Debt Affordability Committee April 26, 2013

1. Debt Affordability CommitteeApril 26, 2013

2. Today’s Agenda • Introduction of attendees • Opening Remarks • Review of Charge • Overview of Current Debt Affordability Analysis • Proposed Work Plan • Overview of Website Information

3. 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

4. Debt Affordability Considerations • The amount of state bonds that, during the next fiscal year: • will be outstanding; and • will be authorized but unissued; • The capital program prepared by the Secretary of Administration and Finance; • Capital improvement and school construction needs during the next 5 fiscal years, as projected by the Massachusetts School Building Assistance Authority; • Projections of debt service requirements during the next 10 fiscal years; • The criteria that recognized bond rating agencies use to judge the quality of issues of state bonds;

5. Debt Affordability Considerations (cont.) • Any other factor that is relevant to: • the ability of the state to meet its projected debt service requirements for the next 5 fiscal years; or • the marketability of state bonds; • The effect of authorizations of new state debt on each of the factors in this subsection; • 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; • 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;

6. Debt Affordability Considerations (cont.) • 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 • 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.

7. Patrick-Murray AdministrationDebt Affordability Policy

8. Patrick-Murray Debt Affordability Policy • 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.

9. Patrick-Murray Debt Affordability Policy (cont). • The Patrick-Murray Administration’s capital investment program continues to be guided by three key principles: • Affordability. • Strategic prioritization of capital investments. • 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”: • A cap of not more than $125 million for the annual growth in the bond cap. • Maintenance of yearly debt service levels below 8% of budgeted revenues.

10. Patrick-Murray AdministrationDebt Affordability AnalysisThe next slides will show the debt affordability analysis as completed for the 2013-2017 Five-Year Capital Investment Plan.

11. Debt Affordability Overview • 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. Existing Debt Service Obligations + Contract Assistance Projected 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. < 8% Projected Debt Service Obligations + Contract Assistance Projected Revenues

12. Step 1: Identify Existing Debt Service Obligations • 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.

13. Step 2: Add Contract Assistance • 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.

14. Step 3: Develop Revenue Estimate • 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. • 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.

15. Step 3: Develop Revenue Estimate • 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%.

16. Step 4: Evaluate Existing Obligations Versus Projected Revenues • 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

17. Step 4: Evaluate Existing Debt Service Versus Projected Revenues • 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.

18. Step 4: Evaluate Existing Debt Service Versus Projected Revenues • As a starting point for the analysis of future debt capacity, this graph shows the previous table visually.

19. Step 5: Establish Capital Spending Bond Cap • 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. • 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.

20. 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.

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

22. Step 6: Project Annual Debt Service from Capital Spending as a Percentage of Projected Revenues (cont.)

23. Step 6: Project Annual Debt Service from Capital Spending as a Percentage of Projected Revenues (cont.) 8% Limit

24. Debt Affordability Committee Proposed Work Plan