Tobacco bonding would borrow from our future

In the waning hours of negotiations on June 30, legislative leaders put an old proposal on the table: tapping our future tobacco settlement money for some one-time, up-front cash. It’s a plan that would borrow money from Minnesota’s future to pay our bills today.

In 1998, Minnesota was part of the charge in suing tobacco companies to recover health care costs related to tobacco use. As part of the settlement, tobacco companies are required to make annual payments to Minnesota, which flow into the state’s general fund. According to the most recent estimates, Minnesota expects to receive nearly $320 million in tobacco payments in FY 2012-13.

The legislative leaders have suggested issuing “tobacco bonds” that would sell off future tobacco payments in return for a one-time, lump sum payment today. How would it work? Investors would buy these bonds in the private market, earning interest on their investment. The state would use the proceeds from the bond sale to reduce our current budget deficit. Future tobacco payments would be used to pay the principal and interest to investors.

There are many reasons to reject the idea:

  1. It’s a short-term fix. The one-time influx of money won’t help solve the state’s long-term imbalance between the revenues we are raising and the cost of meeting our needs.
  2. Selling tobacco bonds now is just borrowing from our future. Minnesota is expected to receive just over $300 million in tobacco settlement money in FY 2014-15. If we sell the tobacco bonds now, all of that $300 million could potentially be committed to repaying the bondholders and would no longer be available for funding important services for Minnesotans.
  3. Issuing bonds is expensive, reducing the value of the one-time payment. According to a report by Connecticut’s Office of Legislative Research, selling tobacco bonds “is an expensive transaction to complete, involving fees for investment bankers, brokers, accountants and lawyers.” Plus, you have to pay interest to the investors.
  4. A number of states have already issued tobacco bonds, and the current outlook isn’t too positive for investors. According to Forbes, “In November 2010 Standard & Poor’s downgraded 51 tobacco bonds in 16 states to junk status, citing decreasing tobacco use.” With that kind of history, Minnesota tobacco bonds would likely need to pay higher interest rates to attract investors, again making the bond sale less profitable.

Legislative leaders have pulled the tobacco bond proposal off the table for now. There are some good reasons to hope it does not resurface. Instead, policymakers should be pursuing revenue options that will benefit us in the future, rather than borrow from the future.

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Scott Russell's picture
Scott Russell

Scott Russell (scott [at] tcdailyplanet [dot] net) wrote for the Southwest Journal and Skyway News (now the Downtown Journal) in Minneapolis from 1999-2005. He also wrote for The Capital Times, a Madison Wisc