COMMONWEALTH OF PENNSYLVANIA HOUSE OF REPRESENTATIVES APPROPRIATIONS COMMITTEE HEARING BUDGET HEARING
STATE CAPITOL MAJORITY CAUCUS ROOM HARRISBURG, PENNSYLVANIA
THURSDAY, MARCH 9, 2006, 10:55 A.M.
VOLUME II OF III PRESENTATION OF TOBACCO SETTLEMENT PROGRAMS AND ISSUES
BEFORE: HONORABLE DWIGHT EVANS, CHAIRMAN HONORABLE GIBSON ARMSTRONG HONORABLE MATTHEW BAKER HONORABLE STEPHEN BARRAR HONORABLE STEVEN CAPPELLI HONORABLE GENE DiGIROLAMO HONORABLE PATRICK FLEAGLE HONORABLE DAN FRANKEL HONORABLE HAROLD JAMES HONORABLE JOHN MAHER HONORABLE EUGENE McGILL HONORABLE FRED McILHATTAN HONORABLE ANTHONY MELIO HONORABLE PHYLLIS MUNDY HONORABLE JOHN MYERS HONORABLE SAMUEL ROHRER HONORABLE CURT SCHRODER HONORABLE JOSH SHAPIRO HONORABLE JERRY STERN HONORABLE THOMAS TANGRETTI
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1 BEFORE: (cont'd.) HONORABLE DON WALKO 2 HONORABLE JAKE WHEATLEY HONORABLE PETER ZUG 3 ALSO PRESENT: 4 MIRIAM FOX EDWARD NOLAN 5
6 JEAN M. DAVIS, REPORTER NOTARY PUBLIC 7
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1 I N D E X
2 WITNESSES
3 NAME PAGE
4 MICHAEL MASCH 5
5 DENNIS YABLONSKY 15
6 CALVIN JOHNSON 18
7 NORA DOWD EISENHOWER 21
8 ESTELLE RICHMAN 22
9 DIANE KOKEN 24
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1 REPRESENTATIVE FLEAGLE: The hour of recess
2 having expired, the House Appropriations Committee
3 will come to order. Before us is the Tobacco
4 Settlement Program Multi-Tasking Committee here. We
5 have numerous secretaries here. We welcome all of you
6 and look forward to your testimony. As has been the
7 program, we would ask that each one of you introduce
8 yourself and then stand and be sworn in by the
9 stenographer.
10 You could start, Secretary Johnson.
11 SECRETARY JOHNSON: Calvin Johnson, Health
12 Secretary.
13 SECRETARY MASCH: Mike Masch, Secretary of
14 the Budget.
15 SECRETARY YABLONSKY: Dennis Yablonsky,
16 Secretary, DCEC.
17 SECRETARY RICHMAN: Estelle Richman,
18 Secretary of the Department of Public Welfare.
19 SECRETARY DOWD EISENHOWER: Nora Dowd
20 Eisenhower, Secretary of the Department of Aging.
21 REPRESENTATIVE FLEAGLE: If you folks would
22 all rise and be sworn in, please.
23 (Witnesses sworn en masse.)
24 REPRESENTATIVE FLEAGLE: I realize this might
25 be a logistical nightmare.
5
1 Secretary Masch, would you start?
2 SECRETARY MASCH: Let me note that
3 Commissioner Koken has rejoined us.
4 Do you want to swear her in as well?
5 REPRESENTATIVE FLEAGLE: Yes, let's do that.
6 I know she did the last time.
7 Commissioner Koken, would you stand to be
8 sworn in again?
9 COMMISSIONER KOKEN: Yes.
10 (Witness sworn in.)
11 REPRESENTATIVE FLEAGLE: Secretary Masch, I'm
12 sure not all of you have an opening statement.
13 Hopefully none of you do.
14 SECRETARY MASCH: Shall we take that as a
15 hint, Mr. Chairman?
16 REPRESENTATIVE FLEAGLE: We have a lot of
17 questions. If you would just like to preface this
18 hearing with a statement, I would certainly take that.
19 SECRETARY MASCH: Let me kick this off. On
20 December 17th, 1999, 46 of the 50 states entered into
21 an agreement which is known as the Master Settlement
22 Agreement with the five major manufacturers of
23 cigarettes in the United States. There are many
24 provisions to that agreement.
25 And although we will undoubtedly focus here
6
1 primarily on that component of the Master Settlement
2 Agreement which calls for annual payments to be made
3 to each of the 46 participating states in the
4 agreement, I should note that the Attorney General of
5 the state negotiated a very comprehensive agreement,
6 which is intended to do two things. It is intended to
7 increase the awareness of the public to the potential
8 health risks of smoking and reduce, ideally, the
9 amount of tobacco consumption in the United States as
10 a result of the agreement.
11 It is also intended to provide the states
12 with funds in recognition, and those funds are
13 provided in perpetuity. There are numerous times that
14 I have noticed in articles, even in the past couple of
15 months, that talk about the 25 year earnings because
16 there have been many statements as to how much the
17 value of 25-years' worth of payments could be.
18 But I want to make it clear, the Master
19 Settlement Agreement is an agreement in perpetuity.
20 It provides compensatory funding to the states for the
21 purpose of recognizing that the states have incurred
22 significant healthcare costs because of the
23 consumption and use of tobacco products by their
24 citizens.
25 Here in the state of Pennsylvania, the
7
1 General Assembly enacted, in 2001, Act 77, which is a
2 portion of the tobacco settlement funds. Some funds
3 were used for a one-time purpose to establish the
4 major programs like the Life Sciences Greenhouses.
5 The other funds are allocated on an annual basis.
6 Each year Act 77 requires the Governor to
7 propose -- to, first of all, estimate the amount of
8 funding that will be available in the coming year and
9 then to propose a plan for the use of those funds
10 consistent with Act 77.
11 Last year the General Assembly agreed with
12 the Administration to make some revisions to the Act
13 77 allocation formula. We are recommending that the
14 General Assembly and the Administration make revisions
15 to the Act 77 formula this year as well. And we'll be
16 happy to speak to that during this hearing. And I'm
17 sure that you have questions about it.
18 I would note that our projection is that in
19 new money, we will receive $379 million in new tobacco
20 settlement funds this year. We also will earn
21 interest on the tobacco settlement fund and on the
22 tobacco settlement endowment. It is our proposal that
23 we use those funds, interest and earnings, on the
24 endowment account, which would come to thirty-seven
25 and a half million in interest and earnings on the
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1 tobacco fund itself, which are estimated at 8.7.
2 We also project that we will have a
3 carryforward in adultBasic. Funding for the
4 adultBasic adult health program lapses into the
5 program and not into the fund or into the General
6 Fund. That would give us total resources of $434.7
7 million. And we have proposed an allocation of those
8 funds and we would be happy to answer questions.
9 The members of the cabinet who are here
10 represent the departments that are responsible for the
11 administration of those various programs. We would be
12 happy to answer your questions about how we have used
13 those funds to date, our proposal for the use of those
14 funds in the coming year, and also general questions
15 you may have about the administration of the Master
16 Settlement Agreement and how it affects the
17 Commonwealth.
18 Thank you.
19 REPRESENTATIVE FLEAGLE: Thank you,
20 Mr. Secretary.
21 Just one more logistical thing. I would ask
22 that members, as we ask questions, try to focus in on
23 the particular member of that cabinet that they think
24 would be best suited to answer that. I realize we may
25 stray from that, because you are a very opinionated
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1 group, as we are. There's a lot of knowledge out
2 there.
3 I understand, Mr. Secretary, you are before
4 the Senate at 2 o'clock, right?
5 SECRETARY YABLONSKY: I have a Senate
6 hearing, Mr. Chairman, at 1:15.
7 REPRESENTATIVE FLEAGLE: The rest can stay
8 the rest of the day, right?
9 SECRETARY MASCH: If it is your pleasure.
10 REPRESENTATIVE FLEAGLE: I will now recognize
11 Representative Cappelli, who was gracious enough to
12 cut his questions off the last time.
13 Representative Cappelli.
14 REPRESENTATIVE CAPPELLI: Thank you,
15 Mr. Chairman.
16 I appreciate the priority given to me this
17 round. First, I have a comment for Secretary
18 Yablonsky. Unfortunately, I was unable to attend the
19 DCED budget hearing. And I just want to commend you,
20 sir, and your staff for the excellent job you're doing
21 relative to the economic development.
22 SECRETARY YABLONSKY: Thank you very much.
23 REPRESENTATIVE CAPPELLI: You are a man of
24 your word. I certainly mean that. I want to thank
25 you for that.
10
1 I guess my question would be for Secretary
2 Masch. I'm wondering what percent decline, what
3 percentage of revenue decline, have we or are we or
4 are we not factoring into estimated tobacco settlement
5 revenues for the upcoming fiscal year?
6 SECRETARY MASCH: Representative, in fiscal
7 year '04-'05, new payments under the Master Settlement
8 Agreement were $371 million. In this current fiscal
9 year, we originally anticipated a decline. That is
10 for '05-'06. We originally anticipated a decline in
11 revenues of three and a half percent. That would have
12 given us a $358 million payment under the agreement in
13 this current year.
14 We have now revised those projections. And
15 in the submitted budget for '06-'07, we start with a
16 projection that this year's payment under the Master
17 Settlement Agreement to the Commonwealth will be
18 $366 million. That is a decline of 1.3 percent. We
19 then project that the tobacco settlement payment for
20 next year will, for the first time in several years,
21 increase to 3.6 percent.
22 Now, the reason for that is that the payments
23 are determined by an interaction of several different
24 factors. The first one is the base amount of funding
25 that is to be available. In calendar years 2002 and
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1 2003, the total base amount of payments that were due
2 to the states was $6.5 billion. And in 2004 to 2007,
3 those payments -- the base payment annually is
4 $8 billion. But those payments are then adjusted.
5 And there are several adjustments that are made.
6 There is an adjustment, first, for volume of
7 cigarettes sold by participating and non-participating
8 manufacturers. And sales by participating
9 manufacturers declined significantly in the years
10 after the base year in the Master Settlement
11 Agreement. That was 1997. By 2002, sales by
12 participating manufacturers declined by about 20
13 percent.
14 The projection is that the declines going
15 forward by participating manufacturers will be much
16 smaller, declines by participating manufacturers
17 determined by total tobacco sales declining, and then
18 how much of the sales are by participating and by
19 non-participating manufacturers.
20 Offsetting the volume adjustments is the
21 inflation factor. The inflation factor is either the
22 greater of 3 percent or the actual inflation factor.
23 Combining those elements together, we get the
24 projection of 3.6 percent for the coming fiscal year.
25 REPRESENTATIVE CAPPELLI: I appreciate that
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1 information because, clearly, tobacco sales nationwide
2 are down by 4.2. I think the total number of
3 cigarettes sold is around 378 billion, which is the
4 lowest number of cigarettes sold in the United States
5 since 1951. And the State Attorney Generals
6 Association is strongly warning states about municipal
7 tobacco funds and that the unpredictability in future
8 revenues and the bonds with future tobacco payments
9 could be a very serious liability. I ask that and
10 raise that issue only because of the Jonas Salk Legacy
11 Fund and the Administration's suggestion that tobacco
12 be securitized, the future of tobacco dollars.
13 SECRETARY MASCH: It is absolutely correct
14 that we are all, the Attorney General and the states,
15 generally the National Governors Association, looking
16 closely at future sales. It is our goal under the
17 Master Settlement Agreement for the states to see
18 tobacco consumption decline. But as I've noted, a
19 decline in tobacco consumption doesn't automatically
20 result in a decline in the payments that the
21 participating manufacturers make to the states.
22 I am also not aware that the Attorney General
23 has taken a position on tobacco securitization per se.
