BILL ANALYSIS
SB 53
Page 1
Date of Hearing: June 23, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 53 (DeSaulnier) - As Introduced: January 14, 2009
PROPOSED CONSENT
SENATE VOTE : 36-0
SUBJECT : TOBACCO SETTLEMENT MONEYS: MASTER SETTLEMENT AGREEMENT
KEY ISSUE : SHOULD THE AG BE PERMITTED TO MAKE BENEFICIAL
AMENDMENTS TO THE MASTER SETTLEMENT AGREEMENT, UNDER WHICH
CALIFORNIA RECEIVES SETTLEMENT FUNDS FROM TOBACCO MANUFACTURERS,
SO LONG AS THOSE AMENDMENTS DO NOT MATERIALLY ADVERSELY AFFECT
THE RIGHTS TO RECEIVE SETTLEMENT FUNDS OR THE RIGHTS AND
REMEDIES OF THOSE HOLDING BONDS SECURED BY SETTLEMENT FUNDS?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This non-controversial bill is an urgency measure. States'
attorneys general and various tobacco product manufacturers have
entered into a Master Settlement Agreement (MSA), to settle
various lawsuits against the manufacturers. The MSA provides
for the allocation of settlement money to the states and certain
territories. California has entered into a memorandum of
understanding (MOU) that provides for allocation of the state's
share of moneys under the MSA between the state and various
local governments. The Attorney General (AG), on the state's
behalf, has entered into the California escrow agreement (CEA),
relating to the division between the state and participating
jurisdictions of amounts payable under the MSA. Moreover, the
California Infrastructure and Economic Development Bank is
authorized to sell, for and on behalf of the state, MSA 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. This bill would
authorize the AG to negotiate amendments to the MSA, the MOU,
and the CEA as long as those amendments would not materially
adversely alter, limit, or impair the rights to receive tobacco
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assets or in any way materially impair the rights and remedies
of bondholders or the security for their bonds. This materially
adverse standard conforms to other states' statutes permitting
amendments to the MSA, and would allow California to agree to
beneficial amendments to the MSA. This bill is supported by its
sponsor, the Attorney General of California, as well as by the
Attorney General of Washington and the American Federation of
State, County and Municipal Employees. The bill has no known
opposition. The bill was approved on April 16, 2009 in the
Senate by a vote of 36-0.
SUMMARY : Provides the Attorney General (AG) more flexibility in
negotiations regarding the transfer of the state's assets that
derive from settlements with manufacturers of tobacco products.
Specifically, this bill :
1)Provides that the AG may negotiate amendments to the Master
Settlement Agreement (MSA), the memorandum of understanding
(MOU), and the California escrow agreement (CEA), provided
that the amendments comply with both of the following
requirements:
a) The amendments do not materially adversely alter, limit,
or impair the rights to receive tobacco assets sold to the
special purpose trust; and
b) The amendments do not 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.
2)Provides that the state pledges that the sale of tobacco
assets shall not materially adversely alter, limit, or impair
the rights of participating jurisdictions.
3)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 CEA, or take any action that
would in any way materially adversely 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 the
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bonds are fully paid and discharged.
EXISTING LAW :
1)Authorizes the California Infrastructure and Economic
Development Bank to sell, for and on behalf of the state, all
or any portion of the (MSA) 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 section
63049.1.)
2)Requires, on or before the effective date of the 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 (CEA) 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 sold tobacco assets are to be
paid directly to the trustee for the applicable bonds of the
special purpose trust. (Government Code section 63049.4(a).)
3)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 memorandum of understanding (MOU), or the
CEA, or take any action that would in any way 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
the bonds are fully paid and discharged. (Government Code
section 63049.4(a).)
4)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).
(Government Code section 63049.5.)
5)Defines "Master Settlement Agreement" as "the settlement dated
November 23, 1998, as amended, among the attorneys general of
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46 states (including California), the District of Columbia,
the Commonwealth of Puerto Rico, Guam, the U.S. Virgin
Islands, American Samoa, and the Commonwealth of the Northern
Mariana Islands, and Philip Morris Incorporated, R.J. Reynolds
Tobacco Company, Brown and Williamson Tobacco Corporation,
Lorillard Tobacco Company, and the other Subsequent
Participating Manufacturers as defined therein." (Government
Code section 63049(c).)
6)Defines "memorandum of understanding" as "collectively, the
memorandum of understanding, dated August 5, 1998, together
with the Agreement Regarding Interpretation of Memorandum of
Understanding, among the state and various local governments
of the state to coordinate their pending cases and to allocate
certain portions of the recovery under the Master Settlement
Agreement." (Government Code section 63049(d).)
7)Defines "California escrow agreement" as "the escrow agreement
dated April 12, 2000, as amended, between the AG, on behalf of
the state, and the California escrow agent named in the
agreement relating to the division between the state and the
participating jurisdictions of amounts payable under the
Master Settlement agreement." (Government Code section
63049(a).)
8)Defines "tobacco assets" as "all moneys required to be paid to
the state under the Master Settlement Agreement, as further
provided in the memorandum of understanding and the California
escrow agreement, and all of the state's rights to receive
those payments." (Government Code section 63049(f).)
