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.