BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 53 S
Senator DeSaulnier B
As Introduced
Hearing Date: March 24, 2009 5
Government Code 3
ADM:jd
SUBJECT
Tobacco Settlement Moneys: Master Settlement Agreement
DESCRIPTION
This bill would authorize the Attorney General (AG) to negotiate
amendments to the Master Settlement Agreement (MSA) that would
not materially adversely alter, limit, or impair the rights to
receive tobacco assets or in any way materially impair the
rights and remedies of bondholders or the security for their
bonds.
This bill would take effect immediately as an urgency statute.
BACKGROUND
In November 1998, the attorneys general of 46 states (including
California), the District of Columbia, and certain territories
("Settling States") entered into the MSA, a structured
settlement agreement, with various tobacco manufacturers for the
payment of moneys ("tobacco assets") to the Settling States. In
August 1998, California entered into a memorandum of
understanding (MOU) with various local governments of the state
("participating jurisdictions") to coordinate pending cases and
to allocate certain portions of the recovery under the MSA. The
San Diego County Superior Court approved the MSA and MOU in
December 1998 ("consent decree and final judgment").
The MSA requires the participating manufacturers to pay the
Settling States amounts in the billions of dollars every year in
perpetuity. California's allocable share of annual payments is
fixed by the MSA at 12.76%. The state splits its MSA payments
(more)
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on a 50-50 basis with the participating jurisdictions pursuant
to the MOU.
Senate Bill 1831 (Chapter 414, Statutes of 2002), Tobacco
Settlement State Securitization, authorized the state to sell
its right to receive future payments under the MSA, in order to
provide General Fund revenue to the state. The authorizing
legislation, Government Code Section 63049 et seq., provides
that the state will sell its right to receive future MSA
payments, the tobacco assets, to a special purpose trust, also
established by SB 1831. The special purpose trust is authorized
to issue bonds, pledging the tobacco assets as security.
Beginning in 2003, the Golden State Tobacco Securitization
Corporation has issued and reissued tobacco settlement bonds
several times. The AG states that more than $5 billion has been
raised for the state. The authorizing legislation prohibits the
state from amending the MSA or MOU in any way that would impact
MSA payments. Any MSA amendment that would change how
participating manufacturers' payments are calculated or the
amount of such payments to the Settling States cannot become
effective unless all MSA Settling States agree to the amendment.
This bill is intended to give the AG the flexibility to agree
to amendments to the MSA or MOU if such amendments do not
materially adversely affect the right to receive tobacco assets
or materially impair bondholders' rights and remedies.
CHANGES TO EXISTING LAW
Existing law authorizes the California Infrastructure and
Economic Development Bank to sell for, and on behalf of, the
state all or any portion of the tobacco assets to a special
purpose trust (not-for-profit corporation) that in turn is
authorized to issue bonds and enter into agreements with public
and private entities. The five voting members of the State
Public Works Board serve ex officio as the directors of the
special purpose trust. Except as specified, the net proceeds of
the sale of any tobacco assets by the bank shall be deposited in
the General Fund. (Government Code (GC) Section 63049.1.)
Existing law requires, on or before the effective date of any
sale, the state (through the AG), upon the direction of the
bank, to notify the California escrow agent under the MSA and
the California escrow agreement that the sold tobacco assets
have been sold to the special purpose trust and to irrevocably
instruct the California escrow agent that, as of the applicable
effective date, the tobacco assets sold are to be paid directly
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to the trustee for the applicable bonds of the special purpose
trust. (GC Section 63049.4.)
Existing law provides that the state pledges and agrees with the
holders of any bonds issued by the special purpose trust that it
will not amend the MSA, the MOU, or the escrow agreement, or
take any action, in any way that would alter, limit, or impair
the rights to receive tobacco assets sold to the special purpose
trust, nor in any way impair the rights and remedies of
bondholders or the security for those bonds until those bonds
are fully paid and discharged. (Id.)
Existing law provides that the state pledges that the sale of
tobacco assets shall not alter, limit, or impair the rights of
participating jurisdictions (57 counties and several cities).
(GC Section 63049.5.)
Existing law defines various relevant terms, including "Master
Settlement Agreement," "memorandum of understanding," and
"tobacco assets."
This bill would authorize the AG to negotiate amendments to the
MSA, the MOU, and the California escrow agreement, provided that
those amendments do not materially adversely alter, limit, or
impair the rights to receive tobacco assets sold to the special
purpose trust, nor in any way materially impair the rights and
remedies of bondholders or the security for their bond until
those bonds, together with the interest on the bonds and costs
and expenses in connection with any action or proceeding on
behalf of the bondholders, are fully paid and discharged.
This bill would provide that the state pledge to and agree with
the holders of any bonds issued by the special purpose trust
that it will not amend the MSA, the MOU, or the escrow
agreement, or take any action, in any way that would materially
adversely alter, limit, or impair the rights to receive tobacco
assets sold to the special purpose trust, nor in any way
materially impair the rights and remedies of bondholders or the
security for those bonds until those bonds are fully paid and
discharged.
This bill would provide that the state pledge that the sale of
tobacco assets will not materially adversely alter, limit, or
impair the rights of the participating jurisdictions.
