HOUSE FINANCE COMMITTEE March 23, 1999 1:40 P.M. TAPE HFC 99 - 52, Side 1. TAPE HFC 99 - 52, Side 2. CALL TO ORDER Co-Chair Therriault called the House Finance Committee meeting to order at 1:40 P.M. PRESENT Co-Chair Therriault Representative Foster Co-Chair Mulder Representative Grussendorf Vice Chair Bunde Representative Kohring Representative Austerman Representative G. Davis Representative J. Davies Representative Williams Representative Moses was not present for the meeting. ALSO PRESENT Douglas Gardner, Assistant Attorney General, Oil, Gas & Mining Section, Department of Law; Eddie Grasser, Staff, Representative Beverly Masek; Matthew Robus, Acting Deputy Director, Wildlife Conservation Division, Department of Fish and Game; Dave Kelleyhouse, Alaska Outdoor Council, Fairbanks. SUMMARY HB 102 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. HB 102 was HELD in Committee for further consideration. HB 114 An Act repealing the prohibition against the taking of antlerless moose. HB 114 was reported out of Committee with a "do pass" recommendation and with a fiscal note by the Department of Fish and Game dated 3/16/99. HOUSE BILL NO. 102 "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." DOUGLAS GARDNER, ASSISTANT ATTORNEY GENERAL, OIL, GAS & MINING SECTION, DEPARTMENT OF LAW, stated that during the past two years, the Knowles Administration with the help of the Alaska Legislature has addressed the problems caused by tobacco and the challenge of limiting access on a number of fronts. Joint efforts have included legislation to increase taxes on tobacco products, measures to limit youth access to tobacco, stepped-up enforcement activities, and litigation and participation in the national settlement with the industry. The Department of Law's efforts have been closely coordinated with the Department of Health and Social Services and Department of Revenue, local tobacco control groups and other state attorneys general. Mr. Gardner pointed out that the bill was contemplated by passage of the Master Settlement Agreement. Every state and territory legislature is considering the same legislation. The State is not required to pass the model statute included in the settlement to receive settlement payments. However, if the State does not pass the model statute, the State will risk a possible reduction in payments under the nonparticipating manufacturers' payment (NPM) reduction formula of the settlement. The settlement provides for an adjustment to the State's payments if the participating manufacturers experience a disadvantage and lose market share for sales of their tobacco products to other nonparticipating manufacturers as a result of the marketing restrictions, payments, and other limits in the settlement agreement. Mr. Gardner continued, every state is considering basically the same bill, however, stylistic changes have been made to it with the inclusion of the Department of Revenue. The bill has resulted from a lot of negotiations. With passage of the bill, the industry will not come back to the State if there is a decrease to the participating manufacturer's market share as a result of passage of the settlement agreement. Any changes to the bill could change the industry's position whether or not it continues to be a qualifying statute. Mr. Gardner continued, under the terms of the settlement agreement, the objective is to prevent small tobacco manufacturers from taking unfair advantage given that major companies have signed an agreement. That action would "level the playing field" and prevent the dumping of cheap cigarettes. Representative Grussendorf referenced Page 3, Line 11, "..and generally perform its financial obligations under the Master Settlement Agreement". He asked the legal authority of using the word "generally". Mr. Gardner advised that language was taken from the model. He did not believe that industry intended to somehow loosen up their obligation by using that language. He emphasized that the Department of Law had changed this area. Those changes were made primarily to the enforcement section, tailoring it to the Department of Revenue and the Department of Law concerns. Representative Bunde asked where the escrow money would be placed. Mr. Gardner explained that the money would be placed into a qualifying escrow account. The money would be in escrow, not necessarily for the State to use. It would act as an insurance policy. The fund would continue to grow so that when an Alaska citizen had a claim, they would be able to satisfy the judgement. The escrow account would prevent the small manufacturer from being "judgement proof" in the event that they had a lawsuit. The funds would remain in that account for 25 years. Representative Bunde stated that if there is a pool of money, people will sue to get at it. He suggested that establishing such an account would create a "carrot" for additional lawsuits. Co-Chair Therriault asked if the State enters into a lawsuit against one of the small, non-participating manufacturers could those settlement costs and the legal court fees come from that account. Mr. Gardner replied that whatever the State receives would be a judgement and it could be satisfied out of that account. It is possible that the State could go against the fund to receive the recovery, whereas, if the fund were non-existent, the State would be out-of-luck if there wasn't "something" existent to satisfy such a claim. Co-Chair Therriault pointed out that large manufacturers build possible settlement costs into their price structure. Mr. Gardner reiterated that the legislation would "level the playing field" and that the "dumping" of cigarettes would not be industry driven. Co-Chair Therriault asked if the "Findings and Purpose" Section of the bill was necessary. Mr. Gardner explained that section of the bill could be important to the extent that it would be subject to a constitutional challenge or other litigation by another participating manufacturer in the future, who somehow felt that this was unfair or unnecessary on commerce. That Section magnifies the public health problem in using tobacco and it keeps the statute consistent with the other bills throughout the nation. Representative J. Davies questioned what a "releasing party" was. Mr. Gardner responded that Alaska is one of the releasing parties as would be each settling state. Representative