24 Certainly, we're all aware of the fact that we and any
25 bond buyers would have to be aware of the potential
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1 uncertainty in terms of the stream of payments going
2 forward.
3 That notwithstanding, we are aware of the
4 fact that other states have successfully been able to
5 securitize their stream of payments with the bond
6 buyers being fully aware of the uncertainty but also
7 the offsetting possibility for growth because of the
8 inflation factor and because of the enactment of the
9 model statutes by all the states. That risk is a risk
10 that the bond buyers would have to bear.
11 REPRESENTATIVE CAPPELLI: Could you just
12 explain the volume adjustment of the Master Settlement
13 Agreement and what that means to the manufacturers in
14 terms of relief, financial relief?
15 SECRETARY MASCH: Well, there are two parts
16 to the volume adjustment. There is the general volume
17 adjustment. That's been in place ever since we've
18 been receiving payments. And that is simply an
19 adjustment based on whether sales by participating
20 manufacturers are declining.
21 And as a result, payments in every year of
22 the settlement have been reduced. Because that's
23 already an adjustment to the base payment, that has
24 not had a significant influence. That has been an
25 adjustment of about 1.2 billion on the base. Most of
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1 those declines occurred between 1997 and 2002.
2 There is an additional adjustment called the
3 non-participating manufacturer adjustment. The
4 non-participating manufacturer adjustment kicks in if
5 there has been a market sale loss by the participating
6 manufacturers of greater than 2 percent since 1997 and
7 the Master Settlement Agreement is found to be a
8 significant factor contributing to that loss and
9 states cannot demonstrate that they have enacted and
10 diligently enforced a model tobacco settlement
11 statute. So there are several parts to this.
12 Now, that part has not kicked in yet. The
13 determination about contributing factor will be the
14 subject of a study that will be released on March
15 27th. And then each state has to argue. And each
16 state is obligated to defend itself. There's no
17 collective defense because the test is whether each
18 individual state has enacted a model statute and
19 diligently enforced that statute to prevent
20 non-participating manufacturers from benefiting
21 unfairly from the fact that the participating
22 manufacturers are in the agreement.
23 The state of Pennsylvania enacted a model
24 statute, Act 64 of 2003. And it is the position of
25 the Administration and the position of the Attorney
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1 General that having enacted that statute, we have
2 diligently enforced it. Therefore, we do not believe
3 that we should be subject to a non-participating
4 manufacturer adjustment.
5 REPRESENTATIVE CAPPELLI: Secretary Masch,
6 what would the amortization schedule period be for the
7 Jonas Salk Legacy Fund?
8 SECRETARY MASCH: On the Salk Fund, let me
9 turn to Secretary Yablonsky.
10 SECRETARY YABLONSKY: Twenty years,
11 Representative.
12 REPRESENTATIVE CAPPELLI: Thank you,
13 Mr. Chairman.
14 Thank you, Mr. Secretary.
15 REPRESENTATIVE FLEAGLE: The Chair thanks the
16 gentleman and recognizes Representative Melio.
17 REPRESENTATIVE MELIO: Thank you,
18 Mr. Chairman.
19 I just wanted to make an observation.
20 Sitting in these hearings, I think the Governor made
21 wise decisions in picking you members for his cabinet.
22 You're very responsive and answer all your questions.
23 The one question I did have, as
24 Representative Cappelli did mention, the Attorney
25 General was here and said that there's so many
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1 cigarette manufacturers who are suing the federal
2 government on the proposal, the reason that we're
3 getting all this tobacco funding. There was a concern
4 that we may not have that funding in the future. You
5 answered that pretty good.
6 What I want to know is, can you explain how
7 the Jonas Salk Legacy Fund is going to help the
8 universities and the people that are concerned with
9 research?
10 SECRETARY YABLONSKY: May I answer that,
11 Representative?
12 REPRESENTATIVE MELIO: Please.
13 SECRETARY YABLONSKY: The Jonas Salk Legacy
14 Fund is a proposed $500 million acceleration of
15 research and commercialization funds predominantly for
16 academic research institutions in the state of
17 Pennsylvania. The need is based upon the competitive
18 situation that they find themselves in, competing for
19 Federal National Institute of Health money.
20 REPRESENTATIVE MELIO: I see.
21 SECRETARY YABLONSKY: And the key variables
22 in that competition are senior faculty and the
23 equipment, laboratory, and facilities necessary for
24 them to do their work, which in that world is very
25 expensive, on average $500 a square foot to build
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1 those kinds of facilities.
2 What is being proposed is an acceleration of
3 50 percent of the tobacco settlement revenue that
4 currently goes to the CURE fund to be used in two
5 years versus a period of between 14 and 16 years,
6 depending on your calculation, for facilities and for
7 the equipment and laboratories related to faculty
8 hiring.
9 This will improve the competitiveness of
10 Pennsylvania's institutions and put them in a much
11 better position to take a larger percentage of that
12 NIH money, which adds economic impact. It also has
13 health benefit impact in terms of the kinds of
14 research and technologies that are developed with that
15 money.
16 REPRESENTATIVE MELIO: Whereas some of the
17 universities probably do need new facilities. The
18 ones that do not need new facilities, how are they
19 going to be helped?
20 SECRETARY YABLONSKY: We have spoken directly
21 with at least a dozen of the leading institutions in
22 Pennsylvania. And every single one of them has at
23 least one laboratory facility hire or facility project
24 either underway or planned. So we have yet to hear
25 from any institution that they would not have a
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1 project that they would propose for these funds.
2 REPRESENTATIVE MELIO: Thank you,
3 Mr. Chairman.
4 REPRESENTATIVE FLEAGLE: The Chair thanks the
5 gentleman and recognizes Democratic Chairman Evans.
6 REPRESENTATIVE EVANS: Thank you,
7 Mr. Chairman.
8 Good morning. The question I would like to
9 ask -- this would be to all of the cabinet officers --
10 is a question about evaluation in terms of the use of
11 the money. Do you have a built-in evaluation or is it
12 going to be evaluated from hiring independent
13 consultants coming in? Three hundred million is an
14 awful lot of money. I'm interested in, have you given
15 any thought to the question of evaluating so that you
16 come back here year after year telling us specifically
17 how, as a result of these investments, we have some
18 way of measuring what is the benchmark? I don't know
19 how we are going to start.
20 SECRETARY JOHNSON: Good morning,
21 Representative. I'll start with talking about the
22 research funding by the Department of Health and also
23 the prevention and cessation dollars. With the
24 research piece, which you call the health research
25 program of CURE, Commonwealth Universal Research
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1 Enhancement program, up front the proposals are
2 evaluated based upon priorities decided upon by a
3 first group of appointed individuals. And a peer
4 review is done to identify quality projects that we
5 fund upfront. So there is sort of a quality piece
6 built in up front in terms of that.
7 Each of the recipients of grant funding by
8 CURE are required on a quarterly basis to file reports
9 and then we file an annual report of the CURE funding
10 and the research. We also have evaluations built in
11 for those research dollars as well.
12 On the prevention and cessation side, an
13 evaluation was started from the very beginning. And
14 that's very key with prevention. And over the long
15 term, the Center for Disease Control and Prevention
16 recommended that evaluation procedures be put in place
17 to begin three to four, three to five years into
18 prevention programs. That's when you really begin to
19 see some measurable results.
20 So we are now at that period. And we have
21 engaged a contractor to do a comprehensive evaluation
22 of the prevention and cessation dollars.
23 SECRETARY YABLONSKY: I'll briefly mention
24 the two programs that we are involved with through the
25 Tobacco Settlement Investment Board, that is, the
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1 overseeing of investment into venture capital
2 companies and, secondarily, into the Life Sciences
3 Greenhouses. And in both cases, we have a
4 quantitative as well as qualitative measure in place.
5 In terms of the venture capital firms, that
6 includes how many companies they've invested in, how
7 much money they put into them, how many jobs those
8 companies retained and created. And then ultimately,
9 the state has a return mechanism. As those venture
10 capitals have a pay-off, the state has the potential
11 to get its share back.
12 Certainly, on the Life Sciences Greenhouses,
13 we look at how many new companies have been formed,
14 how many jobs have been retained and created, and then
15 there also is a return mechanism through the Life
16 Sciences Greenhouses.
17 REPRESENTATIVE EVANS: Are there, like, any
18 kind of claw-back provisions if people don't
19 accomplish what they started out to do?
20 SECRETARY YABLONSKY: In these particular
21 cases, with the venture capital side, the answer is
22 no. We've made an investment in the fund like other
23 limited partners. We have the same risk profile and
24 return profile as any other partner. So there is a
25 potential that we would not get a return on our money.
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1 On the Life Sciences Greenhouses, once again,
2 there is no claw-back provision. There is just a
3 monitoring evaluation procedure. And then, obviously,
4 there's ongoing requests for future monies. We
5 wouldn't be considering those if there wasn't tangible
6 results being achieved.
7 REPRESENTATIVE EVANS: Thank you.
8 SECRETARY DOWD EISENHOWER: Good morning,
9 Representative Evans.
10 REPRESENTATIVE EVANS: Good morning.
11 SECRETARY DOWD EISENHOWER: What we focus on
12 in the Department of Aging with tobacco dollars are a
13 couple of programs that I think you're probably very
14 familiar with. Home and community-based care programs
15 where we are able to get people home when they're able
16 and when it's appropriate instead of in an
17 institution, it's very cost-effective and very
18 desirable. We have many quality assurances in those
19 programs, and we're creating more every day as the
20 program expands. That's where we use our tobacco
21 dollars.
22 In addition to that, up until this fiscal
23 year, we will be using some of those tobacco dollars
24 for a bridge program. The name of the program is less
25 important than to know what that program does is help
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1 keep people at home longer by making available to them
2 services that they wouldn't otherwise be eligible for
3 because their income levels are too high but we know
4 within the year they will qualify for Medicaid. So
5 it's a way of delaying that and spending dollars in a
6 way that is much wiser.
7 In addition to that, the tobacco dollars have
8 been used in part so that expansion that we saw in '03
9 to higher income limits in the PACENET program is
10 where we put our tobacco dollars. In addition to
11 that, we have many protections in place to make sure
12 that our PACE and PACENET programs work well. I think
13 most people agree that those are exemplary programs.
14 That's how we operate.
15 REPRESENTATIVE EVANS: Thank you.
16 SECRETARY RICHMAN: Good morning,
17 Representative. The Department of Public Welfare
18 basically has four programs that receive money from
19 the tobacco settlement funds. We can start with the
20 home and community-based services. Obviously, we work
21 in partnership with the Department of Aging with the
22 home and community-based services dollars.
23 We also have two categories of dollars that
24 actually fade into the larger picture. One of those
25 is uncompensated care from hospitals. And as I
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1 testified in my appropriation hearing for DPW, we are
2 basically trying to look at how we can revise our
3 hospital payment system. This would add into that to
4 make sure we know how we're spending the dollars and
5 that we're getting quality hospital care.
6 An additional program is the Medical
7 Assistance Program for workers with disabilities.
8 This is to actually encourage people with disabilities
9 to go back to work while we may insure that gap in
10 their insurance to ensure that the insurance they are
11 receiving doesn't undermine the effort of having
12 people working. It's actually a good program. It's
13 continuing to grow.
14 We're continuing to see more people go back
15 to work and become part of the tax base of the state
16 as opposed to just payments on the part of public
17 welfare. We continue to look at the program, the
18 outcomes. The results of that program are good, and
19 we're always willing to share those.
20 The final piece is the long-term care
21 appropriation. The Legislature did designate money
22 for long-term care. Again, this is a program to help
23 us rebalance the system, as Secretary Dowd Eisenhower
24 mentioned. And we're continuing to do some very heavy
25 monitoring of that program and evaluation to make sure
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1 we're getting a better balance than we have right now.
