And the beat goes on!
By Erik Smith and Krista Norsworthy
Staff writers/ Washington State Wire
OLYMPIA, Jan. 31.—A Wall Street bond-rating house has downgraded Washington’s outlook to “negative” just as lawmakers are trying to decide whether to put another billion dollars on the state’s credit card.
It signals a debt debate that is just beginning, and a little-heralded report issued last month by a commission on state debt demonstrates that it’s not as easy as saying “charge it.” Already the report says state debt has reached record levels. The state is butting up against a constitutional limit on general-obligation debt. And while the new billion-dollar jobs proposal gets around that limit by using other pots of money, you might say that the state is already spending that cash to keep its credit card current.
State Treasurer Jim McIntire is pushing a set of debt-commission proposals he says would manage the state’s debt more effectively – and help Washington state get its house in order.
But it just goes to show there’s a big question this year. Can the state whip out the card, charge up another billion, and still convince lenders that it is behaving responsibly?
Fitch Downgrades Outlook
The biggest debate at the statehouse right now, aside from the budget and gay marriage and a dozen other issues that seemingly popped up during the first three weeks of this year’s session, is whether Washington ought to go another billion dollars into debt to finance public-works projects. The proposal, backed by the state labor council and the Associated General Contractors, aims to put 15,000 people back to work on projects the state was likely to launch eventually, once it had the money. The bonds would be financed by a couple of funds the state normally uses for public-works projects, on a pay-as-you-go basis – the Public Works Trust Fund and the Model Toxics Control Act account. The thing is, the money hasn’t been going for those purposes lately – for the last three years, the state has raided the two funds for hundreds of millions of dollars in order to bail out the state budget.
And where has that money been going? All money is fungible, of course, but an argument can be made that it has been going to pay off the state’s debt. The payments on the state’s general-obligation debt rose from about $1.6 billion in 2007-2009 to an all-time high of $1.9 billion in the current two-year budget.
A final jobs proposal has yet to be introduced, but lawmakers are talking right now about tying up only a small part of the two funds to pay for the bond issue, says state Sen. Derek Kilmer, D-Gig Harbor – 10 percent of the MTCA money, 15 percent of the public works trust fund. Yet it's not as though the state's budget picture has gotten any brighter. Meaning that the way things are going now, the more money the state takes from those funds to pay off the new bonds, the less it will have to pay for the old ones. And the more programs lawmakers will have to slash in the next budget.
Which helps explain, in a rather general way, why Fitch Ratings, one of the three big Wall Street bond-rating houses, downgraded Washington’s long-term financial outlook last week from “stable” to “negative.” Its reasoning probably won’t come as any shock to lawmakers who are struggling with the state’s current $1.5 billion shortfall. Fitch cited “challenges faced by the state in addressing a sizeable budget gap that developed after the adoption of the current biennial budget.” And it noted, “the state is operating in an environment of significantly constrained revenue raising and spending control flexibility.”
Wake-Up Call
What the Fitch report seems to show is mainly that Wall Street is paying attention to what is happening in this corner of the country. It didn’t affect Washington’s bond rating. Fitch reaffirmed Washington’s high AA+ credit rating, a score that gives the state a favorable interest rate and is worth tens of millions every time the state goes to market. The other two major bond houses also give Washington the same high, one-notch-from-the-top rating. But every time a bond house has a discouraging word, ears perk up.
Should it be taken as a caution against additional debt? The state treasurer’s office has a firm answer. Says spokesman Chris McGann, “It depends.
“The bottom line is that it would be impossible to look at this as a standalone issue. Things like size [of the bond issue], the way it’s put together, whether or not the Legislature implements the proposals of the Debt Commission, and the Legislature’s budget solution all play into our bond rating and creditworthiness. Just looking at the jobs proposal we couldn’t answer the question. Are they going to balance the budget in a reasonable amount of time in a way that is sustainable? and are they going to bond against reasonable revenue streams? are all things that play into it.”
But the treasurer’s office says it helps make the case for a pair of proposals from the debt commission, which McIntire chaired.
Close to the Line
Among other things, the commission report notes that the state’s nearly $18 billion in general obligation debt puts it within a hairsbreadth of the state’s constitutional debt limit of 9 percent. That doesn’t count revenue bonds like the ones the state is contemplating for the jobs program, and which also are used for road construction and certain types of other projects. What happened is that tax revenues plummeted in 2009 and they still haven’t caught up, but debt racked up in the fat years had to be paid – the report calls it “a perfect storm” that brought the state close to the line.
Findings include:
* The Legislature has managed to expand state debt in the past simply by changing the definitions of funds that are covered by the state debt limit.
* Debt service is gobbling an increasing share of the state budget. Notes the report, “Concern has been expressed about debt service crowding out other budgetary priorities and reducing financial flexibility since debt service cannot be cut in response to revenue downturns.”
* As measured by the rating agencies, Washington ranks among the top 10 states for debt per capita, debt as a percentage of personal income, debt as a percentage of gross state product, and debt service as a percentage of government expenditures.
* The state debt limit ratchets down too far in recessionary times, when demand is high for state jobs programs and construction costs are low.
Aims to Stabilize Debt
The debt commission proposals would slightly reduce the state’s debt capacity but would make limitations more stable.
Senate Joint Resolution 8221 would “smooth” the impact of the state’s debt limit over time. It would reduce the state’s constitutional debt limit from 9 percent to 8.75 percent of tax revenues, but would expand the definition to include property tax receipts, which are more stable than other taxes. The calculation would be based on a six-year average of tax revenues, rather than the current three years. Because the measure would amend the constitution, voter approval would be required.
Senate Bill 6262 would establish the Debt Advisory Council and set a new “working debt limit” of 8 percent in non-recessionary times and 8.5 percent in times of recession.
In a presentation to the Senate Transportation Committee last week, McIntire said the new council would offer a way to consider the state’s debt issues in a comprehensive way. He noted that transportation debt right now is considered by the Legislature’s transportation committees, while capital construction spending is considered by other budget panels.
“We have two different revenue streams and two different sets of committees, and we’ve kind of balkanized the decision-making in Olympia about debt,” McIntire said, adding, “It would be nice to have a place where we could actually have a conversation about various-purpose capital debt and transportation debt, and how they interact, and how we manage those going forward.”
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Dazed and confused.............the fog is closing in
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