Schowalter v. State, No. A12–0622.

• Decision Date: 31 October 2012
• Docket Number: No. A12–0622.
• Citation: 822 N.W.2d 292
• Parties: James D. SCHOWALTER, in his capacity as Commissioner of the Minnesota Department of Management and Budget, Petitioner, v. The STATE of Minnesota and the Taxpayers and Citizens of the State of Minnesota, Respondents.
• Court: Minnesota Supreme Court

822 N.W.2d 292

James D. SCHOWALTER, in his capacity as Commissioner of the Minnesota Department of Management and Budget, Petitioner,

v.The STATE of Minnesota and the Taxpayers and Citizens of the State of Minnesota, Respondents.

No. A12–0622.

Supreme Court of Minnesota.

Oct. 31, 2012.

Syllabus by the Court

1. The constitutionality of the Appropriation Refunding Bonds sought to be issued by the Commissioner of the Minnesota Department of Management and Budget presents a justiciable controversy.

2. The Appropriation Refunding Bonds sought to be issued by the Commissioner of the Minnesota Department of Management and Budget do not constitute public debt for which the State's full faith, credit, and taxing powers have been pledged under Article XI, Section 4 of the Minnesota Constitution.

Jessica L. Roe, Curtis L. Christensen, Patrick B. Griffin, Kutak Rock LLP, Minneapolis, MN, for petitioner.

Lori Swanson, Attorney General, Alan I. Gilbert, Solicitor General, Jason Pleggenkuhle, Jacob Campion, Assistant Attorneys General, Saint Paul, MN, for respondents.

OPINION

PER CURIAM.

On April 5, 2012, petitioner James D. Schowalter, in his capacity as Commissioner of the Minnesota Department of Management and Budget (“Commissioner”), filed a Verified Complaint pursuant to the bond validation procedures in Minn.Stat. § 16A.99 (Supp.2011). In this original action, the Commissioner seeks validation of certain tobacco appropriation bonds to be issued to refund, in advance of maturity, outstanding tobacco securitization bonds issued in 2011. The only disputed issue in this proceeding is whether the proposed tobacco appropriation bonds are constitutional under Article XI, Sections 4 and 5 of the Minnesota Constitution. The Commissioner argues that the bonds do not implicate Minnesota's constitutional limitations on incurring public debt. Minnesota Attorney General Lori Swanson argues that the bonds constitute “a subterfuge to evade the balanced budget requirement” of the Minnesota Constitution. We conclude that the proposed tobacco appropriation bonds do not constitute public debt for which the State's full faith, credit, and taxing powers have been pledged under the plain language of Article XI, Section 4 of the Minnesota Constitution; therefore, the restrictions imposed by Section 5 do not apply to the bonds.

The material facts are undisputed for purposes of deciding the constitutionality of the proposed tobacco appropriation bonds.¹ Minnesota's tobacco settlement agreement, as amended in 2001, “requires certain tobacco companies to make annual ... payments to the State in perpetuity.” Several states that entered into similar settlement agreements with the tobacco industry have “securitized” this stream of annual payments to address budget deficits. In essence, these states have issued bonds to generate revenues, with the debt payment on the bonds secured by the state's annual stream of tobacco settlement payments. These bonds are typically referred to as tobacco securitization bonds.

Minnesota first considered issuing tobacco bonds in 2009, as part of the 2010–11 biennial budget process. Then–Governor Tim Pawlenty proposed in his biennial budget recommendation that the State would dedicate one-half of the tobacco settlement payments for 20 years to repay bonds for the University of Minnesota football stadium and bioscience program. Under the proposal, if the settlement payments were not sufficient to pay off the bonds, the Legislature “would be requested to appropriate money to pay the deficiency.” In response to an inquiry from then-Senate Majority Leader Larry Pogemiller, Attorney General Lori Swanson analyzed the constitutionality of the proposed bonds and observed that the State would essentially be borrowing money to balance its budget. Noting that the Minnesota Constitution limits the purposes for which public debt may be incurred, the Attorney General was “not confident” that a court would uphold the constitutionality of the bonds in light of “the balanced budget requirement in the Minnesota Constitution.” The tobacco bonds were not included as part of the 2010–11 biennial budget.

The use of tobacco bonds resurfaced in 2011 as a way to help address the projected deficit in the 2012–13 biennial budget. Legislative leaders proposed generating revenue by borrowing against future proceeds from the State's tobacco settlement. The 2011 special session legislation authorized the Commissioner to issue (1) tobacco securitization bonds, payable from and secured by the tobacco settlement payment revenues through the Tobacco Securitization Authority; ² and (2) tobacco appropriation bonds, payable from the State's future general fund revenues and not secured by a particular revenue source. Act of July 20, 2011, 1st Spec. Sess., ch. 7, art. 11, 2011 Minn. Laws 977, 1067–83 (to be codified at Minn.Stat. §§ 16A.97–.99 (2012)). The Commissioner may issue bonds under either or both approaches, but the net proceeds of the bonds cannot exceed $640 million during fiscal years 2012 and 2013. Minn.Stat. § 16A.97 (Supp.2011). In addition, the Commissioner may issue tobacco appropriation bonds for the purpose of refunding any outstanding tobacco securitization bonds. Minn.Stat. § 16A.99, subd. 4. The legislation authorizing the tobacco appropriationbonds includes a judicial validation procedure, conferring original jurisdiction on our court to determine the “validation” of the bonds. Minn.Stat. § 16A.99, subd. 9. There is no similar validation procedure for tobacco securitization bonds. SeeMinn.Stat. § 16A.98 (Supp.2011).