2 Those kinds of data on the evaluation of what
3 we're doing and how we're doing are just being
4 designed.
5 COMMISSIONER KOKEN: The Insurance Department
6 uses the tobacco settlement funds for the adultBasic
7 health insurance program for individuals between the
8 ages of 19 and 64. We use an RFP process to contract,
9 which allows us to make sure that we are competitively
10 bidding and getting the best providers. And this is a
11 program that has only been in existence since 2002.
12 We have begun recently looking at the requirements as
13 far as judging the efficiency of some of the program
14 delivery.
15 REPRESENTATIVE EVANS: To the Budget
16 Secretary, did you look back, as Budget Secretary,
17 from an evaluation standpoint how the money was used
18 prior to you coming in?
19 SECRETARY MASCH: Well, Representative Evans,
20 because of the provision of Act 77, we did not have
21 the discretion, nor did we have the desire, to make
22 wholesale changes in the allocation. I want to say
23 straight up, I think that this General Assembly
24 deserves a lot of credit for the responsible way in
25 which they planned for the use of our settlement
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1 payments in Pennsylvania under the Master Settlement
2 Agreement.
3 The money has been designated broadly to be
4 used for purposes that improve the quality of health
5 of the citizens of Pennsylvania. And you hear an
6 array of programs being described here, but the money
7 is all focused in that way. We support that strongly.
8 And that's why we have continued to advocate for the
9 continuation of funding for these programs.
10 As, I believe, Commissioner Koken stated in
11 her testimony on the Insurance Department earlier, we
12 are looking at program design in terms of the
13 adultBasic program. As, I believe, Commissioner Dowd
14 Eisenhower stated and Commissioner Richman stated in
15 their testimony before this committee, we are looking
16 at the design of home and community-based programs.
17 We think that the things that we are funding
18 are the right activities to promote the health and
19 welfare of Pennsylvanians. But we think that we can
20 make improvements in the programs.
21 For instance, as the Commissioner noted, we
22 do not want the availability of the adultBasic
23 program -- and when I say we, I mean the General
24 Assembly and the Administration. I think we are
25 united that we do not want to create or offer any
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1 program that provides a disincentive to private
2 employers to continue to maintain healthcare coverage.
3 We are looking closely to make sure that that is not
4 an unintended consequence of our broadening the
5 availability of the affordability of health insurance.
6 Likewise, we think that there are more
7 effective ways -- within the area of supporting
8 biomedical research, that there are more effective
9 ways that we can use those monies. And that's why
10 this year we proposed the Jonas Salk Legacy Fund.
11 So I think the broad categories of funding
12 direct health care, biomedical research, doing our
13 part in alliance with the national government and the
14 states we have created, I think you may know, through
15 the tobacco settlement, the American Legacy
16 Foundation. That is supported by the 46 states as a
17 national effort to promote the decline in tobacco
18 consumption. And we do our part through the Health
19 Department programs here.
20 So I think we have the right programs. Our
21 challenge is to finetune those programs so that they
22 are more effective. And we have been working on that
23 during the course of this Administration.
24 REPRESENTATIVE EVANS: I appreciate that
25 comment relating to the General Assembly. Obviously,
27
1 we're working with the Administration. But, like,
2 anytime when you talk about the amount of money that
3 we have, we need to make course changes in whatever
4 way, tinker, adjust. Obviously, those of us who have
5 been here know that we need to talk about that and
6 look at those things. I also believe that we should
7 never be locked into something just because it's been
8 there for so long. We need to ask questions. That's
9 the reason I asked all of you all of those questions
10 about the proposed use and where we are.
11 Thank you, Mr. Chairman.
12 REPRESENTATIVE FLEAGLE: The Chair thanks the
13 gentleman and recognizes Representative Rohrer.
14 REPRESENTATIVE ROHRER: Thank you,
15 Mr. Chairman.
16 Thank you, everybody, for being here this
17 morning. My questions are going to go back to what
18 was originally asked about the whole tobacco payment
19 securitization issue. Clearly, the whole concept of
20 taking and securitizing these funds is creative and
21 it's obviously controversial. And I think, from my
22 perspective, there's two aspects of it.
23 One, those who would be impacted by the
24 changes -- I know I have talked with many of them --
25 don't see the benefit that's being prescribed to them.
28
1 I don't think everybody is in agreement with it. And,
2 two, there are some questions relative to the accuracy
3 of the numbers that we have. Again, when you're
4 talking about doing something that's going to commit
5 this Legislature and the taxpayers to payments for the
6 next 20-some years, I think it's prudent that we take
7 a very close look at it.
8 The question that I have would be around this
9 issue. The statement is that it's $500 million that's
10 going to be securitized. Information that the
11 Appropriations Committee got from DCED showed that
12 there would be proceeds of $511 million, which would
13 indicate, I believe, that the amount securitized would
14 have to be larger than the 500.
15 The Citigroup Global Markets met with
16 Appropriations Committee staff. They indicated and
17 showed that there would need to be $550 million of
18 tobacco payments that would have to be securitized in
19 order to generate the proceeds of 509 million, which I
20 think relates to the 511 million we got from DCED.
21 Now, the question I would have of you would
22 be this: Precisely what is the amount of the tobacco
23 bonds that you're proposing to sell? Let's start with
24 that. What is the precise amount?
25 SECRETARY YABLONSKY: Let me start,
29
1 Representative, with the one absolute in all of this.
2 And that is, we are proposing 9.5 percent of the
3 state's tobacco settlement revenue, whatever that
4 number is, would go toward securitizing this bond.
5 That number could rise or fall with the amount of
6 money that the state gets. And the bond issuers
7 understand that.
8 From there, the actual amount of the bond
9 issuance and the debt service and all those
10 particulars are based upon, No. 1, what the interest
11 rate would be at the time of the issuance and, No. 2,
12 what the taxable versus non-taxable component of those
13 bonds are.
14 And that's why the numbers -- I can't give
15 you an absolute number. There has to be more detail.
16 The bill is going to have to be flushed out and the
17 interest rate will have to be determined at that time.
18 So we have various models that show different
19 assumptions, that show as low as 480 million. We have
20 the one that we did share with you, which we believe
21 is the most likely scenario, the $511 million.
22 But the absolute is 9.5 percent of the
23 state's tobacco settlement revenue. If the state's
24 overall tobacco revenue goes down in any given year,
25 we still only pay that 9.5 percent prorated portion.
30
1 And the bond issuers have to take that into account
2 when they structure the bond.
3 REPRESENTATIVE ROHRER: So the statement that
4 we are securitizing 500 million, is that right or is
5 that wrong?
6 SECRETARY YABLONSKY: The accurate statement
7 is, we are securitizing 9.5 percent of the state's
8 tobacco settlement revenue. The estimate that was
9 originally made is that that would generate
10 approximately $500 million in funds that could be
11 invested.
12 REPRESENTATIVE ROHRER: So therefore but for
13 the sake of the projection of where these funds are,
14 there are obviously going to be commitments made to
15 those people, whoever they are going to be?
16 SECRETARY YABLONSKY: Right.
17 REPRESENTATIVE ROHRER: What are you basing
18 that on? That's not based on 500 million either
19 because we don't know for sure that that's going to --
20 SECRETARY YABLONSKY: Well, we've done all of
21 our estimates based on approximately $500 million. It
22 could be slightly larger. It could be slightly
23 smaller. But the absolute number will not be known.
24 All we're asking the General Assembly to
25 agree to is 9.5 percent of the tobacco settlement
31
1 revenue. And there's no risk. If it's lower than
2 that, the state has to make up the risk or has to back
3 this in terms of general obligation. That is all
4 factored in. The bond issuance and the bond holders
5 take that risk.
6 SECRETARY MASCH: If I can add to this,
7 Representative, every time we go to market, we have an
8 estimated sizing and hard value on an issue. And then
9 depending on the market conditions that day, we may be
10 faced with a premium or a discount to the prior value.
11 What we are saying is that we believe we can go to
12 market with a pledge of 9.5 percent of Pennsylvania's
13 annual payments under the Master Settlement Agreement
14 and generate net proceeds of at least $500 million.
15 Obviously, if market conditions were to
16 change radically between today and the date when we
17 would go to market, perhaps that number would change.
18 I think $500 million is our threshold in terms of, you
19 know, what we would be aiming for.
20 We need to discuss it with you and we need to
21 discuss -- as I said when I was here before, anything
22 that we do like this is always a partnership between
23 the Administration and the General Assembly. We will
24 need to negotiate the details.
25 We all need to make sure that we structure
32
1 any proposed tobacco securitization in a way that
2 protects the interest of the Commonwealth and the
3 interest of the academic medical centers. If for any
4 reason the market conditions would change in a way
5 that would not permit us to structure this proposal in
6 the way we think is in the interest of the state and
7 the academic medical centers, we would want to reserve
8 the right to not proceed.
9 I want to make it clear. I do not foresee
10 any potential market conditions anytime between now
11 and when we might go to market on these bonds that
12 would warrant that. But it's all something that you
13 have to consider.
14 Understand, every time we go to market, we
15 never are going to know exactly to the dollar before
16 we complete the transaction how much we're going to
17 yield in net proceeds. But can we yield at least
18 $500 million under current and likely future market
19 conditions in the foreseeable future? We think the
20 answer to that is yes.
21 REPRESENTATIVE ROHRER: How many are you
22 factoring in then? I know that the risk factor you're
23 saying is going to be borne by the bond holder. The
24 question that I have though is that with the
25 uncertainty of future tobacco payments and with the
33
1 information that we just heard about the levels of
2 tobacco taking a dip down to 1952 levels not being
3 significant, I don't know how we could structure that
4 -- that bond holders would be able to take a risk of a
5 significant amount if the funds go down over this next
6 20 years without running a risk to this Commonwealth.
7 SECRETARY YABLONSKY: A couple of different
8 ways. First of all, 17 other states have securitized
9 a portion of their tobacco settlement revenue. I will
10 tell you that in most cases, that money has been used
11 to balance budgets. That's not what we're proposing
12 here. We're proposing a use of the money that's in
13 line with the intended use of tobacco money.
14 But there is a track record and history of
15 doing this in the financial community, No. 1. Number
16 2, we have discussed this with multiple firms who are
17 actively involved in tobacco securitization and they
18 have all indicated that they have taken into account
19 the discussion you just raised about reduced tobacco
20 consumption.
21 And as Secretary Masch testified earlier this
22 morning, even with that factored in, there's still a
23 projection in the next few years of a small increase
24 in the overall amount of tobacco settlement revenue
25 that will come to the state.
34
1 So that's all been factored in in our
2 discussions with various folks in the professional
3 industry. And they all believe that it is doable.
4 And this isn't just one firm telling us this. It's
5 multiple.
6 REPRESENTATIVE ROHRER: I guess I'm just
7 raising the question somewhat just by the mere fact
8 that this is something that would be an obligation to
9 us for a long time in the future. I understand that.
10 But when I hear declines of 4.2 percent -- and I read
11 an article from a financial paper on this whole issue.
12 They're saying that if consumption declines to
13 4 percent, even traditional tobacco bonds say this, at
14 this level it raises significant concerns.
15 SECRETARY YABLONSKY: I want to repeat that
16 all we would be pledging is 9.5 percent of whatever
17 tobacco settlement revenues the state receives. The
18 risk of that going down is not borne by the
19 Commonwealth. It's not supported by the Commonwealth.
20 That's part of the bond issue and the bond holders
21 would take that risk.
22 SECRETARY MASCH: If I could add,
23 Representative Rohrer, that we know that the credit
24 markets are rational. So it's a reasonable question
25 for to ask. Why is it that investors are willing to
35
1 buy tobacco settlement securitized bonds? Well, the
2 answer is because it is a legally enforceable
3 agreement in perpetuity and the consumption of tobacco
4 products is not the only or even the controlling
5 variable in determining the future payments.
