Minnesota sells tobacco bonds to raise $640 million needed in budget fix

The state sold $757 million in tobacco bonds yesterday and is putting $640 million of the proceeds into the state coffers as a piece of the funding puzzle that ended last summer’s state shutdown over the budget deficit.

The rest of the bond sale proceeds, $117 million, will be used for “funding of a debt service reserve fund, capitalized interest, and costs of issuance,” state officials said today.

They said the “true interest rate” was 4.75 percent.

The state gets money each year from the tobacco companies, as the result of a 1998 settlement of a lawsuit over the health costs of smoking. The money had been about $200 million a year, but in recent years dropped to $160 million because fewer people are smoking. By selling the bonds, the state gets money up front, rather than waiting for the yearly payments. But the cost of selling the bonds caused some to say it was inappropriate to, in a sense, mortgage the future in order to pay current bills.

The Minnesota Management and Budget said:

Public Financial Management, Inc. is the financial advisor and Barclays Capital is the senior banker for the sale. The state participated in an extensive pre-marketing effort aimed at potential institutional investors. 

The Minnesota Tobacco Settlement Revenue Bonds were sold on a negotiated basis after a competitive selection of the underwriting team. The true interest rate on the bonds was 4.75%. The ratings of the bonds are based on the underlying ratings of the tobacco companies and the security features of the bonds. They will be rated A/A- by Standard & Poors and BBB+ by Fitch.

Comments (1)

  1. Submitted by James Hamilton on 11/17/2011 - 05:26 pm.

    It’s rarely considered wise to finance current expenses over the long term. But then, why do I expect wisdom from the Legislature and the Governor?

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