administration and finance 1 debt affordability committee april 26, 2013

Administration and Finance

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Debt Affordability Committee

April 26, 2013


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• Introduction of attendees• Opening Remarks• Review of Charge• Overview of Current Debt Affordability Analysis• Proposed Work Plan • Overview of Website Information

Today’s Agenda


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• “On or before September 10 of each year, the committee shall submit to the governor and the general court the committee’s estimate of the total amount of new commonwealth debt that prudently may be authorized for the next fiscal year”

• “The committee shall review on a continuing basis the size and condition of the commonwealth tax supported debt as well as other debt of any authority of the commonwealth…The estimate shall be made available electronically and prominently displayed on the official website of the commonwealth.”

-Massachusetts General Laws Chapter 29 Section 60B

Debt Affordability Committee’s Charge


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1) The amount of state bonds that, during the next fiscal year:a) will be outstanding; andb) will be authorized but unissued;

2) The capital program prepared by the Secretary of Administration and Finance;

3) Capital improvement and school construction needs during the next 5 fiscal years, as projected by the Massachusetts School Building Assistance Authority;

4) Projections of debt service requirements during the next 10 fiscal years;

5) The criteria that recognized bond rating agencies use to judge the quality of issues of state bonds;

Debt Affordability Considerations


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6) Any other factor that is relevant to:a) the ability of the state to meet its projected debt service requirements for

the next 5 fiscal years; orb) the marketability of state bonds;

7) The effect of authorizations of new state debt on each of the factors in this subsection;

8) Identification of pertinent debt ratios, such as debt service to General Fund revenues, debt to personal income, debt to estimated full-value of property, and debt per capita;

9) A comparison of the debt ratios prepared for paragraph (8) with the comparable debt ratios for the 5 other states in New England, New York and 5 other states the committee determines to offer a fair comparison to the commonwealth;

Debt Affordability Considerations (cont.)


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10) A description of the percentage of the state's outstanding general obligation bonds constituting fixed rate bonds, variable rate bonds, bonds that have an effective fixed interest rate through a hedging contract, and bonds that have an effective variable interest rate through a hedging contract; and

11) The amount of issuances, debt outstanding, and debt service requirement of other classes of commonwealth tax supported debt as well as other debt of commonwealth units.

Debt Affordability Considerations (cont.)


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Patrick-Murray Administration

Debt Affordability Policy


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• To protect the long-term fiscal health of the Commonwealth, the Patrick-Murray Administration has imposed a Debt Affordability Policy that limits the amount of bonds to be issued each year.

• Under the “bond cap,” annual borrowing has been substantially less than the total amount authorized.

• The credit rating agencies reacted positively to this debt affordability policy, and the Commonwealth has achieved the highest credit ratings in its history, which has already locked in $100 M in reduced debt service costs over 30 years.

Patrick-Murray Debt Affordability Policy


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• The Patrick-Murray Administration’s capital investment program continues to be guided by three key principles:

1) Affordability.

2) Strategic prioritization of capital investments.

3) Transparency.

• In addition to the statutory debt limit, the Patrick-Murray Administration maintains two constraints on the Commonwealth’s debt as part of the “bond cap”:

1) A cap of not more than $125 million for the annual growth in the bond cap.

2) Maintenance of yearly debt service levels below 8% of budgeted revenues.

Patrick-Murray Debt Affordability Policy (cont).


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Patrick-Murray Administration

Debt Affordability Analysis

The next slides will show the debt affordability analysis as completed for the 2013-2017 Five-Year Capital Investment Plan.


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• The first task in the Patrick-Murray debt affordability analysis is to ensure existing obligations (debt service and contract assistance) is less than 8% of projected revenues.

Debt Affordability Overview

Existing Debt Service Obligations + Contract AssistanceProjected Revenues < 8%

• After this determination is made and a bond cap has been set, we must ensure that the projected obligations are less than 8% of projected revenues.

Projected Debt Service Obligations + Contract AssistanceProjected Revenues < 8%


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• Our total existing direct debt service obligations consists of debt service for our general obligation debt, Federal Grant Anticipation Note (GANs) Interest, Special Obligation debt, Federal GANs interest for the Accelerated Bridge Program (ABP) and Special Obligation debt for the ABP.

