feels the commission  should include                                                                   
members of the industry to deal with the practicalities.                                                                        
                                                                                                                                
REPRESENTATIVE  HARRY CRAWFORD asked  whether the  bill would                                                                   
fix the  gaming system or make  the shift to new  gaming. Mr.                                                                   
Biwar replied  that CHARR feels  that the gaming  industry is                                                                   
not well run. Representative Crawford  asked for instances of                                                                   
the state or charities not receiving  their share.  Mr. Biwar                                                                   
replied  that   there  is   no  accurate  reporting   without                                                                   
enforcement.                                                                                                                    
                                                                                                                                
Representative  Crawford  followed  up  by  asking  if  those                                                                   
organizations  in  violation  would be  issued  licenses  for                                                                   
electronic video  machines.  Mr.  Biwar pointed out  that the                                                                   
commission would make that decision.                                                                                            
                                                                                                                                
GEORGE  WRIGHT, VOLUNTEER,  ALASKA  NATIVE BROTHERHOOD  (ANB)                                                                   
LEGISLATIVE COMMITTEE, spoke in  favor of the commission.  He                                                                   
felt that  the fiscal note is  too low, but he  supported the                                                                   
idea of  the commission if  it has a balanced  representation                                                                   
and the legislature makes the decisions on new gaming.                                                                          
                                                                                                                                
SPEAKER KOTT  commented that  the bill  is irrelevant  to the                                                                   
expansion of  gaming activities.   He addressed the  issue of                                                                   
taxation. The Commission would  make recommendations if there                                                                   
were options  available throughout the State.  Currently, the                                                                   
Governor has  legislation regarding  the pull-tabs.  Both the                                                                   
voluntary unpaid members on the  commission and the provision                                                                   
of  the quarterly  reports  would  benefit  the state.    The                                                                   
accounting of annual  revenues currently does not  exist.  He                                                                   
added  that currently  there  are not  many  problems in  the                                                                   
pull-tab  and   bingo  industries.   The  legislation   is  a                                                                   
framework to oversee the industry  and to control current and                                                                   
potential  activities.     The  number  of   members  on  the                                                                   
commission  should   be  left   to  the  discretion   of  the                                                                   
committee. Other states do not have industry members.                                                                           
                                                                                                                                
Co-Chair Harris  thought it would be  a good idea to  have at                                                                   
least one or two members with  industry experience, and asked                                                                   
if  the Speaker  had  a personal  position  on that  concern.                                                                   
Speaker Kott  deferred that  consideration to the  committee.                                                                   
He agreed that  there should be some  industry representation                                                                   
but he  questioned how the determination  would be made.   He                                                                   
did not want to see industry dominate the membership.                                                                           
                                                                                                                                
Co-Chair  Williams  noted  that  HB  509  would  be  HELD  in                                                                   
committee for further consideration.                                                                                            
                                                                                                                                
HOUSE BILL NO. 503                                                                                                            
                                                                                                                                
     An Act relating to the tobacco product Master                                                                              
     Settlement Agreement; and providing for an effective                                                                       
     date.                                                                                                                      
                                                                                                                                
CO-CHAIR  HARRIS, SPONSOR,  briefly introduced  HB 503.   The                                                                   
bill  addresses the  Master Settlement  Agreement (MSA)  with                                                                   
the tobacco industry and would  close a current loophole with                                                                   
the non-participating  tobacco manufacturers and  place money                                                                   
into an escrow account held by the state.                                                                                       
                                                                                                                                
