2012 Annual Conference of the National Association of State Auditors, Comptrollers and Treasurers

1. 2012 Annual Conference of the National Association of State Auditors, Comptrollers and Treasurers • Debt Affordability Studies: • Impact on Debt Management and Credit Ratings August 13, 2012

2. Agenda • Who Utilizes a Debt Affordability Study? • Why is a Debt Affordability Study Useful? • What are the Factors Typically Analyzed? • How States Create a Debt Affordability Study • Case Study: Washington • Case Study: Utah

3. Who Utilizes a Debt Affordability Study? • Many highly rated states develop debt affordability studies or reports, including: • Georgia (Aaa/AAA/AAA) • Florida (Aa1/AAA/AAA) • Maryland (Aaa/AAA/AAA) • Minnesota (Aa1/AA+/AA+) • North Carolina (Aaa/AAA/AAA) • Ohio (Aa1/AA+/AA+) • South Carolina (Aaa/AA+/AAA) • Texas (Aaa/AA+/AAA) • Virginia (Aaa/AAA/AAA) • Washington (Aa1/AA+/AA+)

4. Why is a Debt Affordability Study Useful? • Debt affordability studies provide a context for states to plan debt financing, track their debt, see how they compare to their peers, and set guidelines for the future issuance of debt • Studies also provide the public with a resource for understanding state debt • Debt affordability studies may take various forms • Some states utilize the studies for strict guidelines for how much debt can be issued based on certain metrics • Other state’s studies may be more informational in nature, providing elected officials, policy makers, and other interested parties a better context to inform policy and financial decisions • Debt capacity is a limited resource and tracking metrics that inform a state’s debt and debt affordability allows for more prudent future planning of debt financing • Given increasing scrutiny from rating agencies, debt affordability reports demonstrate a state’s commitment to carefully and prudently managing their debt program • Willingness to pay and strong management are key components evaluated by rating agencies • Rating agencies have noted that they view debt affordability studies as helpful tools and a display of strong management

5. What are the Factors Typically Analyzed? • Types of Debt • All types of debt including GO, COP, revenue, etc. are included • Issuance trends, debt service, borrowing costs, and amortization • Credit rating history • Tracking credit ratings and changes over time • Constraints on Debt Issuance • Constitutional debt limits and/or other policy guidelines • Debt Portfolio • Debt outstanding, continent obligations, other financial liabilities (pension, OPEB, etc.), and obligations of other state entities • Debt Metrics • Rating agency assessment of state credit profile and medians, primary metrics include: • Debt per capita, debt as percentage of personal income, debt as a percentage of gross state product, and debt service as a percentage of expenditures • Census data • Peer analysis • Discussion of recommendations, policies, or limits to be applied

6. How States Create a Debt Affordability Study • Varied political factors can determine the initial creation and evolution of a debt affordability study • Florida • The Florida Debt Affordability Study dates back to 1999 • Goal was to inform policymakers and provide framework for measuring, monitoring and managing the state’s debt • The annual development of a DAS was implemented in Florida statute in the 2001 legislative session • Establishes a benchmark debt ratio of debt service to revenues • Policy target is 6% debt service to revenues; policy cap is 7% debt service to revenues • North Carolina • In 2004, North Carolina’s General Assembly adopted legislation creating the Debt Affordability Advisory Committee to annually advise the Governor and the General Assembly of the estimated debt capacity for the state for the upcoming 10 fiscal years • Controlling metric is debt service as a percentage of revenues • Texas • The creation of the DAS was mandated by the Senate Finance Committee as a joint effort between the Legislative Budget Board, the Texas Bond Review Board, and the Texas Public Finance Authority • The DAS provides target and cap guidelines for analysis of debt service • Uses five ratios to analyze the impact of state’s annual debt service requirements on general revenues

7. How States Create a Debt Affordability Study • California • The annual development of the California Debt Affordability Report was mandated in statute in 1997 • According to statute, several specific metrics must be included, but the DAR changes annually based on what the Treasurer believes should be focused in on during a particular year • Washington • The Office of the State Treasurer first began considering the use of a Debt Affordability Study to provide a concise and comprehensive report of the state’s debt • The Legislature mandated the creation of a debt affordability study in 2010 • OST has since issued a second Debt Affordability Report in 2012 • Washington has followed up with other measures to support the analysis of the state’s debt

