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Debt service is a significant component of the operating budget and arises from the issuance of debt to finance the Commonwealth's capital investment plan. The Patrick-Murray Administration recognizes the need for increased capital investment as a means to create jobs in the near term and create the environment needed to support job creation and economic growth over the long term. The Administration also recognizes that the level of annual borrowing to support these capital investments must be set at affordable levels.
Debt Service Generally
Although a portion of the Commonwealth's capital investments is funded from federal grants and other sources, the Commonwealth borrows funds through the issuance of bonds to fund the majority of its capital investments. The issuance of bonds generates financial resources to fund capital programs, and also obligates future annual operating revenue for repayment of the bonds. Debt service is the annual payment of principal and interest on these borrowed funds.
The issuance of bonds to fund capital projects must be approved by a two-thirds vote of each house of the Legislature. The State Treasurer is responsible for the issuance of the Commonwealth's debt obligations upon the request of the Governor. The Governor, through A&F, allocates the proceeds of the bonds to support authorized projects and monitors spending.
Fiscal Year 2010 Debt Service Budget
The Commonwealth's budget includes several line items for the payment of debt service or other debt-like obligations, as described below.
|Line Item||Description||FY10 Budget|
|0699-0015 Consolidated Long-Term Debt Service||Includes debt service for general obligation bonds (secured by a pledge of the full faith and credit of the Commonwealth) and special obligation bonds (secured by a pledge of receipts credited either to the Highway Fund or Convention Center Fund).||$1.87 billion|
|0699-9100 Short Term Debt Service||Covers interest and related costs associated with borrowing to cover temporary cash shortfalls which may arise due to a mismatch of when revenues are received and when expenses are due. These short-term borrowings may take the form of a fixed rate revenue anticipation note and/or commercial paper. In either case, any borrowing for cash flow needs must be paid off within the same fiscal year in which the short-term debt was issued.||$52.1 million|
|0699-2004 Central Artery/Tunnel Debt Service||Covers principal and interest on bonds issued to finance the Central Artery/Tunnel project.||$91.7 million|
|0699-9101 Grant Anticipation Notes Debt Service||Amounts are deposited in a trust account to pay interest due on federal grant anticipation notes. The principal of such notes is paid by future federal highway construction grants.||$52.1 million|
|1599-0093 Water Pollution Abatement Trust Contract Assistance||Funds the Commonwealth's commitment to make matching grants to capitalize the state revolving funds. These funds in turn are leveraged with the issuance of bonds by the Trust to make loans to local governments to finance eligible water pollution abatement and water treatment projects. The commitment to make matching grants is a general obligation of the Commonwealth for which its full faith and credit is pledged.||$70.0 million|
|0599-1970 Massachusetts Turnpike Authority Contract Assistance||Compensates the Turnpike Authority for the financial burden imposed on the Authority by virtue of its assumption of the responsibility for operation and maintenance of certain roadways in the Metropolitan Highway System that were formerly maintained by the Commonwealth. The Commonwealth's obligation to make these annual payments is a general obligation for which the full faith and credit of the Commonwealth is pledged for the benefit of the Authority and its bondholders.||$25.0 million|
|1599-0050 Route 3 North Contract Assistance||Funds the Commonwealth's payment obligations associated with bonds issued to finance Route 3 North improvements.||$9.6 million|
|1599-1970 Massachusetts Information Technology Center Rent||Funds rent and associated costs at the Massachusetts Information Technology Center in Chelsea.||$0.6 million|
|1599-3856 Star Store Reserve||Funds a reserve for the facilities costs associated with the college of visual and performing arts of the University of Massachusetts at Dartmouth||$2.7 million|
|0699-0016 Accelerated Bridge Program||Covers principal and interest on bonds issued to finance the Accelerated Bridge Program to rehabilitate structurally deficient bridges.||$12.0 million|
Limitation on Commonwealth Debt
Statutory Debt Limits - Legislation enacted in December 1989 restricts the amount of the Commonwealth's outstanding direct debt (M.G.L. Chapter 29, Section 60A). This legislation imposed a "statutory debt limit" of $6.8 billion in fiscal year 1991 and set the limit for each subsequent year at 105% of the previous fiscal year's limit. The statutory debt limit is calculated according to certain rules and excludes several direct and contingent obligations of the Commonwealth. The statutory debt limit on "direct" debt during fiscal year 2008 was approximately $15.6 billion, and the Commonwealth's outstanding direct debt subject to the limit at June 30, 2008 was $13.5 billion.
