Minnesota finance officials are preparing to sell the tobacco bonds that were part of the state budget solution, but questions remain about the details of the sale, the amount of money the bonds will raise and even the legality of one version of the bonds.
The bonds represent $640 million of the agreement that erased Minnesota's $5 billion deficit and ended the state government shutdown.
Many key people involved in the tobacco bond sale are reluctant to discuss it. Minnesota Management and Budget, the agency charged with selling the state's right to future tobacco settlement revenue, declined repeated interview requests. Gov. Mark Dayton and Republican legislative leaders don't offer details about the bonds, and neither side claims ownership of that part of the budget deal. Although Dayton signed the bill, he said his proposed income tax increase on top earners would have been a better option. He blames the GOP for the tobacco bonds.
"That's what the Legislature insisted on, the Republican leadership," Dayton said.
The bonds are based on future payments the state is due to receive from tobacco companies as part of a 1998 lawsuit settlement. Dayton said he's concerned about the costs associated with the bonds.
"The need for another $750 million of debt financing by the state is not going to be good for the state's financial ratings," Dayton said.
"If it hadn't been for those tobacco bonds," Dayton speculates, "I don't think the rating agencies would have reduced our credit rating, and that raises the cost of borrowing. It also makes it more difficult to place our bond sales."
At least 20 other states have already sold similar bonds.
Senator Julianne Ortman, R-Chanhassen, the chair of the Senate tax committee, voted for the bill. But she blames Dayton for the tobacco bonds.
"It would never have been my choice to raise $640 million in this way. I think the governor has made this choice," Ortman said.
Ortman said she can accept the sale because of the experience of other states. Another reason is that Minnesota's tobacco payments have been shrinking due to fewer people smoking.
"They bring in about $150 million to $160 million now a year when they used to bring in about $200 million," Ortman said.
Since payments are decreasing each year, Ortman said it makes more sense to sell them off as bonds and use the proceeds for emergencies.
The new law allows the state two options for the sale. Securitization bonds are backed only by the future tobacco revenue. Appropriation bonds are less costly and would be secured by future general fund revenue. They would also require the state to first file a lawsuit seeking a validation from the Minnesota Supreme Court.
Attorney General Lori Swanson, who helped write the law, has raised concerns about the constitutionality of tobacco appropriation bonds from the time they were first suggested by Gov. Tim Pawlenty in 2009. Those bonds could tie the hands of future legislators, Swanson said.
"Under tobacco appropriation bonds, essentially what the state is doing is not only cashing in its future payments and selling them to investors, but the state Legislature is saying if the tobacco industry doesn't perform as contemplated that the state of Minnesota will stand behind the obligations and essentially back them up."
Swanson said MMB is evaluating whether to sell appropriation bonds or the less risky securitization bonds. The agency could use the securitization bond option right away or wait until a court ruling comes on appropriations bonds, she said.
MMB officials last month provided documentation about the anticipated bond sale process. They expect the bonds to be sold in two series: one issue this fall using the securitization approach, and a second in 2012.