MINUTES SENATE FINANCE COMMITTEE March 31, 1999 6:00 PM TAPES SFC-99 # 76, Side A and Side B CALL TO ORDER Co-Chair John Torgerson convened the meeting at approximately 6:00 PM. PRESENT Senator John Torgerson, Senator Sean Parnell, Senator Loren Leman, Senator Pete Kelly and Senator Lyda Green. Also Attending: SENATOR RICK HALFORD; JACK KREINHEDER, Senior Policy Analysis, Office of Management and Budget; JANICE ADAIR, Director, Division of Environmental Health, Department of Environmental Conservation; DEBORAH BEHR, Assistant Attorney General, Legislation and Regulations Section, Civil Division, Department of Law; DOUG GARDNER, Assistant Attorney General, Oil, Gas and Mining Section, Civil Division, Department of Law; CAROL CARROLL, Director, Division of Support Services, Department of Military and Veterans Affairs and Department of Natural Resources; JOHN BITTNEY, Legislative Liaison, Alaska Housing Finance Corporation, Department of Revenue; GEORGE UTERMOHLE, Legal Council, Division of Legal Services, Legislative Affairs Agency; JAMES CRAWFORD, Assistant Reviser, Division of Legal Services, Legislative Affairs Agency; Attending via Teleconference: From Mat-Su: GARVAN BUCARIA; BILL BRUU, Treasure, Mat-Su Home Builders; DENNIS WALDOCK; From Anchorage: TERESA WILLIAMS; ERIC DYRUD; DICK DOLMAN; ARLENE PATTON, State Coordinator with Alaska Housing and Urban Development; ARTHUR CLARK; SUE BENEDITTI, representing the Alaska Banker's and Manager of First National Bank; JUDY KEMPLEN, National Bank of Alaska and Northland Mortgage; JAN SIEBERTS, representing Alaska Bankers, employed at National Bank of Alaska; CHARLES BLALOCK, representing Prudential Insurance; JEWEL JONES; SUMMARY INFORMATION SB 101-DEFINITION OF DISASTER The committee had questions of the Division of Legal Services. Testimony was taken from the Department of Military and Veterans Affairs. A new committee substitute and Amendment #10 were adopted. CS SB 101 (FIN) was reported out of committee. SB 24-REGULATIONS: ADOPTION & JUDICIAL REVIEW The committee heard testimony from the Department of Environmental Conservation, Department of Natural Resources, Office of Management and Budget and Department of Law on the fiscal notes. Amendments #14 - 25 were considered. CS SB 24 (FIN) was reported out of committee with new SFC fiscal notes. SB 113-FINANCES OF ALASKA HOUSING FINANCE CORP The committee heard testimony from the sponsor, the Alaska Housing Finance Corporation and various members of the public. The bill was held in committee. SB 42-1999 REVISOR'S BILL The Assistant Reviser from the Division of Legal Services explained the bill to the committee. The bill was reported out of committee. SB 84-CIGARETTE SALES: AGREEMENT/ESCROW The committee heard testimony from the Department of Law. The bill was held in committee. SENATE BILL NO. 101 "An Act amending the definition of 'disaster.'" This was the sixth hearing for this bill. Amendment #10 was distributed to members relating to wildland fires. Senator Sean Parnell moved for adoption of Amend #10. Without objection, it was adopted. Senator Loren Leman requested George Utermohle to explain the flood provision. GEORGE UTERMOHLE, Legal Council, Division of Legal Services, Legislative Affairs Agency, told the committee that the President of the US could declare a flood a disaster emergency. He explained the flood provision and how an event would qualify for $5 million or $1 million in aid. It did not lower the amount of funds it just lowered the threshold that the Governor must come to the Legislature for further assistance. Senator Loren Leman clarified that it just changed the methodology that the Governor had to use to obtain the floods. George Utermohle affirmed. Senator Gary Wilken asked if the Upper Chena River flooded and ten years later, the Lower Chena River flooded would that be considered the second flood. George Utermohle said it would be incumbent upon the Governor to define the area affected. Co-Chair John Torgerson noted the limit was set at $5 million. The authority was actually broadened. Co-Chair John Torgerson announced that Amendment #10 must be rescinded to allow the committee to adopt the CS Version "K". Action taken on Amendment #10 was rescinded without objection. Senator Sean Parnell moved to adopt the CS Version "K". Without objection it was adopted. Senator Sean Parnell moved to adopt Amendment #10. Without objection, it was adopted. Co-Chair John Torgerson asked if there was anyone wishing to testify for SB 101. CAROL CARROLL, Director, Division of Support Services, Department of Military and Veterans Affairs and Department of Natural Resources, testified. She asked the committee's intent with the adoption of Amendment #10. Co-Chair John Torgerson said wildfires were exempted. They discussed the intent of the amendment. Co-Chair John Torgerson stated that his intent was exactly as the amendment was worded. Carol Carroll stated her interpretation of that. Co-Chair John Torgerson