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Pawlenty’s tobacco plan budget fix gets smoked in committee debut

MinnPost illustration by Corey Anderson

Gov. Tim Pawlenty, Minnesota’s Marlboro Man, is riding into hostile country.

In his budget presentation a few days ago, the governor proposed using “tobacco settlement revenues” to cover about $1 billion of the state’s projected $4.8 billion (and growing) budget deficit.

DFLers clearly believe that this plan to sell bonds backed by tobacco settlement proceeds is Pawlenty at his slickest. They see this idea — hey, it’s just tobacco money — as a way for the governor to continue to say he won’t increase taxes with a plan that passes on costs to future generations.

“This is a major change in public policy,” said Rep. Jean Wagenius, DFL-Minneapolis, during hearing of the House’s Committee on Capital Investment with Pawlenty’s management and budget honchos Tuesday. “The next generation will pay off the debt we incur today.”

Tom Hanson, the commissioner of management and budget and presumably a key designer of the plan, seemed to squirm in his chair as Wagenius spoke quietly but firmly.

“It’s a budget tool to be used in difficult times,” said Hanson.

“To say he’s not raising a tax is simply wrong,” Wagenius continued.  “We’re raising a tax to be paid by our grandchildren.”

Longer hearing, shorter tempers
The longer the hearing went, the shorter tempers became.

Rep. Tom Rukavina
Rep. Tom Rukavina

At one point, Rep. Tom Rukavina, DFL-Virginia, started doing what he loves to do most. He started ridiculing the governor, in this case by using the governor’s own words.  Rukavina recalled how a couple of years ago, Pawlenty called an idea raised by the state Senate  “profoundly stupid.”

“This is an incredibly profoundly stupid idea,” Rukavina said.

Rep. Greg Davids, R-Preston, saw those as fightin’ words. He interrupted Rukavina, saying that Rukavina shouldn’t be saying the governor is profoundly stupid. 

“I’m just quoting the governor and what he said about our Senate,” said Rukavina, again spitting out the words “profoundly stupid.”

“I’d have reprimanded the governor, too [for that remark about the Senate],” said Davids.

“You’re profoundly fair,” said another member of the committee.

There was a moment of laughter.

But then it was back to hammering the idea. There were questions raised, by DFLers,  about how honestly this plan is being presented. Questions about its legality under the state Constitution that requires a balanced budget. Questions about the basic wisdom of the idea, because sale of bonds to gain $1 billion for today’s budget deficit would cost the state $1.6 billion to pay back over the next 20 years. 

There was a steady line of defense of the governor to those DFL questions from Republican legislators at the hearing and from Pawlenty’s spokesman, Brian McClung. 

“It’s not ideal,” said McClung of the plan. “But it would help us get through this historic crisis. If the Democrats don’t like the idea, we expect them to identify another $1 billion they’d be willing to cut from the budget.”

DFLers say they will get around to countering the governor’s budget proposal in a few weeks. Almost certainly, their plan will include tax increases.

But back up a moment. To understand the governor’s plan, you must understand the history of the tobacco settlement.

In 1998, when the tobacco companies settled a suit filed against them by the state and Blue Cross & Blue Shield, the state essentially received two huge piles of money.

There was a $1.2 billion immediate payment. Eight percent of that total was set aside, by the Legislature, to be used for a smoking cessation program that still exists.

Mike Ciresi
Mike Ciresi

Mike Ciresi, who led the litigation on behalf of the state in that historic case, said that Skip Humphrey, attorney general at the time, came up with the plan for the nearly $1 billion that remained in the lump sum portion of the settlement.  That money, Ciresi said, was set aside in a fund, and the interest from it was sent every year to every county in the state “for children at risk. This wasn’t just for smoking. This was to help delinquents, kids who were abused, everything you can imagine. It was a great program with money that was set wholly apart from the normal budgeting process.”

Ciresi irked tobacco funds ‘stolen’ for budget fix
All that came to a screeching halt in 2003, when Pawlenty and the Legislature grabbed the $1.2 billion and used it to help balance the budget in 2004.

“Pawlenty and the Legislature stole it” is how Ciresi describes what happened to the huge wad of settlement cash.

The budget was balanced. But — pffffft — that hunk of tobacco money was gone forever.

But there is an even bigger part of the tobacco settlement. Based on a formula involving the volume of sales and profitability, the tobacco companies send money — about $200 million each year — to the state’s general fund.

At the time, the total settlement was said to be about $6.1 billion. But Ciresi said that number may be small.

“That was the nominal amount expected over a 25-year period,” Ciresi said. “But the thing is, that part of the settlement goes on forever, or at least as long as the tobacco companies exist. That could be 10 or 12 years. I it could be 100 years.”

It’s half of this pot of money — the $185 to $200 million that streams into the general fund each year — that Pawlenty says he’s using to finance appropriation bonds that would be sold in late summer or fall for about $1 billion.

But that’s a bit misleading. Whenever the governor talks about his plan, he calls it tobacco money.

