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Panel recommends state debt limits

Lawmakers will set bond ceilings, set projects as part of state budget process

A panel has urged Oregon lawmakers to limit new state debt to just slightly more than $1 billion in the next two-year budget cycle starting July 1.

Lawmakers adopt limits on bonds and other debt as part of the state budget process.

The State Debt Policy Advisory Commission, in its annual report approved Thursday, says the state’s debt capacity has improved as a result of several factors. Among them are a recovering economy, which produces more for the tax-supported general fund, and a pay-down of previous debt.

But the report concludes:

“While the commission projects that the state will have available debt capacity in the years to come, it notes that this debt capacity must be balanced against the considerable backlog of pressing capital projects and transportation improvements for which the state will need to tap the credit markets for funding.”

The recommended two-year ceilings are $974 million for general obligation debt, which is repaid through the tax-supported general fund, and around $200 million for lottery-backed bonds, although amounts are likely to drop for the latter in the future.

Lawmakers will take those recommendations into account as they decide how new bonds should be allocated for state projects, community college and university buildings.

Already on the table are a variety of projects, including $162 million for universities, $150 million for state buildings, $86 million for housing, and $62 million for information technology systems — all in Gov. John Kitzhaber’s proposed budget. His budget also proposes $100 million in bonds for seismic reinforcement of schools and emergency services buildings.

Lawmakers also are contemplating $200 million for a seismic reinforcement and other work at the state Capitol.

Lawmakers last year authorized $200 million in bonds for a cancer center at Oregon Health & Science University in Portland if $800 million was raised from other sources. Kitzhaber's budget proposes that the state use higher education bonds to pay for the state's share, which is likely to be issued after the end of the current budget cycle.

Status of state debt

Total state debt as of June 30, 2014, was $10.8 billion, up about $176 million from the previous year. The total includes bonds that are repaid from nontax sources, such as college dormitory fees, or earmarked sources such as vehicle and driver fees for highway work.

Debt repaid from the tax-supported general fund was $2.68 billion as of June 30, 2014. If all debt authorized by the Legislature in 2013 and 2014 is issued by June 30 of this year — the end of the current budget cycle — that total will rise to $3.43 billion.

Still, the report says, debt service payments as a share of the tax-supported general fund will amount to 3.5 percent, less than the target of 5 percent.

New debt was limited in the 2011-13 cycle, largely because of declining state tax collections resulting from the economic downturn. Also, Oregon in 2013 finally paid off $450 million in debt it incurred a decade earlier to balance the state’s operating budget, and repaid over 10 years with its share of the national tobacco settlement.

Laura Lockwood-McCall, director of debt management for the Oregon State Treasury, says the state still is paying off some “certificates of participation,” a form of short-term bonding in the budget that was once used on building improvements and computer purchases. Voters in 2010 approved a different form of bonds to cover these expenses at lower interest costs.

The commission is led by state Treasurer Ted Wheeler. Members are Michael Jordan, the state’s chief operating officer and director of the Department of Administrative Services; Tim Duy, a public member and an economist at the University of Oregon, and two lawmakers. They are Sen. Richard Devlin, D-Tualatin, Senate co-chairman of the Legislature’s joint budget committee, and Rep. Phil Barnhart, D-Eugene, House Revenue Committee chairman.

Caution on lottery bonds

Although the commission recommendation allows for $200 million more in bonds repaid from Oregon Lottery proceeds in the next two years, members heard from the state’s economists about the long-term prospects for the lottery and what those trends may mean for future bonds.

Lottery proceeds dropped during the economic downturn, and the amounts transferred to the state also were reduced by about $160 million over four years to help the Oregon Lottery upgrade its video terminals and networks. Lottery reserves paid for the rest of the $225 million project.

About 70 percent of lottery income comes from video terminals, which started with poker in 1992 and expanded to other games in 2005. About 12,000 machines will be replaced.

But Mark McMullen, the state economist, and Josh Lehner, senior economist, told the commission that all forms of gaming — including state lotteries — “are very much an industry under attack,” in Lehner’s words.

The Oregon Lottery’s annual growth rate is averaging 1 to 2 percent, better than a few years ago, but down from its peak after the introduction of electronic line games a decade ago.

McMullen says gaming demand nationally is down because of the economic downturn of the past few years and a generational shift by younger people toward other forms of entertainment.

The apparent exception is Las Vegas, where taxable sales of leisure and hospitality activities have recovered to pre-recession levels. But the economists say that’s because visitors are spending their money on activities other than gambling.

In contrast to tax-supported general-obligation debt capacity, estimated at $3.9 billion over the next nine years, the commission report projects only $643 million in lottery-debt capacity available over that same period.

Lawmakers approved $195.9 million in new lottery-backed bonds in 2013 and 2014.


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