BILL ANALYSIS                                                                                                                                                                                                    




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           602 (Padilla)
          
          Hearing Date:  05/11/2009           Amended: 04/28/2009
          Consultant: Mark McKenzie       Policy Vote: Rev&Tax 5-3
          _________________________________________________________________ 
          ____
          BILL SUMMARY:   SB 602 would prohibit the Board of Equalization  
          (BOE) from issuing a new cigarette and tobacco products license  
          for a retail location in an "area of overconcentration," as  
          specified.  The bill would also authorize BOE to take action  
          related to the licensure of retailers who have violated the Stop  
          Tobacco Access to Kids Enforcement (STAKE) Act at any time.  The  
          Department of Public Health (DPH) or other enforcement agency  
          would be required to notify BOE of any conviction of a violation  
          of either the STAKE Act or provisions that prohibit the sale of  
          tobacco products to minors.
          _________________________________________________________________ 
          ____
                            Fiscal Impact (in thousands)

           Major Provisions         2009-10      2010-11       2011-12     Fund
           BOE: determination of  Unknown administrative costs, likely in  
          the                    Special*/
           license applicant eligibiltiy      range of $300 - $500  
          annually                  General

          BOE: STAKE Act         Unknown administrative costs, likely in  
          the                    Special*/
                                   range of $250-$500 annually        
          General

          DPH: tracking/reporting           $89         $178       
          $178Special*/
           of STAKE Act violations                                    
          General

          Law enforcement reporting         Unknown reimbursable mandate  
          costs,                 General
           (local mandate)         likely in the range of $300-$500  
          annually
          __________             
          * Cigarette and Tobacco Products Compliance Fund, General Fund,  
          other tobacco tax special funds (see staff comments)










          _________________________________________________________________ 
          ____

          STAFF COMMENTS: This bill meets the criteria for referral to the  
          Suspense File.
          
           Tobacco retail license restriction
           This provision is intended to prevent further proliferation of  
          tobacco retailers by requiring denial of new tobacco retail  
          licenses in areas of overconcentration.

          Existing law requires retailers of cigarette and tobacco  
          products to pay a one-time license fee of $100 and requires  
          annual renewal of the retailer license.  A retailer is subject  
          to a $100 reinstatement fee if they allow the license to expire.  
           Fees collected pursuant to the Cigarette and Tobacco Licensing  
          Act are deposited into the Cigarette and Tobacco Products  
          Compliance Fund and are available solely for the purpose of  
          implementing, enforcing, and administering the Act.   
          Approximately 38,200 retailers are currently licensed by BOE.   
          Each year approximately 6,000 new licenses are issued, but a  
          corresponding number are typically surrendered, so the total  
          number of active licenses has been fairly stable since the  
          Licensing Act was established in 2003.
          Page 2
          SB 602 (Padilla)

          SB 602 would place unabsorbable administrative burdens on BOE,  
          primarily due to the requirement to determine whether an  
          applicant retail location is in an area of overconcentration,  
          determine a "public convenience or necessity" threshold, and  
          revise existing processes and procedures for tobacco retailer  
          licensure.  At the time of this analysis, BOE had not finalized  
          a detailed estimate, but unabsorbable annual costs associated  
          with this provision of the bill would likely be in the range of  
          $300,000 to $500,000 annually.

          The bill requires BOE, the State Department of Public Health  
          (DPH), and the Department of Alcoholic Beverages Control (ABC)  
          to share all information with respect to retailers'  
          implementation of the Licensing Act.  The restriction on  
          issuance of a tobacco retailer license in an area of  
          overconcentration is modeled after a similar restriction on  
          ABC's issuance of a liquor license, which prohibits issuance if  
          it would result in "undue concentration," as specified.  Current  
          law also authorizes BOE to issue a license without further  










          investigation of an applicant for a retail location if the  
          applicant holds a valid license issued by ABC for that same  
          location.  Since both the ABC restriction and the restriction in  
          this bill use the same basis for determining concentration of  
          licenses in a specific census tract, information sharing could  
          create efficiencies.  SB 602 would at a minimum require BOE to  
          develop procedures to define and identify "areas of  
          overconcentration.  This provision would also require permanent  
          staffing for BOE to determine compliance with this restriction  
          for each of the 6,000 annual new applicants.

          SB 602 provides an exception to the restriction of issuing a  
          tobacco retailer license in an area of overconcentration if a  
          local governing body determines within 90 days of notification  
          of a completed application that "public convenience or  
          necessity" would be served by the issuance.  This exception  
          would presumably be most applicable to smaller communities and  
          rural areas with limited retail space.  The bill also allows BOE  
          to issue a license under this exception after the 90-day period  
          if the applicant demonstrates "public convenience or necessity."  
           BOE would incur one-time costs to develop procedures to make  
          such a determination and ongoing administrative costs to  
          coordinate with applicable local agencies.