agreed that was correct. Senator Lyda Green wanted to know if that was the current practice. Co-Chair John Torgerson said it was not, that it had been set at $1 million. Senator Lyda Green noted that there had been wildland fires much in excess of $5 million and she had never been polled on whether more funds should be expended. Co-Chair John Torgerson explained that the presiding officers had made the decision in the past. Under this legislation, the Legislature would be polled. Carol Carroll asked if wildland fires would be less than $5 million and more than $1 million. Co-Chair John Torgerson requested George Utermohle explained the trigger procedure. George Utermohle this provision provided that either $5 million or $1 million disaster depending on what the Governor declared and depended on whether the President declared. However, it exempted that it must be declared a federal disaster before additional funds could be appropriated. Senator Sean Parnell made a motion to move CS SB 101 (FIN) from committee. Without objection, it was so ordered. CS FOR SENATE BILL NO. 24(JUD) "An Act relating to regulations; relating to administrative adjudications; amending Rule 65, Alaska Rules of Civil Procedure; and providing for an effective date." This was the fifth hearing for this bill. Co-Chair John Torgerson reminded the committee that a motion to adopt Amendment #14 was on the table. Senator Dave Donley moved to withdraw his motion to adopt Amendment #14. There was no objection. Senator Dave Donley moved for adoption of the CS Version "Y". It was adopted without objection. Senator Dave Donley stated he would not offer Amendment Senator Dave Donley spoke to Amendment #16 and moved for adoption. Senator Lyda Green asked how Section 3 would read. Senator Dave Donley read into the record. Without objection adopted. Senator Dave Donley moved for adoption of Amendment #17. Co-Chair John Torgerson explained his amendment that clarified language to page 2 line 25. Without objection, it was adopted. Senator Dave Donley moved for adoption of Amendment #18. Co-Chair John Torgerson explained. Senator Gary Wilken wanted to make sure that it changed the * substantially. So the burden was up to the commissioner? Co-Chair John Torgerson believed the burden would be up to the plaintiff. Senator Dave Donley explained it would first be up to the Department of Law then the plaintiff. Co-Chair John Torgerson commented it should reduce the number of times the regulation had to go out for public notice. Senator Gary Wilken question. Co-Chair John Torgerson respond. Without objection Amendment #18 was adopted. Senator Dave Donley moved for adoption of Amendment #19. Co-Chair John Torgerson explained. The burden of proof would be the same. Without objection, Amendment #19 was adopted. Senator Dave Donley moved for adoption of Amendment #20 and explained that it had the same scheme as Amendment #16 and addressed the cost benefit analysis. Without objection, adopted. JANICE ADAIR, Director, Division of Environmental Health, Department of Environmental Conservation, testified to the fiscal note. She appreciated the work on the bill but still had some concerns about how the department would instigate some of the changes. She spoke to the number of comments received on some of the proposed regulations. If she received only 13 comments, they would be required to send out second notices to all 3000 people on the mailing list. While she would like to hear from more people, she did not. She noted the prior amendment to the fiscal note. The highest cost to do the notices was newspaper publishing and printing of the notices. Those costs were contained in the contractual component. Senator Loren Leman spoke to the number and length of public notices published in newspapers. Janice Adair detailed the requirements of public notices. Senator Gary Wilken referred to Amendment #18 and the addition of the word, "substantially" Janice Adair said it did somewhat, but she was still unsure what substantially meant in relationship to regulation changes. Senator Gary Wilken thought it was the intent of the amendment was to prevent from re-sending additional public notices. Co-Chair John Torgerson responded not necessarily. Senator Dave Donley agreed and said there was a reason because if there was a substantial change, the public may want to know of the changes. Senator Gary Wilken referred to page 2 line 25 and the relationship between the cost benefit analysis and the fiscal note. He asked for clarification. Senator Dave Donley replied there were three potential scenarios. The department could research in the Legislative Library. Second, *. If the commissioner found that the cost of doing the analysis was greater than the benefit of the regulation, there was an exemption. He said there were about five other options. Senator Gary Wilken asked if that applied to legislation that was in place for over ten years. Senator Dave Donley said it was. Senator