Step 1: Identify Existing Debt Service Obligations

Fiscal Year

General Obligations

Federal GANs Non

Bridge Program (interest

only)

Special Obligations Non Bridge Program (gas tax

only)

Federal GANs Bridge

Program (interest

only)

Special Obligations

Bridge Program

Total Existing

Direct Debt Service

Obligations

2012 1,822,001 27,989 58,939 2,774 7,465 1,919,168

2013 1,993,433 22,608 58,922 2,774 45,794 2,123,531

2014 1,909,664 13,183 52,704 2,774 46,558 2,024,883

2015 1,848,845 5,395 52,701 2,774 46,359 1,956,074

2016 1,943,953 0 51,382 2,664 46,484 2,044,483

2017 1,579,403 0 51,752 2,418 46,601 1,680,174


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• General Obligation contract assistance is a full faith and credit pledge by the Commonwealth to make payments. It is the same as general obligation debt.

• Contract assistance obligations include capital lease obligations that relate to major capital projects. Examples include the Route 3 North Transportation Improvements Association and the Saltonstall Building Redevelopment Corporation Project, each of which were funded outside of the bond cap by prior administrations.

Step 2: Add Contract Assistance

Fiscal Year

Water Pollution Abatement

Trust

MassDOT (Turnpike Authority)

Route 3 North Transportation Improvements

AssociationSaltonstall

Building

Total Contract Assistance Obligations

2012 64,987 125,000 5,409 9,398 204,794

2013 62,692 125,000 1,129 9,465 198,286

2014 59,731 125,000 1,130 9,533 195,394

2015 58,272 125,000 1,128 9,627 194,027

2016 53,414 125,000 1,129 9,699 189,242

2017 46,296 125,000 1,116 9,773 182,185

Budgetary General Obligation


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• Budgeted revenue includes:• All Commonwealth taxes and other revenues

available to pay Commonwealth operating expenses, including debt service, pensions and other budgetary obligations.

• Budgeted revenue amounts do not include:• Off-budget revenues or tax or toll revenues

dedicated to the Massachusetts Department of Transportation, the Massachusetts Bay Transportation Authority, and the Massachusetts School Building Authority.

• Any one-time federal stimulus funding received (or expected to be received) pursuant to the American Recovery and Reinvestment Act of 2009 (ARRA) in fiscal years 2009, 2010 and 2011 has been excluded from the calculation of budgeted revenues for purposes of this debt affordability analysis.

Step 3: Develop Revenue Estimate

• The budgeted revenue projection includes the budgetary revenue amounts reported in the audited statutory basis financial statements. An additional adjustment was made to budgeted revenue to adjust for the cost of the sales tax holiday.

(in millions) FY13 GAA

Gross Tax Revenues 22,011

Less MBTA Sales Tax (787)

Less SBA Sales Tax (689)

Less Workforce Training Fund (20)

Net Tax Revenue 20,515

Plus Fed Reimbursements 8,034

Plus Department Revenues 3,331

Plus Interfund Transfers 1,710

Plus Cost of Sale Tax Holiday 21

Budgeted Revenue For DAA 33,611


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Fiscal Year

Budgeted Revenues (Excluding

ARRA Revenues)

8% Bond Cap

Annual Growth

Rate

Compound Annual Growth

Rate

2002 21,174,800 1,693,984 n/a

2003 21,987,200 1,758,976 3.84%

2004 23,988,400 1,919,072 9.10%

2005 24,373,400 1,949,872 1.60%

2006 26,305,600 2,104,448 7.93%

2007 28,615,900 2,289,272 8.78%

2008 30,313,200 2,425,056 5.93%

2009 28,412,300 2,272,984 -6.27%

2010 29,125,400 2,330,032 2.51%

2011 31,690,320 2,535,226 8.81%

2012 32,314,700 2,585,176 1.97%

2013 33,610,700 2,688,856 4.01%

2014 34,619,021 2,769,522 3.00%

2015 35,657,592 2,852,607 3.00%

2016 36,727,319 2,938,186 3.00%

2017 37,829,139 3,026,331 3.00%

4.32%

Projections

• The debt affordability analysis is based on projections of budgeted revenue that will be available to support debt service and other budgetary needs. The budgeted revenue projection for fiscal year 2013 was $33.611 billion. This estimate was based in part on the tax revenue estimate of $22.011 billion, on which the fiscal year 2013 General Appropriations Act is based.