J. Davies asked if a municipality could sue to gain recovery from the escrow account. Mr. Gardner replied that they could and that anyone could access that account, i.e., the State, a municipality, or an individual. It would be necessary for them to have a judgment and settlement to make that claim. Co-Chair Therriault asked what the reference to "financial obligations", on Page 3, Line 11, would be. Mr. Gardner explained that those obligations are the ones, which the participating manufacturer would be required to undertake as specified in the Settlement Agreement. There is a sixty-day (60) wait period for a person to become a manufacturer; there has been discussion of extending that wait period. At this time, approximately 99.8% of the market shares are not either participating or subsequent participating manufacturers. Most companies are involved in the deal. Representative G. Davis noted that the proposed legislation would provide a means for the State to "catch" those manufacturers who did not sign the master agreement. Representative Bunde questioned how that law would be enforced. Mr. Gardner advised that the Department of Revenue currently tracks all tobacco volume coming into the State. They have a long-standing practice of doing this accounting. The importer is responsible for paying State taxes. He elaborated that the tobacco industry is a very "cut-throat" business and self-policing industry, and consequently, if there is any deviation the Department hears about it quickly. Co-Chair Mulder referenced Page 3, regarding the amounts placed into the escrow account. He asked if that amount was determined per pack or per cigarette. Mr. Gardner replied that it had been distilled down per unit, per cigarette. Mr. Gardner did not know the formula used to determine that figure. Co-Chair Therriault referenced Page 4: "The Commissioner of Department of Revenue shall adopt regulations to ascertain the amount of excise tax on cigarettes". Mr. Gardner explained that the purpose of that section was to guarantee that to the extent that the Department of Revenue could, under existing statute or regulation, they would be given the regulatory authority to adopt regulations. The escrow account will be based on taxable sales of tobacco into the State. Representative J. Davies asked if the deposit of money into the escrow account would limit the liability of these companies. Mr. Gardner acknowledged that was an interesting perspective and that the industry might try to make that argument, however, he thought such an argument would be a "loser". There is no intention to limit liability but rather to provide for some sort of compensation. Representative J. Davies questioned the earnings of the escrow account. Mr. Gardner advised that no money could be released from the escrow account for a period of twenty-five (25) years. It is intended that it become an income- producing stream for companies. Co-Chair Mulder calculated that the State would need to sell 130 million packs of cigarettes in order to arrive at the $20 million dollar amount for the escrow account. Mr. Gardner suggested that Department of Revenue would be better able to generate information regarding those calculations. Representative Grussendorf asked if payment on an agreement would be tax deductible. Mr. Gardner did not know, however, thought that there would be a difference between a settlement and an agreement. Representative Foster referenced the letter from the Governor in member's packets. He asked if the items recommended by the Governor would be the best use for the funds. Mr. Gardner reiterated that the proposed statute would create an escrow account. The purpose of the statute would not be revenue generating for the State but rather to provide a claim to potentially satisfy a judgment or settlement against a company. Discussion followed between Representative Foster and Mr. Gardner regarding the Governor's letter and its relationship to the legislation. Co-Chair Therriault referenced Page 4 & 5, "Certificate of Compliance" requirement. He asked if that action would consist of a written letter. Mr. Gardner agreed that the "letter" was not well defined, leaving that statute open, in order that the Commissioner of Department of Revenue, through regulation, could recommend considerations. Mr. Gardner suggested that the letter would need to address taxable volume coming into the State. (Tape Change HFC 99 - 52, Side 2). Representative J. Davies asked the intent of the model issue. Mr. Gardner explained that within a provision under state law, advertising would be restricted from those companies and would be considered unconstitutional. There is a limit as to what the State can legislate. Co-Chair Therriault asked without a settlement, could the State require tobacco companies to set up an escrow system like this. Mr. Gardner believed that it was possible that the State could have done that, however, it would be difficult because the litigation brought out all the problems with tobacco and health related issues. If there had been no litigation, it would have been difficult for the Legislature to make a "finding" to create such escrow accounts for protecting the public. Co-Chair Therriault stressed that there has been no court finding, only a settlement. Mr. Gardner agreed that it was during a settlement, however, that the litigation process unearthed the documents which illustrate all the problems and health effects. Ultimately, those documents have painted the picture of serious health problems. Without the litigation and settlement, it would have been difficult for the Legislature to have done this. Representative Bunde characterized the model legislation as a "take it or leave it" piece. Mr. Gardner pointed out that every word and punctuation mark in the bill was determined through extensive negotiation with the industry. He reiterated, it took 1.5 months of hard bargaining to create the bill before the Committee. Three (3) of the 46 jurisdictions have adopted the model legislation. Co-Chair Therriault asked if the State does not participate in the program, would payments be reduced by 60%. Mr. Gardner explained that if the model statute is passed, the way that it is, the State of Alaska would not be subject to any non-participating manufacturer adjustments, however, if Alaska determined that the statute was unconstitutional, that