House Capital Budget Committee

Work Session:
WA State Debt, Financing Tools, and the Capital Budget SSJR 8215 – Debt Reduction Act of 2011

Office of Program Research

April 18, 2011

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Presentation Outline
• • • • • • Overview of Washington State debt 9% Constitutional Debt Limit Types of Debt and other Long-Term Obligations Capital Budget Funding History General Fund Debt Service SSJR 8215 – Debt Reduction Act of 2011

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General Obligation Bonds
• Various Purpose General Obligation (VP GO) bonds are issued to pay for a wide variety of state authorized projects in the capital budget. Debt service is generally paid from the State General Fund. • As of June 30, 2010, outstanding VP GO bonds totaled $10.4 billion * – an amount reflecting bonds issued over the past 25 years. • Motor Vehicle Fuel Tax (MVFT GO) bonds are also general obligations and like VP GO bonds, are backed by the full faith, credit, and taxing power of the state. Debt service is paid from excise taxes on motor vehicle and special fuels. • As of June 30, 2010, outstanding MVFT bonds totaled $6.2 billion * – an amount reflecting bonds issued over the past 25 years.

* Source: Office of the State Treasurer, Debt Affordability Study, January 31, 2011.

Office of Program Research

Washington State Debt Outstanding Bonds by Fiscal Year - As of 6/30/2010
$ 18,000 $16,600 $ 16,000 $ 14,000 $ 12,000 (Dollars in Millions) $ 10,000 $ 8,000 $ 6,000

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$6,190

$806

$9,604

$ 4,000
$ 2,000 $0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Fiscal Year Various Purpose GO Bonds - General Fund Various Purpose GO Bonds - Reimbursable Motor Vehicle Fuel Tax GO Bonds
Source: Office of the State Treasurer, February 7, 2011.
Office of Program Research

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Projected Cumulative Motor Fuel Tax Debt Outstanding
$9 $8

$7
$6
(Dollars in Billions)

$5 $4 $3 $2 $1 $0 2011 2012 2013 2014 2015 2016
Fiscal Year
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2017

2018

2019

2020

2021

Toll Revenue Bond Facilities
• SR 520 floating bridge and landings – $404 million in “Triple pledge” bonds • Backed first by tolls, then fuel taxes, then full faith & credit – $553 million in toll revenue bonds – $793 million in federal GARVEE bonds • Alaskan Way Viaduct Replacement – Legislative intent for tolls to contribute $400 million, tolls not imposed, bonds not yet authorized • Other facilities—W. End of SR 520 Bridge and Columbia River Crossing project: Finance plan not yet developed, tolls not imposed, bonds not yet authorized
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9% Constitutional Debt Limit

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Constitutional Debt Limit
– 9% debt limit (Article 8, Section 1) adopted by voters in 1972 replaced a fixed debt limit of $400,000.

– The state debt limit expands and contracts with state general revenues, and consequently, with the growth or contraction of Washington’s economy. – Principal and interest payments in any year may NOT exceed 9% of average of prior three years general state revenues.
– An unofficial working debt limit has been used to maintain a cushion below the 9% constitutional limit since the 2003-05 biennium.
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What are “General State Revenues” used to calculate the debt limit?
Generally speaking, “General State Revenues” include all undedicated state money received in the Treasury.

Does not include (examples): – State Property Tax (in General Fund) – Cigarette Tax (non-General Fund) – Public Works Assistance Account (non-General Fund) – State and Local Toxics Accounts (non-General Fund)
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General State Revenues are 87% of Near General Fund Revenues
$18,000 $16,000 $14,000 $12,000 (Dollars in Millions) $10,000 $8,000 $6,000 $4,000 $2,000 $0 FY 2010 FY 2011 Near State General Fund FY 2012 General State Revenues
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FY 2013

Source: General State Revenues – March 2011 Bond Model. Near General Fund – Economic and Revenue Forecast Council.

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2012 is the tightest pinch point under the debt limit
$ 1,800 $ 1,600 $ 1,400 (Dollars in millions) $ 1,200 $ 1,000 $ 800

$ 600
$ 400 $ 200 $0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Fiscal Year

8.75% Working Debt Limit

Maximum Annual Debt Service
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Legislative Changes to Expand General State Revenues (GSR)
2005 HB 2170
2009 ESSB 5073

Removed the statutory dedication of the Real Estate Excise Tax - “for the purpose of common schools”.
Eliminated the Health Services Account, Water Quality Account, Public Safety & Education Account, and the Violence Reduction & Drug Enforcement Account. Transferred balances in the accounts to the state general fund.

