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March 18, 2011
OREGON’S CREATIVE FINANCING PLAN
The Oregon lottery was established by
Constitutional Amendment in 1985. The
original purpose of the lottery was to
raise money to be used for economic
development and job creation. Within a
few years the lottery was generating
more revenue than most people had
expected. The economy was booming and it
was perceived that some of the lottery
revenue could be put to better use.
In 1995 the people amended the
constitution to dedicate 15% of the
proceeds to help fund public education.
In 1998 another constitutional amendment
dedicated 15% of the lottery revenue for
the preservation of natural resources.
In 2002 the percentage dedicated to
public education was increased to 18%.
Thirty three percent of all lottery
revenue is now constitutionally
dedicated.
Over the years the legislature decided
to borrow money and to secure the debt
with future lottery earnings. They
believed that borrowing the money to
spend now would stimulate the economy
better than waiting to spend the lottery
revenue at a later date when it had
actually been earned and was available
to spend. It is interesting to note that
according to Legislative Counsel, the
legislature has no specific
constitutional or statutory authority to
borrow money to be paid with future
lottery earnings. The Legislature has
created the lottery bonding program
through a series of separate legislative
acts authorizing the sale of specific
lottery revenue bonds.
The bonding authorities required that
the revenue generated by the lottery
must remain at least four times the
total debt service for all of the
outstanding lottery revenue bonds. The
Treasury has carefully adhered to the
four to one earnings to debt service
ratio in order to maintain favorable
bond ratings and lower interest rates.
The first lottery bonds were structured
to repay the borrowed money within 15
years. A few years later the bonding
structure was changed to a twenty year
repayment schedule. Much like
refinancing a home mortgage, this was
done to reduce the annual payments by
increasing the number of years allowed
to repay the debt. This change allowed
the Treasury to borrow more money while
still maintaining the four to one ratio.
It also significantly increased the
total interest paid, and the total debt
service, by increasing the number of
years that interest must be paid on the
money owed.
The lottery bond indebtedness has about
doubled in the past eight years and now
stands at more than $1.1 billion. The
principle and interest payment on that
current lottery debt is nearly $130
million per year which is equal to about
25% of the annual lottery revenue. Much
of that debt service will continue for
the next 20 years.
Every dollar that must be used to pay
the debt on these lottery bonds
represents a dollar that cannot be used
for the original job creation and
economic development purposes of the
lottery program. The sum of the 33% of
lottery income constitutionally
diverted, and the 25% of lottery revenue
required to pay debt service, now stands
at 58% of all lottery earnings.
The combination of increased lottery
bond indebtedness, and declining lottery
earnings, has resulted in significant
stress to the lottery bonding program.
The program is now right at the four
times revenue to debt service ratio.
Selling more lottery bonds at this time
would cause the revenue to debt ratio to
be inadequate. The result is that Oregon
is currently unable to sell $190 million
in lottery bonds that have already been
authorized by the legislature, but that
have not yet been sold.
Oregon State Treasurer Ted Wheeler has
responded to this reality by proposing
to refinance some of the existing
lottery bond debt in order to create an
additional $282 million in borrowing
capacity.
The first part of his proposal is to
issue some replacement lottery bonds
that pay interest only for several
years. These bonds would replace current
traditional bonds that pay both
principle and interest. This plan would
have the effect of delaying payment of
about
$70 million of principle that is now due
and payable on the current bonds between
2011 and 2019 for about a decade. The
principle on the refinanced bonds would
be repaid between 2019 and 2027.
The second feature of his proposal is to
issue some replacement lottery bonds
that extend the time for principle
repayment beyond the current term. The
length of time required to pay back the
principle would be increased in order to
reduce the annual principle payment. It
also significantly increases the total
debt service by increasing the number of
years that interest must be paid on the
borrowed money.
The total principle and interest
payments for all of the restructured
bonds would increase by about $10
million dollars.
Implementing these proposals would allow
the state to borrow an additional $282
million dollars including the $190
million that has already been authorized
and about $90 million for other
purposes. In the event that the
legislature borrows that money now, it
would reduce the State’s future
borrowing capacity by an equal amount.
Further, it would decrease the lottery
revenue available to spend for future
economic development and job creation
for another twenty years.
Those proposing the refinancing plan
claim that borrowing and spending more
money now will stimulate much needed
economic growth and job creation. The
question is whether it is a good idea?
Is it sound fiscal policy to shift a
portion of the debt repayment obligation
to the next decade? Should we borrow
more money to pay for what we want today
and leave the next generation with the
bill?
Please remember, if we do not stand up
for rural Oregon no one will.
Best regards,
Doug
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900
Court St. NE, S-303, Salem,
Oregon 97301 