Gary Wilken asked if Senator Dave Donley would consider an amendment to limit this bill to legislation passed in the past few years. Senator Dave Donley said the point was to require the cost benefit analysis to determine the impact to the public. Senator Gary Wilken moved for adoption of Amendment #21. This would delete language from page 4 lines 21-29. Co- Chair John Torgerson objected and asked if this reflected current statute. Senator Gary Wilken affirmed. Senator Loren Leman felt that to delete members of the standing committees would be a mistake. Senator Gary Wilken withdrew his motion. Senator Loren Leman questioned the mailing list of 3000 names and wondered how that list could be shortened. Janice Adair noted the provision in the bill requiring all interested parties be included. Senator Loren Leman asked how good Janice Adair felt that list was. Janice Adair replied that they did remove names for undeliverable mail. Senator Loren Leman asked if they ever did mailouts to determine interest in remaining on the mailing list. She did not have very good response and then received complaints from those who were purged as a result. She added that the regulations were posted on the Internet. Senator Dave Donley moved to amend the Department of Environmental Conservation fiscal note as Amendment #22 to delete all components but supplies and contractual for each year. The contractual component would be reduced to $35.75. Without objection, it was adopted. Senator Dave Donley moved to amend the Department of Law fiscal note to reflect the Department of Law memo as Amendment #23. Without objection, it was also adopted. Carol Carroll testified to the Department of Natural Resources fiscal note. Senator Dave Donley moved for adoption of Amendment #24, which would amend the Department of Natural Resources fiscal note. Without objection, it was adopted. JACK KREINHEDER, Senior Policy Analysis, Office of Management and Budget, testified. He asked for clarification of dec fiscal note. Senator Dave Donley said the contractual component was reduced 50 % and the supplies remained the same. All other components were deleted. Tape: SFC - 99 #76, Side B Jack Kreinheder said that helped. However, the extent of the fiscal note reductions would make it difficult to implement the bill. He had trouble understanding the intent for exemptions of the cost benefit analysis. They were not done in an hour. It seemed clear to him that the regulatory staff in the state was already under funded. Therefore the ability to absorb the costs of the analysis was limited. He detailed that an acceptable cost benefit analysis would not be possible under this provision so he assumed the committee intended only cursurary analysis be done. Senator Dave Donley said that was not the intent. They wanted the agencies to exercise common sense. Co-Chair John Torgerson noted that many regulations were outside the statutory authority. DEBORAH BEHR, Assistant Attorney General, Legislation and Regulations Section, Civil Division, Department of Law, testified. She had questioned many in the timber and other industries on this matter and was told that this would be a new tool that could be used to halt development. Parties wishing to prevent timber sales and other development could use this process to stop or slow such sales. In the section addressing supplemental notices, there was some question on whether the burden of proof would be placed on the person contesting the regulation. Several areas of the bill lent the process to inadvertent errors. She suggested if the intent was to place the burden of proof on the challenger, it needed to be stated in the supplemental notice as it was done in other provisions. She addressed the fiscal note. Some of the costs listed would be to cover the preparation of the regulation to ensure they would be defensible in court. The remaining costs would be incurred for defense of the regulations when they actually went to court. She spoke to the Department of Law's ability to defend the provisions of the bill. She referred to sections 2, 3 and 13 as the greatest concerns. There would need to be an excellent record to show that the regulation was necessary. Frankly, most regulations in the environmental area were compromises, she warned. The result was that these were often not the least intrusive methods, but rather the agreement of the involved parties as a compromise. She believed that very few state regulations would be required by substantial state interest, which was another provision of the bill. She anticipated litigation to determine the provisions of the bill. She felt this would result in an unsettling environment for business and investment in the state. GARVAN BUCARIA, testified via teleconference from Mat-Su. He spoke to the definition of "reasonable" and suggested that word meant different things to different people. He commented that the bill contained superlative language and needed to be cleaned