An important division of the Office of the State Treasurer is Debt Management. It manages total outstanding state debt obligations of almost $20 billion. Elected lawmakers – and sometimes voters – decide how much debt to issue and for what. Debt is issued through instruments called bonds or through similar means. The process is well understood to government and finance industry employees, but may be less clear to others. Below are some key questions and answers about the state bond issuance process.
What are state bonds and why are they important? A bond is a form of a borrowing or a loan. Bonds represent an IOU or a debt obligation, that is being paid back over time. Bondholders typically receive payments from the issuer of the bonds over the life of the bonds. At the maturity date of the bond, the bondholders are paid back the principal of the bond and the remaining interest they are owed.
Similar to mortgages, bonds are typically used for capital projects with a long useful life. Most state bonds are paid back over 25-years. The state uses bonds to fund capital projects in both its biennial Capital and Transportation Budgets. For the 2015-17 Capital Budget, approximately $2.244 billion of the total $3.925 billion was funded with bonds.
What are some major projects funded (at least in part) with State of Washington bonds?
- Capital Budget items funded fully or partially with bonds include K-12 school renewal and replacement projects, facilities for state universities and community and technical colleges, state facilities projects, habitat conservation projects, outdoor recreation facilities, and farmland preservation.
- An example of bond funding is the assistance provided to school districts through the School Construction Assistance Program (SCAP). SCAP provides financing for school districts that are undertaking a major new construction or modernization project.
- Bond-funded higher education projects include the Carver Academic Center renovation at Western Washington University; Everett University Center at Washington State University; and the Samuelson Communication and Technology Center at Central Washington University.
Some of recent Transportation Budget capital projects funded fully or partially with bonds include:
- In Puget Sound: SR 520 Bridge Replacement and HOV Program; the Tacoma/Pierce County High Occupancy Vehicle (HOV) project; I-405/Kirkland Vicinity – Widening; and SR 99/Alaskan Way Viaduct – Replacement.
- In Eastern Washington: I-90/Snoqualmie Pass East; and US 395/NSC BNSF Railway Structures/Realignment.
What type of bonds does the State issue? To fund its capital needs, the state typically sells two types of bonds: Various Purpose General Obligation Bonds and Motor Vehicle Fuel Tax General Obligation Bonds. In addition, the State has issued other types of bonds – such as grant revenue bonds, TIFIA bonds, and triple pledge bonds – specifically to fund the State Route 520 bridge replacement program.
What is the process by which state bonds are issued? Under state law, the legislature has delegated to the State Finance Committee the authority to supervise and control the issuance of all state bonds and other state obligations – including financing leases – that are first authorized by the Legislature.
The Committee is composed of the Governor, Lieutenant Governor and Treasurer. The Treasurer is designated as Chairman of the Committee, and the Office of the State Treasurer provides administrative support to the Committee.
All new money State general obligation debt must be authorized in one of three ways:
- by the legislature by a 60% majority in both the state House and Senate (without voter approval);
- by a simple majority of both the legislature, and voters at a general or special election.
Does the state refinance its bonds?With several years of very low interest rates, multiple refinancings (or refundings) have been executed to lower the state’s borrowing costs. Refundings over the last twelve years have reduced debt service costs by more than $1.516 billion on a nominal (or cash) basis and $1.219 billion on a present-value basis.
What is the state’s general obligation bond rating, and what is that rating based upon?The state’s general obligation bonds are rated AA+, Aa1, and AA+ from Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings, respectively – all with a stable outlook. The ratings reflects each agency’s assessment of the state’s creditworthiness, taking into account factors including Washington’s finances, governance, economy, and debt and other liabilities.
Summary. The State of Washington typically issues new money bonds twice per year. In addition, the state sells refundings bonds as market conditions permits. The state currently has $19.525 billion outstanding in bonds. Over the last four years, total issuance has ranged from around $2.1 billion to $3.7 billion per year, with new money bond issuances averaging around $1.4 billion over the last four years. Refunding issuances have ranged from around $224 million to $2.6 billion per year over the last four years.