Legislature(2003 - 2004)

04/19/2004 08:07 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
           HB 503-TOBACCO MASTER SETTLEMENT AGREEMENT                                                                       
MR. MIKE BARNHILL, Assistant Attorney  General, Department of Law                                                               
(DOL), told  members that HB 503  seeks to close a  loophole in a                                                               
statute  that   was  enacted  pursuant  to   the  tobacco  Master                                                               
Settlement Agreement.  He gave the  following background  of that                                                               
In 1997  or 1998,  Alaska, in conjunction  with 46  other states,                                                               
sued the major  tobacco companies, settled the  case, and entered                                                               
into an  agreement called the Master  Settlement Agreement (MSA).                                                               
Under that  agreement, the state relinquished  its claims against                                                               
the  tobacco  companies  for  money   lost  related  to  Medicaid                                                               
payments.  In  exchange,  the  tobacco  companies  agreed  to  an                                                               
indefinite  payment of  money  to  the states.  As  part of  that                                                               
settlement, the  states enacted a  non-participating manufacturer                                                               
(NPM) statute. Alaska  enacted its NPM statute in  1999, with the                                                               
intent  of  leveling  the playing  field  between  those  tobacco                                                               
manufacturers that  participated in  the MSA  and those  that did                                                               
not. Without  a way to  level the  playing field between  the two                                                               
groups,  the   NPMs  could  potentially  keep   their  prices  of                                                               
cigarettes  low,   grab  market  share  from   the  participating                                                               
companies,  and undermine  the entire  MSA. Alaska's  NPM statute                                                               
requires all  non-participating manufacturers to deposit  into an                                                               
escrow  account a  certain  amount of  money,  per cigarette,  to                                                               
mimic the  amount the participating manufacturers  are paying the                                                               
states. This year that amount is about 2 cents per cigarette.                                                                   
Under Alaska's NPM  statute, the money in the  escrow account can                                                               
be used for three reasons. First,  if the state or someone in the                                                               
state  sues  a NPM,  the  money  can be  released  to  pay for  a                                                               
judgment against the NPM or  for a settlement. Second, the excess                                                               
of  the money  in the  escrow account  over the  amount the  NPMs                                                               
would have paid the state  had they participated in the agreement                                                               
can be  withdrawn. Third,  the money  can be  taken out  after 25                                                               
years. The loophole in the law is in the second provision.                                                                      
MR. BARNHILL  referred to  a spreadsheet  in members'  packets to                                                               
explain the loophole and gave the following scenario.                                                                           
If a  hypothetical company  named Cheap  Smokes sold  100 million                                                               
cigarettes per year and participated in  the MSA, it would pay $2                                                               
million  to the  state.  Under  the MSA,  that  payment would  be                                                               
disbursed among  all 46  states and of  that amount  Alaska would                                                               
receive about $6,800; Washington  about $41,000; California about                                                               
$255,000; and  Oregon about  $23,000. Because  Cheap Smokes  is a                                                               
NPM, it would be depositing 2  cents per cigarette into an escrow                                                               
account. If that company sold  1 million cigarettes in Alaska, 20                                                               
million in  Washington, 75 million  in California, and  4 million                                                               
in  Oregon, it  would be  required  under Alaska  law to  deposit                                                               
$20,000   in  Alaska;   $400,000  in   Washington;  $750,000   in                                                               
California; and $80,000 in Oregon.                                                                                              
Under  the second  part  of the  MSA  escrow release  provisions,                                                               
Cheap  Smokes could  get reimbursed  for  the amount  it paid  in                                                               
excess  of the  MSA. Under  the  MSA, Alaska  would only  receive                                                               
$6,800 so Cheap Smokes would  be reimbursed $13,800. Cheap Smokes                                                               
would receive substantial reimbursements from each state.                                                                       
He  explained   the  loophole  is  that   assuming  that  Alaska,                                                               
Washington, California and Oregon are  the only states that Cheap                                                               
Smokes sells  in, the total amount  it can be reimbursed  is $1.6                                                               
million, because had Cheap Smokes  been a participant in the MSA,                                                               
it would  have paid a  total of $2 million.  Because it is  not a                                                               
participant and concentrates  its market in four  states, it gets                                                               
reimbursed  $1.6 million  so is  only depositing  $400,000, which                                                               
amounts to less  that one cent per cigarette.  This enables Cheap                                                               
Smokes   to   sell    cigarettes   cheaper   than   participating                                                               
manufacturers and will create problems for the MSA.                                                                             
Alaska has not experienced this problem  yet and has only had one                                                               
request for an  escrow release since 1999.  However, other states                                                               
with  larger  markets have  had  significant  problems. NPMs  are                                                               
concentrating their markets  in those states. They  ask for their                                                               
money back  and are able  to expand  their market share  by under                                                               
pricing MSA participants.                                                                                                       
HB 503 will solve that problem  by assuring that NPMs put 2 cents                                                               
per cigarette  in an  escrow account  and not  allow them  to get                                                               
reimbursed for more  than that, irrespective of  whether they had                                                               
participated  in the  MSA. He  explained that  HB 503  contains a                                                               
number of contingent provisions in Section  2 in case this fix is                                                               
found to  be unconstitutional.  Section 2 says  an NPM  cannot be                                                               
reimbursed except to pay for a  judgment or if the money has been                                                               
held in  an escrow  account for  25 years.  If that  provision is                                                               
found  to be  unconstitutional, the  bill reverts  to the  status                                                               
MR.  BARNHILL informed  members  that  HB 503  was  drafted by  a                                                               
working committee of the national  committee of attorneys general                                                               
in  conjunction  with  the participating  manufacturers.  It  was                                                               
unanimously  endorsed  last  December  by all  of  the  attorneys                                                               
general  at   the  National  Association  of   Attorneys  General                                                               
meeting. To date, it has been enacted by 29 states.                                                                             
SENATOR FRENCH  asked Mr. Barnhill  to describe how  that anomaly                                                               
crept into the MSA.                                                                                                             
MR. BARNHILL said  he believes the assumption,  when drafting the                                                               
NPM  statute  for   states  to  enact  in  1998,   was  that  all                                                               
manufacturers  would sell  to all  states.  The rationale  behind                                                               
maximizing  the  amount  deposited  into escrow  to  reflect  the                                                               
states'  interest in  the MSA  was that  manufacturers' sales  in                                                               
each  state  would  be  the  same. He  does  not  believe  anyone                                                               
contemplated  the   possibility  that  smaller   companies  would                                                               
concentrate their markets in a few states.                                                                                      
With no further interest, CHAIR SEEKINS closed public testimony.                                                                
SENATOR THERRIAULT  moved HB 503  from committee  with individual                                                               
recommendations and its accompanying fiscal note.                                                                               
CHAIR  SEEKINS  announced  that  without  objection,  the  motion                                                               

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