Minnesota completes sale of US$757M in bonds using tobacco settlement payments as backup

ST. PAUL, Minnesota , November 17, 2011 () – Minnesota finance officials said Thursday they've completed the sale of $757 million in bonds using the state's future tobacco lawsuit settlement dollars as the repayment stream — a move that comes with substantial costs.

The sale finalized this week will generate a one-time infusion to temporarily close a state budget gap. But principal and interest costs will top $1.2 billion over the next two decades. It will leave a $60 million to $80 million annual hole in the budget for years to come.

All told, the state will give up $1.21 billion in settlement payments tied to a 1998 court case with cigarette makers. Interest on the new debt approaches $460 million.

Democratic Gov. Mark Dayton and the GOP-led Legislature authorized the sale as part of a summer budget agreement that ended a nearly three-week government shutdown. Dayton saw it as a way to prevent deeper spending cuts, while Republicans favored it over raising taxes or more IOUs to schools.

The sale nets $640 million for the budget fix. The rest of the proceeds will go into a special account to cover the cost of issuing the bonds and create a reserve fund that can be used for repayment.

The bonds are considered riskier than standard government bonds issued for construction projects, which are usually backed up by state taxing authority. Uncertainty over the financial stability of tobacco companies and declining smoking rates could cause drops in the settlement dollars Minnesota is due to get because the annual checks are based partly on cigarette sales.

The National Conference of State Legislatures says about 20 states have borrowed against their settlement money, some more than once.

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