July 15 (Bloomberg) -- Minnesota Governor Mark Dayton agreed to a bond issue instead of higher taxes, and Republican legislative leaders endorsed higher spending in a deal to end a budget impasse that has closed state government for 15 days.
The shutdown was the longest of six in U.S. states since 2002, according to the National Conference of State Legislatures. The deal to end it came after Dayton sent a letter yesterday to legislative leaders agreeing with conditions to an offer they made June 30.
The sides will settle the details during the weekend before a special session to pass budget bills, ending the shutdown in a “very few days,” Dayton said.
“We’ve reached a framework that will get Minnesota back to work, yet still protect our vital services,” Dayton, a 64-year-old Democrat, said at a news conference with Republican Senator Amy T. Koch, the majority leader, and Kurt Zellers, speaker of the House of Representatives.
Koch and Zellers said they expect their members to support the bargain.
“A deal we all can be disappointed in, but a deal that’s done,” Zellers told reporters.
Most government functions stopped at 12:01 a.m. July 1 after Dayton and lawmakers failed to resolve the budget dispute in the Midwestern state of 5.3 million. The closure idled 23,000 workers, closed parks and agencies, and halted construction projects.
Dayton had said he didn’t want spending cuts alone to close the state’s deficit, and Republicans opposed his plan for a tax increase on the wealthiest 2 percent of Minnesotans.
The budget deal means Republicans will accept higher spending than they wanted. Republicans had passed budgets totaling $34 billion, while Dayton wanted $35.8 billion.
In exchange for Dayton’s abandoning his tax increase, Republicans dropped demands for restrictions on abortions, as well as a 15 percent reduction of state employees. Republicans also agreed to a bonding bill of at least $500 million for capital projects, according to his letter.
The governor and legislative leaders agreed to bridge a $1.4 billion budget gap by raising $700 million through bonds tied to a 1998 settlement with tobacco companies. The deal also calls for delaying $700 million for school districts until the next budget so that money isn’t counted in the current one.
Minnesota has shifted education money to balance budgets since the 1980s, Scott Croonquist, executive director of the 38-member Association of Metropolitan School Districts in St. Paul, said in a telephone interview.
“If you’re going to put a gun to our head and say, ‘Do you want a cut or a shift?’ then generally the school officials are going to say, ‘Well, we’d rather have the shift then, because at least we’re going to get the money in the future,’ ” Croonquist said.
Minnesota would be the 16th state to issue tobacco bonds, said Richard Larkin, director of credit analysis at Herbert J. Sims & Co. in Iselin, New Jersey.
Tobacco companies agreed in 1998 to reimburse states $246 billion for treating smoking-related illnesses. States have more than $106.8 billion of outstanding bonds backed by the payments, made annually in April, according to data compiled by Bloomberg.
“A financing like this, a one-time borrowing just to plug a hole, is never viewed as a very positive development,” Larkin said in a telephone interview. “But these are tough times.”
Last week, Fitch downgraded about $5.7 billion in Minnesota general-obligation bonds one step to AA+ from AAA, the highest level, in response to the budget problems. Moody’s Investors Service rates the state Aa1, second-highest, and Standard & Poor’s gives it a top AAA grade.
Investors are seeking riskier bonds as they hunt for yield, said Lyle Fitterer, who helps oversee $26 billion of municipal bonds for Wells Capital Management in Menominee Falls, Wisconsin. Minnesota may be able to borrow at about 5.5 percent for bonds maturing between 15 and 20 years. The state would get a lower rate if it guaranteed the bonds, he said.
The governor said yesterday’s that the agreement is “not advantageous” to solving the state’s long-term budget problem.
“The real solution is for the state of Minnesota’s economy to improve,” Dayton told reporters.
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