• For purposes of projecting budgeted revenue in future fiscal years, 3.00% was applied to fiscal year 2014 revenues and to each year thereafter. This is consistent with established policy of applying the lesser of (a) the compound annual growth rate (CAGR) of historical budgeted revenues, which is 4.32%; and (b) 3%.

Step 3: Develop Revenue Estimate


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• As a starting point for the analysis of future debt capacity, this table shows existing debt service and contract assistance payment obligations in each of the next ten fiscal years as the total amount of existing obligations

Step 4: Evaluate Existing Obligations Versus Projected Revenues

Fiscal Year

Existing Direct Debt

Service

Existing Contract

AssistanceTotal Existing Obligations

2012 1,919,168 204,794 2,123,962

2013 2,123,531 198,286 2,321,817

2014 2,024,883 195,394 2,220,277

2015 1,956,074 194,027 2,150,101

2016 2,044,483 189,242 2,233,725

2017 1,680,174 182,185 1,862,359

2018 1,538,048 184,850 1,722,898

2019 1,477,788 184,928 1,662,716

2020 1,475,664 185,035 1,660,699

2021 1,692,879 185,118 1,877,997

2022 1,548,809 185,204 1,734,013

2023 1,318,187 185,293 1,503,480

Table 4

Existing Debt Obligations as Percentage of Budgeted Revenue

Fiscal Years 2012-2017

($000s)


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• This table shows existing obligations in each of the next ten fiscal years as a percentage of the budgeted revenue projection for each of those fiscal years. Also, shown is the amount of space the Commonwealth has available under the 8% cap.

Step 4: Evaluate Existing Debt Service Versus Projected Revenues

Fiscal Year

Total Existing

Obligations

Projected Budgeted Revenue

Existing Obligations as % of Budgeted

RevenueAdministrative

Bond Cap

Amount of Space

Under Cap

2012 2,123,962 32,314,700 6.57% 2,585,176 461,214

2013 2,321,817 33,610,700 6.91% 2,688,856 367,039

2014 2,220,277 34,619,021 6.41% 2,769,522 549,245

2015 2,150,101 35,657,592 6.03% 2,852,607 702,506

2016 2,233,725 36,727,319 6.08% 2,938,186 704,461

2017 1,862,359 37,829,139 4.92% 3,026,331 1,163,972

2018 1,722,898 38,964,013 4.42% 3,117,121 1,394,223

2019 1,662,716 40,132,934 4.14% 3,210,635 1,547,919

2020 1,660,699 41,336,922 4.02% 3,306,954 1,646,255

2021 1,877,997 42,577,029 4.41% 3,406,162 1,528,165

2022 1,734,013 43,854,340 3.95% 3,508,347 1,774,334

2023 1,503,480 45,169,970 3.33% 3,613,598 2,110,118


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• As a starting point for the analysis of future debt capacity, this graph shows the previous table visually.

Step 4: Evaluate Existing Debt Service Versus Projected Revenues

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20230

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Existing Debt Obligation vs. 8% Projected Revenue Limit

Available for future debt issuances $2.1 B$704 M

Existing Obligations


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• The Patrick-Murray Administration restricts growth in the annual bond cap for the regular capital program to $125 million each year (excluding carry forwards of unused bond cap). This limit applies even if in some years the actual revenue growth projection provides capacity to issue a greater amount of debt. This constraint ensures stable and manageable growth and avoids taking on an unaffordable long-term debt burden on the basis of unusually robust short-term revenue growth.

• Two programs are accounted for under the 8% debt limit, but not subject to the Administration’s “Bond Cap” due to their financing mechanisms.

• Accelerated Bridge Program (ABP) –ABP is a $2.984 billion, eight-year program to rehabilitate and repair bridges in the Commonwealth. ABP is financed with a combination special obligation bonds secured by the Commonwealth Transportation Fund and federal grant anticipation notes.