Legislation enacted in January 1990 imposes a limit on debt service appropriations in Commonwealth operating budgets (M.G.L. Chapter 29, Section 60B). No more than 10% of total budgeted appropriations may be spent on debt service (both interest and principal) on Commonwealth general obligation debt in any fiscal year. Payments on debt not subject to the statutory debt limit described above are also excluded from the debt service limit. In fiscal year 2008, budgeted debt service on debt subject to this limit was approximately $1.6 billion, representing 4.9% of total budgeted expenditures, which were approximately $32.8 billion.
Administrative Bond Cap - The statutory debt limit and debt service limits represent only an upper limit on the amount of direct debt the Commonwealth may incur, and they do not count many types of Commonwealth debt and debt-like obligations (e.g., contract assistance liabilities). Since fiscal year 1991, A&F has established an "administrative bond cap" to limit annual bond issuance to affordable levels. Prior to the Patrick-Murray Administration, the stated bond cap was not based on transparent, analytical measures of affordability.
This is the first Administration to engage in an affordability analysis which has resulted in a transparent, rational policy for determining the annual bond cap. The Administration believes that this analysis and policy is necessary to ensure that the state's capital budget is based on a level of debt that will keep annual debt service payments in the operating budget to affordable levels.
Based on the debt affordability analysis, the Administration established a policy for setting the bond cap subject to the following constraints: (a) payment of debt service and debt-like obligations for existing and new debt must stay within 8% of total annual budgeted revenues and (b) future growth of the bond cap to fund the regular capital program is limited to not more than $125 million per year. This policy ensures that the annual borrowing limit is informed by changing fiscal conditions - such as the challenging current economic and financial market conditions we are facing.
A $3 billion capital investment program, known as the Accelerated Structurally Deficient Bridge Program, was recently authorized to rehabilitate and repair bridges in the Commonwealth that are structurally deficient or that would otherwise become structurally deficient within the next few years. In an effort to achieve the public safety and cost savings benefits through the acceleration of investment in these bridges, the amounts to be borrowed for the Program will be in addition to the annual bond cap. The debt service impact of financing the Program has, however, been taken into account for purposes of determining the affordable level of debt to fund the regular capital program.
The table below has been extracted from the Debt Affordability Analysis - FY2009-2013 which was published in December 2008. The table lists the annual bond cap (including unused bond cap amounts from FY08 that have been carried forward into future fiscal years); total annual debt service, which includes existing debt service, contract assistance payment obligations and new debt service from the annual bond cap and the Bridge Program; projected budgeted revenue; and total debt service as a percent of budgeted revenues. Note that this table is based on an affordability analysis which has been modified to better reflect current fiscal conditions - i.e., lower revenue growth and higher interest costs. The Administration will revisit the debt affordability analysis each year to reflect fluctuations in interest rates, revenues, and other changes impacting the Commonwealth's debt capacity.
|Projected Annual Debt Service as a Percentage of Budgeted Revenues|
|Fiscal Years 2009-2013|
|Fiscal Year||Annual Bond Cap||Total Existing Obligations||Total Annual Debt Service||Budgeted Revenue Growth||Total Annual Debt Service as % of Revenues|
The Governor's fiscal year 2010 budget proposal includes debt service appropriations to cover the payment obligations on outstanding bonds and to cover expectations regarding upcoming bond issues developed in accordance with the debt affordability analysis and policies described above. Note that the debt service projections in the table above will not correspond perfectly to actual debt service because assumptions used to project future debt service will vary from actual experience. For example, for the Debt Affordability Analysis, it is conservatively assumed that all bonds are issued on July 1 of each fiscal year, when in fact it is not uncommon to issue a series of bonds over the fiscal year.
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