Time to Take Action
Our Klamath Basin Water Crisis
Upholding rural Americans' rights to grow food,
own property, and caretake our wildlife and natural resources.

Senator Doug Whitsett
R- Klamath Falls, District 28

Phone: 503-986-1728    900 Court St. NE, S-303, Salem, Oregon 97301
Email: sen.dougwhitsett@state.or.us
Website: http://www.leg.state.or.us/whitsett
State Seal

March 18, 2011

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 Stateís 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,


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              Page Updated: Tuesday March 22, 2011 01:58 AM  Pacific

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