September 22, 2005

Washington State University proposes a revised funding mechanism to get construction of the $63 million WSU Biotechnology/Life Sciences Building underway by summer, 2006, by leveraging the university’s own funds from trust lands and utilizing the state treasurer’s Certificate of Participation process. This revised proposal could be considered by the 2006 Legislature. The proposal would address statewide needs for research and economic development without impacting existing WSU trust land principle, the state’s debt limit, or compete with other general-fund state capital projects. It utilizes the same funding mechanism that constructed the Todd Hall Addition and other projects in Pullman.

The Biotechnology/Life Sciences Building

            Washington’s legislature has declared that a clear public purpose and government priority is “to promote life sciences research to foster a preventive and predictive vision of the next generation of health-related innovations, to enhance the competitive position of Washington state in this vital sector of the economy, and to improve the quality and delivery of health care for the people of Washington.”[1]  Construction of a biotechnology and life sciences building on the Pullman campus of Washington State University is a critical component in helping to fulfill this purpose. Yet, the 2005 Legislature did not identify funding to keep this project moving ahead on schedule. Clearly, it has been difficult for research buildings to compete in the Legislature against other capital priorities.

Construction of this facility will provide significant economic benefits to the State of Washington.  It will create the opportunity to obtain significant externally funded research grants from organizations such as the National Institute of Health and other federal agencies.  It will attract leading scientists and researchers in biotechnology and the life sciences.  This will help to put Washington in the forefront of biotechnology research, and will accelerate the development of the biotech industry in the state.  Construction of the biotechnology and life sciences building will give the State of Washington an important strategic advantage.  For these reasons, WSU has explored alternative mechanisms to fund the construction of this facility and has identified the land grant permanent funds as an appropriate source of revenue for this purpose. 

Background

Trust Lands and Permanent Funds

            In 1889 the federal government granted certain lands to the then newly admitted State of Washington to be held in trust for the benefit of specifically designated institutions.[2]   The purpose of these trusts was to provide economic support for the designated institution[3].

Two of these trusts - the “Agricultural Trust” and the “Scientific Trust” - were established for the benefit of Washington State University.[4]   These two trusts presently contain approximately 150,000 acres of land that is being managed by the Department of Natural Resources.[5]

            Proceeds from the sale of the granted lands are to be held in the Agricultural Permanent Fund and the Scientific School Permanent fund for the support and maintenance of Washington S tate University.[6]  There are no express limitations under federal law on how the Scientific School Permanent Fund may be invested; however, the Morrill Act provides that funds held in the Agricultural Trust may only be invested in “bonds of the United States or of the States or of some other safe bonds.”[7]

            Unlike proceeds from the sale of lands, proceeds from the sale of timber and other crops may be used for the acquisition and construction of facilities, as well as the retirement of bonds authorized by law for such purposes.[8] 

            The permanent funds are managed and invested by the State Investment Board (“SIB”).[9]  Although the Washington State Constitution prohibits the investment of permanent funds in corporate equities,[10] there are no specific restrictions on other investment types.  The principal directive to the SIB is that it must use “reasonable care, skill, prudence, and diligence under circumstances then prevailing which a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an activity of like character and purpose.”[11]  Therefore, WSU was supportive of suggestions during the 2005 Legislative session to directly invest permanent funds to get the building moving ahead. With the broad authority granted to SIB, it has the ability to direct that funds of the Scientific School Permanent Fund be invested in such a building.  The assets of the Agricultural Permanent Fund cannot be invested directly in a biotechnology and life sciences building because of the restrictions of the Morrill Act.[12]  However, a significant portion of the Agricultural Permanent Fund (like the Scientific School Permanent Fund) comes from the sale of timber and other natural resources.  By segregating those funds from those that were derived from land sales, SIB could invest the portion of the Agricultural Permanent Fund that does not come from land sales in the biotechnology and life sciences building.  

This direct investment a portion of the permanent funds has some advantages.  It provides for construction of the building and allows for the state to quickly realize the benefits of the research the building provides without impacting other state capital projects. However, it has one significant disadvantage. It would result in diminishing the principle of this fund and therefore diminishing income to the university in future years. The University began exploring an option that has been used on WSU buildings in the past and that would preserve the existing principle.     

The preferred option: Use of Interest Income Funds for the Biotechnology/Life Sciences Building

Currently, interest income from the permanent funds is appropriated to the university to largely fund minor capital and smaller major capital projects (about $10 million per year) and to pay off old debt.  The University recommends that a portion of this income be utilized to fund construction of the Biotechnology/Life Sciences Building.  This would be accomplished without diminishing any of the existing principle of these funds by granting the University authority to borrow money utilizing the Certificates of Participation (COP) process through the State Treasurer’s Office.  The source of funds to repay the COPs  would be from the interest accrued on the University’s permanent funds.

The WSU building account has been used to finance construction debt for many decades.  In the early 1990’s service on the debt was approximately $7 million per year. By 2000 it had declined to less than $6 million.  In 1999 and 2001 the legislature appropriated $36 million dollars to the WSU Agriculture Permanent Fund, and earnings from this new funding was used to service debt on the Spokane Health Sciences building (SHS).  Excluding the special funding for the SHS, WSU building account debt service had dropped to less than $4 million by 2005 and is scheduled to be less than $1 million by 2010.  Adding $4.3 million per year to service the debt for the new BioTechnology Life Sciences building will still leave the debt service below historic levels.

The advantages of pursing this method utilizing repayment of COPs include the following:  

• This is not a new funding scheme. No new state funding precedent would be set. This is the same funding method that was successfully used for WSU’s Fulmer Hall Renewal and the Todd Hall Addition in Pullman.

• WSU could complete design for this facility by spring 2006, and thus could be prepared to commence construction by late spring 2006.

• Costs of additional delays in beginning construction beyond 2006 could be avoided. A one-year delay has already increased the total project cost from $57 million to $63 million.

• The building would be available for the first years of the state’s Life Sciences Discovery Fund process.

• Other higher education or state projects, such as classroom facilities, would not be in direct competition with funding for this construction project.

• WSU’s permanent fund would be maintained without diminishing the existing principle.

• The state’s debt limit would not be impacted.