CHICAGO — Minnesota Gov. Mark Dayton signed 12 budget-related bills Wednesday, paving the way for the state’s sale later this summer of $600 million to $700 million of general obligation bonds for capital projects and the fall sale of tobacco bonds to help balance the new $35 billion budget.
In addition to authorizing the sale of between $800 million to $900 million of tobacco bonds for budget relief, the two-year legislative package includes a new $500 million bonding bill and extends for another two years the state’s ability to use negotiated sales on general obligation deals.
Most state government operations shut down on July 1 because of an impasse over a new two-year budget between Dayton, a member of the Democratic-Labor-Farmer party, and Republicans who control the Legislature.
Dayton sought a mix of cuts and an income tax increase on top earners to erase a $5 billion deficit. Republicans refused to go along with any tax increase.
A $1.4 billion divide remained between the two sides. It was bridged last week when Dayton agreed to go along with a Republican proposal to delay school aid payments and issue tobacco bonds to make up the shortfall.
The GOP agreed to several concessions, including passage of the $500 million bonding bill for capital projects, and dropped some policy demands. Dayton earlier this year pressed for a $1 billion bonding bill but Republicans refused.
The Legislature approved the final 12 bills that appropriate funding and authorize spending in the new budget early Wednesday during a special session and Dayton later signed them. He announced that government operations would resume Thursday.
“I’m not entirely happy with what I’m signing into law,” Dayton said. “It’s not what I wanted, but it’s the best option available.”
The governor had sought to avoid the use of one-shot revenues.
The Office of Management and Budget will launch in the coming weeks a competitive selection process to select an underwriting team for its tobacco issuance that would be sold in two tranches this fall and in the fall of 2012. Public Financial Management Inc. is advising the state.
The legislation gives state finance officials some flexibility in structuring the transaction. The tax bill authorizes the commissioner of the Minnesota Management and Budget office to issue tobacco securitization bonds or tobacco appropriation bonds.
“We have the ability under the legislative to do either with the goal of reaching $640 million in net proceeds. That’s the magic number,” state debt manager Kristin Hanson said Wednesday.
If tobacco securitization bonds are sold, they would be special revenue bonds, secured by a pledge of tobacco settlement revenues that can be issued in a public or private sale of up to $900 million.
The legislation creates a special authority governed by the commissioners of the MMB, Revenue, and Health departments to manage the process. The commissioner would sell to the authority the state’s right to a portion of the tobacco settlement payments.
Under a tobacco appropriation bond structure, the Office of Management and Budget could sell up to $800 million earmarking both tobacco settlement revenues and other general fund money towards bond repayment through an appropriation pledge.
The latter would mark a first use of the state’s appropriation pledge for a bond sale. The state has previously put its appropriation pledge on some bonds issued through authorities or commissions, but not directly by the state.
If officials eventually decide to tap the pledge, they would seek a Minnesota Supreme Court opinion on the legality of issuing appropriation-backed bonds.
Because of the need for a court opinion, Hanson said the fall tranche of tobacco bonds will be sold as securitization bonds.
Minnesota has not previously leveraged its payments under the Master Settlement Agreement between most states and the major tobacco companies, though former Gov. Tim Pawlenty proposed a $1 billion issue to help balance the budget in 2009. The state currently deposits its annual payment into the general fund and it can be used without restriction, according to state reports.
Tobacco companies made $6 billion in payments to states in 2011 under the agreement, down 5.6% from a year earlier, according to a report from Herbert J. Sims & Co. Minnesota received $160 million in its last fiscal year under the agreement, Hanson said.
Annual payments are based on a complex formula that adjusts for the size of the cigarette market, inflation, consumption, and other factors.
The $500 million bonding bill for capital projects would be funded with future general obligation borrowing. The bill includes authorization extending for another two years the state’s ability to sell GO debt through negotiation.
State statutes limit GO bonds to competitive bidding but lawmakers in the last two-year budget authorized the use of negotiation due to market turbulence, and Minnesota sold bonds using both techniques over the last two years.
Hanson said her finance team has not yet settled on whether to use a negotiated or competitive sale on the next GO issue slated for later this summer or early fall.
The annual sale provides funding for previously approved bonding bill projects and trunk highway projects. The state was awaiting passage of a budget before selling any debt due to financial disclosure issues.
First up, however, is the planned sale of $50 million of revenue bonds to provide ongoing funding for the statewide emergency communication system. That sale will take place this summer ahead of the GO issue. Jefferies & Co. is senior manager.
The bonds are secured by a gross pledge of the 911 fees paid by telephone and cellphone users. The ratings range from a high of AA-plus from Standard & Poor’s to a low of A1 from Moody’s Investors Service. Fitch Ratings assigns a AA-minus.
The budget compromise relies solely on one-time revenues, for which the state has shown a proclivity during its years of politically divided government.
It has already been punished by Fitch which recently downgraded the state’s $5.7 billion of GOs one level to AA-plus over its use of non-recurring revenues and accounting gimmicks amid political gridlock to erase red ink. Minnesota retains its AAA rating from Standard & Poor’s while Moody’s rates it Aa1.
