CHICAGO -- Opposition lawmakers are questioning Minnesota's decision to use bond proceeds for Northwest Airlines now that the company has warned its employees of possible disaster for the airline's finances.
Senate Majority Leader Roger Moe, a Democratic-Farmer-labor party member from Erskine, recently urged the governor to "take a step back" from the state's agreement with the airline, according to Vic Moore, a spokesman for the senator.
The lawmaker cited the unflattering fiscal picture the company painted in a May 26 letter it sent to its employees before the start of labor negotiations, Mr. Moore said.
"Sen. Moe is concerned by some of [Northwest's] most recent moves, and further downgrading could have some effect in the marketplace on the bonds that will be issued," Mr. Moore said.
Standard & Poor's Corp. last week downgraded senior unsecured debt to B-minus from B for NWA Inc., the parent of Northwest Airlines, and conferred a negative outlook on the rating. The downgrade reportedly was due to the weak economic recovery and increased fare competition.
Sen. Charles A. Berg, a Democratic-Farmer-Labor party member from Chokio, joined Sen. Moe in opposing the use of state proceeds to help Northwest.
"I've always thought it was a crazy idea," Sen. Berg said Friday. "I think taxpayers will end up paying for a big chunk of the debt."
But Gov. Arne Carlson, an Independent Republican, stands by the state's decision to assist Northwest, according to Cyndy Brucato, the governor's press secretary.
"The governor has every confidence in the financing package. The ups and downs of NWA were all taken into consideration," Ms. Brucato said last week, adding, "A letter to employees is a labor management issue."
The airline, the state, and the Minneapolis/St. Paul Metropolitan Airports Commission agreed last December that Minnesota would issue up to $350 million of general obligation and lease-revenue bonds for Northwest's use.
The bonds would finance the construction of an airplane maintenance facility in Duluth and an engine repair facility in Hibbing.
The bonds were part of $620 million of taxable and tax-exempt bonds scheduled to be issued by the airports commission and the state to benefit Northwest. Up to $175 million of the bonds would carry the state's GO pledge. Rating agency officials have said it would mark the first time a state has given its GO pledge to benefit a major airline.
Opponents of this plan are pointing to a letter Northwest sent to its 47,000 employees warning of tough competition from other airlines and must survive by streamlining operations. The letter was sent in anticipation of labor negotiations.
"Deregulation has led to a viciously price-competitive end game designed to eliminate the marginally unprofitable carriers. Given our revenue disadvantage and our current cost structure, we are unprofitable at price levels sustainable by the Big Three," said John H. Dasburg, the company's chief executive officer, in the letter.
The "Big Three" are American Airlines, United Airlines, and Delta Airlines.
In April, the airports commission sold $270 million of taxable bonds and lent the proceeds to the St. Paul-based airline partially to refinance some of its debt. In addition, the commission also lent Northwest $45 million from the commission's construction fund of bond reserves.
The commission sold the $270 million of taxable bonds only after a lawsuit against the issue was dismissed by a Minnesota district court. The suit challenged the constitutionality of a law allowing the commission and the state to issue bonds to help Northwest's expansion plans.
The commission finally closed the issue April 23, after lawyers advised the panel that the plaintiffs' appeal of the decision was unlikely to succeed.
The state, however, is delaying its plans to issue up to $350 million of tax-exempt bonds to build Northwest's maintenance plants in Duluth and Hibbing. The first installment of $107.6 million for initial construction of the Duluth plant had been expected to be issued May 1, according to Peter Sausen, an assistant state finance commissioner.
He said proceeds from $250 million of the tax-exempts were to be used for construction of the Duluth facility on an as-needed basis. The proceeds from the remaining $100 million of bonds for the Hibbing plant are scheduled to be sold next summer, Mr. Sausen added.
The Minnesota Court of Appeals is expected to release a ruling on the lawsuit sometime this month. But Mr. Sausen said the case could be appealed to the Minnesota Supreme Court.
Mr. Sausen said it was "highly likely" that the airline facilities would be built because the state and Northwest have signed a contract. That contract requires the state to sell bonds and, with the airline, build the facilities in Duluth and Hibbing. It also requires Northwest to lease the buildings from the state and pay off the bonds.