2011 Proposed Undedicates the Cigarette Tax (permanent). HB 2019 2011 Proposed Temporarily undedicates the Public Works Assistance SHB 1497 Account revenue that was transferred to the state general PSHB 5467 fund in FY 2011. 2011 Proposed Adds State Property Tax to GSR beginning in 2016. SSJR 8215
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Constitutional Debt Limit
(Continued)

Article 8 of the Washington State Constitution excludes some types of debt from the debt limit calculation, most notably: – Bonds payable from the gas tax and motor vehicle license fees; – Voter-approved bonds; – Bonds payable from income received from the investment of the Permanent Common School Fund; – Debt issued to meet temporary deficiencies in the State Treasury; – Debt payable solely from revenues of particular public improvement (Revenue debt); – Debt which has been refunded; and – State guarantee of voter-approved GO debt of school districts.
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Types of Debt Obligations
Various Purpose State General Obligation (GO) Bonds
$10.4 billion outstanding (6-30-10)

Cost *
4.5% to 5.0%

Examples
Renovation of K-12 school facilities. Prison construction. Higher Ed building preservation.

Other Debt Obligations Not Subject to the Constitutional Debt Limit
MVFT/GO Bonds
$6.2 billion outstanding (6-30-10)

4.5% to 5.0%

Highway projects.

Certificates of Participation (COP)
$751.7 million outstanding (6-30-10)

25-50 Student services building. Parking basis points (bp) garage construction. higher than GO 25-100 bp higher than GO University of Washington 5-10 bp higher than GO 25-100 bp higher than GO

State Revenue Bonds
$0 outstanding (6-30-10)

Potential future authorization for SR 520, Alaskan Way Viaduct. Student housing, dining, and parking. UW Balmer Hall reconstruction. DIS data center and office buildings at the Wheeler Block.
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Higher Education Revenue Bonds
$1.3 billion outstanding (6-30-10)

63-20 Financing
$54.9 million outstanding (6-30-10) + $305.8 million in September 2011
* See Appendix for more detail on cost, structure, and ratings.

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Other Financial Obligations
• Long-term operating leases
Real Estate Authority General Administration Higher Education Other State Agencies Total Annual Rent $171,429,518 45,522,123 22,049,577 $239,001,217 Total Square Feet 9,961,196 1,894,164 2,041,522 13,896,882

Source: Office of Financial Management, 2010 Facility Inventory Summary. Figures do not include other occupancy costs (such as utilities, janitorial, etc).

• Pensions – Standard & Poor’s Article (3-31-11)

Office of Program Research

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Capital Budget History & GF-S Debt Service

State Bonds Subject to the Debt Limit Historical Capital Budget Appropriations
$3,000

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* Includes House Proposed 2011 Supplemental and 2011-13 Capital Budgets
$2,559

$2,500

$2,000
$1,703 $1,500 $1,493

$1,956

$1,419

$1,000

$900

$989 $796

$927

$982

$970

$500

$0

1991-93 1993-95 1995-97 1997-99 1999-01 2001-03 2003-05 2005-07 2007-09 2009-11* 2011-13*
Source: Legislative Evaluation & Accountability Program (LEAP) Committee. Office of Program Research

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Capital Budget Functional Area History Debt Limit Bond Appropriations
($ in Millions)

1991-93 1993-95 1995-97 1997-99 1999-01 2001-03 2003-05 2005-07 2007-09 2009-11* 2011-13*
Govt Operations Natural Resources Human Services Higher Education Education Total 182 147 224 280 67 $ 900 121 135 105 509 119 $ 989 100 70 191 332 104 $ 796 108 84 240 447 49 $ 927 143 107 175 456 101 $ 982 175 161 138 436 59 $ 970 200 184 252 690 167 $ 1,493 225 248 337 697 197 $ 1,703 661 530 229 792 348 $ 2,559 470 343 64 505 574 $ 1,956 134 324 44 430 586 $ 1,419

