Background: State General Obligation Bonds. Washington periodically issues general obligation bonds to finance projects authorized in the capital and transportation budgets. General obligation bonds pledge the full faith, credit, and taxing power of the state toward payment of debt service. Legislation authorizing the issuance of general obligation bonds requires a 60 percent majority vote in both the House of Representatives and the Senate. The State Finance Committee, composed of the Governor, the Lieutenant Governor, and the State Treasurer, is responsible for supervising and controlling the issuance of all state bonds.

Constitutional Debt Limitation. Washington's indebtedness is limited by Article VIII, section 1 of the state Constitution. The State Treasurer may not issue any debt that would cause the debt service – principal and interest payments, on any new, plus existing bonds, to exceed 9 percent of the average of the three prior years' general state revenues. In November 2012 voters approved an amendment to the constitutional limit specifying that (1) beginning July 1, 2014, general state revenues will be averaged over the six immediately preceding fiscal years; (2) for the purpose of the calculation, the definition of general state revenue is expanded to include property taxes received by the state; and (3) the 9.0 percent constitutional limit on debt service will be reduced to 8.0 percent by July 1, 2034, in downward steps to 8.5 percent starting July 1, 2014, to 8.25 percent starting July 1, 2026, and finally to 8.0 percent starting July 1, 2034.

For purposes of the debt limit, debt is defined as borrowed money backed either by the full faith and credit of the state or by general state revenues. Generally speaking, the state Constitution defines general state revenues as all state tax revenues other than revenues from taxes levied for specific purposes. Revenues derived from the ownership or operation of any undertaking, facility, or project are not general state revenues.

Exemptions from Constitutional Debt Limitation. Article VIII of the state Constitution excludes some types of debt from the debt limit calculation, most notably debt approved by both the Legislature and a majority of the voters in a general or special election; debt payable from motor vehicle fuel taxes and license fees; debt payable from common school fund investments; state guarantee of voter-approved general obligation debt of school districts; and obligations payable solely from specific revenues.

In 2002 the Legislature authorized revenue bonds backed by payments to the state under the Master Settlement Agreement with the major tobacco manufacturers. Bonds issued for transportation purposes have pledged various combinations of taxes and other revenues, such as tolls.

Lottery Revenue. Washington's lottery was originally established in 1982. Since then, net lottery revenues have benefitted different state accounts. Under the original 1982 legislation, the state's share of revenues to the Lottery Account was deposited in the state general fund. Games approved in the 1990s dedicated certain proceeds to debt service on Safeco Stadium and CenturyLink Field and Exhibition Center. In 2000 Washington voters approved Initiative 728 (I-728), which redirected lottery revenue contributions from the state general fund to education funds. Under I-728, lottery proceeds were originally deposited in the Student Achievement Fund and then shifted to the Education Construction Fund. From July 1, 2004, to July 1, 2009, all lottery net revenues allocated for education were sent to the Education Construction Account to help build, renovate, and remodel schools throughout the state. On July 1, 2009, lottery funds were redirected from the Education Construction Account to the state general fund for the 2009-11 biennium to help address the projected budget deficit.

In 2010 the Legislature created the Opportunity Pathways Account to support higher education access grants, state work study awards, two merit scholarship programs, and early learning. Beginning in fiscal year 2011, all net revenues from in-state lottery games not dedicated to debt service on the stadiums were dedicated to this account up to $102 million annually, rather than to the Education Construction Account. Each year beginning in fiscal year 2011, statute directed $102 million to be transferred from the state general fund to the Education Construction Account. For the 2011-13 and 2013-15 biennium this transfer was suspended by the Legislature. Legislation enacted in 2013 removed the $102 million annual transfer requirement.

In addition to the in-state lotteries, in 2002 the Legislature authorized the state to participate in the multi-state Mega Millions game, and in 2009 the Legislature approved participation in the multi-state game Powerball. Proceeds from the shared games are deposited in the Shared Game Account, with net benefits directed to the state general fund and a hold-harmless guarantee for the Opportunity Pathways Account. Proceeds from the Shared Game Account are also used to fund problem gambling prevention and treatment.

Summary of Bill: The State Finance Committee is authorized to issue $707 million in lottery revenue bonds payable from the Opportunity Pathways Account, which consists of net lottery revenues received in the Lottery Account and net shared game lottery revenues deposited in the Shared Game Account.

The bonds are backed solely from the pledged lottery revenues and are not backed by the full faith, credit, and taxing power of the state, nor are they payable from general state revenues. For these reasons, the bonds are not subject to the constitutional debt limit. The Opportunity Pathways Account is revised to authorize use of the Account for debt service on the bonds and to declare that the debt service payments are the first priority use of the Account.

Proceeds from the lottery revenue bonds must be deposited into a new Education Construction Revenue Bond Proceeds Account. The purpose of the account is to support all-day kindergarten and K–3 class size reduction facility needs. An appropriation is required for expenditures from the account.

The State Finance Committee and the Office of Financial Management (OFM) must conduct an objective analysis of the most effective financing structure for the lottery revenue bonds and provide a report to the Legislature by December 1, 2014. The State Finance Committee and OFM must consult with a minimum of five firms with expertise in helping state and local governments organize and manage a wide variety of financing structures, including revenue bonds. The analysis must consider and rate options designed to:

maximize the amount of bond proceeds to address all-day kindergarten and K–3 class size reduction facility needs;
leverage lottery revenues in a manner to achieve the highest invest grade possible;
achieve the lowest cost of issuance; and
strengthen the issuance and marketability to investors by considering terms of borrowing such as maturity, debt service reserves, coverage ratios, legal covenants, and other credit enhancements.

The Superintendent of Public Instruction (Superintendent) must establish a plan for grant allocations that considers the following criteria:

Public schools must demonstrate the existence of unhoused K–3 students based on a 90 square foot space allocation per enrolled student;
Grants may be used for building modernization, new construction, and the purchase and installation of modular and portable facilities;
One hundred percent of project costs are eligible for grants under this program;
Grants must be awarded solely for instructional space used by K–3 students;
Grants may be reallocated for use at another public school within a district if the school district can demonstrate it is unable to build permanent space, or install a modular or portable facility at the identified school.

By December 1, 2014, the Superintendent must submit a report to the Legislature describing the estimated need for additional classrooms to address all-day kindergarten and K–3 class size reduction by school, implementation timelines, and proposed rules for program implementation.