Brief(1)
H.B. 2568 concerns tobacco money and is model legislation provided for by the Master Settlement Agreement (MSA) that must be enacted by states in order to protect future tobacco payments. The legislation would protect Kansas from having its tobacco payments reduced if tobacco manufacturers who participated in the settlement lose their aggregate market share as the result of a competitive disadvantage against tobacco companies that did not participate in the settlement.
H.B. 2568 would give nonparticipating tobacco manufacturers the option of either entering into the settlement and agreeing to the settlement's terms or putting money into an escrow fund based on the number of cigarettes sold. The money in escrow and accrued interest would be used to pay any judgements or settlements on claims brought against the tobacco manufacturers by the state or other parties. After money has been in the escrow fund 25 years and remains unspent, it would be returned to the tobacco manufacturer.
Background
The tobacco settlement agreed to by the Attorney General on November 20, 1998, involves participating manufacturers who have 99.8 percent of the market share of tobacco sales. These companies have agreed to a series of restrictions on their advertising and will make payments to the states in perpetuity. For the next 25 years, the payments are calculated to be $206 billion.
The payments, however, could be affected by a number of variables. One is the possibility that tobacco companies that are not party to the agreement would have a competitive advantage because they are not bound by the restrictions of the settlement and could increase their market share at the expense of participating manufacturers. If that happens, the settlement provides that payments to the states by participating manufacturers would be reduced.
The model legislation provided for by the settlement, in effect, would level the playing field by making nonparticipating companies put into escrow an amount based on their cigarette sales which is capped by the amount they would have been required to pay had they participated in the MSA. Money required to be paid into escrow each year would remain available for 25 years to pay any judgments or settlements to the state or other releasing parties as defined in the MSA for claims similar to those covered by the MSA. Only Kansas claims would be paid from the escrow fund established pursuant to Kansas law. Money would be spent from the escrow fund to pay claims on a first-money-in, first-out basis, and any money remaining in the fund unspent for more than 25 years would be returned to the manufacturer. Interest or other earnings on the money in escrow would be kept by the manufacturer.
If a state does not pass the model statute, the MSA provides that the state would lose 3 percent of its settlement proceeds each year for every 1 percent that the market share of tobacco companies participating in the MSA declines below their base market share, which was established in 1997. Payments would be reduced in order to capture money to pay states that had enacted the model statute. Under this formula, it would take approximately an 18 percent decline in market share for the state to lose 50 percent of the tobacco money to which it is entitled. After 50 percent of the tobacco money is lost, the formula used in the MSA causes the next 50 percent of the state's tobacco money to be taken at a rate which takes all of the money when the participating manufacturer's market share reaches zero.
Because the model legislation was part of the settlement entered into by more than 50 states and jurisdictions, it must be adopted in a nearly identical form by each state. In testimony before legislative committees, staff from the Attorney General's Office has testified that H.B. 2568 must be passed in its present form in order to comply with the terms of the MSA.
1. *Supplemental notes are prepared by the Legislative Research Department and do not express legislative intent. The supplemental note and fiscal note for this bill may be accessed on the Internet at http://www.ink.org/public/legislative/bill_search.html