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Other Financial Assumptions
Debt service is a significant expense in the Commonwealth's budget. Facing the constraints of a tight operating budget, the Administration has adopted a thoughtful and fiscally responsible approach to managing its debt over the long-term to keep debt service at an affordable level while allowing the Commonwealth to increase its investment in the general capital infrastructure needs of the state. This debt policy and the debt affordability analysis upon which it is based can be viewed in their entirety on Mass.gov/EOAF.
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 results in obligating future annual operating revenue for repayment of the bonds. Debt service is the annual payment of principal and interest on these borrowed funds.
The following table shows the debt service payment obligations on outstanding bonds of the Commonwealth as of October 1, 2007:
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.
The Commonwealth's debt takes a number of forms. This includes direct debt, such as general obligation debt (secured by a pledge of the full faith and credit of the Commonwealth, special obligation debt (secured by a pledge of certain receipts credited either to the Highway Fund (Transportation Fund) or Convention Center Fund) and federal grant anticipation notes (secured by a pledge of federal highway construction grants). In addition to direct debt, the Commonwealth has a number of other debt-like long-term liabilities, including contract assistance payments, lease-financing payments and contingent liabilities. Contract assistance payments and lease financing payments are required to be made by the Commonwealth to certain other public or quasi-public entities to support all or a portion of the debt service on certain bonds issued by these entities to fund public infrastructure improvements. Contingent liabilities relate to debt issued by independent authorities or other agencies of the Commonwealth that is expected to be paid by the issuing entities, but the payment of debt service or replenishment of reserves is guaranteed by the Commonwealth if expected payment sources are inadequate.
In its first year, the Patrick-Murray Administration published a thorough debt affordability analysis and policy for determining the state's annual borrowing limit, or "bond cap". This is the first time an Administration has engaged in such an analysis and published 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 is limited to not more than $125 million per year.
Based on the debt affordability analysis and the policy for setting the annual bond cap described above, the Administration has projected that the Commonwealth will have the capacity to accommodate steady increases in the bond cap over the next few years while decreasing the percentage of the Commonwealth's annual budgeted revenues needed to pay debt service during that period. This will result in increased capacity in the capital budget to make needed investments in public infrastructure and greater capacity in the operating budget to fund needed state programs.
|Fiscal Year||Bond Cap||Existing Debt Service Obligations||Cumulative New Debt Service from Annual Bond Cap||Total Debt Obligations||Estimated Budgeted Revenue||Debt Service as % of Budgeted Revenues|
Before July 1, 2008, the Administration will publish a new debt affordability analysis and annual bond cap determination for fiscal year 2009 based on the policy set forth above and based on updated budgeted revenue and debt service payment assumptions. The Administration intends to revisit the debt affordability analysis each year to reflect fluctuations in interest rates, revenues, and other changes impacting the Commonwealth's debt capacity.
The Governor's fiscal year 2009 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 policy described above.
Transfer of State Personnel from the Capital Budget to Operating Budget
Section 28 of the Governor's fiscal year 2009 budget authorizes a no-cost mechanism for taking hundreds of personnel and other budgetary expenses off of the capital budget with the goal of significantly scaling back the fiscally imprudent practice of funding these expenses with debt. For every dollar we spend on the capital budget, an additional $0.60 is added in interest costs. For a number of years, commodities such as personnel and other non-durable goods have been charged to the capital account - resulting in millions of additional dollars in interest payments while reducing the amount of money available for statewide construction projects. The Administration recently filed a bond bill seeking authorization to borrow $50 million a year to fund the acquisition of equipment on the capital budget instead of the operating budget. If this bond authorization is passed, $50 million in the operating budget will no longer be needed to fund equipment acquisitions, creating capacity in the operating budget to fund $50 million of personnel and operating-related expenses currently being paid for with borrowed funds.
Section 28 would give A&F the authority to transfer money between line items in the operating budget to ensure the initiative is cost neutral. If a line-item funded the acquisition of durable equipment, this outside section would allow A&F to transfer that amount to another line-item to fund the cost of personnel that would have otherwise been funded from the capital budget.
The total amount of such transfers cannot exceed $50 million, and A&F will be required to give the Senate and House Committee on Ways and Means a schedule of all such transfers. This outside section and the bond authorization must both be passed in order to implement the proposed transfer of personnel from the capital budget to the operating budget.
Earmark Policy for H.2
The Governor's fiscal year 2009 budget includes funding in a number of agency line items for specific programs and organizations that were earmarked and funded in fiscal year 2008. These purposes are consistent with the programs and services provided by the agencies where the funds are being appropriated. While the funding is not specifically earmarked in the document, this Administration expects that the budgeted amounts will be directed, via the appropriate state agency, to the programs and organizations.
Elsewhere, the Governor's fiscal year 2009 budget eliminates nearly 300 other earmarks totaling approximately $40 million that were included in the fiscal year 2008 budget. These earmarks were inconsistent with the mission of the agency under which they were funded or otherwise not affordable in a challenging budget year. An additional $70 million of earmarks are part of the MassHealth savings and so they are not represented in this total. While these earmarks have been removed, valued programs and organizations may still be able to receive state funds in fiscal year 2009. The Governor's fiscal year 2009 budget recommends $15 million for the Workforce Competitiveness Trust Fund, $7 million for the Massachusetts Cultural Facilities Fund and $5 million for a new Regional Tourism Grant Program. These programs would allocate funding through a competitive grant process and in some cases leverage private matching dollars. In this way, the Administration has taken steps in this budget toward a more transparent, equitable and responsible process of allocating funds to the myriad of programs and organizations throughout the Commonwealth.