up. He was unsure which state agencies the current bill would encompass. Co-Chair John Torgerson clarified that the bill excluded everyone but Department of Environmental Conservation, the Department of Natural Resources and the Division of Habitat and Restoration. Garvan Bucaria could not go along with that since those agencies were responsible for the health and safety of the state. They had enough to do without the extra burden placed on them by the Legislature to do these analyses. He spoke of water quality standards in Wasilla saying the only protection was these regulations. Co-Chair John Torgerson debated that this would not change the way water would flow into Wasilla Lake. Garvan Bucaria countered. He was concerned about the regulations being less effective since the agencies were working on limited resources. TERESA WILLIAMS, via teleconference from Anchorage. She was on line to address Amendment #11, which was not offered. She was concerned that the sponsor might offer it in the future. Senator Dave Donley took the testimony from Office of Management and Budget to heart and noted language on page 2 line 19 saying that was included early in the process and was no longer needed. Senator Dave Donley moved to delete page 2 line 17 "or that the cost and benefits cannot be easily determined" as Amendment #25. Senator Loren Leman or Senator Gary Wilken objected. Senator Dave Donley commented that the preceding line in the bill addressed the issue of when the cost of the analysis was prohibitive. Senator Gary Wilken felt they should defer to the commissioner's judgement and this amendment would nail down the options more than what was necessary. Amendment #25 was adopted by a vote of 4/2/3. Senator Gary Wilken and Senator Loren Leman voted nay. Senator Al Adams, Senator Randy Phillips and Senator Sean Parnell were absent. Senator Dave Donley made a motion to move from committee CS SB 24 (FIN). Senator Pete Kelly objected. Break 7:05 PM / 7:06 PM Senator Pete Kelly removed his objection and the bill moved from committee without objection. Break 7:08 PM SENATE BILL NO. 113 "An Act making activities of the Alaska Housing Finance Corporation subject to the Executive Budget Act, relating to appropriations to the Alaska Housing Finance Corporation; relating to bonds and bond anticipation notes issued by the Alaska Housing Finance Corporation; and providing for an effective date." SENATOR RICK HALFORD spoke to the bill. The bill was drafted in response to a Commonwealth North Report that dealt with the consolidation and maximization of return on state assets. AHFC was the third highest cash asset of the State Of Alaska behind the permanent fund and the constitutional budget reserve. Its cast value was somewhat in question because the corporation would not provided information on what the liquidated value would be. Instead, information was given about bond conveyances and provisions. The program included operations that would occur regardless of the state's cash situation, such as veteran's housing bonds since they were not subsidized and passed along a benefit from the federal government. It was a complicated issue. He referred to the great deal of feedback the Legislators had received. The bill was drafted to put AHFC under the Executive Budget Act and draw the corporation into the financial system of the state in such a way that the Legislature would be in control of the appropriation and expenditure processes as well as the authorization of future bonds. There were concerns from people who represented bondholders. There were other legitimate concerns about the requirement for appropriation, refunding bonds or debt service on existing bonds. Jeopardizing those items was not the intention of the legislation as far as drawing the system back under state control. If the original bond was authorized and could be refunded at a lower cost, the original authorization was the legislative action that said the appropriation process was followed as well as the constitutional entity behind it. In the same sense, the appropriation of the debt service on a bond that was already authorized would not need to go back through the process. He felt this addressed the concerns voiced. He speculated that the marketplace would love to see $2 billion stay in the account and was satisfied with the current system. He spoke about the state's budget appropriations and stressed that the money belonged to the people of Alaska. They had a right to know the worth and what the program was accomplishing. He didn't believe that was currently the case. He continued speaking to the merits of the bill. Senator Dave Donley felt that the Commonwealth North did an excellent study showing how the state could maximize its assets. AHFC was one of the largest public assets and until the Legislature had authority to implement the recommendations of the commonwealth study, there was no way to reach those goals. The intent of the legislature was to do