Balanced By Tobacco

Tobacco has been very, very good to Minnesota's budget. And this year, the evil weed has come to the rescue again.

A key part of the deal that ended the state's 20-day shutdown on Wednesday was a Republican plan to borrow against annual payments made by tobacco companies to Minnesota's general fund. Gov. Mark Dayton, a Democrat, initially rejected but eventually accepted the "tobacco bonding" proposal.

In 2003, when the state faced a huge deficit and a similar political battle over taxes and spending, the compromise was to raid health-care endowments funded by tobacco companies.

In both cases, money from the state's landmark 1998 settlement of a lawsuit against Big Tobacco allowed deficits to be addressed without cutting more deeply (which DFLers opposed) or raising statewide tax rates (which Republicans opposed.)

The state and Blue Cross and Blue Shield of Minnesota sued tobacco companies in the 1990s, producing a settlement valued at $6.5 billion. The lawsuit also produced a trove of documents on the tobacco industry that "exposed the industry's long history of deceptive marketing, advertising and research,'' according a Mayo Foundation report.

The bulk of the money flowed to the state to set up "permanent" health-care endowments and as continuing yearly payments to the state's general fund.

Interest on the endowments was to be used to pay for tobacco prevention, medical education, the U's Academic Health center and other public health efforts.

By mid-2002, three endowments were valued at $943 million. In 2003, that money proved irresistible. The endowments were dissolved and the money was used to help resolve a budget deficit.

The annual payments have continued to flow into the state's general fund and will do so "in perpetuity,'' as the lawyers say. The money is used for general state operations and the current-year amount is $160 million. This week's agreement between Dayton and the Legislature allows the state to borrow money by selling bonds backed by the tobacco industry payments. The net state proceeds will be $640 million, state officials say; as with all loans, Minnesota will incur interest and other costs.

The 1998 settlement also produced approximately $469 million for Blue Cross and Blue Shield, and $200 million for an advocacy group now known as ClearWay Minnesota. ClearWay continues its work in smoking cigarettes-cessation, advocacy and research. The group argued against the "tobacco bonds" idea and favored a cigarette tax hike instead.

When this deal is completed, much of the long-term benefit to state taxpayers from the tobacco settlement will have been used to address immediate budget crises. And as was the case in 2003, Minnesota's books will be balanced with one-time money that will not be available to Dayton and the Legislature when they go to work on the next budget in January of 2013.