Tobacco Settlement Agreement Fund Oversight Committee


2005 Interim


<MeetMDY1> September 13, 2005


The<MeetNo2> meeting of the Tobacco Settlement Agreement Fund Oversight Committee was held on<Day> Tuesday,<MeetMDY2> September 13, 2005, at<MeetTime> 1:00 PM, in<Room> Room 131 of the Capitol Annex. Representative Carolyn Belcher, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Vernie McGaha, Co-Chair; Representative Carolyn Belcher, Co-Chair; Senators Charlie Borders, David E Boswell, and Joey Pendleton; Representatives Adrian K Arnold, James R Comer Jr, Thomas M McKee, and Tommy Turner.


Guests:  Attorney General Greg Stumbo, Keith Rogers, Brian Furnish, Maggie May, Bill McCloskey, Tim Hughes, and Nick Whobrey, Governor's Office of Agricultural Policy; Wayne Hunt, Agricultural Development Board; Berea Ernst, Community Farm Alliance; Stephen A. Coleman, Division of Conservation; Todd Perry, Christian County Agri-Business Association; Ben Payne and Robert Gray, farmers; Brian Alvey and Jeff Harper, Kentucky Farm Bureau; Dean Wallace, Council for Burley Tobacco, and Daniel Green, Burley Tobacco Growers Cooperative.


LRC Staff:  Lowell Atchley, Tanya Monsanto, Carl Frazier, and Kelly Blevins.


Following the roll call, Chairman Belcher asked Attorney General Greg Stumbo to brief the Committee on the North Carolina Supreme Court’s ruling in August requiring large tobacco companies to make their required 2004 Phase II payment. Attorney General Stumbo said they believed the state would receive its part of the Phase II payment (about $124 million) within three to six months.


The attorney general said there was a question regarding interest. He said post-judgment interest would be accruing since the North Carolina Supreme Court ruling was handed down. He estimated that could total $3-$7 million. The attorney general said they did not see a federal issue that would allow for a federal appeal. The companies had a right to request a rehearing at the state court level, but as a practical matter, a rehearing on a unanimous judgment was unlikely, he said.


Several committee members lauded the work of the Office of the Attorney General in pursing the appeal of the North Carolina lower court ruling in the Phase II case. Senator Charlie Borders referred to the 2005 General Assembly’s approval of $114 million in Phase II payments and noted the foresight of the Legislature in assuring that the funds would be returned to the state should a favorable North Carolina ruling occur.


In response to questions from Representative McKee, Attorney General Stumbo predicted the General Assembly could safely build the anticipated Phase II reimbursement into its budget beginning in January. During discussion, two members alluded to the understanding that moneys would be returned to the Agricultural Development Fund (Phase I).

Next, Chairman Belcher asked Mr. Keith Rogers, executive director of the Governor’s Office of Agricultural Policy (GOAP) to address the Phase II issue. Mr. Rogers the general counsel in his office had worked closely with Assistant Attorney General Michael Plumley in pursuing the Phase II case in the North Carolina courts.


Mr. Rogers explained some motions were prepared for filing. He said the National Tobacco Trust had sent a letter to them indicating it would assist in the return of the $114 million. The GOAP official told the Committee that any amount of funds greater than the $114 million that Kentucky recovers must go to tobacco producers who had received payments under the Phase II agreement. That would include the interest payments assessed on tobacco companies.


According to Mr. Rogers, it was unclear whether the Phase II funds from the tobacco companies would be arrive soon enough to forestall a half-year payment on the first-year $9.2 million bond payment as a result of the 2005 Phase II legislation.


A question from Representative Comer also elicited information that tobacco producers may be receiving some additional money in the future from the DeLoach settlement.


Next, the Committee received a report from Mr. Steve Coleman, Director, state Division of Conservation, on the soil erosion and water quality cost share program, and soil stewardship program. According to Mr. Coleman’s report, the program has received $54 million in tobacco funds to date, plus state and federal funds resulting in a total of almost $68 million. Total expenditures totaled $52.3 million. It was pointed out there were expenditures outstanding before the end of the fiscal year.

The program had processed over 19,000 applications for funding since FY 96. Over 6,200 projects had received approval since then, and of that number, about 4,400 had been completed. Mr. Coleman explained that applicants could take up to two years to use the committed funds.


Responding to a question from Representative McKee about the general demand for the funds, Mr. Coleman said they were seeing a decrease in the number of applicants and that could be attributable to the effects of the tobacco buyout and less production. But he said that, as farmers shift from tobacco to other agriculture pursuits, participation in the program might rise.