6 For instance, the base payment will go up by
7 a billion dollars regardless of the offset that I
8 described before, the volume adjustment. In 2008, the
9 aggregate payments go up by a billion dollars. There
10 is the inflation and adjustment as well.
11 Also, although there is this
12 non-participating manufacturer adjustment downwards
13 that the participating manufacturers can claim, the
14 Attorney Generals of the 46 states were no dummies.
15 They agreed to that and then agreed to a defense on
16 the part of states, including our state. We do not
17 believe that we will be subject to, nor should we be
18 subject to, a downward adjustment because we have
19 fulfilled our legal responsibilities under the
20 agreement.
21 We passed the model statute. And the
22 Attorney General can tell you that we are diligently
23 enforcing that statute. And that is our legal
24 obligation under the agreement. So the credit markets
25 are not irrational here. They never are irrational.
36
1 If people are willing to invest in these bonds, it's
2 because they believe that there is a very high
3 likelihood. There's never a certainty.
4 That's why there's bond insurance and that's
5 why there are bond ratings and credit assessments.
6 But there is a very high likelihood of a payment of
7 monies due. So there are people willing to take that
8 risk. People take risks in the credit markets.
9 That's why they're there.
10 REPRESENTATIVE ROHRER: And I understand that
11 whole aspect. I'm just drilling down because the
12 certainty of it still seems to be rather elusive and
13 unsure.
14 Under the Jonas Salk Legacy Fund aspect of
15 it, bringing back up that 9.5 percent, our
16 understanding is, looking at that, at the current law
17 strategic contribution payments that a portion of
18 those are going to have to be used to pay the debt
19 service on the securitization bond that we're talking
20 about. Is that a correct statement or is that not
21 correct?
22 SECRETARY YABLONSKY: Well, the correct
23 statement is that 9.5 percent of whatever tobacco
24 settlement revenue we get, which would include that
25 element -- correct, Michael?
37
1 SECRETARY MASCH: Yes.
2 SECRETARY YABLONSKY: -- which would include
3 that piece would be used to securitize these bonds.
4 SECRETARY MASCH: We're proposing -- we can't
5 do this without restructuring the Act 77 provision.
6 REPRESENTATIVE ROHRER: That's my question.
7 Under the current law, the contribution payments have
8 to be put into the endowment account. So if you're
9 going to change it and take 9.5 percent, which is what
10 you said, then there's going to have to be a law
11 changed in order to make that possible.
12 SECRETARY MASCH: Absolutely. And that's one
13 of several amendments now. We did make changes to Act
14 77 in this current fiscal year. And as I said in my
15 opening testimony, we will need to make additional
16 changes. And in the spirit of Representative Evans's
17 comments earlier, we do think it is the right and
18 responsibility of the Administration and the
19 Legislature, working together, to reconsider the
20 decisions made in the past and to try to decide
21 whether we can improve upon the work that was done
22 before.
23 As I say, our general thrust here is the way
24 that the use of tobacco settlement funds are
25 structured in Pennsylvania is vastly superior to the
38
1 way these monies were used in other states. That's
2 where we're starting out. Now the question is, can we
3 be even smarter and more strategic about the way we
4 use those dollars?
5 REPRESENTATIVE ROHRER: That answers my
6 question. I just wanted to make sure that that, in
7 fact, was being done.
8 One last question, Secretary Yablonsky, on
9 this. From your perspective, what specific rule will
10 the Legislature directly have in the decision-making
11 process relative to the competitive grants that would
12 be derived by the program?
13 SECRETARY YABLONSKY: The proposal,
14 Representative, would be to create an independent
15 board or authority or some mechanism, some body, that
16 would have legislative appointees on the board, would
17 have gubernatorial appointees on the board, and would
18 have private sector people on the board that would
19 make the ultimate decisions on the awards of funding.
20 They would rely upon multiple committees, including
21 certainly a scientific committee and probably a
22 commercialization committee.
23 REPRESENTATIVE ROHRER: Separately appointed
24 on the outside?
25 SECRETARY YABLONSKY: The details of that
39
1 have to be worked out. We feel it's important to have
2 that type of expertise available to the board to make
3 some meritorious decisions.
4 REPRESENTATIVE ROHRER: I think that would be
5 an excellent idea.
6 Thank you.
7 Thank you, Mr. Chairman.
8 REPRESENTATIVE FLEAGLE: The Chair thanks the
9 gentleman and recognizes Representative Tangretti.
10 REPRESENTATIVE TANGRETTI: Thank you,
11 Mr. Chairman.
12 Secretary Yablonsky, just to follow up on
13 that last question. How do you envision the grant
14 process to work? Do you see applications coming from
15 the institutions by project, by faculty, by facility
16 needs, or a combination? And how would dollars flow
17 in that regard?
18 SECRETARY YABLONSKY: Well, first of all, we
19 see two discrete uses of the money. The first would
20 be the physical facilities that would be built to
21 house multiple faculties and teams and laboratories
22 and so forth. And those are typically tens of
23 millions and sometimes hundreds of millions of dollars
24 in investments.
25 REPRESENTATIVE TANGRETTI: Based on a
40
1 specific project?
2 SECRETARY YABLONSKY: No. For example, the
3 University of Pittsburgh Medical Center, who is
4 publicly supportive of this program, has indicated
5 that they are planning on building a major new cancer
6 institute facility in Pittsburgh that they would use
7 this for. Children's Hospital in Philadelphia, who
8 has been publicly supportive, has talked about it.
9 REPRESENTATIVE TANGRETTI: And will there be
10 applications made and/or recruitment of faculty?
11 SECRETARY YABLONSKY: In addition to faculty
12 applications, we would envision applications related
13 to the hire of a specific member or maybe they can say
14 hire five faculty members in genomic. It could be
15 project specific. It could be facility specific. And
16 that would be a separate pot of money as part of the
17 overall 500 million.
18 REPRESENTATIVE TANGRETTI: Is there a
19 limitation with respect to decisions? Secretary Masch
20 and Secretary Johnson, do you envision a limitation by
21 facility, by region of the state, or any other kind of
22 requirement for standards that would be dealt with?
23 SECRETARY YABLONSKY: Ultimately that would
24 be up to this board. Our appropriation would be
25 split. The money would be split 80 percent for
41
1 facility and 20 for faculty hires, which we think will
2 address the needs. Whether there's limits or caps,
3 that would be up to the body to determine those
4 particulars.
5 REPRESENTATIVE TANGRETTI: Do you have
6 language available?
7 SECRETARY YABLONSKY: We'll have something
8 soon, but it's not available today.
9 REPRESENTATIVE TANGRETTI: Thank you.
10 Thank you, Mr. Chairman.
11 CHAIRMAN FLEAGLE: The Chair thanks the
12 gentleman and recognizes Representative Stern.
13 REPRESENTATIVE STERN: Thanks, Chairman
14 Fleagle.
15 I want to ask about what we have been
16 informed on in this committee, that Attorney Generals
17 in other states that have gone in and proceeded with
18 tobacco settlement securitization are hampered in
19 those settlements. And sometimes the Attorney
20 Generals have to think twice before they file a motion
21 in court because of the potential impact on tobacco
22 bond holders. Have you had any discussion with
23 Attorney General Corbett or tobacco enforcement about
24 this proposed securitization plan?
25 SECRETARY MASCH: I have been in discussions
42
1 all along with the first deputy to the Attorney
2 General. We have discussed this and I am not aware of
3 nor has the Attorney General ever raised any
4 objections with me to date. We certainly see the
5 Attorney General's Office as our ally and partner in
6 all the aspects of the enforcement of the Master
7 Settlement Agreement in Pennsylvania. If there are
8 concerns there, we would want to know about that.
9 REPRESENTATIVE STERN: So they have not
10 indicated to you any pros or cons of going forward
11 with this securitization plan?
12 SECRETARY MASCH: No, they have not.
13 REPRESENTATIVE STERN: Going back to medical
14 research. We have fine facilities in Pennsylvania.
15 You are aware of that. You are here to comment about
16 the tobacco settlement proposal as we fashioned it and
17 put together by this General Assembly and Secretary
18 Masch. You have complimented the General Assembly.
19 We appreciate that.
20 I guess I wonder why you are targeting and
21 making research dollars that are currently already in
22 the mix as your focus of the securitization plan here
23 when you use that 9.5 percent if we can take half of
24 our research funding and putting it into this
25 securitization plan.
43
1 SECRETARY YABLONSKY: The reason for the
2 focus is because of a competitiveness issue, which I
3 touched on earlier in my testimony this morning, and
4 the need that the universities have conveyed for
5 additional funds.
6 What we are proposing is not taking away
7 money from the existing research programs but
8 accelerating half of the money into a two-year cycle
9 versus investing it over 14 to 16 years. So this is
10 building on top of what we think is a secure program
11 to improve the competitiveness of institutions by
12 accelerating funding for them.
13 SECRETARY MASCH: If I could add,
14 Representative, I'm not sure that a securitization of
15 other programs would make sense. As we have noted,
16 there are states that have taken their whole agreement
17 of future payments, borrowed against it, and used the
18 money to balance an operating budget. It's not
19 prudent taking a long-term loan out if we don't know
20 how we are going to pay it back.
21 In this case, this is more akin to making a
22 mortgage payment or more akin to making a business
23 investment in bricks and mortar.
24 Here we are talking about capitalizing a
25 stream of payments and creating assets in academic
44
1 medical centers with the added advantage that the
2 sooner we have those facilities in place, the sooner
3 world-class principal investigators come to our
4 institutions. And, as you know, I was the vice
5 president of one of these academic medical centers.
6 And I can tell you that some of the best biomedical
7 researchers in the world want to come to Pennsylvania
8 institutions.
9 One of the major constraints that prevents
10 our universities, they have to be able to bring in a
11 research team. And once that happens, then we get NIH
12 grants and then we get the National Science Foundation
13 grants and private industry grants and the clinical
14 trials. It can't happen until they are here.
15 REPRESENTATIVE STERN: I appreciate that
16 answer. We are already doing that in Pennsylvania
17 now.
18 SECRETARY YABLONSKY: I can't give you a
19 date. But they are happening every month or every
20 quarter, keeping in mind there have been 17 done since
21 the beginning of the Master Settlement Agreement.
22 Every month there is yet another newsletter.
23 REPRESENTATIVE STERN: That's refinancing
24 securitization. That's not --
25 SECRETARY YABLONSKY: No, it's taking some or
45
1 all of the state tobacco money securitization bond
2 proceeds to pay for something, in many cases, budget
3 deficits. It's the same approach, just a different
4 end use.
5 SECRETARY MASCH: We will provide the
6 committee with a list of issues to date and the dates
7 of those and also what we know about issues that are
8 in the works in other states now.
9 REPRESENTATIVE STERN: Thank you. Why are we
10 looking at securitization if we have the money already
11 that these institutions can get funding and put it
12 into capital improvements? I know you mentioned the
13 University of Pitt and how about, you said, Penn.
14 SECRETARY YABLONSKY: I said Children's
15 Hospital of Philadelphia.
16 REPRESENTATIVE STERN: Are these the only two
17 facilities that you envision will benefit?
18 SECRETARY YABLONSKY: No. Those are the only
19 two I talked about. Every institution said they have
20 at least one project that could take advantage of
21 that. Acceleration of these projects is expensive.
22 We are talking about $30 million projects and we are
23 talking about the kind of capital that is the hardest
24 capital for universities to get.
25 REPRESENTATIVE STERN: You think the capital
46
1 available, the 50 percent funding available now, is
2 not sufficient?
3 SECRETARY YABLONSKY: It's just for a certain
4 level of activity.
