In his first year as Washington state treasurer, Kennewick’s Duane Davidson has refinanced more than $1.2 billion in general obligation bonds, shaved $200 million off of interest payments and told both Republicans and Democrats to look elsewhere when they tried to tap the state’s rainy day fund.
Now, one of only three Republicans serving in statewide office on the West Coast, Davidson is using his position as the state’s banker to raise awareness about the Evergreen State’s surprising “thirst for debt.”
With $21 billion in debt, Washington is sixth in the U.S. on a per capita basis, according to Moody’s and Standard & Poor’s, two of the top credit rating agencies.
The state’s current IOUs add up to $2,717 for every resident. The median is about $1,000 in tax-supported debt per resident.
Connecticut is the highest at about $6,000 per person and Nebraska is lowest at near zero.
In just 20 years, Washington’s outstanding general obligation debt portfolio has nearly tripled, to more than $19 billion.
No one questions the value of the projects that bonds support, including schools, libraries, jails, public buildings, roads, parks, bridges, hospitals and more.
But as anyone with a credit card or mortgage knows, debt means payments. In 2018, Washington will pay more than $1.2 billion or 5.77 percent of the state’s general fund revenue to cover its general obligation debt payments. Serving its $21 billion total debt will cost even more.
Davidson said he’s not trying to be alarmist, but he wants Washingtonians to understand they live in one of the “most highly leveraged states in the country.”
“I’m getting concerned about it,” he told the Tri-City Herald editorial board during a holiday visit.
He called the 2017 capital budget a good example of the state’s pay-for-it-later approach to investing in public infrastructure.
The $4 billion capital budget is stalled while a Senate majority coalition demands a fix for the unrelated Hirst decision, a 2016 Supreme Court ruling that clouds rural water rights.
The capital budget relies on debt to support 60 percent of the spending. Davidson is challenging Olympia to adopt a pay-as-you-go plan that puts more of the onus on current revenue.
“I strongly urge the Legislature to fund its growing need for capital projects with available revenues while reducing its reliance on debt,” he wrote in a 20-page report on the state of the state’s debt.
The Legislature’s failure to pass a capital budget has one silver lining. With no new debt to oversee, Davidson’s team successfully issued $1.2 billion in refinancing bonds. The move anticipated the Republican-led tax bill would prevent governments from issuing refunding bonds to prepay their debt in the future.
The Washington treasurer sold $742.6 million and $500 million in “refunding bonds,” essentially taking on lower-interest debt to retire older higher-interest debt. The move is akin to refinancing a home mortgage, but on a far larger scale. Bank of America Merrill Lynch won the bid for the first bond and Morgan Stanley & Co. LLC won the second.
The two transactions closed in November. The lower interest rates will save Washington taxpayers roughly $200 million.
Rainy day fund
When Republican leaders asked Davidson to support using money from the state’s emergency reserves to bring one of the pension funds into line, he refused.
He’s also resisting Gov. Jay Inslee’s 2018 supplemental budget plan to use $950 million from the $2.3 billion reserve to make a one-time investment in education to comply with the McCleary decision that schools are unconstitutionally underfunded.
Heading into the 2018 legislative session, Davidson said the reserves should be growing, not declining at a time when the economy and tax are both expanding.
“This is when we should be adding to the fund balance.”
$21B Outstanding debt
$2,717 Owed per resident
6 National rank for debt
$2.9B Remaining debt capacity
Washington State Treasurer’s Office