CHICAGO — Underwriters interested in participating in the financing team for Minnesota’s proposed tobacco bond issues have until Aug. 24 to submit their proposals for review.
The state published its request for proposals for underwriting services on Monday with a deadline for questions set for Aug. 15 and proposals due by 4:00 p.m. Central Daylight Time on Aug. 24. The Minnesota Management and Budget office anticipates selecting a team by Sept. 1.
A separate RFP will be released later this month to establish new underwriting pools for the state to choose from on general obligation bonds it opts to sell through negotiation over the course of the fiscal 2012-13 budget period that ends June 30, 2013, said Kristin Hanson, an assistant commissioner in MMB.
The state has the option to sell through negotiation under legislation signed by Gov. Mark Dayton last month but has not decided what type of sale to use on a $600 million to $700 million GO issue slated for later this summer or in early fall, Hanson said.
Dayton and lawmakers agreed to the issuance of between $800 million and $900 million of tobacco bonds — with the aim of raising $640 million in cash — as part of a plan to help eliminate a remaining $1.4 billion deficit in the state’s $35 billion biennial budget. The agreement last month ended a state government shutdown that began July 1 amid a budget impasse.
The state anticipates selling its tobacco bonds in two tranches, with the tentative goal of raising $400 million in tax-exempt proceeds by Nov. 4, a deadline timed to the state’s release of its annual November forecast in early December. Any later and the state would have to revise its financial disclosure. The state would use the proceeds to cover required December debt service deposits. The second tranche would raise the remaining balance of $240 million and be sold by November 2012.
The legislation gives state finance officials some flexibility in structuring the transaction as either tobacco securitization bonds or tobacco appropriation bonds. The state anticipates selling the first as a securitization and has not decided on the second.
Minnesota is asking underwriters to present pricing and cost of issuance assumptions for both types of securities. Under the legislation, 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, MMB could sell up to $800 million earmarking both tobacco settlement revenues and other general fund money toward bond repayment through an appropriation pledge.
“Eligible expenditures may include general fund working capital needs, capital expenditures otherwise paid by the state general fund, and debt service payments paid by the state general fund. While it is the state’s goal to develop a plan of finance that will allow bonds to be issued on a tax-exempt basis, it is possible that at least some portion of the bonds will be issued on a taxable basis,” the RFP reads.
Public Financial Management Inc. is financial advisor to the state. Jeanne Vanda and Jessica Cameron Mitchell are the lead advisors. Kutak Rock LLP is transaction and bond counsel. Attorneys Curtis Christensen and John Wagner are leading the firm’s team.
Minnesota has not previously leveraged its tobacco settlement payments. It was one of four states, with Florida, Mississippi, and Texas, that did not participate in the 1998 Master Settlement Agreement with tobacco companies to settle health care claims. Minnesota, along with Blue Cross and Blue Shield of Minnesota, entered into its own agreement with the four major tobacco companies.
The 1998 pact mirrors the national settlement in that it provides annual payments in perpetuity for the state’s general fund, but it has some distinct features from the MSA “and should be carefully reviewed by respondents,” the RFP suggests.
Minnesota received $105 million in 2000 under its agreement. Its highest payment for $184 million came in 2008. It expects $165 million this year. It saw a 6.4% drop in its 2010 payment and anticipates a 4.4% decline next year and a 2.6% decline in 2013, a 3% decline in 2014, and a 2% drop to $150 million in 2015, according to the RFP.
Tobacco companies made $6 billion in payments to states in 2011 under the MSA agreement, down 5.6% from a year earlier, according to a report from Herbert J. Sims & Co. Annual payments are based on a complex formula that adjusts for the size of the cigarette market, inflation, consumption, and other factors.