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Holden to legislators: pass tobacco bond or I'll cut 10 percent from education

January 27, 2003
By: Jason McLure
State Capital Bureau

JEFFERSON CITY - Gov. Bob Holden is planning to withhold as much as $350 million in state funding for public schools and universities this year unless lawmakers agree to sell the state's share of the tobacco settlement as bonds, according to the governor's office and State Budget Director Linda Luebbering.

If these cuts become reality, the UM system will have to find a way to pare an estimated $40 million - 10 percent of its annual budget - in the final five months of the fiscal year. Other schools can expect to see their share of state general revenue cut by 10 percent as well.

Republican leaders in the legislature said the move was a power-play to ramp up pressure for the bond's passage.

"I'm sure the governor is trying to posture, and that's expected," said Sen. John Russell, R-Lebanon, chairman of the senate appropriations committee. "I just hope he doesn't scare elementary and higher education so badly that they make bad decisions."

House budget committee Chairman Carl Bearden, R-St. Charles, said he and other Republicans had an open mind about borrowing money against the state's share of the tobacco settlement. But he disagreed with the governor's approach.

Bearden, who was informed about the proposed cuts by a reporter, said the governor should have consulted with lawmakers before making the announcement.

"It would have indicated a little more willingness to work the problem together instead of [saying] 'Here's my solution: take it or leave it,'" he said.

The governor is asking legislators to approve the tobacco financing plan by the end of February, so that the sale can be completed by the end of the fiscal year.

Lawmakers in Jefferson City are searching for ways to close the state's yawning budget deficit. State budget director Linda Luebbering said Missouri faces a $383 million shortfall that must be closed by the end of the fiscal year on June 30. This is even after $67 million in cuts announced earlier this year.

Luebbering is forecasting that the state will take in $300 million less than anticipated this year. The state also must pay out an additional $70 million in supplemental Medicaid payments and $30 million in court costs.

Additionally, the legislature passed this year's budget with the expectation of raising $50 million from the sale of tobacco bonds. That sale has not yet been approved.

Missouri is not the first state to issue tobacco bonds, but it is trying to do so in a way that will lower its borrowing costs. Earlier this year California issued $3 billion in bonds backed by that state's share of the settlement. But because investors saw the future tobacco revenues that would pay off the bonds as a risky investment, California had to pay more than 7.5 percent in annual interest.

Luebbering said the governor is asking the legislature to approve 'hybrid' bonds. These are bonds issued directly by the state, which trade on Missouri's AAA credit rating and are backed by the taxpayers. The legislature would then pass laws requiring future tobacco revenue to be used to pay off the bonds.

While this could allow Missouri to borrow money for as little as 4.5 percent annually, the state's taxpayers bear the burden of repaying the bond if one or more of the tobacco companies is unable to pay its share of the settlement.

Rep. Vicky Riback Wilson, D-Columbia, said the state has few options left.

"We've come to a crisis situation," she said. "I think this is the best possible plan."