T HE 1997-2007 CAPITAL PLAN charts a course for investments in capital facilities that are necessary for delivering essential public services, promoting economic development, and enhancing the quality of life over the next ten years. Development of this plan, and selection of specific projects to be funded in the 1997-99 Biennium, were guided by many of the same factors that affect operating budget decisions. These include:

• Demographic Pressures: Washington State's population is currently forecast to grow by 22 percent through the 1990s, approaching almost six million people by the year 2000. This rapid increase in population, now growing at the fastest rate since the World War II boom of the late 1940s, is exerting strong pressure on the state's infrastructure, including public schools, higher education institutions, prisons, parks, and recreational lands.

• Spending Limits: The operating budget is constrained by the Initiative 601 expenditure limit and the capital budget is constrained by the 7 percent Statutory Debt Limit. Both budgets must balance short and long-term demand for services within these financial constraints.

• Interdependency: The capital and operating budgets are dependent on the decisions made concerning the other. For example, the decision to open a branch campus or renovate a prison has major implications on both budgets. In recent years, the Governor, the Legislature, and state agencies have worked to improve coordination between these two aspects of Washington's financial plan.

The 1997-99 capital budget proposed by Governor Lowry recognizes all of these influences, providing $1.8 billion for new projects, with $934.2 million funded by the proceeds of general fund-supported bonds. An additional $1.4 billion in reappropriations are recommended to allow currently funded projects to proceed.

The capital budget from bond funds proposed for the 1997-99 Biennium must be viewed together with the 1997 supplemental operating budget proposed by the Governor. The supplemental budget includes funding for four capital items: $50 million for public school construction grants; $38.5 million for the Harborview Medical Center research facility for the University of Washington (UW); $21 million for construction of a Health Sciences facility at the Joint Center for Higher Education in the city of Spokane; and $2.6 million for the Building for the Arts program to meet the full commitment for state assistance to the Seattle Symphony.

The $112.1 million provided for these projects in the supplemental budget, added to the $934.2 million in new bond appropriations for the 1997-99 Biennium, brings total state bond and general fund commitments for capital purposes to approximately $1.05 billion.

Highlights

Major projects and programs proposed in the 1997 supplemental and 1997-99 capital budgets are summarized below.

Education

The capital budget proposed by the Governor for the 1997-99 Biennium includes $743 million in new funding for projects in the K-12 and higher education systems. Combined with funds provided in the Governor's 1997 supplemental operating budget, education will receive $801.5 million over the next two years. This represents the largest functional area to receive funds. Highlights of this funding plan include:

• A total of $251 million in new funds is provided to assist local school districts with new construction and modernization projects. New funds are made available through timber revenues, $50 million in general fund resources deposited in the Common School Construction Account through the 1997 supplemental operating budget, and another $50 million available from the Timber Trust Land Transfer program in the 1997-99 Biennium. Funds are also provided to continue currently authorized projects.

• The UW construction program totals $188.9 million in new funds in the 1997 supplemental and 1997-99 capital budget, plus funding to continue ongoing projects. Construction of the Harborview Research and Training Facility is included in the 1997 supplemental budget. The 1997-99 capital budget includes funds for major projects on the Seattle campus including construction of the Law School and the Oceanography Building, decommissioning and remodeling the old Nuclear Reactor building for the School of Mechanical Engineering, and design of the modern research laboratories located in the Health Sciences Center. Funding is also provided for construction of the first phase of the new collocated Bothell branch campus, and for soil cleanup at the Tacoma branch campus site.

• A total of $84.2 million is included for new projects at Washington State University (WSU). Major construction projects include renovation of Bohler Gym and Thompson Hall, and renovation and an addition to Kimbrough Hall. Design funds are provided for the Teaching and Learning Center. Funds are also provided for design of the Engineering Building, construction of physical plant facilities, and road and site improvements at the WSU-Vancouver branch campus.

• The capital budget for the community and technical colleges includes $164.2 million for new projects. Funds are provided to begin construction of a collocated campus for the new Cascadia Community College in Bothell, and construction of projects at North Seattle, Everett, South Seattle, Bellevue, and the Poulsbo Campus for Olympic Community College.

• A total of $21 million is provided in the 1997 supplemental budget for the Joint Center for Higher Education in Spokane. Funds will allow design and construction of a new Health Sciences building that will serve WSU and Eastern Washington University. The second phase of the facility, including research space, is scheduled for funding in the 2001-03 Biennium.

• The Higher Education Coordinating Board will receive $2 million to distribute to higher education institutions for the construction of classrooms to accommodate K-20 technology improvements.

Human Services

The capital budget proposed by the Governor for the 1997-99 Biennium includes $271.5 million in funding for projects in corrections, juvenile rehabilitation, and other areas of human services. Highlights include:

• A total of $200.6 million is budgeted for new Department of Corrections projects, including $155.6 million to construct the 1,936-bed multi-custody Stafford Creek Correctional Center in Grays Harbor County. Funding is also included to convert medium custody housing to close custody at the Monroe Reformatory, design a 400-bed pre-release facility in Tacoma, and to begin site selection for a new $106.7 million women's facility. Design funds will prepare for expansion of the Monroe Special Offender Unit to 400 beds in conjunction with the Civil Commitment Center administered by the Department of Social and Health Services (DSHS). Authorization for alternate financing to construct a Tacoma pre-release center on tribal lands is also provided.