On November 29, 2011, the Tobacco Securitization Authority issued tobacco securitization bonds—the Tobacco Settlement Revenue Bonds—in the par amount of $756,955,000. The Tobacco Settlement Revenue Bonds consist of two series: the 2011A taxable series and the 2011B tax-exempt series. The State netted a total of $640 million from the transaction, which the State has used to pay debt service obligations.

The Tobacco Settlement Revenue Bonds are payable from and secured by the tobacco settlement payment revenues beginning in fiscal year 2014. SeeMinn.Stat. § 16A.98, subd. 2. These bonds are revenue bonds. By their terms, if the pledged tobacco settlement payments are not sufficient to cover debt service payments, “the bondholders cannot look to the State's general fund or other assets to satisfy the obligation.” The Tobacco Settlement Revenue Bonds have “an all-in-true interest rate of 4.79%” and “received an A/A- rating from Standard & Poors and a BBB+ rating from Fitch.” ³

The Commissioner now proposes to issue tobacco appropriation bonds in an amount not to exceed $800 million to refund in advance of maturity the outstanding Tobacco Settlement Revenue Bonds. Essentially, the Commissioner is seeking to refinance the Tobacco Settlement Revenue Bonds at a lower interest rate.

On April 5, 2012, the Commissioner issued an Order for the Issuance and Sale of State General Fund Appropriation Refunding Bonds (“Appropriation Refunding Bonds”). The Appropriation Refunding Bonds “would be issued in two series corresponding to those of the outstanding Tobacco Settlement Revenue Bonds: the 2012A taxable series not to exceed the aggregate principal amount of $80 million ... and the 2012B tax-exempt series not to exceed the aggregate principal amount of $720 million.” Although not yet established, the Commissioner anticipates that the all-in-true interest rate of the Appropriation Refunding Bonds will be approximately 3.27%. The reason for the potentially lower interest rate is that the anticipated bond ratings will be in the A+ to AA range. The Commissioner estimates that the State will save $65,466,217 by issuing the Appropriation Refunding Bonds.

According to the Preliminary Official Statement, the Appropriation Refunding Bonds will be “payable in whole or in part from tobacco settlement revenues and from money appropriated by law in any biennium for payment of principal of and interest on the Bonds.” In the bond documents,⁴ the State “acknowledges itself to be indebted and promises to pay” the principaland interest on the bonds. The State will do so, the bond documents explain, via a “continuing appropriation” to pay the principal and interest on an annual basis. The bond documents also state that “there shall be credited” to the applicable bond accounts an amount each year that is sufficient to pay the principal and interest due on the bonds.

The bond documents make clear, however, that the annual appropriations are “subject to the Legislature's discretionary authority at any time to modify or repeal the standing appropriation and the Governor's unallotment authority.” Further, the statute authorizing the Appropriation Refunding Bonds specifies that the bonds “are not public debt of the state, and the full faith, credit, and taxing powers of the state are not pledged to the payment of the appropriation bonds or to any payment that the state agrees to make.” Minn.Stat. § 16A.99, subd. 6. The bond documents contain the following statement, which tracks the language of the statute:

THE BONDS ARE NOT PUBLIC DEBT OF THE STATE, AND THE FULL FAITH, CREDIT, AND TAXING POWERS OF THE STATE ARE NOT PLEDGED TO THE PAYMENT OF THE BONDS OR TO ANY PAYMENT THAT THE STATE AGREES TO MAKE UNDER MINNESOTA STATUTES, SECTION 16A.99, AND THE ORDER. THE BONDS SHALL NOT BE OBLIGATIONS PAID DIRECTLY, IN WHOLE OR IN PART, FROM A TAX OF STATEWIDE APPLICATION ON ANY CLASS OF PROPERTY, INCOME, TRANSACTION, OR PRIVILEGE. THE BONDS SHALL BE PAYABLE IN EACH FISCAL YEAR ONLY FROM AMOUNTS THAT THE LEGISLATURE MAY APPROPRIATE FOR DEBT SERVICE FOR ANY FISCAL YEAR, PROVIDED THAT NOTHING IN MINNESOTA STATUTES, SECTION 16A.99, AND THE ORDER SHALL BE CONSTRUED TO REQUIRE THE STATE TO APPROPRIATE FUNDS SUFFICIENT TO MAKE DEBT SERVICE PAYMENTS WITH RESPECT TO THE BONDS IN ANY FISCAL YEAR. THE BONDS SHALL BE CANCELED AND SHALL NO LONGER BE OUTSTANDING ON...