ST. PAUL, Minn. (AP) — Minnesota’s government is about to give up $1.1 billion in future payments from tobacco companies so it can get about half as much money now for a temporary budget fix.

A new state authority expects to finalize a bond sale late next week that leverages a portion of Minnesota’s 1998 tobacco lawsuit settlement. The sale will free up $640 million to patch a near-term budget hole, but the payouts to bondholders, with interest, will add to the budget woes the state is projected to have for years to come.

Minnesota isn’t the first state to take such a step. Lawmakers could even go back to the remaining tobacco money if another budget deficit surfaces in a new economic forecast due Dec. 1.

“Once you’ve already done it, it’s something I’m sure everyone will be looking at again,” said House Taxes Committee Chairman Greg Davids, R-Preston.

In an interview last week, Democratic Gov. Mark Dayton said he “would be very strongly opposed to it” but declined to take the option off the table.

The arrangement was a key link to a summer budget deal that ended a nearly three-week government shutdown. Both sides cast it as a default option because Republicans refused to raise income taxes and Dayton balked at deeper spending cuts.

But it comes at a high price.

Documents supplied to potential bond investors suggest that the state is actually selling $787 million worth of bonds. Almost $150 million of it is going toward a debt reserve fund, set-up costs and other expenses that limit the amount available for budget purposes.

Similar to a home mortgage, the state receives an infusion of money but will pay bondholders between $65 million and $80 million per year for the next 20 years. The highest annual debt costs come toward the beginning, when the state’s budget is already anticipated to be in rough shape.

Under the so-called tobacco securitization bond, the state gives up rights to a big chunk of tobacco payments through 2031. Last year, the state received about $170 million.

The overall cost to the state won’t be known until the sale is final because interest rates could still fluctuate. But officials are projecting $1.2 billion in total debt costs, all but about $100 million coming from the diverted tobacco payments. The rest is from the new reserve account.

The major tobacco companies reached settlements with all 50 states in 1998. The goal of states was to recover costs incurred from treating smoking-related illnesses. Minnesota, which was one of four states to negotiate its own deal, was counting on $6.1 billion over 25 years, with payments continuing into perpetuity. So far, state records indicate that Minnesota has collected $3.3 billion.

The National Conference of State Legislatures says about 20 states have borrowed against their settlement money, some more than once.

Democratic Rep. Ann Lenczewski, a former chairman of the House Taxes Committee, voted against Minnesota’s tobacco bond sale. She criticized Republican lawmakers and Dayton for agreeing to the arrangement, equating it to a worker giving up future pay for money to pay household bills now.

“You sell your salary to pay for something short-term, two years. The problem is back and now you have no salary,” she said. “It’s an example of politicians in both parties not wanting to take their medicine. If we would have cut more it would be permanent. If we raise more (taxes) it would have been permanent.”

Dayton said he went along to end the stalemate that idled thousands of workers and darkened critical parts of state government.

“We had 20 days of shutdown. It was clear to me they weren’t going to agree to a tax increase,” Dayton said.

Republicans said it was far from their favored approach. They spoke almost apologetically about it when the bill authorizing the bond sale was approved in July on party-line votes.

“There are 201 of us plus a governor who wouldn’t say this is their very first choice about how to proceed,” Senate Tax Committee Chairwoman Julianne Ortman, R-Chanhassen, told colleagues at the time.

The bonds carry risks for investors because the future tobacco payments — not the state taxing authority — back up the debt.

According to documents associated with the sale, tobacco companies face more than 10,000 lawsuits. Adverse outcomes would affect the viability of some companies, and could possibly force some into bankruptcy. Public smoking restrictions, increased tobacco taxes and general declines in smoking rates could also drive down Minnesota’s settlement proceeds, which are based partly on cigarette sales volumes.

As it stands, smoking rates are expected to drop by 3 percent per year, according to modeling done by an economic forecaster working for the state. It would take a smoking decline above 10 percent, year over year, for bond holders to dip below a break-even point.

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

Comments (8)
  1. DougT says:

    And what did they do with all the tobacco taxes they collected over the last 50 years? Did this go to a healthcare fund?

    Nope they spent it on other things….And even knowing then that smoking was “bad for you” they still shamelessly collect taxes from the sales –

    So who is really addicted to tobacco? I would say the state.

  2. mohair sezs says:

    And when this money runs out?

    back to the same issues they dodged by mortagaging the states future at half the price, mind you

    fixing the state’s budget.
    anyone remember the shut down, anyone?
    that went rather well don’t you think?

  3. Chuck says:

    So; Let’s use this money instead of making the top 1% of the state’s taxpayers pay a little more. Makes perfect sense to me. NOT!!

  4. Kevin says:

    Ummm….wasnt that money supposed to be used for the State and the Medical Community to pay for the damage done by those evil smokes??? Oh thats right the Lawyers got most of it……..God Bless American….So why not just put your big boy and girl pants on…and increase the tax burden on the rich….while begining to have the 50% begin to pay taxes….oh…and shut down Govt fraud…….is their a priest in the house????

  5. Wake Up says:

    Now what are they gonna do – oh wait how about we actually live within our means – now theres a new concept – we can increase the tax on the top 1% but thats only a short term fix unless they don’t get with the program and decrease spending and get everyone to pay there fair share – oops that menas the 40% who pay nothing would actually have to start paying something.

  6. Susan says:

    This is really irresponsible.

    You are eventually going to have to make deep cuts. The longer you prolong the inevitable, the worse it will be.

  7. Murph says:

    Most people in rural Wisconsin and Minnesota make their own cigarettes because the 5 to 7 dollar a pack retail ones are full of chemicals and the raw tobacco is not! At 15 to 20 dollars a carton for a good flavored smoke that doesn’t put brown snot in your nose is worth it! So Mn should be elated that they get their money now as the politiccians and others who make promises rarely actually deliver on them.The corrption and outlandish lying and whining of those creepozoids is just plain annoying.Relax ,have a smoke and hope they are all arrested before the election! They’re all quilty of something!