Tobacco bonds back on agenda for lawmakers

JEFFERSON CITY, Mo. -- A plan to prop up Missouri's budget by selling the rights to the state's tobacco settlement has fared a bit like a smoldering cigarette.

It was lighted to meet a need, was set aside briefly and now, with stresses mounting, is about to be picked up again.

Missouri officials who last year proposed to sell bonds against the state's future tobacco settlement proceeds hoped they had a win-win proposition in their hands.

The quick cash from bonds could shore up the budget without making more cuts. And the state could transfer to the bond holders any financial risk should the settlement payments someday diminish.

Lawmakers passed the plan on the final day of the last legislative session. Gov. Bob Holden promptly signed it into law. And a special bond-issuing board -- composed of Holden, Lt. Gov. Joe Maxwell and a skeptical Attorney General Jay Nixon -- immediately began lining up professionals to help issue the bonds.

Then the plan ran into trouble.

High interest rates

There was a side effect -- a cancer, if you will -- that the state hadn't foreseen.

The bond market wasn't willing to assume the financial risk of Missouri's tobacco bonds without exacting a steep price in the form of high interest rates, creation of a cash reserve and a larger-than- usual coverage ratio.

While the plan lay smoldering, state financial officials came up with a new approach: Instead of issuing the bonds through the specially created tobacco board, the state could issue them through the existing state Board of Public Buildings.

Doing so would put the credit of state government behind the bonds, diminishing the risk to bond holders and saving the state about $100 million through lower interest rates over the 40-year life of the bonds.

To make the new approach work, lawmakers would need to pass a special spending bill, ensuring money would be available from the treasury, if needed, to pay the bond debt.

In his State of the State speech, Holden called on lawmakers to pass such a plan quickly, so bonds can be issued before the June 30 end of the state fiscal year.

Without the bonds, Holden says he could be forced to cut funding for education in order to cover a budget shortfall. Speaking last week in Cape Girardeau, Holden warned that state colleges could face up to $175 million in cuts and public school districts $175 million or more.

So now legislators are facing the same dilemma as last year -- either plunge the state into debt through the bonds, or force more cuts to state government.

Sen. Ken Jacob, who sponsored last year's tobacco bonding bill, acknowledges that things haven't worked like he envisioned.

"I've been struggling with whether I thought that idea was still a good one," Jacob, D-Columbia, told fellow senators last week, "and I have come to the conclusion that it is the only idea."

But some legislators aren't convinced -- at least not yet.

House Speaker Catherine Hanaway, for one, said her majority Republican caucus is still learning about Holden's proposal, which has yet to be introduced in the form of a bill.

On the positive side, it sounds like an innovative approach that, compared to the original idea, would save the state money, she said.

On the negative side, the state would be putting its credit on the line. So if tobacco sales drop and settlement payments fall, the state could have to dip into cash reserves to pay off the bonds, Hanaway said.

And there are other issues.

This year's budget assumed the use of $50 million in tobacco bonds. If lawmakers don't authorize the new approach, the budget shortfall could grow bigger.

Holden has proposed a $480 million bond sale, which -- after subtracting such things as issuing costs and initial interest payments -- would leave the state with about $373 million to use for its budget.

According to Hanaway: "The bigger question is, what are we going to do with the proceeds?"

A proposal distributed to the Senate Appropriations Committee by Holden's administration would direct $130 million to capital improvement projects at state colleges and universities this year and $87.5 million to cover several court-ordered payments.

It's those kinds of details that Hanaway wants to review.

Senate President Pro Tem Peter Kinder also has a request. He wants the state Board of Public Buildings -- again consisting of Holden, Maxwell and Nixon -- to take some sort of official action endorsing the new approach before lawmakers move forward.

All of that could require time. As would the basic process of passing an appropriations bill.

Some have said the state must approve the new approach by mid- to late February to make it work. Meanwhile, the cigarette smolders.