8. Case Study: Washington • Given Washington’s high debt levels and plan to issue a significant amount of debt going forward, the Office of the State Treasurer determined that the state would benefit from a Debt Affordability Study and presented their thoughts to the Legislature • The Legislature statutorily required the development of the first Debt Affordability Study in 2010, and the Office of the State Treasurer has developed a second study that was published in January 2012 • Future reports are not statutorily required but are planned to be developed annually • Washington’s Debt Affordability Study was created to inform the general public and policy makers’ understanding of the state’s debt and its debt in comparison to its peers • The Debt Affordability Study provides the context to make more informed policy decisions and compares the state to its peers, but does not mandate strict rules to determine the debt limit • The state has also taken further measures to address the state’s debt affordability including: • Creation of a Debt Commission to further examine some of the issues that the Debt Affordability Study brought to light • Restriction of state debt by directing the State Finance Committee to lower the state’s working debt limit from 8.75 percent in 2016 to 7.75 percent by 2022 • Passed a proposed constitutional amendment that goes to voters in November 2012 which if passed will reduce the constitutional debt limit from 9 to 8 percent and improve the way the debt limit is calculated in the future

9. Utah’s Outstanding Debt • General Obligation Bonds $3,487,680,000 • State Building Ownership Authority Bonds $315,770,000 • Revenue Bonds $61,205,000 Source: State of Utah Official Statement dated October 5, 2011

10. Unissued Authorizations • Additional Highway Bonds Authorized: • Critical Highway Needs Fund $56,165,228 • Transportation Improvement Fund $443,318,200 • Additional Unused Authorization: • 2011 Building Authorization $40,270,747 • 2008 Development Authorization $42,500,000 • 2004 Projects Authorization $1,623,400

11. Utah’s Constitutional Debt Limit Source: State of Utah Official Statement dated October 5, 2011

12. Utah GO Debt Limit ($ millions) Constitutional Debt Limit 85% of limit

13. Utah General Obligation Debt Principal Only, As of FYE

14. Utah GO Debt Limit ($ millions)

15. Annual P & I Debt Service – G.O. Bonds Source: State’s Financial Advisor (compiled from past Official Statements)

16. Utah G.O. Debt Per Capita Source: State’s Financial Advisor (compiled from past Official Statements)

17. Debt Per CapitaUtah Compared to Other Aaa-Rated States Source: Moody’s Investors Service – 2011 State Debt Medians – June 3, 2011

18. Utah Debt Per Capita Ceiling Target Source: State’s Financial Advisor (compiled from past Official Statements)

19. Historical Tax Supported Debt/Personal Income Source: Moody’s Investors Service – 2011 State Debt Medians – June 3, 2011

20. Debt to Personal Income – Utah Compared to other AAA States Source: Moody’s Investors Service – 2011 State Debt Medians – June 3, 2011

21. Debt to Personal Income Ceiling Target Source: Moody’s Investors Service – 2011 State Debt Medians – June 3, 2011

22. Debt to ExpendituresUtah Compared to Other AAA-Rated States Source: Standard & Poor’s 2011 State Debt Review

23. Utah Debt to Revenues Ceiling Target Source: State’s Financial Advisor (compiled from State CAFRs and Official Statements)

24. Moody’s on Utah Debt Profile “While the state’s debt ratios increased in the early 1990s…issuance had been limited until 2009.” “While Utah’s debt ratios have risen quickly, it still amortizes its debt quickly, reflecting its conservative approach.” “Credit Challenges: - A debt burden that has risen quickly to an above-average level.” “What could change the rating down? - Departure from the state’s tradition of conservative fiscal and debt management.” Source: Moody’s Investors - Rating Report – June 2, 2011

25. Utah’s Contingent Liabilities • State School Bond Guarantee Program - $2.53 billion • Moral Obligation Bonds • State Board of Regents - $565 million • UCAN - $4 million • Contingent Tax Credit Certificates - $300 million • New Moral Obligation for Charter Schools - ?

26. Recommended Debt Levels

27. Implied Future Issuance