Govt Operations Natural Resources Human Services

20.2% 16.4% 24.9%

12.2% 13.6% 10.6%

12.5% 8.8% 24.0%

11.7% 9.1% 25.8%

14.5% 10.9% 17.9%

18.1% 16.6% 14.3%

13.4% 12.3% 16.9%

13.2% 14.5% 19.8%

25.8% 20.7% 8.9%

24.0% 17.5% 3.3%

9.4% 22.9% 3.1%

Higher Education
Education Total

31.1%
7.4% 100.0%

51.5%
12.0% 100.0%

41.7%
13.0% 100.0%

48.2%
5.3% 100.0%

46.4%
10.3% 100.0%

44.9%
6.1% 100.0%

46.2%
11.2% 100.0%

40.9%
11.5% 100.0%

30.9%
13.6% 100.0%

25.8%
29.3% 100.0%

30.3%
34.2% 100.0%

* Includes House Proposed 2011 Supplemental and 2011-13 Capital Budgets.
Note: Items may not add to total due to rounding.
Source: LEAP Committee. Office of Program Research

$120

Public High School Construction New Construction/Replacement Projects Project Size = Greater than 200,000 sq. ft.
Actual Projection

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$100
Base Bid = $314 sq ft State CCA = $198 sq ft Base Bid = $488/sq ft State CCA = $279/sq ft

($’s in Millions)

$80
3. Evergreen SD (2005) New East High Base Bid = $209/sq ft State CCA= $142/sq ft 1. Everett SD (1992) Henry M. Jackson HS Base Bid = $115/sq ft State CCA= $84/sq ft

3. Projection Assumptions Project Size = 215,000 sq. ft. Construction Inflation = 3%/Yr State CCA Increase = 2.3%/Yr

$60

4.
4. Pasco SD (2007) Mt. Tahoma HS Base Bid = $205/sq ft State CCA= $162/sq ft

$40

1.

2.

$20

2. Puyallup SD (1998) Emerald Ridge HS Base Bid = $138/sq ft State CCA= $99/sq ft

$0 1990

1995

2000

2005

2010

2015

2020

2025

2030

Source: Office of the Superintendent of Public Instruction – Summary of New High School Projects Bid 1990-2010. State CCA = State Construction Cost Allocation.

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New Prison Construction
$450 $400
2025 New Prison $389 million, 2,048 beds $194,000/bed

$350
$300
($ in millions)

$250 $200 $150 $100 $50 $0 1990

2007 Coyote Ridge Corrections Center $234 million, 2,048 beds $114,000/bed

1999 Stafford Creek Corrections Center $203 million, 1,936 beds $104,000/bed

2013 Proposed New Reception Center $220 million, 1,024 beds $214,000/bed

1995 Airway Heights Corrections Center $117 million, 1,936 beds $60,000/bed

1995

2005

2010

2020

2030
Office of Program Research

Source: Department of Corrections. 2025 projection by the Office of Program Research.

General fund debt service payments for the 2011-13 biennium are projected at $1.96 billion, or 6.08% of Near General Fund.
$2,500 $2,000 $1,774 $1,565
(Dollars in Millions)

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$1,964

$1,500 $1,114 $1,000 $715 $562 $500 $971 $841

$1,369 $1,210
$1,214

$0 1991-93 1993-95 1995-97 1997-99 1999-01 2001-03 2003-05 2005-07 2007-09 2009-11 2011-13
Projected
Source: LEAP Committee. Economic and Revenue Forecast Council March 2011 Forecast. Office of Program Research

Debt Service and Near General Fund Revenue
10.00% $32,306 $30,166 9.00% $28,388 8.00% $25,000 $30,254 $30,000 $35,000

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$25,395
Debt Service % of NGF-S 7.00% 6.25% $20,000

NGF-S Revenue (in thousands)

6.00%

6.08%
4.87% 4.33% 4.57% 5.00%

$15,000

5.00%

$10,000

4.94%

4.75% 4.54%

4.81% $5,000

4.00% 3.70% 3.00% 1991-93 1993-95 1995-97 1997-99 1999-01 2001-03 2003-05 2005-07 2007-09 2009-11 2011-13
Source: LEAP Committee. Economic and Revenue Forecast Council March 2011 Forecast.

$0
Office of Program Research

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SSJR 8215 Debt Reduction Act of 2011

Comparison of Current Law and SSJR 8215
Current Law
9% debt limit. Governor and Legislature have adopted an unofficial working debt limit to guide capital budget development. • 8.50% - 2003-05 thru 2007-09. • 8.75% - 2009-11 and 2011-13. Based on prior 3-year average of GSR. Excludes State Property Tax from GSR.

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SSJR 8215
9% limit is phased down to 7% in half percent increments every two years beginning in FY 2016 and completing in FY 2022. Governor and Legislature may choose to adopt a working debt limit.