TOM WRIGHT,  STAFF TO  REPRESENTATIVE JOHN HARRIS,  explained                                                                   
that   the  legislation   was  suggested   by  the   National                                                                   
Association of Attorneys General.  The statutory change would                                                                   
ensure  that the  non-participating  manufacturers (NPMs)  in                                                                   
the  MSA  place   in  escrow  approximately   1.5  cents  per                                                                   
cigarette sold in the state, rather  than an allocable share.                                                                   
Alaska's allocable share nationwide  is .34%.  Currently, the                                                                   
NPMs are able to  take out of escrow any amount  that exceeds                                                                   
its  allocable  share,   which  in  some  states   may  be  a                                                                   
significant  amount.   Mr.  Wright  commented  that the  bill                                                                   
sections are confusing.   He explained that Section  1 is the                                                                   
"heart"  of the bill,  and Section  2 and  Section 3  contain                                                                   
conditional language  in the event  that either Section  1 or                                                                   
Section 2 is found to be unconstitutional.                                                                                      
                                                                                                                                
Co-Chair  Harris  asked  for an  explanation  of  the  Master                                                                   
Settlement Agreement and the loophole.                                                                                          
                                                                                                                                
MIKE BARNHILL,  ASSISTANT  ATTORNEY GENERAL,  COMMERCIAL/FAIR                                                                   
BUSINESS SECTION,  DEPARTMENT OF LAW, provided  background on                                                                   
the Master  Settlement Agreement (MSA).  In 1997 most  of the                                                                   
states sued the four principal  tobacco manufacturers and the                                                                   
litigation was  settled in  1998 under the  MSA.    Under the                                                                   
agreement, all manufacturers  that have signed onto  it pay a                                                                   
certain  amount of  money  on every  cigarette  sold and  the                                                                   
money is  distributed on  an annual basis  to all  the states                                                                   
that participated  in the MSA.   It has generated  about $100                                                                   
million in revenue for the state of Alaska.                                                                                     
                                                                                                                                
Mr.  Barnhill  explained  that some  manufacturers  were  not                                                                   
going to  participate in the  MSA, which created  an "unlevel                                                                   
playing field".   The participating  members raise  the price                                                                   
of their cigarettes by the amount  they estimate they'll need                                                                   
to  contribute   to  the   MSA  revenues,   while  the   non-                                                                   
participating  members   don't  raise  their  price.     This                                                                   
undermines the MSA because the  non-participating members can                                                                   
capture market share by undercutting.   The MSA proposed that                                                                   
all  participating states  would enact  legislation to  level                                                                   
the economic playing field and  require all non-participating                                                                   
manufacturers to  deposit money into an escrow  account.  The                                                                   
money is calculated on an annual  basis, at about 2 cents per                                                                   
cigarette this year.  The amount  is designed to reflect what                                                                   
the non-participating  members  would have  paid in  the MSA.                                                                   
All the manufacturers in the participating  states either pay                                                                   
into  an  escrow  account  or   the  MSA  revenues  that  are                                                                   
approximately the same amount of money per cigarette.                                                                           
                                                                                                                                
Mr. Barnhill  explained the circumstances  in which  the non-                                                                   
participating manufacturers (NPMs)  can request that money be                                                                   
released from escrow:                                                                                                           
                                                                                                                                
*  If  the state sues the  NPM, recovers a judgment  and that                                                                   
manufacturer  is judgment-proof,  the  money  can be  claimed                                                                   
from the escrow account; or                                                                                                     
*   If more is  paid into a state's  escrow account  than the                                                                   
NPM would  have paid  as a  participating manufacturer  under                                                                   
the MSA; or                                                                                                                     
*  If  the money has been  sitting in the escrow  account for                                                                   
twenty-five years.                                                                                                              
                                                                                                                                
Mr.  Barnhill  noted the  spreadsheet  in the  packets,  "NPM                                                                   
Escrow    Release   Calculations    for   hypothetical    non                                                                   
participating  manufacturer  Cheap  Smokes,  Inc."  (copy  on                                                                   
file.)   The spreadsheet  indicates that  under current  law,                                                                   
the  market advantage  has shifted  to the  non-participating                                                                   
manufacturer who pays less than  a penny per cigarette.  This                                                                   
is the loophole that HB 503 is trying to solve.                                                                                 
                                                                                                                                