Rep. Al Juhnke
Rep. Al Juhnke

“As I listen and watch,” said Rep. Al Juhnke, DFL-Willmar, “they (the Pawlenty administration) always mention tobacco settlement receipts. That’s because people say, ‘Oh, it’s just tobacco money.’ But it isn’t tobacco money.That’s general fund money.”

“Call it what you want,” said Hanson, admitting that it’s really not tobacco money that would be used to pay off the bonds.

Rep. Alice Hausman, DFL-St. Paul, chairwoman of the committee, summed up the reason it won’t really be tobacco money being used to finance the bonds: “Tobacco bonds are not marketable.”

Bond sale complications and semantics
If the Pawlenty plan is adopted, these bonds would be sold as appropriation bonds, which are different from general obligation bonds. General obligation bonds have “the full faith and credit” of the state behind them. That means the state must pay back bondholders no matter how dire the circumstances.

Appropriation bonds don’t have that pay-at-all-cost guarantee, but certainly they’re stronger than tobacco bonds would be. 

Theoretically, a state could decide not to pay appropriation bonds back. But realistically, the state that made that choice would forever destroy its credit rating. Still, because of the slight degree of risk, an appropriation bond would pay about 1 percentage point more to the bondholder than a general obligation bond.

“Moral obligation bonds” is how Rep. Loren Solberg, DFL-Grand Rapids, described the bonds Pawlenty proposes to sell. 

By any name, we’ve got some rather two-faced marketing going on within the administration. When he’s talking to people in the state, Pawlenty always uses the words “tobacco money” to describe the revenues that would pay off the bonds. But the state will NOT use the word “tobacco” when marketing the bonds to potential buyers.

Semantics, though, represent only a portion of the questions being raised about the Pawlenty proposal. 

Though similar appropriations bonds have been sold in 17 other states — with ranging degrees of success — this would be a first in Minnesota. Typically in Minnesota, bonds are used to finance capital projects.

In this case, $958 million of the revenues generated from the sale of the bonds would be used to pay what the state owes to service other obligations.

Rukavina, enjoying himself immensely, recalled how in early December Pawlenty had ridiculed the notion of “using credit cards to pay off credit cards.”

This got Davids wiggling again and talking about how “the DFLers should come up with a plan.”

Additionally, Pawlenty’s plan, his office says, would pay the state’s $20 million appropriation for the University of Minnesota’s football stadium and the state’s $4.5 million appropriation for the University’s bio-sciences building.

The plan smacks of deficit spending to a number of DFLers, who questioned whether it even is legal under the Minnesota Constitution, which requires any deficits incurred in a budget to be paid off in the same biennium, not over a 20-year period.  In fact, this plan would require a change in law.

There also were questions about what would happen to the state’s credit rating. Would the sale of these bonds be seen as debt by the big bonding houses and, therefore, lower Minnesota’s credit score? 

The answer — from Katherine Kardell, assistant to the management and budget commissioner — is that some bonding houses would see this as debt and  some wouldn’t.

So many questions — but all  from DFLers.

Republicans were mostly quiet, except when upset by the DFLers.

Rep. Larry Howes
Rep. Larry Howes

“I hope you’re as concerned about the big deficits of the federal government as you are this,” said Rep. Larry Howes, R-Walker, at one point.

Back and forth they went.

“You’re borrowing to pay the debt service,” said Solberg, shaking his head.

“It’s extremely difficult times,” said Hanson.

“We’re stacking risk on risk,” said Rep. Lyndon Carlson, DFL-Crystal.

“Give us a better idea,” said Davids.

Doug Grow writes about public affairs, state politics and other topics. He can be reached at dgrow [at] minnpost [dot] com.

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Comments (11)

  1. Submitted by Bernice Vetsch on 02/04/2009 - 03:56 pm.

    Mr. Swift: The government isn’t using these funds to meddle in people’s lives but to help young people avoid the harmful mistake of becoming smokers.

    The last time Pawlenty robbed these DEDICATED monies, he took them from the funds for TV ads designed to help prevent teens from starting to smoke. Six months after the ads stopped, Minnesota teens were asked in a study how likely they were to try smoking. The number who felt they WERE likely to try smoking had grown by 11 percent in that short half a year.

    Which means that, decades in the future, the number of cases of emphysema and lung cancer and heart disease would increase proportionately.

    I suggest making any use of dedicated funds for another purpose be made a criminal offense so the perpetrator could, according to Article 8 of the Minnesota Constitution, be impeached.

  2. Submitted by Robert Moffitt on 02/04/2009 - 10:24 am.

    Having at least half of the tobacco settlement funds tied up in debt payments would make it nearly imposible for the state to fund tobacco prevention and cessation programs at the levels recommended by the Centers for Disease Control and Prevention.

    We think this is a bad idea.

    Robert Moffitt
    Communications Director
    American Lung Association of Minnesota

  3. Submitted by Thomas Swift on 02/04/2009 - 03:16 pm.

    Gee, Bob. Wouldn’t it be a shame if you and your little pals didn’t have the financial wherewithal to “direct” profoundly mendacious “communications” in support of a further government intrusion into the private lives of citizens?

    Gosh, you all might actually have to go out and get a real job; but do not despair, for I hear that “the Onion” is looking for some fresh talent.

