Tobacco Bonds In MN Budget Come At Hefty Price

MINNEAPOLIS (AP) — The budget deal that ended Minnesota’s government shutdown comes with a hefty price: It relies heavily on borrowing $640 million against money from the state’s 1998 tobacco settlement, but might cost that same amount in interest — plus a substantial annual revenue loss for years to come.

Still, it allowed Democratic Gov. Mark Dayton and Republican legislative leaders to avoid $640 million in spending cuts or tax increases.

“From the Republican standpoint it is considered better than a tax increase. I would presume from the governor’s standpoint it makes money available to support critical programs,” said Tom Hanson, who was the state’s finance commissioner under former Gov. Tim Pawlenty. “The downside is it’s money that’s not going to be available in the next biennium … but the spending expectations will probably be there.”

All 50 states reached settlements with the major tobacco companies in 1998 to recover billions of dollars in costs incurred from treating smoking-related illnesses. Forty-six states signed a master agreement with the industry while Minnesota was one of four states that negotiated separate deals. Minnesota’s settlement was expected to bring the state $6.1 billion over 25 years, with payments continuing into perpetuity.

About 20 states have issued bonds backed by future tobacco settlement revenues to meet more immediate needs, according to Arturo Perez, a financial analyst with the National Conference of State Legislatures. Some states have done so more than once. This will be Minnesota’s first time, although the idea has been floated at the Capitol before, most recently in 2009 when Pawlenty was unable to get support for a tobacco bond issue.

The budget deal calls for $1.4 billion from tobacco bond proceeds and delayed payments to schools. Minnesota currently gets about $160 million a year from the cigarette makers, so it’s expected to receive about $320 million in the two-year budget period that began July 1. The loss of an as-yet unknown portion of that revenue in future budgets means lawmakers may have to find a way to plug that gap.

“They’re going to have the same debates two years from now,” Hanson predicted. “… Hopefully the economy will grow and the revenue will grow faster than the obligations for the programs.”

The special session tax bill Dayton signed Wednesday leaves it up to his finance commissioner to work out most details of how to structure the bond sale, including how long it will take to repay bondholders. The bonds won’t be guaranteed by the state.

As a general rule, said Bill Marx, a fiscal analyst for the Minnesota House of Representatives, the final cost to the taxpayers could be 150 percent to 200 percent of the bonds issued. By that math, a $640 million tobacco bond issue could cost nearly $1 billion to close to $1.3 billion.

Marx said the full costs won’t be known until the bonds are finally put out for bids, so it’s difficult to know yet what the interest rates would be. Tobacco bonds typically get slightly lower ratings from Wall Street analysts than the state gets for general obligation bonds, he said.

A week into the shutdown, Fitch Ratings cited the state’s expected reliance on one-time money for closing its budget gap when it downgraded Minnesota’s credit rating from AAA to AA+.

Perez said tobacco bond issues ground to a halt in 2008, partly due to failure of investment bank Bear Stearns Cos., which had been a leader in the field. He said it’s not clear if a sale by Illinois late last year and the Minnesota plan mark the beginning of a trend.

Illinois sold $1.5 billion worth of tobacco bonds last December, which could give Minnesota a guide. James Prichard, manager of capital markets for the Illinois Office of Management and Budget, said the bonds had an average yield of 5.6 percent. He said Illinois was careful to structure its deal more conservatively than many other states have done, to ensure bondholders can be paid if smoking rates decline faster than expected.

The amount of money the state gets under the settlement is tied to tobacco sales.

Danny McGoldrick, vice president for research at the Campaign for Tobacco-Free Kids, said it’s a bad deal for Minnesota. The group has been critical of tobacco bond issues by other states, too. It says raising tobacco taxes would have the added benefit of reducing smoking.

“You’re giving up a future revenue stream that can and should be used for what was intended from the settlement, which is to help prevent kids from smoking and encouraging smokers to quit,” McGoldrick said.

(© Copyright 2011 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten or redistributed.)

  • Goob

    Didn’t we all learn about credit cards when we were younger and got in trouble with them?? Idiots!!

  • Mike Merker

    It looks like it doesn’t matter who we vote in, they just don’t get it and never will. The whole system of politicians should be done away with. their loyalties lie with their party and campaign donors and not with the people!

    • Mike Hunt

      You sir are correct!!!

  • Leroy

    I could never vote for a democrat, we just don’t see eye to eye.
    But I am getting so frustrated with the disorganization and distinction of the rhino’s in the republican party, I just might.

    We voted for tax cuts, real ones, not ones that come with wait and see disclosures.

    Republicans, you failed us.