• The budget for DSHS includes $64.1 million in new funds. New projects include continued funding for the residential redevelopment of Green Hill School to increase capacity to 416 beds, the addition of new and replacement beds at Maple Lane School, and site selection and related costs for a new 300 bed Juvenile Rehabilitation Administration (JRA) institution at a site to be determined. Funding is provided for renovation of the Eastern State Hospital Eastlake Building for legal offenders. Design funds are provided for a $43 million replacement of the Western State Hospital Legal Offenders Unit.

• Funding is provided to perform a feasibility study for analyzing housing options and preparing a plan for the future of the Washington Veterans Home at Retsil. A feasibility study for the Soldiers Home at Orting is planned for the 1999-01 Biennium.

Natural Resources

The capital budget proposed by the Governor for the 1997-99 Biennium includes $486.2 million in funding for projects administered by natural resource agencies. Highlights include:

• A total of $70 million for the Interagency Committee for Outdoor Recreation to provide grants to state agencies and local governments for acquisition and development of wildlife and recreation lands under the Washington Wildlife and Recreation Program (WWRP). With the funding level provided in the Ten-Year Plan, the full commitment to the WWRP program identified by the Capital Forum will be achieved. Total new funding for all grant programs is $98.8 million.

• The Department of Ecology receives $206.2 million in new funds, including $70.5 million for the Centennial Clean Water Fund, $31.4 million from the Local Toxics Control Account, and $6.4 million for the Resource Conservation Recovery Act. An additional $53.2 million in state funds and $44 million in federal funds will be provided to the Water Pollution Control Revolving Account.

• The Department of Natural Resources will receive $114.8 million for new projects including $53 million for the Timber Trust Land Transfer program that provides funding for public school construction, permanent protection of forested lands, and the purchase of replacement trust lands.

• A total of $35.4 million in new funding is provided to the Department of Fish and Wildlife for renovation and stewardship of fish and wildlife facilities and resources across the state.

• New projects totaling $21.2 million are funded to preserve and maintain facilities, upgrade utilities, and improve roads and access throughout the park system.

Governmental Operations

The 1997-99 capital budget, together with funding for four capital construction projects funded in the Governor's 1997 supplemental operating budget, includes $323.9 million in funding for projects administered by general government agencies. Highlights include:

• A total of $245.9 million is provided for new programs in the Department of Community, Trade, and Economic Development. New funding includes $158 million for Public Works Trust Fund loans; $60 million for housing assistance, weatherization and affordable housing programs; $11 million for Community Economic Revitalization Board loans and grants for local infrastructure improvements; $4.7 million to assist community-based family service providers to acquire and rehabilitate buildings used for services to low-income people; $5 million to the Development Loan Fund; $3.9 million for Building for the Arts grants in the 1997-99 Biennium; and $2.6 million for completion of the Building for the Arts grant to the Seattle Symphony in the 1997 supplemental budget.

• The $49.6 million for new projects for the Department of General Administration includes funding to continue addressing safety concerns at the Plaza/Department of Transportation Garage, clean and preserve the historic sandstone buildings on the Capitol Campus and proceed with the Heritage Park project by constructing the "Arc of Statehood." The Governor's proposal also provides project management expenses and funding for continued preservation of the buildings owned and managed by the Department on the Capitol Campus and around the state.

• The Secretary of State is provided $2.3 million, with $2.1 million to purchase land and design the Eastern Branch Archives to be located on the Riverpoint Campus in Spokane.

• A total of $14.3 million in new capital funds for projects administered by the Office of Financial Management includes pooled funds for distribution to agencies for asbestos abatement, compliance with the Americans with Disabilities Act, and environmental cleanup associated with underground storage tank removal.

• The budget authorizes the use of alternate financing for the Department of Revenue to construct a new headquarters building in Thurston County in order to consolidate the operations of the Department.

Transportation

Most of the funding for transportation-related projects is contained in the transportation budget. However, the capital budget includes funding for facilities managed by the Washington State Patrol. Highlights include:

• A total of $9.6 million in new funds to upgrade and preserve district headquarters and other support facilities across the state; continue development of the Fire Training Center; and upgrade the existing communication infrastructure. Design funds are included for renovation of space to replace the existing Seattle crime laboratory with a new laboratory that is collocated with the Seattle Police Department and University of Washington toxicology laboratories.

State Debt

There are two main funding sources in the proposed Ten-Year Plan: proceeds from general fund supported bond sales, and dedicated funds. Dedicated funds are limited by statute as to the sources of revenues and allowable expenditure purposes. Bond funds, however, can be allocated to any capital project to meet priority needs.