    Pffft.

    Even if it didn’t make so much sense in a time of financial disaster, using the tobacco money to backfill past spending rather than fueling assaults on our Constitutional freedoms is a gimme.

    I would also second Brian McClung’s profoundly obvious observation “If the Democrats don’t like the idea, we expect them to identify another $1 billion they’d be willing to cut from the budget.”

    Let me say that again…”If the Democrats don’t like the idea, we expect them to identify another $1 billion they’d be willing to cut from the budget.”

    One more time for the profoundly obtuse…”If the Democrats don’t like the idea, we expect them to identify another $1 billion they’d be willing to cut from the budget.”

    It’s important for Minnesota Democrats to get that through their heads, because while their ilk at the US Capital dig us into a debt the likes of which most people can’t begin to get their arms around, they seem to have forgotten that all of the struggling “working families” they so love to pay lip service to are profoundly broke.

    When it comes to raking in more tax loot, there’s no “there”, there, kids.

  4. Submitted by Thomas Swift on 02/04/2009 - 05:02 pm.

    I see you’re a big fan of Bob’s work, Bernice; would you care to flesh out the source of your stastics?

    Heh…of course that was a rhetorical question. I was at the matinee show, but I won’t give up the plot.

  5. Submitted by Eric Ferguson on 02/04/2009 - 05:23 pm.

    Hey Rep. Davids, I’ll give you a better idea. Just put the income tax back where it was before those foolish cuts in the Ventura era. Only fools couldn’t see that would have big blowback when the economy went into recession. You’ve tried the gimmicks, so now try some responsibility.

  6. Submitted by Tom Anderson on 02/04/2009 - 08:27 pm.

    With SCHIP making heaters even more expensive I wouldn’t count on “tobacco money” for long. And this “passing debt on to our children” is hilarious in the days of 1 trillion dollar stimulus bills and 750 billion bailouts…

  7. Submitted by Tim Hayes on 02/04/2009 - 10:11 pm.

    Corey Anderson is spot on with the illustration, because we all know that T-Paw would favor the Pall Mall.

    Good times.

  8. Submitted by Robert Moffitt on 02/05/2009 - 11:27 am.

    Actually, Tom, I HAVE been quoted in The Onion, on the topic of smoking bans and how they helped increase the number of outdoor dinning spots in the Twin Cities — a nice bonus, don’t you think?

  9. Submitted by Bernice Vetsch on 02/05/2009 - 04:15 pm.

    Happy to oblige, Mr. Swift.

    The study showing an increase of 10% in the number of teens who were likely to start smoking(I mis-remembered it as 11%, sorry) was conducted by David Sly of the University of Minnesota and reported by Lorna Benson of Minnesota Public Radio on May 13,2004.

  10. Submitted by Colin Lee on 02/06/2009 - 08:27 am.

    To Mr. Swift, it’s easy to come up with $1 billion in a two year timeframe in Minnesota. Just pass Sen. John Marty’s Minnesota Health Act. The Colorado Blue Ribbon Commission on Health Care figured that a proposal like that would save $1.4 billion a year there in waste, fraud, and abuse and still cover everyone. We spend more on our health programs than Colorado.

    100,000 people in Japan die of smoking-related deaths every year, yet they pay only 6-7% of GDP on their health care compared to our 16% and have a longer life expectancy as well. It all comes down to quality of care when most Americans are forced to skip treatment.

  11. Submitted by Thomas Swift on 02/06/2009 - 10:03 am.

    Thanks, Bernice.

    Although it appears that David Sly has worked on behalf of anti-smoking campaigns, and I was unable to find the report you cite, any source you provide to support your argument puts you miles ahead of Bob’s usual seat-of-the-pants rhetoric.

    A few selected quotes from the report Colin suggests:

    “If we expand public programs to include more people, and as we recognize that non-citizens will
    continue to need care even if they do not have coverage, we must preserve and enhance
    safety net providers’ ability to serve these populations.”

    Build capacity to serve illegal immigrants into our public health care system? It may well be cheaper to tend to illegals in a clinic than an emergency room, but, um, do I really need to point out the obvious?

    “In order to accomplish our goals, we must maximize the federal funding available to
    Colorado – for example, through public program expansions that will enable us to draw
    down the maximum federal match….”

    Well, passing costs onto the fed will undoubtedly lower the costs to the state, but it doesn’t mean it’s any more cost effective.

    “Reforming the individual insurance market by requiring health plans to cover
    everyone who is not eligible for a restructured Cover Colorado program due to a highcost
    pre-existing condition.”

    And passing along the high risk, high cost patients to the private insurance market will help pay for any illegals that like the ER better than the clinics!

    “Require all legal residents of Colorado to have minimum insurance coverage (“individual
    mandate’). Enforce the mandate through the income tax system.”

    Ahh, there she blows! So the state will be deciding what our insurance needs are for us and automaticly deduct it straight out of our paychecks (you know, so we don’t have to be bothered with all that paperwork.)

    This was a *very* interesting report Colin. In fact, I’m inspired to write a post on my own little blog about it.

    Thank you very much!

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