5 SECRETARY JOHNSON: If I could add to that,
6 looking at that portion of secure funds that can go
7 for infrastructure, looking at institutions that use
8 it, that ranges from 3 percent to as high as 40
9 percent in terms of what percentage of that formula
10 funds that institutions use for infrastructure. For
11 me, that says two things. One, looking at the lower
12 end, it says that all institutions aren't using that
13 now for infrastructure, even though their needs exist.
14 Secondly, looking at the higher end of that,
15 it shows that they do want to use that for
16 infrastructure.
17 SECRETARY MASCH: Representative, I think the
18 other point is this: Let's say we had enough money
19 now in the stream of funds to recruit one world-class
20 principal and capitalize the funds, then our
21 institutions are recruiting, instead of one a year for
22 the next 15 years, 15 principals now.
23 That's just the beginning of the process.
24 It's only when they get here that they can bring
25 associate faculty and post-docs and graduate students
47
1 and grants with them. And then it usually takes us,
2 from initial research, anywhere from five to eight
3 years to move to the potential discovery that can lead
4 to commercialization. So the sooner it gets the
5 growth that we are doing, we think this is the right
6 thing here. But this is a way to do it so we have a
7 greater impact sooner. Then the institutions will
8 build on that strength going forward.
9 REPRESENTATIVE STERN: I appreciate your
10 thought process.
11 Thank you, Mr. Chairman.
12 REPRESENTATIVE FLEAGLE: The Chair thanks the
13 gentleman and recognizes Representative Shapiro.
14 REPRESENTATIVE SHAPIRO: Thank you,
15 Mr. Chairman.
16 I commend your team for the way you have
17 allocated the tobacco settlement dollars. I think you
18 have done it in a prudent way. I think you're on the
19 right track. I have a completely unrelated question
20 to the tobacco settlement fund, which stems from a
21 conversation I was having with Commissioner Koken this
22 morning.
23 Forgive me, Mr. Chairman. We have the brain
24 trust here. We were talking about physician
25 reimbursements. And the question I posed to
48
1 Commissioner Koken was about, how can we do a better
2 job of helping physicians get higher reimbursements?
3 The testimony was essentially saying that the
4 Insurance Department does not have the authority to be
5 able to go out and oversee the issue of physician
6 reimbursements. The question I have is, doesn't the
7 agency currently have that authority? And, if not, I
8 want to work hard to give you that authority.
9 SECRETARY MASCH: In programs like the
10 medical assistance fee-for-service program, we set the
11 rates. But the larger part of the healthcare that we
12 pay for we pay for through intermediary negotiations
13 with all provider hospitals, doctors, and with other
14 specialized medical services.
15 REPRESENTATIVE SHAPIRO: The question was
16 more focused on physicians, private physicians,
17 outside of where the state gets involved.
18 SECRETARY RICHMAN: For example, as Secretary
19 Masch mentioned, fee-for-service contracts, it's
20 directly. With our Access Plus Program dollars, we
21 negotiated that contract. So there could be
22 incentives to both the contractor and physicians to
23 work with us.
24 On the managed care area, we actually rely on
25 the managed care entities to contract with the
49
1 physicians. They do rate setting. Frequently it's in
2 concert with us, somewhere within that range. But
3 they have the ability to give rate increases
4 frequently and pick and choose who they want to see.
5 REPRESENTATIVE SHAPIRO: Is there a
6 regulatory authority or a body within DPW that
7 monitors the reimbursement rates or is that an
8 authority that DPW does not have? I understand what
9 you are saying in terms of that private relationship.
10 You leave that to the managed care company. Is DPW in
11 a position to stop a managed care company reimbursing
12 at a higher rate or making it more uniform or is that
13 something outside?
14 SECRETARY RICHMAN: We must have caution in
15 doing that, obviously, if we ask to do any level of
16 significant rate increase. We see this as a regular
17 part of our budget process and our continual work with
18 the managed care companies. Certainly, we are all
19 aware that some of our reimbursements are lower than
20 the national average. But that's all part of
21 negotiating the DPW budget.
22 REPRESENTATIVE SHAPIRO: Thank you.
23 Thank you, Mr. Chairman.
24 REPRESENTATIVE FLEAGLE: The Chair thanks the
25 gentleman and recognizes Representative Armstrong.
50
1 REPRESENTATIVE ARMSTRONG: Thank you,
2 Mr. Chairman.
3 My question goes to earlier questions
4 regarding securitization of 9.5 percent of future
5 tobacco settlement money. Secretary Yablonsky, which
6 universities have expressed interest in taking this
7 money and using it for research in the way that you
8 expressed?
9 SECRETARY YABLONSKY: There are a number that
10 have expressed interest: University of Pittsburgh
11 Medical Center, CHOP in Philadelphia, Carnegie Mellon.
12 REPRESENTATIVE ARMSTRONG: Can't they do this
13 now? Can't they understand that the tobacco
14 settlement act provides that a research grant
15 recipient can spend up to 50 percent of whatever money
16 on infrastructure?
17 SECRETARY JOHNSON: I was just saying a
18 little bit earlier, that comes in smaller amounts,
19 essentially. Some do and some do not spend anything
20 at all, less than 3 percent on infrastructure.
21 REPRESENTATIVE ARMSTRONG: I appreciate that.
22 If they are already spending money on infrastructure
23 and building labs and so forth, why do we have to set
24 up a separate program and securitize against future
25 earnings to do that?
51
1 SECRETARY YABLONSKY: The issue is how much
2 money is available and what we were talking about,
3 accelerating this by 14 to 16 years. We will invest
4 the same amount of money in two years under this
5 program. These are facilities. When you build them,
6 you have to have the financing in place to pay over
7 time. And these are expensive facilities, as I
8 testified to earlier. This is an opportunity to hire
9 a lot more faculty in the next few years and to build
10 a lot more facilities that will bring more research
11 into the state.
12 REPRESENTATIVE ARMSTRONG: If we take 9.5
13 percent less money that we have to pay for research,
14 so we could end up with a lot of nice labs without the
15 money to fund the staff to do the research in them.
16 SECRETARY MASCH: The overwhelming number of
17 dollars available for biomedical research in the
18 Commonwealth of Pennsylvania are and will be from the
19 National Institute of Health and National Science
20 Foundation and, to a lesser degree, from private
21 donors, foundations, and corporations.
22 One thing we recognized when I came here is
23 that the money we have in the CURE program devoted to
24 infrastructure makes a very small, marginal
25 contribution to the ability to build up research
52
1 infrastructure. As I noted, I used to participate in
2 the recruitment of investigators. And the first thing
3 that they want to know is, what kind of lab facilities
4 can you offer me? And making this money available
5 sooner means the sooner we build the research base,
6 the sooner that enables us to leverage in
7 Pennsylvania.
8 REPRESENTATIVE ARMSTRONG: Why don't we just
9 use the capital budget to build these labs? Why do we
10 need a special program involving options in the
11 future?
12 SECRETARY MASCH: Well, one of the obvious
13 advantages here is that by doing this, it would not
14 diminish our capacity to use the capital budget for
15 the other critical priorities of the state that we
16 have already identified, other economic development
17 programs, the investment in our own facilities, the
18 transportation grants, the ability to do other kinds
19 of development, even in our higher education
20 institutions outside of academic medical centers.
21 I can tell you, there is a tremendous
22 competition for those available dollars. So this
23 enables us to expand our capacity to invest in a
24 crucial area without priorities.
25 REPRESENTATIVE ARMSTRONG: Thank you,
53
1 gentlemen.
2 Thank you, Mr. Chairman.
3 REPRESENTATIVE FLEAGLE: The Chair thanks the
4 gentleman and recognizes Representative Frankel.
5 REPRESENTATIVE FRANKEL: Thank you,
6 Mr. Chairman.
7 Many of my issues have been discussed
8 already. One of the reasons that we are seeing some
9 of the reductions or projected redistributions with
10 respect to tobacco settlement money is obviously a
11 reduction in tobacco use. But one thing we've seen is
12 that while cigarette use has been cut down, we are
13 moving, particularly young people, from cigarettes to
14 chewing tobacco and other tobacco products. It's time
15 to remove the tax exemption on other tobacco products
16 other than cigarettes. It's a $50 million source of
17 revenue that could be securitized, complementing what
18 we do here. That would go a long way to enhancing the
19 things we are doing here.
20 The other issue I talked about this morning
21 with Commissioner Koken needs to be addressed. And I
22 also spoke about it in prior years with Secretary
23 Richman. If it is good enough to seek a Medicaid
24 waiver for the Cover All Kids initiative, which I
25 think is a great initiative, why can't we take a look
54
1 at 80-some million dollars of adultBasic and seeking a
2 Medicaid waiver with that as well and leveraging those
3 dollars to federal Medicaid. There is a better way to
4 do this to cover more uninsured adults in our
5 communities.
6 I have a hard time understanding why we can
7 look for a Medicaid waiver in one place and not
8 another one.
9 Can you customize a benefit that maybe
10 mirrors something like adultBasic?
11 SECRETARY RICHMAN: To a degree, you have.
12 We have more of that flexibility with some of the new
13 regulations that have just come down from the Deficit
14 Reduction Act than we have before. So we have a
15 little bit more flexibility now designing programs on
16 both sides. And the waivers they are drafting now
17 also provide us a little bit more flexibility about
18 who we cover and how we cover it. But before we put
19 that together, we need to make sure we understand the
20 risk associated with it and that we don't endanger
21 either the rate setting or the stability of the
22 program into the future.
23 REPRESENTATIVE FRANKEL: Well, thank you very
24 much, Madam Secretary. Thank you all very much.
25 Thank you, Mr. Chairman.
55
1 REPRESENTATIVE FLEAGLE: The Chair thanks the
2 gentleman.
3 Secretary Yablonsky, I have a question on the
4 Jonas Salk Legacy proposal. I understand that there
5 is a match component to that with the institutions.
6 Can you explain that? Is that a fact?
7 SECRETARY YABLONSKY: Certainly. We have
8 proposed, as part of the program, that there would be
9 a dollar-for-dollar match required on the part of the
10 applicants. So if they're building a facility and we
11 give them a million dollars, they would have to put at
12 least a million dollars of their own money into it as
13 well. So there's a dollar-for-dollar match. And
14 that's where the total of a billion dollars that we
15 referred to as going into this program is generated.
16 REPRESENTATIVE FLEAGLE: And the preliminary
17 thoughts that you had show that that's not a problem?
18 SECRETARY YABLONSKY: Absolutely. I really
19 don't think that this is an issue.
20 SECRETARY MASCH: I'd actually say that for
21 some of the institutions, I think the availability of
22 the state money could help with their fund-raising in
23 terms of generating the matching funds, knowing that
24 those funds are there. In essence, it plays the role
25 of the lead gift that we often will have in academic
56
1 fund-raising for facilities. It could actually
2 stimulate an acceleration of fund-raising for academic
3 research facilities from other sources.
4 REPRESENTATIVE FLEAGLE: So they were going
5 to build this anyhow? Is that your point?
6 SECRETARY MASCH: No, my point is that donors
7 might be more willing to contribute to projects if
8 they know that a sizable percentage of the cost of the
9 project is already there. Sometimes what makes the
10 sale in terms of recruiting a major gift is knowing
11 that, you know, the gift isn't going to just give you
12 20 percent of the money and then maybe it takes
13 another five years to raise the other 80 percent.
14 I've actually been in these kinds of
15 solicitations. And the person who makes the gift that
16 closes the deal, you know, that's the easiest kind of
17 donor to close with.
18 REPRESENTATIVE FLEAGLE: God bless you for
19 that.
20 Secretary Yablonsky, you mentioned the Life
21 Sciences Greenhouses. I know there's $3 million in
22 the budget. What specifically would that be used for?
23 SECRETARY YABLONSKY: It would be used for
24 administrative purposes and for certain technical
25 assistance programs that the greenhouses provide to
57
1 start-up companies in their regions.