Workforce Competitiveness Trust Fund (WCTF) - $15 million 
The WCTF was established in the economic stimulus legislation of 2006 to provide resources for industry-specific employment and training programs developed in collaboration between regional and community-based organizations, industry, labor organizations, and state and local government agencies. The WCTF , which is administered by the Commonwealth Corporation, has proven to be remarkably successful, awarding competitive 3-year grants for projects to train or re-train workers across the state, building on the strengths of the Massachusetts workforce. Grant funding represents a key resource for workforce development organizations across the Commonwealth to leverage their employment programs and initiatives with state dollars, while ensuring balanced economic development and growth.
Regional Tourism Grant Program - $5 million
This new initiative would provide $5 million in fiscal year 2009 in competitive grants for tourism advertising and promotion, regional branding, and other local projects to attract in-state, out-of-state, and overseas travelers to the state's numerous cultural, historical, and natural attractions. The grant program is designed to match investments made by local or regional organizations with state funding. These grants would be available to local groups across the state and would complement the efforts of the state's tourism promotion partner agencies and the Massachusetts Office of Travel and Tourism (MOTT), which would be responsible for administering the program.
Massachusetts Cultural Facilities Fund (CFF) - $7 million
CFF grants, which are awarded by the board of the Mass Development Finance Agency, are selected on a competitive basis to provide essential funding to non-profit cultural organizations, municipalities, and institutions of higher education to support their efforts to preserve and maintain cultural facilities. This program, initially created in 2006 by the Massachusetts Legislature, is a vital tool in providing investments in cultural and historical attractions across the state. Grant awards are based on a variety factors including community and financial need, benefit to the local and regional tourism market, and local support for the project. All grants from the Fund must be matched with cash contributions from the private or public sector.
Chapter 29, Section 6 states "The operating budget shall indicate the number of positions proposed to be authorized for each state agency or such other public instrumentality for the ensuing fiscal year, the number of positions for each state agency in the current and ensuing fiscal years and such other information as may be held to explain the anticipated results of the proposed expenditures". Thus, H.2 should include the historical and projected number of Full Time Equivalents (FTEs) for each agency.
The FY09 H.2 budget recommendations include funding for 68,509 FTEs across state government. This represents an increase of 0.48% (330) over the January 5, 2008 employment levels.
|Government Area||June |
|Administration & Finance||2,848||2,929||2,791||2,858||2,968|
|Energy & Environmental Affairs||2,108||2,201||2,168||2,199||2,371|
|Health & Human Services||21,116||21,055||21,117||21,338||21,635|
|Housing & Economic Development||580||585||610||627||687|
|Labor & Workforce Development||324||323||320||334||343|
|FY08-FY09 % Growth||1.12%||1.60%||2.55%||0.48%|
|Note: If County Sheriffs legislation is enacted, an additional 2,800 FTEs will be added in fiscal year 2009. This will increase the growth rate between fiscal year 2008 - fiscal year 2009 to 4.4%.|
The additional hires can be attributed to critical investments made in the FY08 GAA and specific items included in the H.2 recommendations. Staffing level increases have been funded for the following reasons:
- Policy Change / Initiative - FY09 H.2 recommends some additional employees that coincide with changes and consolidations of line items. One example of an initiative that is included in H.2 is legislation to bring County Sheriffs departments on as state employees. This would increase the total FTE level in H.2 by approximately 2,800 employees for the 7 County Sheriff Departments. Other initiatives include requiring 40 additional employees at the Judiciary consistent with staffing levels recommended by the Monan Report; and 25 new employees at the Division of Banks for the mortgage loan originator legislation enacted in FY09, among others.
- Targeted Investments - The Governor includes specific investments in the budget that will require additional staff to implement. Examples of these investments would include 146 across the Environmental Agencies consistent with the Beaches Commission recommendations and to implement regulations passed in FY08 for a Regional Greenhouse Gas initiative; 130 at the Department of Revenue to implement enhanced tax enforcement; 70 for additional Social Workers at the Department of Social Services to address staff to case ratio levels; and 45 across our Education agencies to assist in the investments made to continue to develop our world class education system.
- Contractor / Capital Conversions - Given the cost associated with paying for employees from capital funds and the renewed focus on wage enforcement efforts, every effort was made to convert contract employees to full-time equivalents, and to transfer employees onto the operating budget. Additionally, H.2 includes an outside section that will increase this amount as costs will be converted between the capital and operating budgets to move more employees off of the high cost capital payroll. (Capital FTEs are not new state employees, they are just new to the operating budget.)
- Critical Hires for Public Health and Safety - Certain direct care and safety staffing positions in specific departments often work with our state's most vulnerable populations, it is critical that staffing levels are maintained so that the most qualified, trained, and experienced staff are helping our state's residents in areas of Public Health, Mental Health and Mental Retardation.
- Backfills - Every organization has natural turnover of staff as personnel leave and are replaced. At any given time, a payroll snapshot will be incomplete because it does not capture the open positions which are being recruited. Responsible budgeting includes those funding for those critical hires, but the reality may be that the position goes unfilled, or once that position is hired, another position is vacated.
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