COMMENT
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1.Stated need for the bill
The author and sponsor, the AG, write:
The principal problem presented by the authorizing legislation
[SB 1831] is that the state has promised not to agree to any
amendment to the MSA, the MOU or the Escrow Agreement, even if
- it could be argued - the proposed amendment would likely
increase tobacco company payments to the state or reduce the
risk that the payments will be adversely affected by one of
the many potential "adjustments" to the payments that are laid
out in the MSA. Among states that have securitized all or
part of their future MSA payments, only California is required
to promise the bondholders that the state will not agree to
amend the MSA in any way that would alter the rights to
receive MSA payments pledged as security for the bonds. Any
MSA amendment that would change how participating
manufacturers' payments are calculated or the amount of such
payments to the states cannot become effective unless all MSA
Settling States agree to the amendment.
California's legal inability to agree to amendments to the MSA
hampers or could even thwart efforts by the Settling States as
a whole to increase MSA revenues through admitting additional
tobacco companies to the MSA and to lower the risk of negative
Non-Participating Manufacturer (NPM) Adjustments to payments
in future years by restructuring the adjustment. Without
California as a signatory and its corresponding 12.76%
allocable share of MSA payments, most such salutary amendments
would fail for lack of "critical mass."
2."Materially adversely" standard
The AG states that the term "materially," as in other legal
contexts, is a relative term that depends upon the circumstances
surrounding a particular situation or set of facts. For
example, in the context of a motion for summary judgment, a
material fact is one that makes a difference to the outcome of
the motion. The AG states that, in the context of the MSA and
tobacco securitization, a "materially adversely" effect would be
one that would negatively affect the Golden State Tobacco
Securitization Corporation's ability to meet the scheduled debt
service on outstanding bonds. Additionally, adding the
"materially adversely" standard to California's tobacco
securitization statutes would bring California into conformance
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with other states that have securitized tobacco assets. (See
Comment 3.)
3.Other Settling States allow MSA amendments; examples
The AG states that more than 20 other Settling States have
securitized their MSA payments with authorization to agree to
amendments to the MSA as long as the amendments do not
"adversely impact MSA payments in a material way." The AG also
reports that, to the AG's knowledge, the "material adverse"
language has not negatively impacted the sale of bonds in the
other states that have securitized their MSA payments.
Examples
a.Washington State's tobacco settlement securitization law
requires the state to include in its bond documents "a
covenant of the state that the state will not agree to any
amendment of the master settlement agreement that materially
and adversely affects the authority's ability to receive the
portion of the state's share of master settlement agreement
payments that have been sold to the authority."
b. New York's law provides "the state pledges and agrees ? that
the state shall ? (iii) neither amend the master settlement
agreement nor the consent decree or take any other action in
any way that would materially adversely (a) alter, limit, or
impair the corporation's right to receive pledged tobacco
revenues, or (b) limit or alter the rights hereby vested in
the corporation to fulfill the terms of its agreements with
such bondholders, or (c) in any way impair the rights and
remedies of such bondholders or the security for such bonds
?."
c.Iowa's tobacco securitization law requires that "? the state
not agree to any amendment of the master settlement agreement
that materially and adversely affects the authority's ability
to receive the state's share that has been sold to the
authority."
1.Sample amendments requiring unanimous approval by Settling
States
The Attorney General of Washington, one of two Tobacco Co-chairs
for the National Association of Attorneys General, describes two
proposed amendments to the MSA, one currently awaiting approval
by the Settling States, the other the subject of ongoing
negotiations between the states and the tobacco manufacturers.
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As to the first, the Washington AG writes:
It took the states and the tobacco companies five years to
negotiate the "Previously Settled States (PSS) Credit"
amendment, but if it is approved by all Settling States, it
would fix an anomaly in the MSA that creates an unfair
business advantage for "Non-participating Manufacturers
(NPMS)" in the four states ? that settled their tobacco
litigation before the MSA came into being. Economic analysis
of the PSS Credit amendment indicates that although certain
MSA participating manufacturers will see their per-cigarette
payments to the states decrease, overall MSA payments to the
states will actually increase over time, and the potential
magnitude of any downward "NPM Adjustment" to MSA payments
will be reduced.
The Washington AG also describes the other potential amendment
to the NPM Adjustment that is the subject of an ongoing complex
nationwide arbitration between all Settling States and all
Participating Manufacturers. He writes:
For almost three years, the attorneys general have been trying
to negotiate a settlement that would resolve NPM Adjustment
disputes for past years and, more importantly, replace the NPM
adjustment with a provision that would bring more
predictability to MSA payments and, thus, to state budgeting.
California's ability to agree to MSA amendments that will
benefit every Settling State is critical to the continuing
success and viability of the MSA.
2.Reasons asserted for urgency clause
This measure is an urgency statute. The reasons given for the
urgency are:
All 46 Settling States, including California,
must agree to any amendment to the MSA.
One amendment is ready for approval, but it
cannot go into effect until California agrees.
Other amendments are in negotiations, and if
resolved, would require California's approval.
The AG needs the flexibility to agree to MSA
amendments in a timely manner, provided they inure to the
benefit of Settling States and do not materially adversely
affect tobacco payments or impair bondholder rights and
remedies.
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Support : Attorney General, State of Washington; American
Federation of State, County and Municipal Employees
Opposition : None Known
HISTORY
Source : Attorney General's Office
Related Pending Legislation : None Known
Prior Legislation :
SB 1831 (Chapter 414, Statutes of 2002) (See Background)
SB 1752 (Chapter 225, Statutes of 2003) provided that the
General Fund may be a guarantor for the sale of tobacco
securitization bonds; increased the potential sale of tobacco
securitization bonds to $5 billion; and placed a $150 million
cap on appeal bonds for appealing of court judgments against
tobacco companies who are parties to the MSA.
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