Say you're having trouble paying your monthly mortgage bill. (For many Minnesotans, this does not require a great deal of imagination.) Say you're advised to get a long-term, high-interest loan -- if you can -- and use the loan proceeds to cover your mortgage payments for the rest of this year.
If you're smart, you'll say "No way," and look for a wiser adviser. Go with the loan, and next year your mortgage payments will return and you'll be stuck with the debt service on the new loan. Your problem won't be solved, just pushed forward, and enlarged to boot.
That home-finance example is fairly analogous to the fiscal temptation that Gov. Tim Pawlenty has put before the 2009 Legislature. Legislators don't have to endure the political pain required to make spending fully and permanently align with expected state revenues in years to come, the governor's budget suggests. There's an easier route to books that balance on June 30, 2011: The state can borrow a little more than $1 billion via something Pawlenty calls "tobacco appropriation bonds." The bonds' proceeds, up to $983 million, can be used to pay the state's debt service bills in the next two years. Then they can be paid back over the next 20 years. Total cost: $1.6 billion.
You may ask:
Why "tobacco"? The governor's original idea was to issue bonds backed by the annual payments the state receives from tobacco companies as a result of a 1998 lawsuit settlement. Seventeen other states have done as much, and have paid high interest rates to do it. But the option seemed to close when credit markets seized up last fall. State bonds backed by tobacco receipts became virtually impossible to sell.
The Pawlenty administration then switched to Plan B, appropriation bonds. But the name stuck. State Rep. Al Juhnke, DFL-Willmar, thinks he knows why: "Politically, talking about hitting tobacco is a good idea," he said this week.
Why "appropriation"? Because these bonds would not be backed by a legally enforceable repayment pledge. They would be backed only by the intention of the Legislature to appropriate money each year to repay them, using about 50 percent of the state's annual tobacco settlement receipts. That means these bonds would carry a higher interest rate than other state bonds. And issuing them could drag down the AAA rating the state enjoys now.
Why use the proceeds for debt service? Because this proposal needs to circumvent various state and federal requirements to be constitutionally permissible as well as tax-exempt. One requirements is that bond sale proceeds be used for nonoperating costs. The Pawlenty administration argues that spending on debt service is "nonoperating." Some legislators aren't sure a court would agree. The spirit, if not the letter, of the state Constitution opposes any public debt for things other than capital expenditures or extreme circumstances, such as the need to "repel invasion."
