Tobacco bonds: A high-priced revenue alternative

  • Article by: LORI STURDEVANT , Star Tribune
  • Updated: November 19, 2011 - 4:19 PM
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Borrowing against future tobacco lawsuit settlement proceeds turned out to be an expensive way to pay for state government.

To put an additional $640 million into the 2012-13 state budget, bonds were issued Thursday that will cost a total of $1.2 billion over their 20-year lifetimes.

Lawmakers were warned that it would be so. But some may not have believed it until last week's $757 million bond sale by the new "Tobacco Securitization Authority" was final.

Of that amount, $117 million will be diverted for "funding of a debt service reserve fund, capitalized interest, and costs of issuance," the bond sale announcement said.

But the expected interest costs over 20 years will be an additional $459 million.

The new bonds sold at a 4.75 percent interest rate.

That compares with the 2.82 percent rate netted in September by Minnesota's general obligation bonds -- the kind the state usually issues for building projects, backed by state taxing authority.

By comparison, the new bonds are backed by the stream of revenue the state gets from its 1998 lawsuit settlement with Big Tobacco. That stream varies with inflation and domestic tobacco sales. That's why Wall Street demanded a higher interest rate.

Let investors worry about the security of these newfangled Minnesota bonds.

What should concern Minnesotans is that this one-time gimmick raids future state revenues to pay for government today.

It all but assures another budget deficit for the 2013 Legislature to address with reduced services, higher taxes -- or more borrowing.

House taxes chair Greg Davids, R-Preston, said earlier this month that borrowing against future revenues is "something I'm sure everyone will be looking at again."

Did I just hear somebody humming "California, Here We Come"?

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Lori Sturdevant is a Star Tribune editorial writer and columnist.

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