Legislature(1999 - 2000)
03/31/1999 06:00 PM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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.