The bond-supported capital plan is constructed within two statutory fiscal limits:

• The 7 percent statutory debt limit specifies the maximum percentage of general state revenues that can be spent for debt service. Since debt service on previously issued bonds is committed, the statutory debt limit effectively limits the amount of new bond funded projects that can be initiated in the 1997-99 and 1999-01 biennia. After Fiscal Year 2001 the structure of previously sold bonds allows the amount of new appropriations to increase.

• The Initiative 601 expenditure limit places an indirect constraint on debt service, since the general fund is used to pay debt service. The recommended Ten-Year Plan for bonds will result in debt service growth of 16.8 percent in the 1997-99 Biennium, decreasing over the following two biennia to approximately 8.3 percent in 2001-03. For the next two biennia, this rate of growth in debt service is above the Initiative 601 fiscal growth factor.

General Fund Capital Appropriations and Debt Service Dollars in Millions
New General Fund Bond Appropriation			Debt Service	Percent Growth Debt Service
	1993-95	952	721
	1995-97	825	843	17%
	1997-99	934	985	17%
	1999-01	921	1,122	14%
	2001-03	962	1,215	8%
	2003-05	972	1,259	4%
	2005-07	997	1,388	10%

The proposed ten-year capital plan recognizes these financial limits by putting forward a borrowing program that is well-managed and affordable. The State Finance Committee manages a borrowing program that commands attractive interest rates and pursues refinancing to reduce costs whenever possible. As a result, the state currently enjoys bond ratings of Aa, AA and AA by Moody's, Fitch Investor Services and Standard and Poor's, respectively. In a bond sale analysis issued in June 1996, Standard and Poor's described its rationale for the state's favorable bond rating:

The rating on Washington's debt reflects a strong and diversifying economic base, which is exhibiting less vulnerability to cyclical downturns in the aerospace industry; sound financial performance; and a moderate debt burden.

-- Standard and Poor's Ratings Group, June 21, 1996

A commonly used measure to evaluate debt service trends is the amount of debt service as a percentage of state personal income. This measure portrays the financial capacity of the state's economy to pay for the costs of previous capital investments. This measure has remained relatively stable in recent years. The total amount of new bond supported appropriations proposed for 1997-99 is $934.2 million composed of $925.9 million allowed under the debt limit and $8.3 million in bond capacity made possible by the elimination of appropriations for projects previously authorized that will not proceed. New bond-supported appropriations allowed under the debt limit in the 1999-01 Biennium are estimated to be $921 million, with new appropriation levels increasing in subsequent years. The structure of past bond sales allows increased new appropriation levels after the 1999-01 Biennium within the 7 percent statutory debt limit. Selecting Projects for Funding in the Capital Plan

• Major project requests (in excess of $5 million) undergo a value engineering study to identify opportunities to increase value in projects, which may reduce or increase the proposed project budget.

• Predesign proposals for major projects that have received previous funding are reviewed.

• Elements of proposed project cost are reviewed for consistency across agencies and universities, with appropriate adjustments for location or other factors.

• Project requests are compared to the amounts identified in previous budgets for consistency or justification of changes.

• Project requests are reviewed based on actual progress to date on currently appropriated projects. The completion of projects on schedule is an indicator of the capacity of an agency to undertake additional projects in the next biennium.

• Requests for funds to preserve existing facilities are reviewed for consistency with long-term plans to identify and manage the preservation needs of each agency. The plan for the management of existing facilities is a new requirement of the capital budget process, and will maximize funds invested in preserving existing capital facilities.

The second step is to compare the operating budget needs and decisions with the capital budget requests. Caseload growth in the operating budget may have capital budget implications. Decisions to expand or reduce operating programs often have a similar effect on the capital projects . Linking agency operating budget strategic plans to long-term capital plans is essential for ensuring that appropriate facilities are available to carry out agency responsibilities.

Capital project recommendations from the Higher Education Coordinating Board and the State Board for Community and Technical Colleges are also reviewed. These recommendations help set priorities within the community and technical college, and university systems for funding to accomplish the goals defined by these Boards.

The final step is to prioritize the various agency and university requests and select the final list of recommended projects. At this point, the choices between facility preservation versus new investments, new capacity versus improvements in quality, and completing previously funded projects versus new proposals, must be resolved. A final set of projects for each biennium across the Ten-Year Plan is identified so that progress is made on recommended projects in an orderly manner. To bring the cost of projects into balance with available resources may require that some projects are delayed, or completed in phases. The outcome of this process of balancing needs and resources is evident in the capital plan presented.

OFM implemented a new process for evaluating the financial implications of alternate financing proposals during this capital budget process. A standard methodology for calculating and comparing cash flow and the present value of a long-term investment was developed and applied to each proposal for alternate financing. The total costs for each proposed alternate financing project are now clearly presented in short-term cash flow and long-term present value investment terms. The full cost implications of each proposal are clearly displayed so that projects proposed on the basis of anticipated savings can be accurately evaluated. Similarly, the future cost/savings for projects proposed on the basis of program, service, or operational need can now be reviewed with more comprehensive and accurate financial information.