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Health & Fitness

Minnesota Budget "Solution": Penny Wise and Pound Foolish

By going the less expensive route, we might actually cause a Constitutional crisis.

Regarding the 2011 budget "solution," there are some key items that the public should be aware of.

First of all, in regards to the school shift and tobacco bonds, it should be made clear that the Republican leadership was the first to propose this remedy. They had rejected any and all tax increase ideas from Governor Dayton's team... all of them... every one. So, in essence, in the end, they "agreed" to revenue but only if it was "borrowed" outside of normal revenue. 

We are all a little leery of the school shift and the consequences that are already being felt in our school districts... but right now, let's talk about the tobacco bonds that ended up in the final agreement.

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A Politics in Minnesota article outlined the budget choices involving this option:

"The tax bill authorizing the bond sales actually lays out two possible scenarios. The preferred option is to issue 'appropriation bonds,' which are secured by the state’s future general fund revenues. The other option is tobacco bonds, which essentially means borrowing against future proceeds from the state’s 1998 settlement with tobacco companies for nefarious business practices."

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Now, the appropriation bonds are preferred because they take advantage of the state's preferred (at least for now) interest rate. From the Politics in Minnesota article:

"According to figures circulated by the Minnesota Management & Budget (MMB) office, it’s estimated that appropriation bonds can be sold with an interest rate of 4.75 percent and would ultimately cost the state $980 million."

The tobacco bonds offer a different cost problem, according to the article:

"By contrast the estimated interest rate for tobacco bonds is 6.65 percent, with a total cost of $1.13 billion. In other words, the method ultimately chosen could mean a $150 million difference in the state’s future liabilities."

So, the obvious preference would be the appropiation bonds, correct? Either option is going to cost the state nearly double what we are actually using to budget revenue for the biennium, but you might as well save the $150 million in interest that goes with appropriation bonds.

But not so fast. According to the Politics in Minnesota article:

"...there are questions about whether appropriation bonds would amount to deficit spending in violation of the state’s constitution. In 2009 Attorney General Lori Swanson issued a letter questioning whether the financing scheme passes constitutional muster. 'A court may be concerned that, if it allowed funding for this purpose here, there would be very little to stand in the way of future legislatures from borrowing to fund general operation expenses, thereby rending meaningless the balanced budget requirement in the Minnesota Constitution,' Swanson wrote. Therefore the Minnesota Supreme Court must explicitly validate their legality before any appropriation bonds can be issued."

By going the less expensive route, we might actually cause a Constitutional crisis.

Really, when all is said and done, wouldn't it have been simpler to just use a modest tax increase on higher incomes? The method we have now is going to cost us much more in interest... not to mention the legal ramifications.

Penny wise, pound foolish—wouldn't you say?

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