           STAKE Act revisions
           This provision is intended to reduce illegal sales of cigarette  
          and tobacco products to minors by strengthening penalties on  
          retailers convicted of furnishing these products to a person  
          under the age of 18.

          Existing law requires DPH to take primary responsibility for  
          enforcement STAKE Act, and to enlist the assistance of persons  
          who are 15 or 16 years of age as decoys for the purpose of  
          attempting to purchase cigarettes.  Penal Code Section 308 makes  
          it a violation to sell or furnish cigarettes or tobacco products  
          to minors.  BOE is required to warn, suspend, or revoke a  
          retailer's license for sales to underage persons or related  
          offenses under the following circumstances:
                 First conviction: warning letter and training  
               requirement.
                 Second conviction in 12 months: $500 fine
          Page 3
          SB 602 (Padilla)

                 Third conviction in 12 months: $1000 fine
                 Fourth to seventh conviction in 12 months: 90-day  










               suspension of license
                 Eighth conviction in 24 months: revocation of license.
          BOE's authority to suspend or revoke a license for underage  
          sales violations is limited to periods when the underage sales  
          rate in California is 13% or more, as measured in an annual  
          Youth Tobacco Survey conducted by DPH.

          SB 602 would delete the restriction on BOE enforcement action  
          (13 percent trigger), thereby authorizing BOE to levy penalties  
          against a license holder for violations of underage sales at any  
          time.  This bill also revises the penalty schedule as follows:
                 First conviction: warning letter, training requirement,  
               and an unspecified fine.
                 Second conviction: unspecified fine.
                 Third conviction within any three-year period: license  
               revocation.

          This bill would also require DPH and state and local law  
          enforcement agencies to notify BOE of any convictions of  
          violations in a timely manner, and require BOE to take  
          appropriate action.  BOE would be authorized to take action  
          against a retailer if other enforcement agencies fail to provide  
          timely notification. 

          SB 602 would increase the Department of Public Health's (DPH)  
          workload and resource expenditure by requiring mandatory  
          reporting of information not normally tracked or evaluated.  DPH  
          would to develop and maintain an enforcement reporting system in  
          order to comply with the proposed reporting requirements.  This  
          would require 2 PY of additional staff as follows:  one  
          full-time Program Analyst position at a cost of $86,000 per  
          year, and a contract for 1 PY of Information Technology support  
          at a cost of approximately $92,000.  Funding for these positions  
          would need to be allocated from the Cigarette and Tobacco  
          Products Compliance Fund.

          Staff notes that any costs to local law enforcement agencies  
          related to the tracking and reporting of information for  
          convictions of the STAKE Act and Penal Code Section 308 (illegal  
          sales of tobacco products to minors) would likely be  
          reimbursable by the state.  Reimbursable costs are unknown, but  
          previous assessments for similar legislation estimated a  
          mandated cost of $300,000 to $500,000 annually.

          With respect to the requirements of the STAKE Act provisions of  
          SB 602, BOE would incur some costs for suspending or revoking  










          retail licenses, processing appeals filed for a suspended or  
          revoked licenses, inspecting suspended or revoked retail  
          licensee locations, and seizing, storage, and destruction of  
          cigarettes or tobacco products from retailers whose license has  
          been suspended or revoked.  These unabsorbable costs are unknown  
          at this time, but likely in the range of $250,000 to $500,000  
          annually.

           Compliance Fund deficiencies
           Up until 2005-06, all BOE costs to enforce and administer the  
          Licensing Act were fully covered by license fee revenues,  
          penalties, and fines deposited into the Compliance Fund.   
          However, since the retail license revenues were predominantly a  
          one-time revenue gain, the Compliance Fund does not have  
          sufficient revenues to cover BOE's 
          Page 4
          SB 602 (Padilla)

          ongoing costs.  In 2008-09, for example, revenues deposited into  
          the Compliance Fund totaled $1.1 million, while BOE's costs to  
          administer and enforce the Licensing Act were approximately  
          $10.2 million.  The difference between revenues and costs are  
          currently offset with $1.1 million General Fund and other  
          tobacco tax revenues: $209,000 Breast Cancer Fund; $2.6 million  
          Cigarette and Tobacco Products Surtax Fund (Proposition 99); and  
          $5.2 million from the California Children and Families First  
          Trust Fund (Proposition 10).  Staff notes that the  
          administrative costs associated with this bill would place  
          further strains on the General Fund and other tobacco tax funds.  
           To the extent that the restrictions in SB 602 results in fewer  
          overall licenses and less convenience for consumers, there would  
          be a net loss in excise tax and license fee revenues.