Legislature(2003 - 2004)
04/19/2004 08:07 AM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 agreement. 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in the escrow account over the amount the NPMs would have paid the state had they participated in the agreement can be withdrawn.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 quo. 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 carried.