• Clean Energy Investment Program (CEIP) – CEIP projects produce energy cost savings from less energy use and a portion of the related budgetary savings is used to pay the debt service associated with the general obligation bonds issued to finance the projects.

Step 5: Establish Capital Spending Bond Cap

Fiscal Year Bond Cap Bridge

Program

2012 1,750,000 298,292

2013 1,875,000 360,451

2014 2,000,000 560,537

2015 2,125,000 532,490

2016 2,125,000 435,088

2017 2,125,000 178,346

• The table shows the level of annual bond funding planned to meet projected capital investment needs to be funded within the bond cap and Accelerated Bridge Program.


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Step 6: Project Annual Debt Service from Capital Spending as a Percentage of

Projected Revenues

• The Administration has made the following conservative and fiscally responsible assumptions to project future debt:– Timing of Debt. All debt issued to fund the capital spending program, is

assumed to be issued at the start of the fiscal year in which it will be spent. This assumption is conservative for modeling purpose.

– Term of Debt. The Administration has adopted a policy of issuing not more than one-third of the debt it issues each year to fund the regular capital program for a term of 30 years. This analysis assumes that one-third of the debt to be issued each year to fund the regular capital program will have a 30-year term and two-thirds of the debt to be issued each year will have a 20-year term.


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Projected Revenues (cont.)

• The Administration has made the following conservative and fiscally responsible assumptions to project future debt (cont.):

– Interest Rates. The interest rate used for 20-year debt and for the federal grant anticipation notes for the Accelerated Bridge Program is 4.25%, which is conservatively above the 3.97% average of the 24 month period ending September 20, 2012 of the Bond Buyer 11 Index. The interest rate used to model the 30-year debt is 4.50%, reflecting the approximate spread between 20 and 30-year general obligation bonds according to municipal market data published in The Bond Buyer.

– Principal Amortization. Consistent with past practice by the Commonwealth, the principal on bonds issued for a 20-year term is structured to result in level annual debt service payments over that 20-year period and the principal on bonds issued for a 30-year term is structured to result in level annual debt service payments over that 30-year period.


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Fiscal Year

Total Existing

Obligations

Cumulative New Debt Service

from Annual Bond Cap

Cumulative New Debt Service

from Bridge Program

Total Annual Debt Service

Budgeted Revenue Growth

Total Annual Debt

Service as % of

Revenues Bond Cap

Space Under

Bond Cap

2012 2,123,962 2,123,962 32,310,021 6.57% 2,584,802 460,840

2013 2,321,817 132,395 20,945 2,475,157 33,604,667 7.37% 2,688,373 213,217

2014 2,220,277 273,615 49,952 2,543,845 34,611,145 7.35% 2,768,892 225,047

2015 2,150,101 423,662 75,968 2,649,731 35,648,368 7.43% 2,851,869 202,138

2016 2,233,725 573,710 95,949 2,903,383 36,714,616 7.91% 2,937,169 33,786

2017 1,862,359 723,757 102,207 2,688,323 37,829,139 7.11% 3,026,331 338,008

2018 1,722,898 882,630 99,230 2,704,758 38,964,013 6.94% 3,117,121 412,363

2019 1,662,716 1,050,330 96,126 2,809,172 40,132,934 7.00% 3,210,635 401,463

2020 1,660,699 1,226,856 92,890 2,980,445 41,336,922 7.21% 3,306,954 326,509

2021 1,877,997 1,412,208 89,517 3,379,722 42,577,029 7.94% 3,406,162 26,440

2022 1,734,013 1,606,387 86,000 3,426,400 43,854,340 7.81% 3,508,347 81,947

2023 1,503,480 1,809,392 82,334 3,395,206 45,169,970 7.52% 3,613,598 218,392


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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

Debt Affordability

Total Existing Debt Service

Projected debt service under existing capital plan



8% Limit


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Debt Affordability Committee Proposed Work Plan

administration and finance 1 debt affordability committee april 26, 2013

Documents

debt outstanding

new commonwealth debt

new state debt

debt of commonwealth

comparable debt ratios

secretary of administration

fixed rate bonds

variable rate bonds