Tobacco Settlement Agreement Fund Oversight Committee





<MeetMDY1> January 9, 2007


The<MeetNo2> meeting of the Tobacco Settlement Agreement Fund Oversight Committee was held on<Day> Tuesday,<MeetMDY2> January 9, 2007, at<MeetTime> 1:00 PM, in<Room> Room 131 of the Capitol Annex. Senator Vernie McGaha, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Senator Vernie McGaha, Co-Chair; Senators Charlie Borders and David E Boswell; Representatives James R Comer Jr, Charlie Hoffman, Thomas M McKee, and Tommy Turner.


Guests:  Keith Rogers, Brian Furnish, Tim Hughes, Bill McCloskey, Catherine Ball, and Kylie Smith, Governor's Office of Agricultural Policy; Michael Plumley, Office of the Attorney General; Kaycie Len Carter, Community Farm Alliance; Christina Gordley, Governor's Office of Policy Management; Tonya Chang, American Heart Association; James "Jitter" Allen and Linda Magee, Altria; Dean Wallace, Council for Burley Tobacco.


LRC Staff:  Lowell Atchley and Kelly Blevins.

Minutes of the December 12 meeting were approved, without objection, by a voice vote upon a motion by Senator Boswell and seconded by Senator Borders.


Chairman McGaha next asked Mr. Keith Rogers and Mr. Brian Furnish, executive director and deputy director respectively of the Governor’s Office of Agricultural Policy (GOAP), to present their monthly report of state and county projects reviewed at the previous Agricultural Development Board (ADB) meeting.


Before beginning, Mr. Rogers introduced a new GOAP staff member to the committee, Kylie Smith.


During the discussion regarding state projects, Chairman McGaha and Representative Comer asked a series of questions about the B & R Drennan Enterprises project, Trigg County, which received $412,500 in state and county funds to upgrade its ham business. Mr. Furnish explained the forgiveness plan which involved a check-off payment equal to 5 cents, with the funds going to the Kentucky Pork Producers Association. According to Mr. Furnish, that plan seemed the most equitable for pork producers, and would allow producers to apply for funds from the check-off for value-added projects.


They said the “fulfillment center” at the B & R location would be an outlet that would sell assorted food products from a variety of Kentucky producers.


Representative McKee asked about the business set-up for the Kentucky Specialty Grains project. Mr. Rogers explained that Kentucky Specialty Grains, a soybean processing facility receiving agricultural development funding totaling $631,510, would be a limited liability corporation, and would be separate as a “closed cooperative.” He said the business would have stockholders, who would sell to the company and receive a premium for their beans. They also would be able to receive potential dividends from the enterprise. He said the company would be buying a certain type of beans that would be new to Kentucky producers.


Responding to Representative Comer, Mr. Rogers said the entity received a $1 million loan from the Kentucky Agricultural Finance Corporation, but certain contingencies were attached to the loan, mainly related to producers making up the majority ownership in the entity. According to Mr. Rogers, the loan terms would change if the company were to be sold.


Responding to Chairman McGaha during the discussion of the Allied Food Marketers project, Mr. Furnish discussed the subcontracting arrangement With Rebekah Grace Food. He said Rebekah Grace would offer merchandise branding for producers who did not want to market their owner products.


Later in the meeting, Mr. Rogers responded to a series of questions from Representative McKee concerning the Central Kentucky Growers Association (CKGA) project. CKGA, of Scott County, received $120,000 in state funds to restructure its operating loans. CKGA would lease its facilities to a company called Cabbage Inc., with the lease payments used to pay off the loan. Representative McKee said he had talked with producers in the Scott County area. He said he believed the deal would be a “step forward,” and expressed optimism about the business deal.


As Mr. Rogers reviewed the projects, members also raised questions about the ADB’s approval of $102,000 in state funds to help establish an indemnification program for the Kentucky Poultry Federation. The program would help provide assistance to non-commercial poultry farmers in the event of an avian disease outbreak.

Addressing a question from Chairman McGaha, Mr. Rogers said the funds would be placed in an interest bearing account. The federation would establish an advisory board, which would establish guidelines for the program. Kentucky Department of Agriculture and U.S. Department of Agriculture representatives also probably would be involved in setting up the program, he said. Mr. Rogers indicated that was the first time the ADB had approved funds for such an undertaking.


Following the project review, Mr. Rogers turned to a memo updating the committee on forgivable loans approved by the ADB since 2001. According to the report, the board had approved 84 forgivable loans ranging from as low as $6,000 to over $1 million. A total of 46 projects were in a “grace period,” meaning the project was approved, but the first forgiveness report was not due. Twenty-seven loans were in the payment stage. Mr. Rogers explained that three loans were not in compliance and steps were being taken to deal with those.


On a related issue, Mr. Rogers told Representative McKee that the Kentucky Agricultural Finance Corporation had approved loans for 35 tobacco-related projects thus far.


Next, Chairman McGaha asked Assistant Attorney General Michael Plumley to address the committee on Master Settlement Agreement issues. Mr. Plumley briefed the committee on the anticipated amount of the 2007 MSA payment and the factors that could affect that payment, the litigation regarding some tobacco companies withholding of funds based on declining market share claims, and enforcement of the state’s nonparticipating manufacturer (NPM) escrow statute.


Responding to questions from members, Mr. Plumley said all MSA states are involved in litigation to recover funds being held by tobacco companies. He said their national association also was involved in the litigation. According to Mr. Plumley, negotiations were proceeding, although he said he could not reveal the specifics of those negotiations.


Responding to question from Representative McKee about noncomplying companies selling cigarettes in Kentucky, Mr. Plumley said that in 2006, they “de-listed” 15 companies for their failure to comply with Kentucky’s MSA-related statutory requirements.


Mr. Plumley also discussed the outcome of legislation passed in the 2006 session. According to his testimony, roll-your-own tobacco companies were beginning to comply with legislation mandating that they establish escrow accounts. Also, he said his office had discussed with a “handful” of nonparticipating manufacturers, the possibility of assigning their escrow moneys to the state. But he said no agreements had been finalized. Legislation in the 2006 session allowed companies to assign their funds. Mr. Plumley said roughly half of the NPMs were foreign companies, thus the escrow assignment opportunity would not benefit them.


Documents distributed during the committee session are available with meeting materials in the LRC Library.


The meeting ended at approximately 2:30 p.m.