2 REPRESENTATIVE FLEAGLE: Is it for operating
3 expenses?
4 SECRETARY YABLONSKY: Part of it would be
5 used for operating expenses.
6 REPRESENTATIVE FLEAGLE: Is that wise to use
7 capital funds like that -- or not capital funds but
8 one-shot deals for operating expenses?
9 SECRETARY YABLONSKY: Well, the money that we
10 would be proposing to be used for the greenhouses is
11 not part of the securitization.
12 REPRESENTATIVE FLEAGLE: Would this have to
13 be an ongoing budgetary item to keep those operating
14 expenses going?
15 SECRETARY YABLONSKY: We would propose that
16 this would be a multi-year item, probably in the range
17 of three to five years, if everybody is agreeable.
18 All the greenhouses have a ten year planning horizon
19 that they've looked at. They're coming up on the end
20 of the first five years. They would be required to
21 generate significant matching money from outside the
22 state to keep things going. And they have all lost
23 substantial portions of investment money that they've
24 raised that they will continue to invest over years
25 six through ten. They need a small amount of
58
1 operating money to keep the operation going. And this
2 would cover a portion of that.
3 SECRETARY MASCH: Representative, I think we
4 all have to acknowledge in every area where we're
5 funding ongoing programs, including home and
6 community-based care, the adultBasic program, you
7 know, the PACE Program, people are depending on our
8 ability to continue to make those dollars available.
9 There has been a lot of concern raised about, you
10 know, the bond holders depending on the ongoing stream
11 of payments. There we actually do shift the risk from
12 them to us. But the people of Pennsylvania are
13 depending on the continuation of these programs that
14 we're funding out of the tobacco settlement.
15 I think it was an appropriate decision on the
16 part of the General Assembly to fund ongoing programs.
17 But we are already way deep into that in the way that
18 we use tobacco settlement funds today. That's why we
19 have to diligently defend our right to enforce the
20 Master Settlement Agreement in Pennsylvania and the
21 other 45 states.
22 As I say, the State Attorney General
23 collectively negotiated a very strong agreement. And
24 it is an agreement in perpetuity. And although the
25 specific dollar amount may vary from year to year, I
59
1 don't think there's any question that we're going to
2 continue to be able to count on tobacco settlement
3 funds as an ongoing component of our operating budget
4 for many years to come.
5 REPRESENTATIVE FLEAGLE: So is that at least
6 a three-year commitment?
7 SECRETARY YABLONSKY: Well, it's a one-year
8 appropriation request. I am under full disclosure
9 telling you that if the budget will support it, we
10 will probably be back to ask for a second year.
11 REPRESENTATIVE FLEAGLE: And they have been
12 very successful in the past?
13 SECRETARY YABLONSKY: In my opinion, the
14 greenhouses have made a tremendous contribution in
15 filling a gap on early stage development of companies
16 to take advantage of the research that's already
17 happening in the state. Yes, there's been over 1,000
18 jobs created directly attributed to them. They have
19 been involved in over 50 new company formations. And,
20 yes, all the measures we look at, I think these
21 organizations have done a fine job for the state.
22 REPRESENTATIVE FLEAGLE: If they are
23 successful, why do they need those monies? I mean, is
24 there a time element involved there?
25 SECRETARY YABLONSKY: Well, the state, in the
60
1 previous Administration, provided a hundred million
2 dollars that was roughly split equally between the
3 three to be used over a five-year period. The
4 five-year period is coming up. I think, in our
5 opinion, they have been successful and I think
6 warrants ongoing support.
7 REPRESENTATIVE FLEAGLE: Thank you,
8 gentlemen.
9 SECRETARY MASCH: Representative, I would
10 note, in the materials we've transmitted to the
11 committee, we've provided you with that annual report
12 for all three of the greenhouses for the most recently
13 completed year.
14 CHAIRMAN FLEAGLE: Secretary Johnson, I have
15 a question for you. It has nothing to do with
16 angioplasty or a heart catheterization. We have been
17 going around with that. You have come before the
18 Health and Human Services Committee, I think the last
19 two or three years, talking about cessation programs
20 and you would give us updates on it. I've talked to
21 you about the efficacy of the program, how do you know
22 you're getting the biggest bang for your buck?
23 Can you very briefly tell us the success or
24 the lack of success and what measurement tools that
25 you use to make sure that a program is working?
61
1 SECRETARY JOHNSON: Sure. I'll pick two
2 specific examples just for the sake of time and then
3 I'd be happy to provide the committee with more
4 extensive examples of some successes.
5 REPRESENTATIVE FLEAGLE: That would be fine.
6 SECRETARY JOHNSON: When we started this, 25
7 percent of adult Pennsylvanians smoked. And because
8 of a lot of broad-reaching, statewide, coordinated
9 efforts based on best practices documented by the
10 Center for Disease Control and others, we are now
11 looking at just under 23 percent, 22.7 percent, of
12 adult Pennsylvanians still smoking today. So that, in
13 real numbers, amounts to a 200,000-person difference
14 in the number of Pennsylvanians smoking just three
15 years ago, four years ago, and where we are today.
16 REPRESENTATIVE FLEAGLE: So there's a
17 successful model out there?
18 SECRETARY JOHNSON: There are a number of
19 successful models. And the Center for Disease Control
20 puts forth nine or ten characteristics of successful
21 prevention and cessation efforts. So incorporating
22 those -- and these, again, are what I call
23 evidence-based and have been proven to be effective in
24 various settings. When you have those components as a
25 part of your efforts, then you are more likely to
62
1 experience real success.
2 Now, let's keep in mind that, you know,
3 Pennsylvania is a very diverse state and so what works
4 in Community A may not work the same way in Community
5 B. And that's why there are elements and components
6 of programs that need to be tailored to the actual
7 communities. And then that's also why 70 percent of
8 the prevention and cessation dollars are required to
9 go to community-level programs.
10 REPRESENTATIVE FLEAGLE: These are mostly
11 county-based?
12 SECRETARY JOHNSON: Yes.
13 REPRESENTATIVE FLEAGLE: And if I go to
14 Dauphin County and then go to Cumberland County, you
15 can pretty much see that they are not going to be two
16 totally different programs that you can measure the
17 success of them using the same apples and oranges?
18 SECRETARY JOHNSON: In some instances, the
19 contractors that we use -- I think there are 48 that
20 we use -- cover a regional area. But where it doesn't
21 make sense to cover a regional area and there are some
22 distinct differences, then you may have a very
23 different contractor. But I think that it is designed
24 such that you can see differences between them.
25 REPRESENTATIVE FLEAGLE: But you can provide
63
1 the committee with the efficacy of those programs?
2 SECRETARY JOHNSON: Yes. And if I could just
3 take a second to give you that second example that I
4 promised you. And it's related to the sales of
5 tobacco. And we talked about sales of tobacco, sales
6 of tobacco to minors. The federal government has set
7 a limit or threshold of less than 20 percent of
8 sales -- there should be less than 20 percent illegal
9 sales of tobacco to minors. Those under 18 years of
10 age, I believe, is the cut off.
11 Pennsylvania's number, most recent number, is
12 8 percent. So we are well below the threshold.
13 Surrounding states, the closest, I think, is between
14 13 and 17 percent so we have a significant difference.
15 And we have been that low for the past -- we have come
16 down for the past two to three years.
17 Why that is so significant is that, one, four
18 years ago and just before we came in, this
19 Administration came in, Pennsylvania was above the
20 threshold. And what happens when you're above the
21 threshold is that federal dollars are threatened,
22 particularly drug and alcohol substance abuse block
23 grant dollars are threatened to the tune of around
24 $26 million if we do not stay below that level.
25 We do specific interdiction efforts, specific
64
1 outreach efforts to merchants to ensure they
2 understand what the law is, what the consequences are
3 of selling tobacco products to minors. And then we
4 follow up. We test. You go in and test to see. So
5 we monitor it that way as well. And Pennsylvania,
6 again, is well below the national threshold. Those
7 are just two examples for you.
8 REPRESENTATIVE FLEAGLE: One last question.
9 How about making the use of tobacco similar to alcohol
10 use under -- I don't know what age you'd have to use.
11 Would that be effective?
12 SECRETARY JOHNSON: Making it illegal?
13 REPRESENTATIVE FLEAGLE: If you were under 18
14 or 21. I don't know what we'd use. Is that
15 enforceable?
16 SECRETARY JOHNSON: It's enforceable through
17 sales.
18 REPRESENTATIVE FLEAGLE: Just the use of it.
19 And the reason I'm asking that is I have a group in my
20 county, a group of young people, who are very avid
21 supports of that concept. And I can't explain to
22 them, other than the hypocrisy that exists in this
23 world, why you can make alcohol use illegal -- and
24 they agree with that -- yet you're kind of turning
25 your head at tobacco use. I guess you're not serious
65
1 about it, Representative, if you don't want it
2 illegal. And they have a good point.
3 SECRETARY JOHNSON: I think that's probably
4 something that's worth having a discussion about and
5 also reaching out and including law enforcement.
6 Because when we talk about enforcement, on a number of
7 levels, with the sales piece, we're also working in
8 conjunction with law enforcement. So any kind of
9 activity like that would involve law enforcement. So
10 I think it's something that's certainly worth a
11 conversation.
12 REPRESENTATIVE FLEAGLE: Well, in law
13 enforcement's defense, I know they have a lot of other
14 things to do. But if we're serious about this, we
15 have to do that.
16 Thank you. We'll look forward to that
17 information if you can get that to the committee.
18 Representative Maher.
19 REPRESENTATIVE MAHER: Thank you,
20 Mr. Chairman.
21 I just wanted to get some clarity on the
22 proposed transaction for the Salk initiative.
23 Secretary Yablonsky, you visited with us last week and
24 indicated you would be able to provide us what your
25 current expectation is about amortization of that. Do
66
1 you have that available today?
2 SECRETARY YABLONSKY: I believe we have
3 provided it to staff and it's available to you.
4 REPRESENTATIVE MAHER: In the meantime, how
5 much do we have on hand in the tobacco settlement
6 investment fund?
7 SECRETARY YABLONSKY: Are you referring to
8 the endowment fund, Representative? I can tell you
9 exactly, actually. The most recent balance was
10 $687 million.
11 REPRESENTATIVE MAHER: So, in essence, we
12 have $687 million on hand, being invested, of tobacco
13 money?
14 SECRETARY YABLONSKY: That's correct.
15 REPRESENTATIVE MAHER: And rather than
16 utilizing funds that are present and in the pocketbook
17 of the state already, the idea is to go out and borrow
18 a half a billion dollars; is that correct?
19 SECRETARY YABLONSKY: Not exactly. I want to
20 reiterate, we are not borrowing any money. We are
21 pledging 9.5 percent of our tobacco money to generate
22 a bond. The state is not incurring any additional
23 debt as a result of the proposal.
24 Now, there is money sitting, the $687
25 million, for the purposes of the endowment. And that
67
1 money is, I think, there for good reasons.
2 But we are proposing something that does not
3 require any appropriation or any additional debt
4 service or taking away. It's an acceleration of an
5 existing program. It's not taking it away from any
6 existing program that we have in place.
7 REPRESENTATIVE MAHER: Well, you are planning
8 -- the state will pay this money back?
9 SECRETARY YABLONSKY: The money would be paid
10 back by using 9.5 percent of the tobacco settlement
11 revenue.
12 REPRESENTATIVE MAHER: I understand.
13 SECRETARY MASCH: Representative Maher, what
14 we've heard repeatedly are concerns expressed by the
15 members of this committee this morning about our
16 funding ongoing programs out of the tobacco settlement
17 fund and not having absolute certainty. We have
18 confidence, but we don't have absolute certainty in
19 terms of the flow of those funds. And as a number of
20 representatives have noted, those funds are supporting
21 ongoing programs in the operating budget.