COMMENTS : 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 almost 50 tobacco
manufacturers for the payment of moneys ("tobacco assets") to
the Settling States. 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 on a 50-50 basis with the counties
and the four largest cities ("participating jurisdictions")
pursuant to the MOU.
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In August 1998, California entered into a memorandum of
understanding (MOU) with the 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").
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 sponsor of this bill, 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.
Need for this bill . According to the author's background
statement: "The 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
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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."
The author states: "SB 53 gives the state the legal flexibility
to agree to changes in the [MSA] that would benefit the state,
the participating jurisdictions and the bondholders, by either
increasing the MSA payments or reducing the risk of
payment-lowering adjustments. 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 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 amendments would fail for lack of
'critical mass.'"
The author also states that this bill is necessary to allow the
state to amend the MSA so that it provides a more reasonable
"Non-Participating Manufacturer" (NPM) adjustment. The NPM
adjustment reduces the amount that a tobacco company pays under
the MSA if the company meets three conditions: (a) it has lost
at least 2% of the market share it had in 1997 to an NPM (a
manufacturer that has not joined the MSA); (b) participation in
the MSA was a significant factor in the market share loss; and
(c) the state was not diligent in requiring NPMs to set aside
money in escrow to cover any future liabilities. If the three
conditions are met, the state could lose its entire payment from
that manufacturer for the year. The author states that the
Settling States and the tobacco companies have been in
settlement negotiations for over two years trying to resolve the
NPM adjustment standard so that a state would not risk losing an
entire year's payment. If an agreement is reached, it would
require amending the MSA to reflect changes to the NPM
adjustment. However, current law prohibits California from
agreeing to such an amendment, even though it would be in the
state's interest to avoid such a serious risk of losing tobacco
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assets.
Other Settling States do allow MSA amendments . More than 20
other Settling States have securitized all or part of their MSA
payments. All of these states may agree to amendments to the
MSA as long as the amendments do not adversely impact MSA
payments in a material way.
For example, 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."
(Emphasis added)
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?." (Emphasis added)
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."
(Emphasis added)
This bill would thus bring California law into conformity with
the laws of other securitized states.
ARGUMENTS IN SUPPORT : Supporter the Attorney General of
Washington, one of two Tobacco Co-chairs for the National
Association of Attorneys General, describes two potentially
beneficial 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. If California is unable to amend the MSA to
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reflect these salutary changes, they cannot take effect because
they will not have the required unanimous approval by the
Settling States.
As to the first beneficial proposed MSA amendment, supporter 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?. I understand that California's ability to agree to
this beneficial MSA amendment depends on the passage of Senate
Bill 53."
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. If a settlement is reached,
California must be in a position to agree to such MSA amendments
as are needed to implement the agreement, or the settlement will
fail."
Supporter the American Federation of State, County, and
Municipal Employees (AFSCME) states: "This bill would permit
California to make changes to an MSA, which would be beneficial
to the state. Provisions in SB 53 would allow California to
incorporate other tobacco product manufacturers into the
Agreements, which would empower California to increase the
revenue generated under the Agreement."
Reasons asserted for urgency clause . This measure is an urgency
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statute. The reasons given for the urgency are:
1)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.
2)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.
PRIOR LEGISLATION : SB 1831 (Peace), Chapter 414 of 2002:
Tobacco assets: Sales. Authorized the Infrastructure and
Economic Development Bank to sell, for and on behalf of the
state, all or any portion of the state's tobacco assets to a
special purpose trust, which would be established as a
not-for-profit corporation by the bill, except that the sale or
sales would be limited to an amount necessary to provide the
state with up to $4.5 billion exclusive of capitalized interest
on the bonds and any costs incurred by the bank or the special
purpose trust in implementing the bill.
SB 1752 (Battin), Chapter 225 of 2003: State property: Surplus.
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.
SB 822 (Escutia), Chapter 780 of 1999: Tobacco products
settlement. Enacted model legislation as recommended in the
Tobacco Master Settlement Agreement (MSA) to create a reserve
fund from which tobacco manufacturers not participating in the
MSA may pay future litigation claims. Specifically: 1) required
any tobacco manufacturer selling cigarettes within the state to
either become a participant in the MSA and generally perform its
financial obligations or place into an escrow account a
specified amount per unit sold during the year in question; 2)
permitted any product manufacturer placing funds into an escrow
account to receive the interest earned on those funds; 3)
required funds in an escrow account to be released only for
specified reasons; and 4) required tobacco manufacturers using
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the escrow option to certify to the Attorney General that they
are in compliance with the law. Also authorized the Attorney
General to bring a civil action against tobacco manufacturers
that fail to comply and established a schedule of penalties.
REGISTERED SUPPORT/OPPOSITION :
Support :
Attorney General's Office (sponsor)
Attorney General, State of Washington
American Federation of State, County, and Municipal Employees,
AFL-CIO
Opposition :
None on file
Analysis Prepared by : Drew Liebert and Rachel Anderson / JUD. /
(916) 319-2334