Debt Affordability Committee August 15, 2013

1. Debt Affordability CommitteeAugust 15, 2013

2. Debt Affordability Committee’s Charge • “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

3. Meeting Topics • Introductions – April 26, 2013 • Tax Supported Debt – May 17, 2013 • Tax Supported Debt Part 2 – May 31, 2013 • Debt Ratio Comparisons – June 20, 2013 • Debt Service and Authorizations – July 17, 2013 • Public Hearing – July 17, 2013 • Preliminary Recommendation – July 31, 2013 • Recommendation – August 15, 2013 • Final Report – September 4, 2013

4. Today’s Agenda • Introduction of attendees • Vote on Minutes of July 31, 2013 Meeting • Final Debt Ratio Review • Historical Debt Ratios • Current Administration Policies • Rating Agency Review • Recommendation • Topics for Future Consideration • Next meeting

5. Minutes • July 31, 2013 – VOTE

6. Pertinent Debt Ratios • Statute • Debt service to General Fund revenues • Debt to personal income • Debt to estimated full-value of property • Debt per capita • Other • Debt as a % of GDP • Debt service as a % of total expenditures • Debt service as a % of tax levy

7. Debt Service to General Fund Revenues *Not included moral obligation debt at $4.5 billion ** "Annual Debt Service" assumes the FY13 projection as footnoted as no debt service was listed for 2012

8. Update on County Debt Research and Debt Service Scenarios

9. Debt as a % of Budget Revenues(historical and projected)

10. Debt as a % of Budgeted Expenditures(historical and projected)

11. Administration Affordability Assumptions • Maximum Debt Service of 8% of Budgeted Revenues • $125 million maximum increase of bond cap per year • 2/3 issued as 20-year debt; 1/3 issued as 30-year debt • Interest Rate:4.25% - 4.50% • Level Debt Service • Rate of Revenue Growth

12. Patrick Administration Long-Term Fiscal Policy Framework • In May 2012, the Patrick Administration released the Administration’s Long-Term Fiscal Policy Framework. • The Long-Term Fiscal Policy Framework included three goals: • (1) structural balance; • (2) sustainable spending growth; and • (3) disciplined management of long-term liabilities. • This Framework assumed debt service would grow at a rate of 4.4% per year. • Using the Patrick Administration’s FY2013-FY2017 Capital Investment Plan and debt affordability analysis assumptions, debt service will grow an average of 2.2% per year from FY2015-FY2019.

13. Rating Sustainability:Standard & Poor’s • Supporting factors for the Commonwealth’s rating include: • Ongoing progress in improving financial, debt, and budget management, • Formalized policies relating to debt affordability as well as multiyear capital investment and financial planning which are key improvements from a credit standpoint • A healthy budget stabilization fund (BSF) balance, has been key to managing budget volatility • High wealth and income levels; and • Deep and diverse economy, which continues to experience steady economic recovery. From Standard & Poor’s rating affirmation published May 23, 2013.

14. Rating Sustainability: Standard & Poor’s • Offsetting considerations to the Commonwealth’s rating: • high debt burden and significant unfunded pension and other postemployment benefit (OPEB) liabilities • View Massachusetts' total postretirement liabilities as relatively high, the commonwealth has been actively managing these liabilities with a focus on cost control and reform in recent years. • After significant contributions to the stabilization fund in 2011 and 2012, the expected use of reserves in the current fiscal year and planned reduction under the governor's proposed budget would diminish flexibility; • [A&F Update] The required deposit of $501 million to the Stabilization Fund for FY13 brings the Fund's year-end balance to $1.603 billion - within $49 million of the balance from the beginning of FY13. The net withdrawal for FY14 is predicted to be $230.7 million. From Standard & Poor’s rating affirmation published May 23, 2013.

15. Rating Sustainability: Stabilization Fund

16. Recommendations • Definition of Affordability: The ability to meet debt service requirements without raising tax rates to uncompetitive levels and without negatively impacting the provision of critical public services.

17. Recommendations • The Committee recommends an amount of between $__ billion and $__ billion as being the total amount of new Commonwealth debt that may be prudently issued in FY15 • Results in projected debt service in the range of $_____ billion in FY15, which is ___% of projected budgeted revenues • This amount of additional debt service is not predicted to cause the Commonwealth to raise tax rates nor negatively impact the provision of critical public services

18. Topics for Future Consideration • Pensions • OPEB • Ratings • Other Topics

19. Next Meeting Topics • September 4th • Vote to finalize Report