Legislature(1999 - 2000)
03/31/1999 06:00 PM Senate FIN
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE BILL NO. 84
"An Act imposing certain requirements relating to
cigarette sales in this state by tobacco product
manufacturers, including requirements for escrow,
payment, and reporting of money from cigarette sales
in this state; providing penalties for noncompliance
with those requirements; and providing for an
effective date."
DOUG GARDNER, Assistant Attorney General, Oil, Gas and
Mining Section, Civil Division, Department of Law, gave an
overview of the bill.
Co-Chair John Torgerson asked him to begin by explaining
why this bill was offered. Doug Gardner explained that on
November 30, 1998, the State Of Alaska along with 46 other
states and the District of Columbia and five other
jurisdictions settled tobacco litigation in a master
settlement agreement with the tobacco industry.
The master settlement agreement contained a "non-
participating manufacturer adjustment." That was an
equation in the agreement that provided that if the
industry as a result of entering into this agreement with
the state, experienced a loss of market share, the industry
was entitled to offset its payments to the state by the
amount of the non-participating manufacture percentage. A
non-participating manufacturer was one that did not sign
the agreement. The bill was envisioned to provide that any
small company that did not sign the agreement should not be
entitled to gain a cost advantage over those competitive
companies that signed the agreement. For example, a small
renegade manufacturer might decide to sell cheaper
cigarettes since they did not have the burdens of the
agreement and flood the market and cause the same public
health problems.
This bill would provide for payment of money by non-
participating manufacturer into an escrow fund so that the
playing field would remain level between the main
manufacturers and the non-participating manufacturers.
In essence this bill gave the companies two options either
to sign the agreement or not sign the agreement and pay
into an escrow the amount they would have paid had they
participated.
He detailed why this was important to the State of Alaska.
He referred to a handout before the members that showed a
hypothetical scenario that envisioned the problems that
could occur if the bill did not pass. It would expose the
state to a non-participating manufacturer adjustment. If
the bill passed, the state would not have to share in any
downside risks if the industry's market share dropped and
they reduced payments to the state. It was a way of
protecting the state's payments and to provide a mechanism
for the citizens to have a fund to recover against.
Co-Chair John Torgerson asked for an example of a
nonparticipating manufacturer. Doug Gardner said that was
not easy to do. As of this date, 99.8 percent of the
tobacco market share was either an original participating
manufacturer, or was one of the smaller companies that
became a subsequent participant. There were very few
companies that had not taken the deal offered in the
settlement. The fear was that in the future, a smaller
manufacturer or newly created company could take advantage
of the situation. Co-Chair John Torgerson clarified that
none could be identified. Doug Gardner said he could
research the matter.
Co-Chair John Torgerson said he thought it looked like the
tobacco companies locked in their sales numbers. This bill
addressed the possibility of another company taking a share
and impacting the participants.
Senator Dave Donley said this was the kind of bill that he
would like to see the recommendations from the previous
committees. He would like to have this provided for all
previous bills.
Co-Chair John Torgerson said it would be considered but
that it may cause an additional burden.
Co-Chair John Torgerson wondered if another option would be
to impose a separate tax on those that did not sign the
agreement. Doug Gardner wagered to say there would be a
high likely hood there would be difficulties in taxing
interstate commerce at different rates. This would not
comply with the state constitution and perhaps the federal
constitution as well.
Co-Chair John Torgerson asked if this was required in order
to collect the settlement monies. Doug Gardner affirmed.
However, if the bill did not pass there was exposure to
adjustments of reduced market-share.
Co-Chair John Torgerson asked what was the outward timeline
if the bill was not passed this year. Doug Gardner replied
that the Legislature could do that but that by the time the
problem was identified, the bill would not be in place for
the year prior that the industry requested a reduction. The
state would then be out the funds for that year.
Co-Chair John Torgerson asked if some of the larger tobacco
companies announced that they sold off their to another
company, how do we know that they won't form some funny
company that was not part of the agreement. Doug Gardner
said there were protections in the Master Settlement
Agreement.
Co-Chair John Torgerson asked about RJR/Nabisco's
announcement of a sell-off. Doug Gardner said it was
complicated and he would research the matter. Co-Chair
John Torgerson requested him to do that. Doug Gardner
understood that the exposure was not great, but if we
allowed them to do that then if the tobacco companies were
allowed to sell without the underlying agreement this would
become an important piece of legislation.
Senator Loren Leman had questions on page 4 regarding
identifying the qualifying financial institutions for the
escrow funds. How many institutions in Alaska met that
requirement? Doug Gardner said the intention of that
language was to prevent a company from managing the escrow
account itself. He didn't think there was a company in
Alaska that had the assets to manage the escrow account.
Senator Loren Leman wondered why it was necessary to have
that great of market capitalization for the portion that
Alaska was concerned about. Doug Gardner responded that the
escrow account would hold funds for all the participating
parties that could collect from the settlement agreement.
Senator Loren Leman noted the language "revert back" on
line 13 was probably a technical amendment. He suggested
deletion of the word "back".
Senator Lyda Green asked if every tobacco manufacturer in
the nation was named and involved in the original suit.
Doug Gardner replied that the suit primarily named the
larger companies. There could have been smaller companies
that might be unable to pay the judgements.
Senator Lyda Green assumed at that time the department did
not anticipate non-participating manufacturers be an issue.
Doug Gardner said that was possible.
Senator Lyda Green asked if every plaintiff named agreed to
the settlement. Doug Gardner answered yes. Senator Lyda
Green wanted to know if this applied to those in business
now or could be in the future. Doug Gardner said this was
market share today in America and there could be an
infinite number in the future. Without this legislation,
there could be an incentive to do business in that way.
Senator Loren Leman returned to the escrow fund matter. It
appeared that the manufacturer had to identify what was
sold in the state. Was there any reason listed in the
Master Agreement why it could not be required that the fund
be held in Alaska? Doug Gardner said there wasn't anything
in the agreement. However, the model agreement was
tailored to Alaska to fit within the statutory scheme and
was hard-fought with the opponents. They had indicated to
him that if they made changes they would take the position
that the statute was not qualifying and challenge. In
principle, he did not see a problem but warned that the
industry could challenge.
Co-Chair John Torgerson asked if the settlement funds were
handled by an independent source. Doug Gardner explained
the system. He stated there was an independent auditor and
that was where the challenge would be heard.
The bill was held in committee.
Doug Gardner clarified the information requested by Co-
Chair John Torgerson.
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