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Debt Service
Introduction
The Patrick Administration’s capital investment program continues to be guided by three key principles: (1) affordability, (2) strategic prioritization of capital investments and (3) transparency. The Commonwealth faces a backlog of needed capital projects; at the same time, it faces the constraints of a challenging, albeit improving, economic climate and a high debt burden. In light of these challenges, it is as critical as ever that the Commonwealth take a disciplined approach to capital budgeting that is guided by the three principles stated above. Over the past seven years, the implementation of these principles has contributed to bond ratings of Aa1, AA+ and AA+ from Moody’s, Standard & Poor’s and Fitch, respectively – the highest ratings in Commonwealth history.
The Commonwealth’s capital program is funded primarily through bond proceeds. As such, the total size of the capital program is determined primarily by the amount of debt the Commonwealth can afford to issue and pay in debt service. The FY 2015 budgeted debt service figure, $2.508 B, displays the capital program impact on the operating budget. It should be noted that a large majority of the $2.508 B funds decades of previous capital infrastructure investment, while only a small portion funds debt service requirements based on new debt issuances. In order to achieve affordable debt service costs, while prudently addressing the Commonwealth’s infrastructure needs, the Patrick Administration has conducted an annual debt affordability analysis.
For the seventh consecutive year, this rigorous analysis of the Commonwealth’s outstanding debt determined the affordable level of bond issuance and addressed the affordability principles listed above. An administrative “bond cap” is established as a guideline for annual bond issuance in support of the capital program. Based on the analysis conducted during the development of the FY 2014-2018 Capital Investment Plan, the Administration established the FY 2014 bond cap at $2 B, the FY 2015 bond cap at $2.125 B, and the FY16-2018 bond caps at $2.25 B. FY 2014 will also utilize $205 M in unspent FY13 bond cap capacity.
Debt Affordability Analysis
The goal of the Administration’s debt affordability analysis is to determine an annual borrowing amount that addresses the Commonwealth’s critical infrastructure needs while remaining affordable in terms of its impact on debt service and the operating budget. To achieve this, two core principles are adhered to: limiting annual growth to $125 M and holding total debt service under 8% of budgeted revenues. The intent of the analysis is to fully encompass all debt service obligations including general obligation bonds, certain special obligations, contract assistance obligations and certain capital lease payments. The analysis also takes a conservative approach to projecting future budgeted revenues, basing its growth estimate on the lesser of 3% or the actual compound annual growth rate of the Commonwealth’s revenues over the last ten years – which included both economic booms and downturns. The analysis models future debt issuance using fiscally conservative assumptions about interest rates, maturities, dates of issuance and market conditions.
While the analysis limits virtually all future bond-funded capital projects to the bond cap, there are certain, limited circumstances in which the Administration plans to undertake borrowing outside the bond cap when there is a sound policy justification for doing so. For example, there are certain projects for which dedicated streams of new, project-related revenues or savings can be identified to support debt service costs related to those projects.
Based on this analytical approach, it is projected that the Commonwealth will have the capacity to accommodate steady increases in the bond cap over the next two years while maintaining the percentage of the Commonwealth’s budgeted revenues needed to pay debt service during that period.
The debt affordability analysis methodology is based on the Commonwealth’s current available financing resources and mechanisms; changes in financing structures and resources in the future may impact how the administrative bond cap and the Commonwealth’s capacity for additional borrowing are viewed. The Administration plans to revisit the debt capacity and affordability analysis every year, revising its estimates for future years by taking into account fluctuations in interest rates, budgeted revenues and other changes impacting the Commonwealth’s debt capacity. In addition, the Administration will annually assess the appropriateness of the methodology and constraints for establishing the bond cap described above.
Self-Supporting Project Financings
Unlike past practice in Commonwealth capital budgeting, the Patrick Administration has taken all debt service and debt-like payment obligations into account in determining the appropriate level of annual borrowing. The Administration recognizes, however, that exceptions to this policy may be justified in limited circumstances where a project financed with debt payable by the Commonwealth directly or indirectly generates new state revenue or budgetary savings that is targeted to the payment of such debt. In these limited circumstances, the Administration will exclude the debt from the annual bond cap and will exclude such debt service payment obligations from the debt affordability analysis. In the instances where such debt service is supported by a new or budgeted stream of state revenue, the related new revenue used to pay such obligations will also be excluded from the analysis set forth herein for purposes of determining the annual bond cap.
| dollars in thousands | |||||
| Fiscal Year | Infrastructure Development Projects Debt Service |
DFS Insurance Assessments | Energy Efficiency Projects Debt Service |
IT ROI Projects | Total Self-Supporting Debt Service |
|---|---|---|---|---|---|
| 2013 | 1,977 | 2,986 | 3,579 | 0 | 8,542 |
| 2014 | 2,615 | 3,130 | 1,102 | 1,832 | 8,680 |
| 2015 | 7,211 | 3,302 | 6,027 | 8,194 | 24,734 |
| 2016 | 8,935 | 3,715 | 12,629 | 14,046 | 39,326 |
| 2017 | 8,934 | 3,847 | 20,079 | 17,555 | 50,415 |
| 2018 | 8,932 | 3,847 | 23,517 | 20,234 | 56,530 |
There are three examples of debt the Administration will exclude from the annual bond cap and debt affordability analysis. The first is debt that the Massachusetts Development Finance Agency issues for public infrastructure improvements necessary to support significant new private development, pursuant to the Infrastructure Investment Incentive Program, more commonly known as “I-Cubed”. This debt will be excluded because the Commonwealth will ultimately be responsible for funding only the portion of the related debt service that is supported by new state tax revenue generated from the related private development. The second example of debt that will be excluded from the debt affordability analysis is debt the Administration issues to fund fire training facility projects, as legislation authorizes the Commonwealth to raise the amounts needed to fund the related debt service costs for such projects through assessments on property insurance policies. The third example is debt associated with projects deemed to be self-funded based on a rigorous return on investment (ROI) analysis. These projects result in cost avoidances, increased revenue or other savings that are in excess of the project’s cost. There are two categories of self-funded projects based on their return on investment. The first is the Clean Energy Investment Program (CEIP) initiated by the Governor in January 2010, in which the Commonwealth issues general obligation bonds to fund energy efficiency and renewable energy projects at state facilities. These projects result in energy cost savings from less energy use and a portion of the related budgetary savings will be used to cover the debt service associated with the general obligation bonds issued to finance the projects. This idea may be expanded to include energy efficiency and renewable energy projects in the state’s outdoor and recreational areas. The second category consists of IT projects that go through a rigorous analysis proving that costs will be decreased or eliminated or additional revenue will be created. In FY 2014 two projects, MassNET, a multi-use network that connects Commonwealth agencies, and COMMBUYS, the Commonwealth’s electronic procurement system, will be subject to the ROI analysis and are candidates for self-funded status. The table above shows the amounts of incremental tax revenue, assessments and captured energy savings projected to be applied to pay debt service on bonds issued to fund the construction of the infrastructure development projects, fire training facilities and energy efficiency projects, respectively.
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