Based on prior 10-year average of GSR. Includes State Property Tax in GSR beginning in 2016. Based on 10-year average, from FY 2006 through FY 2015. • 2006 = Adds $1.4 billion • 2015 = Adds est. $2.0 billion • Projected annual growth = 2%
Office of Program Research

($’s in Millions)

8.75% Working Debt Limit Compared to SSJR 8215 Biennial Bond Capacity
$4,291 $3,973 $3,599 $3,464 $3,086 $3,333 $2,970 $2,750 $2,546 $3,208 $2,857 $2,646 $2,450 $2,268 $2,100

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$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $1,432 $1,432

$1,081

$1,081

$1,081

$1,081

$1,167

$0
House 2011-13 Senate 2011-13 2013-15 2015-17 2017-19 2019-21 2021-23 2023-25 2025-27 2027-29 2029-31 2031-33

K-12 & Other Education Natural Resources SSJR 8215
Note: Depicts no alternative economic cycles.

Higher Education Governmental Operations

Human Services 8.75% Working Debt Limit
Office of Program Research

($’s in Millions)

8.75% Working Debt Limit Compared to SSJR 8215 Biennial Bond Capacity
$4,197
$3,886 $3,598 $3,605 $3,420 $3,138 $2,879 $2,666 $2,450 $2,268 $2,100 $2,468

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$4,500 $4,000 $3,500 $3,000 $2,500

$3,870

$2,000
$1,500 $1,000 $500 $0
House 2011-13 Senate 2011-13 2013-15 2015-17 2017-19 2019-21 2021-23 2023-25 2025-27 2027-29 2029-31 2031-33

$1,432

$1,432 $1,096 $1,007 $1,007 $1,184

$1,007

$1,007

$1,088

K-12 & Other Education Natural Resources SSJR 8215
Note: Recessions modeled in 2020 and 2030.

Higher Education Governmental Operations

Human Services 8.75% Working Debt Limit
Office of Program Research

($’s in Millions)

8.75% Working Debt Limit Compared to SSJR 8215 Estimated Debt Service Payments
6.65% of NGF

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$6,000

$5,000

$1.3 billion $4,000
5.85% of NGF
4.91% of NGF

$3,000
6.08% of NGF

6.43% of NGF 4.61% of NGF

$2,000

5.59% of NGF

$1,000

$0
2011-13 2013-15 2015-17 2017-19 2019-21 2021-23 2023-25 2025-27 2027-29 2029-31 2031-33

8.75% Working Debt Limit
Note: Recessions modeled in 2020 and 2030.

SSJR 8215
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Policy Questions
1. How should the Legislature allocate its limited debt capacity? What are the most essential investments? 2. Should any potential changes to the debt limit include other types of “debt obligations”?
 MVFT bonds, COP’s, 63-20 financing, revenue bonds  Long-term operating leases

3. Should the Legislature undedicate all revenue?

4. What is an appropriate cushion or “working debt limit” under the current 9% limit or SSJR 8215?

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Appendix

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General Obligation Bonds
• Definition: A municipal security secured by the full faith, credit, and taxing power of the issuer; an unconditional promise to repay. • Typical use: To finance the capital portion of tax-supported general public purpose governmental activities, such as public buildings and roads.

• Rating: Aa1, AA+, AA+.
• Cost: Lowest interest cost. Lowest cost of issuance; Recent interest rates in the 4.5% to 5.0% range. • Structure: Various Purpose GO bonds or MVFT/GO bonds. Typically 25 to 30-year maximum term with level debt service. Most VPGO bonds subject to the Constitutional debt limit; MVFT/GO bonds not.

• Recent examples: a) Various purpose capital projects, and b) highway projects.

Source: Office of the State Treasurer, April 16, 2011.

Office of Program Research

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Certificates of Participation
• Definition: A municipal security whose payments represent an interest in payments that an issuer has promised to make. • Typical use: State agency acquisition of real estate or equipment. Financing program also available to local governments.

• Rating: Aa2.
• Cost: Approximately 25-50 bp higher interest cost than General Obligation Bonds. Relatively low cost of issuance. • Structure: Maximum term depends on useful life of property; can be sized and structured to fit unique project requirements and revenue stream(s). Not subject to the Constitutional debt limit.

• Recent examples: a) Equipment for state and local agencies, and b) energy efficiency equipment.

Source: Office of the State Treasurer, April 16, 2011.

