Because the capital program is funded primarily through bond proceeds, the total size of the capital program is determined primarily by the amount of debt the Commonwealth can afford to issue. Since FY91, A&F has established what is known as the “bond cap” to limit annual bond issuance in support of the capital program to affordable levels. For the fourth consecutive year, the Patrick-Murray Administration engaged in a rigorous analysis of the state’s outstanding debt within affordable levels. Based on this analysis, the Administration has established the FY11 bond cap at $1.625 billion, $1.75 billion for FY12, $1.875 billion for FY13, $2.0 billion for FY14 and $2.125 billion for FY15. A complete description of the Administration’s debt affordability analysis and policy is attached as Appendix A.
In summary, the Administration takes a fiscally responsible approach to setting the annual bond cap, analyzing the Commonwealth’s capacity for debt issuance from the point of view of affordability. Specifically, the Executive Office for Administration and Finance (A&F) sets annual constraints on both the size of the bond cap and its future rate of growth.
For purposes of its analysis of existing payment obligations, A&F takes into account not only debt service on general obligation bonds, but also debt service on certain special obligations, contract assistance obligations and certain capital lease payments. Although the accelerated bridge program is being carried out in addition to the regular capital program in order to achieve savings from avoided cost inflation and deferred maintenance and to achieve the other objectives of the program, the debt service resulting from the bridge program is also taken into account within the 8% limit under the debt affordability analysis. (See description of the Accelerated Bridge Program, below.)
A&F 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. A&F models future debt issuance using fiscally conservative assumptions about interest rates, maturities, dates of issuance and market conditions.
Based on this analytic approach, A&F has projected that the Commonwealth will have the capacity to accommodate steady increases in the bond cap over the next four years – albeit at lower base levels than originally planned due to economic conditions – while maintaining the percentage of the Commonwealth’s budgeted revenues needed to pay debt service during that period below 8%.
The Patrick-Murray Administration intends to limit the total amount of virtually all future bond-funded capital projects to the bond cap. As described in Appendix A, however, 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 a dedicated stream of new, project-related revenues can be identified to support debt service costs related to those projects.
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 A&F examines the administrative bond cap and the state’s capacity for additional borrowing. 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.