would not be the result. In that event, the State would be subject to a 65% reduction. Co-Chair Therriault asked if it were not passed, would the State be subject to 100% lose. Mr. Gardner replied that it could be zeroed out. Co-Chair Therriault asked if there had been any unanswered questions from the meeting in the House Judiciary Committee. Mr. Gardner replied that the Attorney General Botelho had testified before that Committee. He did not know if all questions had been answered. Representative Grussendorf requested that if amendments were being offered, on Page 3, Line 11, the word "generally" be deleted. Co-Chair Therriault additionally request further clarification of "financial obligation". Representative Bunde asked why the bill would sunset in 25 years. HB 102 was HELD in Committee for further consideration. HOUSE BILL NO. 114 "An Act repealing the prohibition against the taking of antlerless moose." EDDIE GRASSER, STAFF, REPRESENTATIVE BEVERLY MASEK, advised that HB 114 would remove the statutory stipulations requiring advisory committees to approve anterless hunts before the Board of Game can implement them. He stated that it would effectively reduce the time involved in implementing anterless hunts, as well as save money. Mr. Grasser continued, since 1975, the Board of Game has been required to obtain the approval of a majority of the local advisory committees in proximity to the game management unit for which the hunt is proposed. The requirement has caused the Department of Fish and Game and the Board, time and expense to pursue antlerless moose hunts. Originally, the provision was instigated on behalf of Alaskans who felt that cow moose hunts were wrong for a variety of reasons regardless of the biological evidence. Since then, the Department has managed to educate most Alaskans about the benefits of anterless hunts in relation to overall population dynamics and quality of habitat. Mr. Grasser stated that HB 114 would benefit the State and the Board of Game by streamlining the regulatory process providing a cost savings to the State in time and money. The Board costs about $10 thousand dollars a day in order to be in session. Co-Chair Therriault questioned if the Department of Fish and Game's fiscal note adequately reflected the anticipated savings. Mr. Grasser ascertained that the Department hastily had calculated the fiscal note, however, he believed that there would not be huge savings. In response to Co- Chair Therriault, Mr. Grasser informed members that an antlerless moose is a cow moose. Representative Grussendorf voiced concern with the Department not being able to call emergency closures to regulate the stocks. Representative Bunde spoke in support of the legislation. He went on to say that scientific research has proven that anterless harvest can be beneficial. Representative Austerman asked if the reason for the legislation was that the advisory board was no longer needed. Mr. Grasser explained that historical record has proven that they are no longer required. He pointed out that anterless moose hunts are the only regulated hunt in the State, which require this special step to take place before the hunt can begin. He added that in Alaska, it is legal to hunt cow caribou, nanny goats and sows without cubs. MATTHEW ROBUS, ACTING DEPUTY DIRECTOR, WILDLIFE CONSERVATION DIVISION, DEPARTMENT OF FISH AND GAME, stated that the Department supports HB 114 which would repeal the requirement to annually reauthorize each moose hunt in the State. Current law causes an unnecessary burden and some extra costs to the Department staff. The present Board of Game cycle addresses four regions of the State once every two years. The Department is forced every spring to address every anterless moose season in the State. Each spring, area biologists and advisory committees are required to go through this process. Mr. Robus commented that the fiscal note was based on the increased costs from the annual reauthorization exercise at the Board of Game level. There have been increased costs for area biologists to travel to advisory boards. Those costs are not well reflected in the note, and he admitted that there could be additional savings. Mr. Robus urged passage of the legislation to achieve better wildlife management while saving money. Co-Chair Therriault asked if the "other" travel by the biologists would be listed in the Fish and Game fund or the general fund travel expenditure. Mr. Robus replied it would be listed in the fish and game funds and the federal program receipt funds. Representative Grussendorf commented that if the advisory boards were no longer used, the Department would be called upon more often to address questions and give advice to the Board of Game. He suggested that would result in not much savings. Mr. Robus replied that the Department meets with the advisory committees quite regularly and offered assurance that if there was a problem, it would continue to be addressed. Area biologists have emergency authority delegated to address any harvest season. Mr. Robus continued, there has been much effort put into working situations out with advisory committees. He recommended that it is always better to address concerns at a local level. Advisory committees will continue to be involved in the management process. Mr. Robus added that the federal subsistence process and the dual management system have substantially modified the State's jurisdiction for wildlife. Representative Bunde advised that the legislation does not preclude advisory board participation; it simply removes their statutory veto power. He added that advisory boards will participate on many subjects and would continue to be involved on important concerns. DAVID KELLYHOUSE, ALASKA OUTDOOR COUNCIL, FAIRBANKS, acknowledged that the test of any good government is its willingness to take unnecessary and expensive regulations off statute when the opportunity arises to save money. He urged the Committee's support of the legislation. Representative Foster MOVED to report HB 114 out of Committee with individual recommendations and with the fiscal note. There being NO OBJECTION, it was so ordered. HB 114 was reported out of Committee with a "do pass" recommendation and with a fiscal note by the Department of Fish and Game dated 3/16/99. ADJOURNMENT The meeting adjourned at 3:00 P.M. H.F.C. 9 3/23/99