22 Our view at this point, which we have shared
23 with the General Assembly but which you must concur
24 in, is in terms of a safety cushion to help us deal
25 with possible fluctuations in the ongoing annual
68
1 contributions from the participating manufacturers,
2 that the endowment has now reached a point where it
3 provides an acceptable safety valve.
4 And our recommendation is not to add further
5 principal to it; but exactly because of the concerns
6 expressed by the members of this committee about our
7 lack of absolute certainty on the flow of future
8 tobacco settlement funds, we think it's appropriate to
9 leave principal in there so that we do have some
10 resources to deal with those uncertainties in the
11 future.
12 REPRESENTATIVE MAHER: All right. What's the
13 expected -- or should I have that amortization
14 schedule that demonstrates that over 21 years, you'd
15 expect to pay over $400 million in interest? What is
16 the interest?
17 SECRETARY YABLONSKY: I believe the
18 assumption was approximately 5 percent, 5.6 percent.
19 REPRESENTATIVE MAHER: And that's the
20 nominal rate or is that the actual effective rate?
21 SECRETARY YABLONSKY: I believe that's the --
22 the cost of capital is 5.6.
23 REPRESENTATIVE MAHER: So that is the
24 effective rate?
25 SECRETARY YABLONSKY: Yes.
69
1 REPRESENTATIVE MAHER: By the way, did you
2 know that Treasurer Casey is lending money at 4
3 percent interest?
4 SECRETARY YABLONSKY: I wasn't aware of that.
5 REPRESENTATIVE MAHER: You might want to get
6 in touch with him.
7 So just to recap this again, we have got a
8 billion dollars that will be repaid over 21 years in
9 order to accelerate and have $500 million on hand
10 today. And the plan is to do that despite having
11 $687 million in the bank, so to speak, available
12 today?
13 SECRETARY YABLONSKY: That is the proposal.
14 REPRESENTATIVE MAHER: So, in essence, you
15 are assuming that the money that's being invested, I
16 hope, will earn a better return than the 6 percent
17 that you're expecting to pay?
18 SECRETARY YABLONSKY: As you know, by being a
19 member of that board, we have generated a compounded
20 annual return on that money in double digits, slightly
21 over 10 percent per year.
22 REPRESENTATIVE MAHER: So, in essence, this
23 is sort an arbitrage situation, that you are borrowing
24 money that you don't really need to borrow because you
25 can expect that you will earn more than you'll have to
70
1 pay?
2 SECRETARY YABLONSKY: Well, there are lots of
3 pots of money in state government that one could look
4 to. Our proposal was to try to do this in a way that
5 would not affect other programs and detract from other
6 things that the state has decided it wants to do. If
7 the General Assembly and the Governor decide they want
8 to use alternate sources, that's entirely their
9 discretion. Our proposal was to do it this way.
10 REPRESENTATIVE MAHER: Now, these are
11 intended to be tax-exempt bonds; is that correct?
12 SECRETARY YABLONSKY: There will be a mix of
13 taxable and tax exempt. There's a possibility it
14 could all be tax exempt as a result of the nature of
15 the bonds. We have to get a final ruling on that from
16 the bond issuers.
17 REPRESENTATIVE MAHER: Well, what would you
18 expect the interest rate would be on the taxable part?
19 SECRETARY YABLONSKY: I don't know that
20 offhand. I'll be happy to get back to you with that
21 answer.
22 REPRESENTATIVE MAHER: And was that 5.6?
23 SECRETARY YABLONSKY: I believe that was an
24 assumption of 100 percent tax free, which is what the
25 financial experts told us we could assume is the most
71
1 likely case.
2 REPRESENTATIVE MAHER: Now, are you expecting
3 that these will be what is known as private-purpose
4 tax-exempt funds?
5 SECRETARY YABLONSKY: I'm not sure I
6 understand what that means.
7 REPRESENTATIVE MAHER: There's a category
8 that the federal tax exemption associated with the
9 ability for state and local governments to issue debt
10 is absolute when you're dealing with things that
11 involve roads and bridges and infrastructure that
12 would be the possession of the government, and it is
13 restricted under the IRS code when you're dealing with
14 matters that are not infrastructures to be owned by
15 the government. So I'm assuming that you're expecting
16 this will be a private purpose?
17 SECRETARY MASCH: Since the beneficiaries
18 will be non-profit academic medical centers and in
19 terms of the direct use of these -- even though there
20 might be ancillary commercialization and transfer
21 activities, they wouldn't be activities that would
22 actually take place in those facilities. So I don't
23 think we have a bad money problem in terms of the use
24 of the proceeds for this purpose that would --
25 REPRESENTATIVE MAHER: I don't know what bad
72
1 money you're talking about. But do you expect these
2 will be private versus tax-exempt funds?
3 SECRETARY MASCH: Well, let me get back to
4 you on that. I think we need to get a ruling. If I
5 understand --
6 REPRESENTATIVE MAHER: You haven't looked at
7 that question? Let me suggest to you why that's an
8 important question. The amount of private purpose
9 debt that can be issued in any state in the course of
10 a year is capped by the IRS. Your appetite would
11 gobble up half a billion dollars of that cap.
12 And assuming this is, in fact, a
13 private-purpose-tax-exempt issue, I'm curious as to
14 what analysis you have done of the other projects that
15 might have been undertaken by authorities and local
16 governments across this state that will now not be
17 able to go forward because the half a billion dollars
18 of the state allotment has been gobbled up so you can
19 borrow money instead of reaching in the bank account.
20 SECRETARY MASCH: We are not strained in the
21 state right now in terms of our capacity to do that
22 issuance.
23 REPRESENTATIVE MAHER: What is the total
24 allotment for Pennsylvania for this year?
25 SECRETARY MASCH: Well, let me -- I don't
73
1 have the analysis in front of me. I'll be happy to
2 provide the capacity analysis to the committee in
3 terms of what the claims are on our IRS capacity at
4 this point. But I know that we have --
5 REPRESENTATIVE MAHER: Well, you are familiar
6 that you have a ceiling on what can be --
7 SECRETARY MASCH: Absolutely. Yes.
8 REPRESENTATIVE MAHER: But you're not
9 familiar with how this fits in with that ceiling?
10 SECRETARY MASCH: I have --
11 REPRESENTATIVE MAHER: It's a fundamental
12 question that you would start with at the imagination
13 stage of this sort of a thing.
14 SECRETARY MASCH: I don't think this -- my
15 understanding is it's not going to count against that.
16 Let me verify that. That's my understanding.
17 REPRESENTATIVE MAHER: And can you help me
18 understand why that might be?
19 SECRETARY MASCH: Because of the types of
20 institutions and the purposes for which we would be
21 making these funds available. For instance, we are
22 going to make money available for state related --
23 substantial amounts will go to state-related
24 institutions. I don't believe that would count
25 against our private purpose.
74
1 REPRESENTATIVE MAHER: I would be interested
2 to see the analysis and whatever correspondence you
3 might have from bond counsel on the subject because I
4 want to be absolutely certain that this initiative
5 does not bootstrap the city's municipalities and
6 authorities across the state.
7 SECRETARY MASCH: Fine. We'll be happy to
8 provide that analysis to the committee.
9 REPRESENTATIVE MAHER: Now, you're speaking
10 about the use of these proceeds and that's part of
11 your analysis about why maybe this other issue is not
12 a concern. It sounds like you have some clarity about
13 the use of the proceeds. Can you provide us with the
14 list of how this $500 million will be distributed?
15 SECRETARY YABLONSKY: We can certainly
16 provide you and have provided some preliminary
17 information on how this would be used, yes.
18 REPRESENTATIVE MAHER: Bear with me just a
19 moment.
20 It's my understanding that this committee has
21 not received information on what institutions you
22 expect would be the beneficiaries of this borrowing.
23 SECRETARY YABLONSKY: Well, I testified
24 earlier this morning on a couple of specific examples.
25 The University of Pittsburgh Medical Center
75
1 specifically expressed interest in a large new cancer
2 institute. The Children's Hospital of Philadelphia --
3 REPRESENTATIVE MAHER: How much would go
4 from this $500 million for the universities?
5 SECRETARY YABLONSKY: This is designed to be
6 a meritorious decision-making process. There would be
7 applications received. A review board would review
8 those and make a determination. No prejudgment on who
9 is going to get the money and what amounts has been
10 made. That's not how the process would work under our
11 proposed approach.
12 REPRESENTATIVE MAHER: So when you described
13 the use of proceeds when you're going to the
14 marketplace so you have a viable use of proceeds so
15 that you're tiptoeing past this private-purpose
16 problem, it would seem to me that you, by that time or
17 perhaps by this time, ought to be able to say, this
18 much would be used with state-related universities,
19 this much would be used in the private sector or this
20 much would be used here and this much would be used
21 there. Are you able to tell us that today?
22 SECRETARY YABLONSKY: We haven't been asked
23 those questions by the professional experts. We have
24 given them answers to every question they have asked
25 about the use of the proceeds. And no one has raised
76
1 any objections or issues to that.
2 REPRESENTATIVE MAHER: So these experts have
3 not been trying to distinguish between what might
4 gobble up the state's capacity under private purpose?
5 SECRETARY YABLONSKY: I don't know that they
6 haven't, Representative. I haven't had that specific
7 discussion with them. And as Secretary Masch said, we
8 will get back to you with that information.
9 REPRESENTATIVE MAHER: Is anybody else
10 familiar with any kind of conversations on that
11 subject?
12 SECRETARY MASCH: As I stated,
13 Representative, I don't believe that we have a
14 capacity problem. Let me give you the facts and
15 figures and let me give the committee the facts and
16 figures in terms of where we sit in terms of our
17 private-purpose capacity right now.
18 REPRESENTATIVE MAHER: I'll look forward to
19 it. And I assume that that analysis would include
20 your surveying the cities, towns, and authorities
21 across Pennsylvania to see what their intentions are
22 for the year ahead?
23 SECRETARY MASCH: We already do that on a
24 regular basis.
25 REPRESENTATIVE MAHER: So that would be a
77
1 yes?
2 SECRETARY MASCH: We have to allocate this
3 authority out.
4 REPRESENTATIVE MAHER: I understand that.
5 I'll look forward to seeing that analysis.
6 You characterized this as an acceleration.
7 If someone is in college and has a credit card and
8 they have a desire for goods and let's even make it
9 that they are long-lived assets, like iPods or stereos
10 or televisions, maybe even a car, and if they were to
11 put half of their earnings for the next 21 years onto
12 the credit card, would you characterize that as an
13 acceleration of their ability to invest in those
14 long-lived assets or would you consider that as
15 reckless behavior by someone who is probably going to
16 be in debt over their head?
17 SECRETARY MASCH: I guess one of the
18 questions is, is it a productive asset? Unless you
19 use your iPod in your line of work, it would not be a
20 productive asset. And also I think the useful life
21 would not match the term of the borrowing. What we're
22 proposing is to help our academic medical centers to
23 create long-lived assets where the asset's useful life
24 would match the life of the financing and would add to
25 their productive capacity. So it would not be an
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1 expenditure.
2 SECRETARY DOWD EISENHOWER: Mike, I'd like to
3 add something to that.
4 I'd like to add something to that,
5 Representative, if I can. Your analogy -- and I've
6 just sent a daughter off to college for the first time
7 -- really, my answer to that would be, this is like a
8 student loan to pay for a student's tuition. We took
9 out a student loan for my daughter to pay for it. And
10 I don't see that as a similar kind of investment. We
11 get her the education. It's strategic. It's what she
12 needs now. We bought her an iPod, too, but we didn't
13 borrow for that. I think that's really what we're
14 looking at. We really see an opportunity here to be
15 strategic. I just had to jump in there because I have
16 learned so much about it. I think that that's what
17 we're talking about.