that. JOHN BITTNEY, Legislative Liaison, Alaska Housing Finance Corporation, Department of Revenue, testified. He provided a letter to the committee expressing the position of the corporation. The corporation was concerned and perplexed with the bill. They were unaware that is was being drafted. The main concern was that AHFC was in the midst of issuing the debt that was authorized by SB 260 last year. The corporation had issued $92.4 million of that debt and did receive an upgrade from Standard and Forbes as part of that issuance. It was uncertain what the impact of this legislation would have on that rating. That could affect the timing and issuance of debt to complete the state capital projects authorized in SB 260 He pointed out that the corporation was already subject to the Executive Budget Act. The operating budget was presented to the Legislature for authorization. The same was done with the capital budget and the mortgage program. However, the extent that the corporation should be under the act had been discussed in the past. The bonding authorizations had always been left to the discretion of the corporation in terms of timing and the amounts. This would allow flexibility under the review and the public process of the board of directors to take advantage of the best timing, interest rates and other factors affecting the investment environment. He was dismayed because the corporation felt it already had a process that worked very well. AHFC provided $103 million annually to the state. That was used to leverage $200 million in bond issuance on behalf of the state. In addition to that, the corporation provided financing for purchases such as the Bank of America building for state office lease space as well as subsidized financing for the University of Alaska. This was the net of the hundreds of millions of dollars of mortgage activity the corporation provided inside the State Of Alaska. He apologized for any misperception that the representatives of the corporation did not provide adequate information. However, he said they would welcome any request and felt that if there was an intent to review the performance of the corporation, he believed that could happen without this legislation. Senator Loren Leman asked if the sponsor had worked with the corporation how would the bill be different. John Bittney said if the intent was to implement the suggestions of the Commonwealth study, they would have been willing to work with the Legislature to implement the programs. There was concern of whether or not the Legislature should approve each and every bond issuance. Section 8 was the main accounting section and would apply to every single home mortgage issuance saying the Legislature would have to appropriate each one. Section 10 would require front section language in each budget to accomplish. Co-Chair John Torgerson had asked the AHFC for a sectional analysis of the bill and asked if he had that with him. John Bittney did not and said the bond council and the tax council were working on drafting it. He also noted the request for the fiscal note and gave the reason it was not provided. He said it was a complex matter and detailed how loan program would have to be analyzed. It would need front section language. Co-Chair John Torgerson asked when the section by section overview would be available. John Bittney replied he could have that delivered later in the evening. Section 8 was the most egregious and would affect the ability for the corporation to do business. All the sections of the bill would severely impact the corporation's ability to conduct business. Section 7 would leave things as a status quo regarding authority for the grant fund within the corporation since that was done already. ERIC DYRUD, Co-Chair, Anchorage Board of Realtors Legislative Committee, testified via teleconference from Anchorage in opposition to SB 113. He suggested passing legislation requiring the corporation to submit reports rather than impede their operations. He invited the committee members to a legislative meeting the organization was holding on Monday. Senator Loren Leman accepted the invitation. He would not be able to give background to the bill since he did not draft it. Eric Dyrud gave the time and place of the meeting. DICK DOLMAN, VP Alaska Manager of a Seattle mortgage company, testified in opposition to the bill. He said this bill would place leg irons and hand cuffs on AHFC. AHFC was very successful and had a good reputation. He was one of the founders of the corporation. Its independence was what allowed it to be successful. He compared it to Fanny Mae and asked how that program would do if each of its loans had to be approved by Congress. ARLENE PATTON, State Coordinator with Alaska Housing and Urban Development, testified via teleconference from Anchorage. During FY98 Alaska benefited from over $780 million in federal resources. She limited her comments to the programs HUD relied on AHFC for funds to