SENATE BILL REPORT

SB 6262

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

Majority Report: That Substitute Senate Bill No. 6262 be substituted therefor, and the substitute bill do pass.

Signed by Senators Murray, Chair; Kilmer, Vice Chair, Capital Budget Chair; Parlette, Ranking Minority Member Capital; Fraser, Harper, Hatfield, Hewitt, Honeyford, Kastama, Kohl-Welles, Padden, Regala, Schoesler and Tom.

Background: The state Constitution limits the issuance of state general obligation bonds. The State Treasurer may not issue a debt-limit general obligation bond if the amount of interest and principal payments in any year, along with such payments for existing debt limit bonds, would exceed 9 percent of the average of the annual general state revenue collections for the previous three fiscal years.

A working debt limit below the 9 percent constitutional limit is used for developing capital bond budgets. That working limit has been 8.75 percent for the past two biennia. Legislation enacted in 2011 (SSB 5181) requires the working debt limit limit to phase down to 7.75 percent by Fiscal Year 2022 starting in Fiscal Year 2016. The state finance committee (composed of the Governor, Lieutenant Governor and State Treasurer) may recommend modified working debt limits in response to extraordinary economic conditions.

SSB 5181 also established the Commission on State Debt and required it to recommend possible changes to the constitutional debt limit and other debt policy in order to:

stabilize the capacity to incur new debt in support of sustainable and predictable capital budgets;
reduce the growth in debt service payments to an appropriate level that no longer exceeds the long-term growth in the general fund expenditures; and
maintain and enhance the state's credit rating.

The Commission on State Debt reported their findings and recommendation in December. Recommendations include changes to the constitutional debt limit and to the statutory working debt limit.

Summary of Bill (Recommended Substitute): The debt advisory council (DAC) is established. DAC has seven members: the State Treasurer (non-voting), the Director of the Office of Financial Management (OFM), the Secretary of Transportation, and four legislators, each selected from the two majority caucuses of the Senate and the House of Representatives. DAC advises the Governor and Legislature on the appropriate level of state debt. DAC's recommendations must be approved by an affirmative vote of at least four members.

The Director of OFM must prepare enhanced reporting of debt service requirements for the Governor's budget requests.

Capital appropriation bills must also include enhanced reporting of debt service requirements resulting from new debt financed appropriations.

Requirements of the State Treasurer to determine amounts of general state revenues for purposes of determining the constitutional debt limit are modified to correspond to changes to the constitutional debt limit proposed in separate legislation.

All provisions in the bill, except the enhanced reporting of debt service requirements, are null and void if the proposed amendment to the constitutional debt limit are not ratified by the voters.

Staff Summary of Public Testimony: PRO: This proposed constitutional amendment is recommended by the Commission on State Debt. From the perspective of the credit ranking agencies and investors, Washington is a relatively high-debt state, but the fundamental fiscal strength of the state largely mitigates that relatively high-debt burden. The Commission also found that Washington has an average debt burden when debt backed by non-tax revenue is included in the analysis. The Commission also found the the state's debt capacity is higher when construction prices are high and unemployment is low, and capacity is low when prices are low and unemployment is high. The Commission recommends smoothing out that capacity in order to take advantage of low prices and to be able to boost employment during recessions.

OTHER: Smoothing out the debt capacity is good policy, but we should not reduce capacity. The return on investment for construction projects is much better than operating budget expenditures. Funding for K-12 construction should be the first priority for bond expenditures.