18 REPRESENTATIVE MAHER: I think that's a nice
19 analogy. I would follow up that you would be likely
20 to take out a student loan if you had those funds
21 sitting in the bank account.
22 SECRETARY DOWN EISENHOWER: That's right. We
23 anticipate that we're going to continue to earn --
24 REPRESENTATIVE MAHER: Pennsylvania has those
25 funds in a bank account right now.
79
1 SECRETARY DOWD EISENHOWER: I still might not
2 do it because the interest rate is so much lower to
3 pay. And I have another student to be careful about.
4 SECRETARY MASCH: Well, there is the issue of
5 the shifting of risk. And that is an advantage to the
6 securitization. But also I think it is a discussion
7 we have to have with the General Assembly more
8 broadly.
9 I understand the logic, Representative, but I
10 also hear the concerns on the part of these committee
11 members and those on the Senate Appropriations
12 Committee and other members of the General Assembly,
13 which motivated them to create the endowment in the
14 first place. So I think we're trying to balance a set
15 of concerns here in an appropriate way.
16 The reason we're here is to have a dialogue
17 with you to explain our proposal. Obviously, we've
18 considered other alternatives. I can imagine the
19 reaction of the Appropriations Committee generally if
20 we're proposing to take principal out of the endowment
21 and then how we would then deal in the future with
22 any, you know, risk in terms of fluctuation in future
23 payments from the Master Settlement Agreement.
24 REPRESENTATIVE MAHER: I think it --
25 SECRETARY MASCH: What this does is it shifts
80
1 risk onto the purchasers of the bonds and leaves us
2 with the endowment to handle our risk exposure. So it
3 seems to me that's a win-win proposition.
4 REPRESENTATIVE MAHER: I think it would be
5 worth noting that a year ago, you sat at that table
6 with a proposal that cannibalized the endowment fund
7 and you succeeded in cannibalizing it a bit by taking
8 earnings and redirecting those earnings instead of
9 allowing the endowment to grow, as had been its
10 original plan. So once the endowment's original plan
11 has been nullified by your appetite for earnings
12 therefrom, I'd suggest to you that this notion -- I'm
13 happy to hear today that you appreciate why that might
14 be a worthy venue, but it's completely at odds with
15 what you did last year.
16 SECRETARY MASCH: Well, I respectfully
17 disagree. Our proposal last year was that we not grow
18 the endowment further. And that is still our position
19 today. It is a different -- the issue of whether we
20 should add to the endowment is, I would submit to you,
21 a different question from whether we should diminish
22 the endowment that we currently have. We are not
23 proposing to grow it, but neither are we proposing to
24 diminish it.
25 REPRESENTATIVE MAHER: Just a couple more
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1 questions, Mr. Chairman.
2 The ongoing --
3 REPRESENTATIVE FLEAGLE: Representative
4 Maher, excuse me a minute.
5 Secretary Yablonsky, I think you're
6 scheduled to leave?
7 SECRETARY YABLONSKY: I have a Senate hearing
8 in 15 minutes and I need to run back to my office.
9 REPRESENTATIVE FLEAGLE: Do you have anything
10 specific for him that you need to address?
11 REPRESENTATIVE MAHER: My guess is that his
12 colleagues will ably handle them.
13 REPRESENTATIVE FLEAGLE: Thank you, Secretary
14 Yablonsky.
15 SECRETARY YABLONSKY: Thank you.
16 REPRESENTATIVE FLEAGLE: Go ahead. I'm
17 sorry.
18 REPRESENTATIVE MAHER: Thank you,
19 Mr. Chairman.
20 Currently, the current year that we're in
21 now, there is $67 million of tobacco proceeds directed
22 towards research. Are we in agreement on that number?
23 SECRETARY MASCH: I have about 69, counting
24 the cancer institute money as well as the health
25 priorities money.
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1 REPRESENTATIVE MAHER: So is your expectation
2 to use both of those line items in terms of this
3 borrowing?
4 SECRETARY MASCH: Well, the current
5 allocation is 18 percent to health priorities and 1
6 percent restricted solely to funding for cancer
7 research. So that's 19 percent. We have to post half
8 of that, so that is 9.5 percent. Clearly, one of the
9 issues that we have to address with you is how to
10 restructure the ongoing grants out of the CURE
11 program.
12 REPRESENTATIVE MAHER: In a nutshell, 70
13 million is what's going for research in this 19
14 percent under the current structure, correct?
15 SECRETARY MASCH: Right.
16 REPRESENTATIVE MAHER: And in the Department
17 of Health, there were line items for this current year
18 for biotech research of 5 million; health research,
19 14.1 million; emergency medical research at one and a
20 half million. Round numbers, it's $20 million in the
21 Department of Health's budget for research-related
22 activities this year?
23 SECRETARY JOHNSON: All of the items, to be
24 clear, under the health research line item do not go
25 to applied research.
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1 REPRESENTATIVE MAHER: Whatever form of
2 research. So we have, between the Department of
3 Health and the tobacco fund, $90 million being
4 directed toward research in the current fiscal year in
5 the budget; is that correct?
6 SECRETARY MASCH: I think that's about right.
7 I don't have that in front of me, but I assume that
8 that's an accurate representation of the budget.
9 REPRESENTATIVE MAHER: And under your
10 proposal, next year there would be $34 million to
11 research?
12 SECRETARY MASCH: Let me go back to a
13 different line of questioning when I appeared
14 previously before the Appropriations Committee.
15 REPRESENTATIVE MAHER: It's a fact question.
16 SECRETARY JOHNSON: I think that's apples and
17 oranges, Representative, because what we're talking
18 about in terms of the 9.5 percent would be from the
19 CURE pot solely. So if you want to make comparisons
20 between what would be before and after the
21 securitization, I think it would be more useful to
22 look strictly at the CURE funding.
23 REPRESENTATIVE MAHER: Well, I can understand
24 why you would want to do that. And I certainly can
25 understand why Pennsylvanians might be interested to
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1 know that the research funding in the current year
2 budget is $90 million. And what would be available
3 next year for research on an ongoing basis is $34
4 million. So that's almost a two-thirds cut in funding
5 of research on an ongoing, forward basis is what
6 you're proposing.
7 SECRETARY JOHNSON: Well, the actual dollar
8 amounts that would be in those additional line items
9 that you have pointed out have not been fully
10 determined.
11 REPRESENTATIVE MAHER: The proposal is zero
12 in that line item.
13 SECRETARY MASCH: Representative, as I
14 testified to this committee previously, this
15 Administration, following a longstanding practice of
16 not only this Administration but all of the preceding
17 Administrations that I'm aware of over the past
18 several decades, has taken those appropriations that
19 have been increased or added by the General Assembly
20 at the end of the budget enactment process and zeroed
21 those out so that we can negotiate with the General
22 Assembly as to what its priorities in terms of whether
23 to fund those lines or different lines in those
24 amounts or different amounts, which is a traditional
25 part of our budget negotiations.
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1 REPRESENTATIVE MAHER: So you're saying
2 basically we should treat the budget that you
3 presented as a comic book on these line items, that
4 you don't really mean it? Is that what you're telling
5 us?
6 SECRETARY MASCH: I'm telling you that it is
7 a longstanding practice to begin with a proposal from
8 the Governor, which presents the Governor's spending
9 priorities, and gives us the opportunity to negotiate
10 with you changes and additions. And like Governor
11 Thornburgh and Governor Casey and Governor Ridge and
12 Governor Schweiker, Governor Rendell has also left
13 open for negotiation whether to fund and the level to
14 fund those budget lines that have been inserted in the
15 budget in the first place by the General Assembly.
16 REPRESENTATIVE MAHER: I want to make sure
17 I'm understanding this. Is that big volume,
18 phone-book-size volume, labeled the Governor's
19 Proposed Budget -- I think it bears your name on that
20 volume as well -- is that your proposed budget?
21 SECRETARY MASCH: Yes, indeed.
22 REPRESENTATIVE MAHER: And that budget
23 contains approximately $60 million less for research
24 on an ongoing, forward, annual basis than the current
25 year; is that correct?
86
1 SECRETARY MASCH: That is correct. If I
2 understand where you're driving, Representative, if
3 you're saying that you would advocate that the General
4 Assembly restore those lines --
5 REPRESENTATIVE MAHER: I'm not advocating
6 that at all. I just want to understand the facts.
7 And the facts sound to me that instead of enhancing
8 Pennsylvania's ability to undertake research, that you
9 are establishing, you are proposing, a $60 million
10 reduction on an annual basis for these research
11 institutions to proceed.
12 SECRETARY MASCH: That would be true if those
13 lines --
14 REPRESENTATIVE MAHER: They can get a lot of
15 bricks and mortar. There will be one big happy day
16 we're going to pass out the $500 million but in terms
17 of day in, day out, year in, year out, you're looking
18 at $60 million less for these institutions on an
19 annual basis under your proposal.
20 SECRETARY MASCH: That would be the case in
21 the final enacted budget, which is the only budget
22 that counts. Those lines remain at the level that
23 they are at now. But I would note, because several of
24 those lines that you -- two of those that you've cited
25 have been in the budget for a long time. And not just
87
1 this Governor but his predecessors have zeroed out
2 those lines at the beginning of the budget process and
3 then an amount has been set in the final enacted
4 budget. That does not make the budget a comic book.
5 That does reflect the seriousness of the interactive
6 process, the negotiation, between the Legislature and
7 the Administration as to what the final shape of the
8 budget will be.
9 REPRESENTATIVE MAHER: You make a good point.
10 If research, medical research, is going to continue to
11 thrive in Pennsylvania, it will be by overcoming the
12 Governor's proposal, not by embracing it.
13 SECRETARY MASCH: By amending and adding to
14 it, rather than overcoming it, that would be my
15 difference. Clearly, our intent is to negotiate with
16 the four caucuses to come up with a final product
17 which we hope every year will be an improvement on the
18 prior year's and an improvement on the first draft
19 that we submitted to you.
20 REPRESENTATIVE MAHER: And where do you
21 suspect the money will come from for this?
22 SECRETARY MASCH: Well, in the past, it's
23 come from our ability to reduce our spending and hold
24 our spending down on administration so we could
25 increase our estimated lapses at the end of the year
88
1 and therefore free up resources to be able to
2 appropriate programs for the next year. Certainly,
3 that's my goal.
4 REPRESENTATIVE MAHER: Well, Mr. Chairman, I,
5 for one, am not satisfied that Pennsylvania ought to
6 be mortgaging 21 years of its research funding in the
7 hope of presenting a bunch of big oversized checks in
8 the midst of an election year. I do hope that
9 Pennsylvania will find a way to provide some year-in,
10 year-out certainty that research will, in fact, be
11 funded as opposed to each year of this Administration
12 that creates uncertainty. The uncertainty on the
13 availability of such funds diminishes the ability of
14 institutions to recruit because they are not able to
15 offer the certainty of ongoing research funding.
16 Thank you, Mr. Chairman.
17 REPRESENTATIVE FLEAGLE: The Chair thanks the
18 gentleman.
19 That concludes our questions. I want to
20 thank the Secretaries for being here today.
21 Two points. First of all, I would like to
22 recognize the presence of Representative George
23 Kenney, who is the chairman of the House Health and
24 Human Services Committee. We appreciate him being
25 here.
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1 Representative Stern has submitted remarks
2 and questions for the record, so they will be directed
3 toward your group.
4 This committee will now be recessed until
5 2 p.m., at which time Judiciary will be in front of
6 us.
7 (The hearing concluded at 12:20 p.m.)
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1 I hereby certify that the proceedings
2 and evidence are contained fully and accurately in the
3 notes taken by me on the within proceedings and that
4 this is a correct transcript of the same.
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8 ______Jean M. Davis, Reporter 9 Notary Public
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