Closing the deficit: More about those tobacco bonds that aren’t really tobacco bonds

The tobacco bond proposal that three former state finance commissioners lashed out against yesterday [previous PIM item] has undergone a quiet cosmetic makeover since it was first announced. And the story of that metamorphosis is also a parable about the measure’s risk to Minnesota’s long-term fiscal health.

When Gov. Tim Pawlenty showcased his budget on January 27, the handout included a one-pager on what were then labeled tobacco appopriations bonds. The idea was to sell future annual revenues from the state’s 1998 tobacco settlement for a period of 20 years; in exchange, Minnesota would get a one-time infusion of $987 million now. These bonds would be more attractive than traditional tobacco bonds that other states have sold, the fact sheet explained, because the state was effectively guaranteeing that payments would be kept up even if tobacco revenues tanked. A PIM followup call to the Department of Management and Budget confirmed that this means the state could end up having to pay off bondholders at least in part with fresh appropriations from future general fund dollars. (Technically, the bonds wouldn’t carry the same legal burden of repayment as general obligation bonds. But a default would have the same impact on state credit ratings–so for practical purposes, Minnesota would be very much on the hook.)

Yesterday former state finance commissioner Pam Wheelock questioned whether tobacco bonds would even be marketable. She was working from old information. The subsequent word from the Department of Revenue is that the word "tobacco" will not even appear in the bond offering, because it’s bond market poison: No one is betting on a bright future for tobacco profits. So Minnesota would be selling future general fund appropriations, period, and privately hoping that future tobacco revenues will be sufficient to foot the bill–even though that’s the precise opposite of the bet that the bond market at large is making.

According to the Department of Management and Budget, the total 20-year payout on the bonds would be $1.6 billion, with estimated annual payouts ranging from $73 million in year one to $89 million in year 20.

No Responses to “Closing the deficit: More about those tobacco bonds that aren’t really tobacco bonds”

1. Anonymous Says:
   February 21st, 2009 at 7:55 am

   Re: …Minnesota would be selling future general fund appropriations, period, and privately hoping that future tobacco revenues will be sufficient to foot the bill–even though that’s the precise opposite of the bet that the bond market at large is making.>/i>

   Only the last half of the old saying “figures don’t lie, but liars can figure” comes into play here. The Governor has slathered a thin watery coat of white wash over a general obligation bond. Hasn’t this been tried before? It’s a scant effort to disguise a general obligation as a revenue bond in order to pay today’s ongoing expenses. My, my, my…will Minnesotans ever learn there’s a difference between “sounding and appearing as nice person” and being “duplicitous”? Naw, we won’t learn…