administer. She listed the positive recognition the corporation received. AHFC must have flexibility. Future opportunities would be jeopardized. She gave figures for the homeless rate in Alaska. "Please remember what we do today is for the long term." Co-chair Torgerson asked the testifier to point out the relationship with AHFC in contrast to HUD. He requested this be done in writing and faxed to his office. ARTHUR CLARK, Key Working Group Chairman, Alaska Association of Realtors for Industry Issues, testified via teleconference from Anchorage. His concern with bill was due to a lack of understanding regarding the bond market. He reminded that the corporation has been benefiting the state with dividends. Problems with communication and management must be addressed, he stated. SUE BENEDITTI, representing the Alaska Banker's, and Manager of First National Bank testified via teleconference from Anchorage. In her travels around U.S. she heard how respected the AHFC was. This was a missing opportunity for Alaskans. JUDY KEMPLEN, National Bank of Alaska and Northland Mortgage testified via teleconference from Anchorage. If Alaska Housing cannot maintain bonds then there would be higher interest rates for potential homebuyers, he warned. This would encourage substandard housing. JAN SIEBERTS, representing Alaska Bankers, employed at National Bank of Alaska testified via teleconference from Anchorage. Over the years, she had seen authority by Legislature over AHFC increased. More independence should be given to AHFC. The Banker's Association saw no purpose to this bill. CHARLES BLALOCK, representing Prudential Insurance testified via teleconference from Anchorage. He noted that twenty-five percent of business was first time homebuyers. He felt the bill just needed to be fine-tuned. JEWEL JONES, testified via teleconference from Anchorage on her concerns about section 8 and said she needed additional time to look at the impact of the bill. She had worked with Senator Rick Halford for many years and would continue to work with him regarding this matter. BILL BRUU, Treasure, Mat-Su HomeBuilders, testified via teleconference from Mat-Su. He was concerned that the bill smacked of "killing the golden goose". The Legislature was always trying to strangle Alaska Housing to get last little bit of cash, in his opinion. He asked who drafted the bill. Co-Chair John Torgerson responded that the bill drafters had. DENNIS WALDOCK testified via teleconference from Anchorage. He had many suggestions on improvements to the bill. Co-Chair John Torgerson requested he submit his suggested changes in writing to the committee. Senator Loren Leman wanted to hear from a representative of the real estate industry who could tell the committee the percentage of home sales with AHFC financing. There was no response. Co-Chair John Torgerson ordered the bill held in committee. He requested a sectional analysis from AHFC. Break 7:56 PM / 8:11 PM Tape: SFC - 99 #77, Side A 8:11 PM CS FOR SENATE BILL NO. 42(JUD) "An Act making corrective amendments to the Alaska Statutes as recommended by the reviser of statutes; and providing for an effective date." JAMES CRAWFORD, Assistant Reviser of Statutes, Division of Legal Services, Legislative Affairs Agency, testified. He said the area of most concern to the committee would probably be Section 21. This addressed an internal numbering reference within an appropriations bill. Between versions of that bill, the section numbering changed and two numbers were skipped. This would correct that and make the changes retroactive to the effective date of the original legislation. He explained the reason for the error was that the original sections contained effective dates that failed to receive the required super-majority vote to be adopted. As a consequence, when the bill was reprinted those sections were removed but the remaining sections were not renumbered properly. Co-Chair John Torgerson clarified that this bill contained technical corrections to previously adopted statutes. James Crawford confirmed and detailed. Co-Chair John Torgerson asked about the different versions of this bill adopted by past committees. James Crawford spoke about changes to more controversial sections of the bill that did not apply to the Senate Finance Committee. Those sections addressed the criminal justice system and were separated into a supplemental reviser's bill. Senator Dave Donley made a motion to move CS SB 42 (JUD) from committee. Without objection, it was so ordered. 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. Co-Chair John Torgerson announced the next meeting schedule to hear SB 100 and SB 6. Break 8:38 PM / 8:40 PM Senator Gary Wilken asked about the schedule for the next week. Co-Chair John Torgerson detailed. Senator Sean Parnell commented that he did not anticipate subcommittee closeouts on the operating budget until later. ADJOURNED Senator Torgerson adjourned the meeting at 8:45 PM. SFC-99 (21) 3/31/99