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Fiscal Year 2010-2014 Debt Issuance Modeling

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In analyzing potential levels of debt issuance to fund the Commonwealth’s capital spending plan for the next five years, the Patrick-Murray Administration has made the following conservative and fiscally responsible assumptions:

• 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.  Similarly, any debt required to be issued to fund amounts expended in fiscal year 2009 that have not yet been reimbursed with bond proceeds is assumed to be issued at the start of fiscal year 2010.  These assumptions are conservative for modeling purposes, as they result in the debt service impact of bonds issued in a fiscal year being assumed as early as possible.

• Term of Debt.  Although the Commonwealth has the statutory authority to issue virtually all of its authorized debt for a term of up to 30 years and the useful life of significantly more than one-third of the Commonwealth’s annual capital investments are for assets with a useful life of 30 years or longer, 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.  Consequently, 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.  For the Bridge Program financing, all of the federal grant anticipation notes are expected to be paid by fiscal year 2021 and this analysis assumes that one-third of the special obligation gas tax bonds will have a 30-year term and two-thirds will have a 20-year term. 

• Interest Rates.  The interest rate used for 20-year debt and for the federal grant anticipation notes for the Bridge Program is 4.63%, which is the average of the Bond Buyer 11 Index[1] for the 24-month period ending August 30, 2009; the interest rate used to model the 30-year debt is 4.80%, reflecting the approximate spread between 20 and 30-year general obligation bonds as of August 2009 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.  The principal on the federal grant anticipation notes issued to finance a portion of the Bridge Program is assumed to be payable in the aggregate amount of $150 million each year in fiscal years 2015 through 2021.

• Carry Forward of Unused Bond Cap.  It is estimated that there will be at least $150 million of unused bond cap from fiscal year 2009 that will carry forward and be available for capital investments in the current fiscal year.  This analysis assumes that there will be no unused bond cap in fiscal year 2010 or any future fiscal year that will be carried forward and available for spending in a subsequent year.  To the extent that there is unused bond cap in fiscal year 2010 or in future years, these amounts will be carried forward and considered available for the next year’s capital budget, since the affordability analysis takes into account the full amount of the annual bond cap being issued at the start of each fiscal year.

In setting the annual administrative bond cap, the Administration has established a policy which sets a cap that will ensure debt service does not exceed 8% of annual budgeted revenues.  By keeping total annual debt service within this limit, the Administration will be able to maximize needed capital investments while ensuring that debt service levels remain affordable. 

For purposes of constraining growth in debt, the Administration has placed another restriction on its debt capacity model: growth in the annual bond cap for the regular capital program is limited to not more than $125 million each year (excluding carry forwards of unused bond cap from prior years).  This limit will apply even if in some years the actual revenue growth projection provides capacity to issue a greater amount of debt.  This additional 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. 

As shown in the table below, funding the annual bond cap and the Bridge Program in the amounts shown, together with the existing obligations, results in total annual debt service as a percent of budgeted revenues within the 8% limit described above[2]. The fiscal year 2010 bond cap is comprised of $1.5 billion plus $150 million of unused bond cap carried forward from fiscal year 2009.

Table 7
Projected Annual Debt Service as a Percentage of Budgeted Revenues
Fiscal Years 2009-2014
(in thousands)

	Projected Capital Spending		Debt Service
Fiscal Year	Annual Bond Cap	Annual Bridge Prog.	Total Existing Obligations	Cumulative New Debt Service from Annual Bond Cap	Cumulative New Debt Service from Bridge Program	Total Annual Debt Service	Budgeted Revenue Growth 2.66% per year after FY10	Total Annual Debt Service as % of Revenues
2009	1,577,000	100,504	2,026,370	17,898	0	2,044,268	29,608,733	6.90%
2010	1,650,000	357,305	2,169,301	35,128	10,842	2,215,272	29,370,942	7.54%
2011	1,625,000	525,529	2,013,460	153,207	48,650	2,215,317	30,298,677	7.31%
2012	1,750,000	688,660	2,025,302	273,969	91,307	2,390,578	31,104,291	7.69%
2013	1,875,000	668,444	1,853,811	404,519	132,927	2,391,257	31,931,577	7.49%
2014	2,000,000	357,140	1,785,683	544,345	164,235	2,494,262	32,781,022	7.61%

 

The annual bond cap amounts reflected in the table above are less than had been previously projected in the prior five-year capital spending plans published by the Patrick-Murray Administration.  The reduction in the annual bond caps is a function of the Administration’s disciplined approach to debt management through its formal debt affordability analysis and policy.  The debt affordability analysis and policy ensure that planned borrowing to fund capital investments is periodically adjusted to take into account the Commonwealth’s fiscal condition and capacity to pay debt.  The following table shows the reductions in the annual bond caps from the Administration’s original five-year capital spending plan resulting from the application of the Administration’s debt affordability analysis and policy.

 

Table 8
Bond Cap Compared with Prior Five-Year Capital Investment Plans
(in thousands)

Fiscal Year	FY08-12 Plan	FY09-13 Plan	Difference Between FY09 and FY08	FY10-14 Plan	Difference Between FY10 and FY08
2008	1,661,000	1,319,600	-341,400	1,319,600	-341,400
2009	1,625,000	1,727,000	102,000	1,577,000	-48,000
2010	1,750,000	1,726,100	-23,900	1,650,000	-100,000
2011	1,875,000	1,762,600	-112,400	1,625,000	-250,000
2012	2,000,000	1,800,000	-200,000	1,750,000	-250,000
2013	2,000,000	1,900,000	-100,000	1,875,000	-125,000
2014	2,000,000	2,000,000	0	2,000,000	0
Totals			-675,700		-1,114,400

The Patrick-Murray Administration will revisit the assumptions underlying this affordability model at least once each year as part of the development of the following fiscal year’s capital plan to adjust the model’s assumptions as needed to reflect new trends in revenue growth, interest rates, and other factors.  As a part of this annual review, the Administration will also reassess the debt capacity model as a whole, including the limitation of keeping debt service below 8% of budgeted revenues and the additional limitation of keeping maximum annual bond cap increases for the regular capital program to the levels prescribed in this report, to ensure that it continues to be an appropriate and responsible model for measuring the Commonwealth’s debt capacity in the future.