Representative  Croft  thought  that the  amount  would  keep                                                                   
sliding.  There would be more  sales by NPMs and a big Alaska                                                                   
market  share that  would grow.    Mr. Barnhill  acknowledged                                                                   
that was  correct.  He stated  that the good news  for Alaska                                                                   
is that the State  ranks last in the country in  terms of the                                                                   
size of the NPM market.  Alaskans smoke brand cigarettes.                                                                       
Mr.   Barnhill   noted   that   specialty   non-participating                                                                   
manufacturers  cater to  price  because a  percentage of  the                                                                   
market buys the lowest cost cigarettes that are available.                                                                      
                                                                                                                                
In  response  to  a question  by  Representative  Croft,  Mr.                                                                   
Barnhill advised that taxing has  no constitutional problems.                                                                   
There have been  proposals for a tax credit  scheme; however,                                                                   
the department  tends to follow  the National  Association of                                                                   
Attorneys  General  on  these   proposals,  and  strives  for                                                                   
uniformity with other states.                                                                                                   
                                                                                                                                
Representative  Croft  thought  that  the  simplest  solution                                                                   
would involve raising  the price to ten cents  per cigarette,                                                                   
giving everyone a credit for MSA  participation, and leveling                                                                   
the price.   Mr. Barnhill  acknowledged that there  have been                                                                   
similar  proposals  and  stated  that  he did  not  know  the                                                                   
specific problems.                                                                                                              
                                                                                                                                
Representative  Croft   noted  that  he  was   attempting  to                                                                   
understand the details of the bill.                                                                                             
                                                                                                                                
In response  to a  comment by  Co-Chair Harris, Mr.  Barnhill                                                                   
stated that there is no direct  financial impact to the state                                                                   
as  a  result  of the  legislation.    However,  an  indirect                                                                   
financial  impact resulted  from  implementation  of the  MSA                                                                   
that  raised cigarette  prices  and provided  the NPM  market                                                                   
advantage.  He added that it will  have an indirect effect on                                                                   
the state  revenues when the  market share of  NPMs increases                                                                   
on an aggregate basis.                                                                                                          
                                                                                                                                
In response  to a question  by Co-Chair Harris,  Mr. Barnhill                                                                   
affirmed that the NPMs and the  MSA participants pay the same                                                                   
tax to the state of Alaska.                                                                                                     
                                                                                                                                
Co-Chair  Harris  asked about  taxing  the  non-participating                                                                   
members more than the participants.   Mr. Barnhill thought it                                                                   
might cause equal protection problems.   He offered to follow                                                                   
up regarding the query.                                                                                                         
                                                                                                                                
Representative Croft noted his support for the bill.                                                                            
                                                                                                                                
Representative Croft  referred to Mr. Barnhill's  spreadsheet                                                                   
and the hypothetical  escrow of $20 thousand,  asking how the                                                                   
state  could continue  to  escrow that  amount  when the  MSA                                                                   
would  bring about  $6800. Mr.  Barnhill  explained that  the                                                                   
amount is  placed into escrow  for 25 years unless  a lawsuit                                                                   
or judgment is  filed, or the manufacturer is  eligible for a                                                                   
release. There  are a  variety of  adjustments under  the MSA                                                                   
that can be implemented against  a state. Alaska is obligated                                                                   
to  diligently enforce  state law  relating to  NPMs and  the                                                                   
department has  filed several lawsuits to  force noncompliant                                                                   
NPMs to deposit money into escrow.                                                                                              
                                                                                                                                
Mr.  Barnhill  commented  that   there  is  not  an  economic                                                                   
incentive  for the  State of Alaska  to file  suit against  a                                                                   
NPM.  The total  escrow account  is less  than $100  thousand                                                                   
dollars spread between  30 manufacturers.  The  NPM market is                                                                   
small  so the  corresponding  escrow deposit  requirement  is                                                                   
small. The state  has only sued the big manufacturers  as the                                                                   
principal cause of alleged harm.                                                                                                
                                                                                                                                