Copies of Mr. Coleman’s materials are on file with meeting documents in the LRC Library.


Next, representatives of the Christian County Agri-Business Association requested that the committee ask the ADB to reconsider its decision in July to deny an association application establishing a tobacco infrastructure modernization program. Their application to the Agricultural Development Board proposed using $217,000 in Christian County tobacco settlement funds to set up the program.


Mr. Todd Perry, president of the association, said the purpose of the project was to invest some of his county’s tobacco settlement funds into tobacco production in a manner similar to investments in other agriculture endeavors. Under the association’s proposal, applicants could receive $5,000 per year on a 50-50 cost-share basis and would be limited to a lifetime maximum of $15,000. Eligible applicants could use their money to invest in facilities, equipment, production systems, site preparation, and the like.


Mr. Ben Payne described himself as a fourth generation tobacco farmer who had stopped growing tobacco for a time, but returned to production of the crop this year. Mr. Payne said the state had the infrastructure in place to produce tobacco. Under agriculture diversification, Mr. Payne explained, there should be no difference between tobacco and tomatoes.


According to Mr. Robert Gray, another tobacco farmer, money granted under the tobacco infrastructure modernization program would provide young farmers like him the seed money necessary to obtain the capital needed to raise tobacco.


Responding to a question from Senator McGaha, Mr. Perry said they reduced the amount of an earlier request to not deplete Christian County’s funds.


Representative McKee said he was encouraged to see the younger farmers, but he went on to express his concern about potential participation in such a program.


Representative McKee said he would rather see producers complete a marketing year, wait until next January or February, and then review the merits of putting money into a tobacco infrastructure program. He asked if acting now would benefit the current crop year.  Mr. Payne said the ADB is approving projects with no inclination regarding what will happen in the future. According to Mr. Payne, tobacco companies need to know that Kentucky is serious about continuing in tobacco production. He deemed tobacco a safe investment.


Senator Pendleton said there was an immediate need to act. He mentioned the changing market in the wake of the buyout. “We need to treat this industry as any other industry in the Commonwealth if we want to maintain it,” he said. The senator moved to refer the issue back to the ADB for favorable action.


Senator Borders said he was concerned that supporters of the program may be misreading the potential market. Both Mr. Payne and Mr. Gray explained the demand for tobacco was evident.


Chairman Belcher asked Mr. Daniel Green with the Burley Tobacco Growers Cooperative and Mr. Dean Wallace, of the Council for Burley Tobacco to explain the new cooperative tobacco infrastructure pilot project. This pilot program hopes to invest $3.5 million in cost match funds to allow tobacco growers in Kentucky and other burley states to improve their tobacco infrastructure.


Mr. Wallace stressed the possibility that Kentucky could lose its prominence as the No. 1 burley production state. He said companies such as Philip Morris are committed to purchasing Kentucky tobacco.


Chairman Belcher asked Mr. Rogers to clarify some matters relating to the Christian County application, Mr. Rogers said their position was that House Bill 611 was “silent” on the issue of allowing tobacco settlement funds to be used to help finance tobacco production.


Senator McGaha said everyone in attendance recognized the importance of tobacco. He said he had expressed his support of a statewide tobacco model program, but others have questions about using tobacco settlement money to raise tobacco. Because there was a lack of consensus, the senator suggested a working group made of committee members and ADB members to look at the relevant issues and come up with a plan.

Senator McGaha asked Senator Pendleton to clarify his motion. Senator Pendleton indicated his motion was to refer the application back to the Agricultural Development Board for the board to review it and reconsider its earlier decision. During subsequent discussion, and a later clarification, Senator Pendleton said he “would hope that when the board comes back and reconsiders that they would take a look at doing something on a statewide model program.”


The motion passed 7-1 with one abstaining. In explaining his no vote, Representative Comer expressed a concern that support for the way the state was using the tobacco settlement funds might wane in the General Assembly. Explaining his decision to pass on the vote, Representative Arnold said he was a tobacco grower and had constituents who favored the use of settlement funds to finance tobacco production. He said he was apprehensive about the future viability of the program itself because of mounting opposition. He said no more than 50 percent of county funds should ever be devoted to fostering tobacco production.


Next, Mr. Rogers and Mr. Brian Furnish, assistant director, reviewed the list of state and county-funded projects from the previous ADB meeting. The list included several entities granted funds to assist cities and counties in their farmer’s market operations. Mr. Rogers also answered questions regarding the Creech Services Inc. project to use $618,309 in state and county funds to expand a compost production operation. The loan arrangement with Creech would require the company to give compost to eligible farmers free of charge.