Office of Program Research

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Revenue Bonds
• Definition: A municipal security which is payable from specific non-general fund source of revenue. No full faith and credit pledge. Revenue bonds are payable from identified sources of revenue, such as tolls and grants. • Typical use: Capital project(s). • Rating: Depends on the structure and the relative strength of the revenue source. • Cost: 25 - 100 bp higher than General Obligation Bonds, depending on the structure and the relative strength of the revenue source. Low to moderate cost of issuance.

• Structure: Maximum term 40 years. Not subject to the Constitutional debt limit.
• Recent examples: At present, Washington State has no outstanding revenue bonds.

Source: Office of the State Treasurer, April 16, 2011.

Office of Program Research

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63-20 Financings
• Definition: Bond issued by non-profit entity "on-behalf of" a governmental entity. The non-profit corporation causes the project to be designed and built, typically through a fixed-price contract with a private real estate development company. Security for the bonds is rent payments from the State to the non-profit under a lease agreement. • Common types: Generally real estate. • Mechanics: The debt is issued by the non-profit entity, which builds or buys the asset in question for lease to the State. Title to the project is held by the non-profit for the life of the bonds and transferred to the State when the debt is repaid. Market views 63-20 bonds as a form of appropriation–backed state obligation. • Cost: 25 - 100 bp higher interest rates than General Obligation Bonds. Significantly higher cost of issuance. • Structure: Can be sized and structured to fit unique project requirements and revenue stream(s). Not subject to the Constitutional debt limit. • Recent examples: The Wheeler block.
Source: Office of the State Treasurer, April 16, 2011. Office of Program Research

SUPERINTENDENT OF PUBLIC INSTRUCTION SUMMARY OF NEW HIGH SCHOOL PROJECTS BID 1/90 - 7/10 CONSTRUCTION COST TOTAL ALLOCATION SQ. FT. $77.08 $82.07 $82.07 $83.36 $89.36 $90.20 $90.41 $91.00 $92.87 $95.07 $98.78 $101.87 $101.87 $106.72 $110.32 $110.32 $110.32 $125.32 $141.95 $141.95 $154.22 $162.43 $162.43 $168.79 $168.79 $174.26 215,016 240,995 210,663 218,621 254,542 227,819 230,177 273,987 218,308 245,147 204,411 239,540 239,540 211,092 216,662 234,991 221,502 277,912 207,159 234,900 244,968 217,597 335,602 222,046 238,335 214,144 --- SQ. FT. COSTS --CONTRACT BASE BID COST $87.30 $142.46 $105.49 $114.66 $99.58 $154.27 $103.54 $108.88 $146.79 $142.95 $138.19 $117.80 $128.42 $180.10 $144.36 $160.90 $123.12 $173.88 $239.95 $208.69 $240.14 $331.39 $205.03 $247.18 $195.67 $355.94 $95.53 $143.27 $112.42 $115.66 $101.71 $155.04 $104.83 $110.02 $146.67 $142.36 $143.49 $120.40 $130.67 $182.64 $148.02 $162.14 $124.46 $176.98 $246.87 $208.69 $262.42 $332.35 $211.56 $247.18 $204.25 $355.94

DISTRICT

PROJECT

BID DATE

Edmonds Mountlake Terrace High Repl 01/16/90 Mukilteo Kamiak High 04/07/92 Lake Washington Eastlake High 04/30/92 Everett Henry M. Jackson High 11/12/92 Kennewick South Ridge High 01/24/95 Kent Kentlake High 05/25/95 Mead Mount Spokane-Mead High 06/06/95 Vancouver Skyview High 09/13/95 Edmonds Edmonds-Woodway High Repl 08/22/96 Seattle Ballard High Repl 07/09/97 Puyallup Emerald Ridge High 09/17/98 Central Valley Central Vly High Repl/Ad 08/03/00 Central Valley University High Repl/Ad 08/29/00 Lake Washington Redmond High Repl 03/21/01 Camas New High 10/03/01 White River New High 11/27/01 Arlington New High 01/23/02 Tacoma 10 Mt Tahoma High Repl & Ad 12/12/02 Highline 401 Mount Rainier High Repl 06/07/05 Evergreen 114 New East High Campus 07/19/05 Snohomish 201 New High #2 09/28/06 Edmonds 15 New Lynnwood High 04/24/07 Pasco 1 New Chiawana High 09/06/07 Clover Park 400 Lakes High Repl 2008 gccm West Valley 208 West Valley High Add & Repl (N/L) gccm 2008 Lake Washington 414Lake Washington High Repl 2009 gccm

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