Minnesota will receive annual payments in perpetuity under a 1998 settlement of its lawsuit against big tobacco companies. Those payments, which are adjusted for inflation and the sale of tobacco products, are currently about $200 million a year.
During the governor's budget presentation, commissioner Tom Hanson of the Department of Management and Budget explained how part of that tobacco revenue would help balance the books.
"We are selling bonds to the tune of 900, almost a billion dollars, $950 million," he said. "And we are using the stream of revenue, half of it for 20 years, to pay the debt service on the bonds. That raises a one-time resource that in this budget we use to pay our debt service off in the current biennium."
Hanson stressed that the bond proposal is more financially prudent than the approach more than a dozen other states have taken to balance budgets with tobacco money. Those states, including Wisconsin, sold off the rights to future tobacco payments to investors at big discounts to bring in needed cash.
The trend is alarming for tobacco opponents. Bob Moffitt of the American Lung Association of Minnesota said the tobacco settlement money is supposed to fund programs that help state residents quit smoking. Under the governor's plan, Moffitt said, the state would give up too much money for too long.
"The opportunities for Minnesota to invest in tobacco cessation programs and youth prevention programs at the levels that the Centers for Disease Control recommend are very unlikely," he said. "And we think that's a big mistake."
State lawmakers are also reacting to the bonding proposal.
"There are some serious reservations about it. It's not easily explained and obviously not easily understood," said Sen. Dick Cohen, DFL-St. Paul, the chair of the Senate finance committee.
He is still trying to get his head around the bond sale and the use of tobacco revenue. Cohen said the proposal is unique and appears to have some weaknesses. He said a lot of questions need answers.
"Whether or not it's going to realize the money the governor suggests it will? Whether or not it puts other parts of the state's bonding capacity or bond rating at risk? That's what we don't know," Cohen said.
Other key legislators are raising similar questions. Rep. Alice Hausman, DFL-St. Paul, chair of the House Capitol Investment Finance Division, said she's concerned the bond sale might prevent the Legislature from considering another borrowing package this session for traditional bricks and mortar projects.
Hausman said she's also wondering if the tobacco plan is a responsible use of state resources.
"As we look at this, we see that other states have warned against it, that we've considered it in the past and rejected it, and that it feels like using one credit card to pay off the debt of another," she said. "And that, I think a family around the dinner table can understand."
Republicans appear more comfortable with the bond proposal. House Minority Leader Marty Seifert, R- Marshall said the governor offered a creative solution that he thinks both parties should get behind.
"I know that in ordinary times we probably wouldn't be doing something like this," he said. "But when you look at the budget shortfall that we have I don't know that we're going to have much of a choice. And I think Democrats are going to take that one with little question."
Legislators will learn more about the tobacco-backed bonding proposal during a hearing next week. Commissioner Hanson is scheduled to appear before Rep. Hausman's committee on Tuesday.