Legislature(1999 - 2000)

03/31/1999 06:00 PM FIN

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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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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