Washington State Debt Management FAQ
The Debt Management Division, an important part of the Office of the State Treasurer, is responsible for managing the State’s $20 billion debt portfolio. (For more information about the state debt portfolio, see the Debt Affordability Study). Elected lawmakers – and sometimes voters – decide the purpose and amount of debt to be issued. Debt is most frequently issued through instruments called bonds. The State also issues certificates of participation (COPs) to fund real and personal property acquisitions by State and local agencies. While the process for issuing bonds is familiar to government and finance industry employees, it may be less clear to others. Below are some key questions and answers about the State’s bond issuance process.
What are State bonds and why are they important?
A bond is a form of a borrowing, similar to a loan. Bonds represent an IOU or a debt obligation that is being paid back over time. Bondholders typically receive semi-annual payments from the issuer of the bonds over the life of the bonds. At the maturity date of the bond, bondholders are paid back the principal of the bond, along with the remaining interest they are owed.
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 that have been authorized through its biennial Capital and Transportation Budgets. For the 2017-19 Capital Budget, including the 2018 Supplemental Budget, approximately $2.95 billion of the total $4.62 billion in new appropriations are authorized to be funded with bonds.
Because the State’s bonds are highly-rated and provide a predictable stream of payments, they are attractive to a variety of different types of investors (See: How to purchase bonds [below]). Additionally, interest earned on certain municipal bonds is exempt from federal income taxes. As with any investment, bonds have risks, and potential bond purchasers should review the official statement prepared for the bonds, review the reports on the State prepared by credit rating agencies and consult their financial and tax advisors.
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, community colleges, 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; Washington State University’s Everett University Center; and the Samuelson Communication and Technology Center at Central Washington University.
Some of the 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 in Spokane.
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. These bonds are back by a pledge of the State’s full faith, credit and taxing power. In addition, the State has issued other types of bonds – such as federal 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 two ways:
- by a 60% majority in both the State House and Senate (without voter approval)
- by a simple majority of both the legislature and by voters at a general or special election.
What is the State’s general obligation bond rating, and what is that rating based upon?
The State’s general obligation bonds are currently 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.
Additional information on the State’s rating can be found here.
How can I buy Washington bonds?
Because of Federal securities law requirements, the State is unable to sell bonds directly to the public. To purchase Washington Bonds, an investor must purchase bonds through a municipal securities broker-dealer and must:
- Establish a brokerage account
In order to purchase bonds, you must have an account with a brokerage firm that actively trades municipal bonds. Investors are encouraged to start the new account process well in advance of the sale, as in may take some time to process. The State does not endorse any particular brokerage firm.
- Learn about the bonds
A Preliminary Official Statement (POS) is the pre-sale document that discloses information about the bonds being offered in the market. Before purchasing bonds, an investor should read the POS, which can be found [here], when available prior to a sale.
- Place your order
Contact your broker to get more information on how to buy bonds.
What yield will I receive on my bonds?
The yield that an investor receives will vary from bond sale to bond sale, depending on market conditions, and will further differ based on the maturity of the bond, the credit rating and other factors. For specific information regarding yields, contact your broker.
How do I redeem a Washington State bond or coupon?
Holders of physical bonds or coupons can go to any branch of U.S. Bank in Washington State (except in-store branches). Find locations here. You do not need to have an account with U.S. Bank to redeem your bond or coupon. And, there is no fee to redeem your bond or coupon at U.S. Bank. Contact information can be found here
I have an older bond that I have not yet redeemed, what do I do?
If your bond matured less than two years ago, contact Washington State’s current fiscal agent. Please have your bond’s CUSIP number available to identify your bond.
If your bond matured more than two years ago, Washington State law directs the fiscal agent to transfer or escheat the funds to the state where the registered owner was last known to reside. In Washington State, unclaimed property is handled by the Department of Revenue’s Unclaimed Property Division.
If you are a Washington Resident, you can look up unclaimed property registered under your name on the Department of Revenue’s website: ucp.dor.wa.gov. Or contact them at (360) 534-1502 to claim your bond. Please be prepared to give them your bond’s CUSIP number to help them identify it.
In some cases, the Washington State Department of Revenue requires a “Pay Out Letter” from the fiscal agent:
- If your bond matured before February 1, 2013, contact The Bank of New York Mellon at 1-800-254-2826. Please have your bond’s CUSIP number available to identify your bond.
- If your bond matured after January 31, 2013 contact the current fiscal agent.
What does it mean when a bond is tax-exempt?
The interest earned on most bonds issued by the State of Washington is exempt from federal income tax, subject to rules relating to tax-exempt bonds contained in federal and state tax law. However, certain bonds do not meet all of the rules for tax exemption. In this situation the State’s bond counsel will not provide its normal opinion that interest on these bonds is exempt from federal income taxation.
The POS will identify which bonds are exempt from federal income tax and which are subject to federal income tax.
Does the State refinance its bonds?
The State’s bonds are generally issued with redemption provisions that allow the bonds to be called on or after 10-years from the issuance date of the bonds. The State regularly reviews its debt portfolio for refunding (i.e. refinancing) opportunities, in order to ensure that taxpayers are being provided the lowest possible cost of capital. Refundings over the last twelve years have reduced debt service costs by more than $1.673 billion on a nominal (or cash) basis and $1.346 billion on a present-value basis.
Where can I find information regarding the State’s upcoming bond and COP sales?
Information on upcoming Bond and COP sales is available here.
Where can I find information regarding the State’s past bond and COP sales?
Information on past Bond and COP sales is available here.