Representative Croft questioned  the legality of holding  $20                                                                   
thousand in  escrow when the NPM  only owes the  state $6800.                                                                   
Mr. Barnhill advised that the  state does not keep the money;                                                                   
rather, the  NPM opens  an escrow account  in their  own name                                                                   
and makes  deposits. Commonly  an NPM  with nationwide  sales                                                                   
deposits money  into segregated sub-accounts for  each of the                                                                   
states.  Alaska is a potential beneficiary of that money.                                                                       
                                                                                                                                
In  response  to  a question  by  Representative  Croft,  Mr.                                                                   
Barnhill  explained  the  three options  of  the  contingency                                                                   
language:                                                                                                                       
                                                                                                                                
*    Section 1  would require the  NPM to pay the  MSA amount                                                                   
into escrow  with no  release, putting it  on equal  par with                                                                   
the participating  member.   In Mr.  Barnhill's opinion,  the                                                                   
legal  drafters have  been  very cautious  in  the event  the                                                                   
states  are   sued  and  that   provision  is  found   to  be                                                                   
unconstitutional.                                                                                                               
                                                                                                                                
*    Section  two  eliminates  any  ability of  the  NPMs  to                                                                   
request a  release from  escrow.  The  escrow amount  is only                                                                   
released  after 25  years or to  pay the  state's lawsuit  or                                                                   
judgment.                                                                                                                       
                                                                                                                                
*    Section three reverts back  to current law if Sections 1                                                                   
and  2  are  found to  be  unconstitutional.    Mr.  Barnhill                                                                   
reiterated that it is cautious drafting.                                                                                        
                                                                                                                                
Mr. Barnhill explained  for Representative Croft  how the NPM                                                                   
sliding  scale has  the ultimate  effect  of undermining  the                                                                   
MSA.                                                                                                                            
                                                                                                                                
Representative  Hawker asked  if this  legislation ties  into                                                                   
the MSA  issues of  last session.  Mr. Barnhill replied  that                                                                   
complementary   legislation    was   designed   to   heighten                                                                   
enforcement  of  Alaska's  NPM  statute.    To  prevent  non-                                                                   
compliance,  a  law  was  passed  requiring  all  sellers  of                                                                   
cigarettes in  the state to  register with the  Department of                                                                   
Revenue.                                                                                                                        
                                                                                                                                
Co-Chair Harris  asked if the  tobacco tax could be  added to                                                                   
this bill.  Mr.  Wright advised that the title  would need to                                                                   
be expanded.                                                                                                                    
                                                                                                                                
Representative  Foster   MOVED  to  report  HB   503  out  of                                                                   
Committee with  individual recommendations and  a zero fiscal                                                                   
note. There being NO OBJECTION, it was so ordered.                                                                              
                                                                                                                                
HOUSE BILL NO. 375                                                                                                            
                                                                                                                                
          An Act making appropriations  for the operating and                                                                   
          loan  program  expenses  of state  government,  for                                                                   
          certain programs,  and to capitalize  funds; making                                                                   
          appropriations   under   art.   IX,   sec.   17(c),                                                                   
          Constitution of the  State of Alaska; and providing                                                                   
          for an effective date."                                                                                               
                                                                                                                                
Representative  Foster  MOVED   to  ADOPT  HB  375  with  the                                                                   
accompanying subcommittee reports.  There being NO OBJECTION,                                                                   
it was so ordered.                                                                                                              
                                                                                                                                
HOUSE BILL NO. 377                                                                                                            
                                                                                                                                
          An Act making appropriations  for the operating and                                                                   
          capital   expenses   of  the   state's   integrated                                                                   
          comprehensive mental  health program; and providing                                                                   
          for an effective date.                                                                                                
                                                                                                                                
Representative  Foster  MOVED   to  ADOPT  HB  377  with  the                                                                   
accompanying subcommittee reports.  There being no objection,                                                                   
it was so ordered.                                                                                                              
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The meeting was adjourned at 3:22 P.M.                                                                                          
                                                                                                                                

Document Name Date/Time Subjects