    • The Architect

      Well hey, at least they got the amendment banning gay happiness onto the ballot next time, right? Well played, elephants! You’ve got those dirty gays right where you want them!

  • Chuck

    But the Republicans made sure the top 7,000 or so Richest Minnesotans did not have to get their taxes raised. MISSION ACCOMPOLISHED!!!!!

  • Enough

    Why is it so darn hard to stop the damn spending and cut it way, way back? These guys all are like drug addicted crack smokers. I’m sick of all of them. They are the worst form of government employee and that is literally scraping the bottom of the barrel since government workers are already at the lowest eschelon within their respective strata. When all else fails and you are nearly unemployable, get a government job or worse become a politician.

  • Jason

    Keep pointing the finger at the opposing party, most of you are just as much of the problem as the crooks running the government…….sheep being led to the slaughter. You actually are stupid enough to believe that it’s one party or the other creating the problems, these same people go hang out together on the weekends and laugh at you for buying into their BS.

    • Mark Lavalla

      You are so correct, Garbage in, Garbage out.

  • Cache

    Soooooooooooooooon we are going to have to visit ‘All’ these thieving bums with pitchforks, torches and rope and hang these bum politicians!

  • Time to get out the choker collar

    What an embarrassment! Count me in Cache! This over the top stupid!

  • Bob

    Minnesota Republicans have got to be the stupidest Republicans in the world.

    Borrow money and increase spending…sigh. Just a bunch of RINOs.

    • Jason

      There ya go Bob join the flock

  • Ted

    They should have used that money to prevent smoking… I don’t understand why this was even considered.

    • Jason

      Ted, I would be very careful what you wish for, because if you think it will stop at banning smoking then you are sorely mistaken.

      If you are going to support even more government intervention, then you will be crying 20 years from now when all of your freedoms are gone. We don’t need babysitters, what we need is accountability.

      Kick people off welfare that are not actively seeking employment, or who are abusing it, using drugs while on it or having more kids while on it.

      Cut off all spending for political travel except the bare minimal essentials, why should they fly first/business class while the rest of America flies coach? Why should they stay at the Hyatt, Hilton, or the Ritz when most of the citizens are bedding down at Super 8.

      No more pay for special sessions, get your jobs done on time or you don’t get paid, just like the real world, if I didn’t meet deadlines I would lose my job.

      If the schools go over budget then that’s too bad, operate within your means.

      Oh look at that I just curbed a lot of spending now didn’t I.

      Oh yeah, FYI Ted, they couldn’t use the money to prevent smoking because they DON’T HAVE IT YET!!!! They are using a bond to borrow against the ANTICIPATED money they are supposed to get. You know……..spending money before they have it, the same habits that got them into this mess to begin with.

      • The Architect

        There is a significant ideological difference between preventing smoking and banning smoking, and I would caution you to keep the difference in mind.

        I have never heard of anybody suggesting a legitimate plan of action towards banning smoking altogether. It’s really not feasible to even think it could happen.

        However, preventing smoking through education and awareness is very feasible and is actually happening.

        • Jason

          I agree, however then we should be looking at it as deterring smoking, instead of saying preventing, as preventing infers to intervene to stop it whereas deterring involves education and incentive to stop voluntarily.

          Freedom to choose is one of the last protected rights we have in this country, and it is quickly being taken away.

          • Ted

            I read in the article here that they wanted to use the money (expected to come) to “prevent” teenagers from smoking and that is what my comment was. This anti goverment “now you moron” stuff is getting annoying on these posts Jason.

  • It's a people problem, not a party problem.

    Echoing some of the wiser posters here – both parties are to blame; this on-going problem is clearly a people problem, not a party problem. And, no surprise, all the politicians accomplished was to again postpone doomsday; they resolved nothing.

    The keystone is and always will be to curb spending. Exactly like responsible families, government needs to live within its means. Taxes should only increase by an amount roughly paralleling inflation.

    For a long term solution, we need to make intelligent changes to government spending habits. An obvious starting point is social programs, ranging from changes in spending for social welfare programs all the way up to and including arts and entertainment.

    Same thing with sports facilities. At this particular economic juncture, they are “would like to haves,” not “necessary luxuries.”

    It isn’t simple, it won’t be easy, but if we don’t begin to seriously deal with it now, it will crush us in the near future.

  • kevin

    I still think my budget compromise would have worked. Give dayton his tax raise and use it to fund a dept. to target fraund at all levels of entitlement and tax dodging etc. It would have created jobs and reduced misused entitlent cost and brought in additional tax income that was and is not being paid, thus reducing the defecit spending.

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