Huge debt handcuffs state in bad times

OLYMPIA — Washington's money troubles go deeper than a multibillion-dollar hole in the budget. The state also has acquired a mountain of debt.

The total amount of money owed for construction projects, not including transportation, has jumped 66 percent since 2000 to more than $10 billion. State payments on that debt will approach $2 billion in the next two-year budget.

That's roughly 6 percent of all state general-fund spending.

Twenty years ago, Washington was paying roughly $560 million on debt, about 3.6 percent of state spending at the time, according to a Senate Ways and Means Committee analysis.

The current budget crisis has many lawmakers looking wistfully at all the money going to pay debt. They wish they had it back.

"If we want more cash in the general fund and we can't raise taxes, over the long run we have to bring down the interest payments," said Senate Ways and Means Chairman Ed Murray, D-Seattle.

"Here we are with a $5 billion deficit we have to fix this session, but we're going to take $2 billion out of the operating budget just on debt service."

The state also has more than $6 billion in bonds for transportation projects, but that debt is paid by the gas tax and doesn't tap the general fund.

Murray and a bipartisan group of lawmakers in the Senate are looking at ways to lower the state debt, including possibly asking voters to approve a constitutional amendment.

Not everyone feels action is needed.

House Capital Budget Chairman Hans Dunshee, D-Snohomish, notes the money is spent on much-needed projects including schools, low-income housing and state prisons.

And when it comes to how much of the state budget debt now consumes, "6 percent looks pretty good," Dunshee said. "How many people are carrying more than that on their credit cards every month?"

A 2007 Federal Reserve report on debt, the latest available, found that, on average, U.S. families had debt equal to around 14.5 percent of their overall income.

And anywhere from 6 to 13 percent of federal government spending goes to pay debt, depending on how you calculate the size of the federal budget.

Richard Davis, president of the Washington Research Council, a business-backed think tank in Tukwila, said comparing state debt with personal debt, or national debt, is not a good idea. Washington's debt is too high regardless, he said.

"It's like if I'm blowing a point-one while I'm driving a car and everybody around me is blowing a point-two," he said, using a drunken-driver analogy. "It doesn't necessarily make anybody feel more secure."

Washington has at least twice the national median in several measures of debt.

A 2010 report by Moody's, for example, showed Washington owed $2,226 for every resident in the state, compared with a national median of $936 per capita. And as a proportion of overall state expenditures, Washington's 6 percent was twice the national median.

The state retains a good credit rating. Moody's rates Washington Aa1 because of what it considers "conservative budgetary controls, absence of liquidity strain and strong demographic trends." But the firm also notes Washington's "above average debt ratios."

State Treasurer Jim McIntire said he sees no immediate threat to the state's credit rating, but noted "I don't think there's any way that we can describe it, other than we're a high debt state."

State-financed debt "is a limited resource," he said. "Going forward we need to be much more careful about how we use it."

Washington's debt has grown faster than population growth and inflation. And it has done so despite laws meant to restrain state borrowing.

The state constitution says principal and interest payments on debt cannot exceed 9 percent of tax collections going into the general fund — which pays for daily operating expenses — averaged over three years.

The constitution exempts from the calculation taxes dedicated to specific purposes, such as the property tax (which goes to schools) and funds that pay for programs such as cleaning up toxic waste or licensing nurses.

Exempting that revenue restricts how much money the state can borrow because it, in essence, reduces the size of the pie used to calculate the debt limit.

In addition, for decades the Legislature had an even more restrictive statute in place that limited debt payments to 7 percent of tax collections averaged over three years.

Inventive legislators

But lawmakers figured out ways to work around the limits.

When they bumped into the 7 percent cap, legislators modified the law until it became meaningless. They finally eliminated it in 2009.

That same year, when the Legislature was in danger of running into the 9 percent constitutional limit, lawmakers took accounts dedicated by law to specific services like health care and public safety and threw them into the general fund.

The action didn't result in cuts to those programs. It was essentially a bookkeeping move that made it look like the general fund was collecting more revenue, which allowed the Legislature to borrow more money.

Lawmakers from both parties pushed for the change. Some viewed it as a good-government measure that made it easier to track spending.

Others saw it as a way to borrow, and spend, more money in a recession.

Because the debt has grown year after year, in good times and bad, the Legislature is once again running up against the constitutional limit, and this time lawmakers have limited ability to get around it.

As a result, the state is expected to spend more on debt service over the next two years than it can borrow to pay for construction projects.

The governor's budget office projects the state can issue around $791 million in bonds over the next two years, down from nearly $2 billion issued for the current two-year budget, and $2.7 billion in the budget before that.

Murray argues the state is not only spending too much money on debt, but it's also hamstringing its ability to spend more during economic downturns to help create construction jobs when they're needed the most.

"In the good years, we should have been going into less debt," he said. "In the bad years, when government can actually create jobs by building things ... we should have left ourselves capacity to bond more."

Proposals for change

Senators have two proposals in the works to limit state debt.

Sen. Linda Evans Parlette, R-Wenatchee, has introduced a measure that would slowly ratchet back the state debt limit to 7 percent over several years.

And Sen. Derek Kilmer, D-Gig Harbor, said he's working on a constitutional amendment that would limit how much money the state could borrow during economic booms, and allow lawmakers to go into greater debt during recessions.

Constitutional amendments require a two-thirds vote in the House and Senate, and voter approval, to become law.

There doesn't appear to be a partisan divide on this issue, at least in the Senate.

The state has to get control over its debt, said Sen. Joe Zarelli, the ranking Republican on the Senate Ways and Means Committee. Otherwise, he said, "It will eat us up eventually."

Andrew Garber: 360-236-8268 or agarber@seattletimes.com