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Capital Outlay

 

During the late 1980s, capital expenditures grew substantially, from roughly $600 million in Fiscal Year 1987 to approximately $971 million in Fiscal Year 1989. In Fiscal Year 1990, a sizable operating deficit necessitated the issuance of approximately $1.4 billion in Fiscal Recovery Bonds authorized under the Commonwealth Fiscal Recovery Loan Act of 1990 to be repaid no later than December 31, 1997. This sizable debt issue contributed approximately $275 million of additional annual debt service expenditures to the Commonwealth's operating budget, spending that could not fund other Administration priorities. In order to contain the Commonwealth's debt burden and limit the growth in debt service expenditures imposed on the operating budget, the Weld/Cellucci Administration implemented a rolling five-year capital spending plan in August, 1991.

The five-year capital plan is an administrative guideline subject to amendment by the Governor at any time, that sets forth capital spending allocations for a period of five fiscal years. The plan limits capital spending to an average of $900 million per year on a rolling five year basis, which is intended to limit the growth in Commonwealth debt outstanding to an average of 2% over any five-year period. Assuming an inflation rate of at least 2% per year, this debt policy prevents the Commonwealth's debt burden from growing in real terms. To the extent that inflation exceeds 2% per year and/or the state's economy grows in real terms, this policy enables the Commonwealth to modestly reduce its outstanding debt burden when measured as a percentage of gross state product or total personal income.

Under the Weld/Cellucci Administration, the annual percentage growth in debt outstanding has dropped from 29% in Fiscal Year 1991 to 2% in Fiscal Year 1996. Aggressive management of capital spending has been one of the reasons that the Commonwealth's bond rating has been increased by all three bond rating agencies several times since 1990.

On May 13, 1996, the Executive Office for Administration and Finance (EOAF) published an Administrative Bulletin to formalize procedures for capital spending management. This Bulletin defined capital spending, named the coordinating agencies for infrastructure and information technology capital spending, defined the process for annual agency submission of capital spending plans to EOAF for consideration in the five-year capital plan, provided parameters for monitoring capital spending and sanctions for non-compliance with the Bulletin, and defined the process for requesting allotments from capital appropriation accounts. EOAF has adhered to the schedule outlined in the Bulletin for soliciting and approving agency capital spending plans for the development of the Administration's five-year capital plan.

The limitation on capital spending is carefully considered when the Weld/Cellucci Administration determines which capital projects to initiate. The Administration is committed to long-term investments that will improve and sustain the Commonwealth infrastructure well into the next century. The priority is on projects that provide economic development opportunities, including transportation improvements, improvements in higher education, increased public safety, and open space for recreation and conservation.

Although the Administration's five-year capital plan focuses on the $900 million in state-supported spending in Fiscal Year 1998, the Commonwealth has access to approximately $1.5 billion in federal highway and public transportation assistance and $200 million in transportation funding for the proposed Metropolitan Highway System. Including $301 million in MBTA capital spending, the Commonwealth has a total proposed capital budget of $2.9 billion in Fiscal Year 1998.

Recent Bond Bills and Initiatives

From Calendar Year 1995 to Calendar Year 1996, several major capital spending authorizations were presented by the Weld/Cellucci Administration and approved by the Legislature. These bond bills, totaling $5.7 billion, including federal highway funding, represent a strong commitment by the Administration to areas such as information technology, environmental clean-up and improvement, public safety, seaport revitalization, and transportation.

Information Technology

$314 million for the acquisition, upgrade, development, and implementation of comprehensive integrated information technology systems.

$75 million for the acquisition, upgrade, development, and implementation of a comprehensive integrated information system for trial courts in the Commonwealth.

Higher Education

$617 million for repairs, renovations, deferred maintenance, and new construction at state universities, state colleges, and community colleges.

Environment

$399 million for environmental enhancement and open space protection.

$30 million for the acquisition and protection of lands fronting on the Commonwealth's rivers and streams.

Prisons

$486 million for prison expansion, upgrades, renovations, and repairs at the Commonwealth's state and county prisons.

Economic Development

$280 million for development and improvements to the Commonwealth's seaports, including rail doublestacking initiatives.

Transportation

$3.1 billion for an accelerated transportation development and improvement program, which includes projected federal matching funds.

$400 million in highway funds for the Metropolitan Highway System.

Central Artery and Third Harbor Tunnel Project

By far the largest capital project of the Weld/Cellucci Administration, in terms of size, duration, and spending is the Central Artery/Third Harbor Tunnel Project (CA/T). The CA/T Project is one of the largest and most complex public works projects in the history of the United States. The total estimated project cost is $10.4 billion (including federal spending) over the life of the project, including $5.5 billion remaining to be spent between October 1, 1996 and project completion in 2004.

On October 1, 1996 the Commonwealth submitted a Finance Plan to the Federal Highway Administration (FHWA), which was accepted by the FHWA in late November, 1996, without significant modification. However, the FHWA did state that it would not authorize new contract encumbrances relying on federal aid after April 1, 1997 unless the Commonwealth formally adopted a structure and mechanism that would provide financing for the non-federal share and ensure that sufficient cash was available at all times to meet contract payment obligations as they become due.

As required by statute, the Weld/Cellucci Administration submitted to the General Court on December 1, 1996, a study completed by a consultant team which identifies many different methods to achieve these financial objectives.  (1)   The key provision of the plan is passage of legislation, which was submitted on January 6, 1997, creating the Metropolitan Highway System. This will provide for the orderly development and operation of the CA/T Project, with substantial financial assistance from the Massachusetts Turnpike Authority, as well as significant involvement by the Massachusetts Port Authority.

Proposed Bond Bills for 1997

In addition to the bond bills already passed, the Governor and Lieutenant Governor plan to file, by the Spring of 1997, the following bond bills:

An Act Providing For Certain Commonwealth Transportation Upgrade and Improvement Programs.

In 1997, the Administration will file a new Transportation Bond Bill. This bill will authorize additional state appropriations necessary to complete the CA/T Project, as well as additional appropriations necessary for the statewide road and bridge program. It will also include the language necessary to authorize the Commonwealth to use federal revenue anticipation note financing as a component of the CA/T finance plan. Federal revenue anticipation note financing has been used successfully in other states to smooth project cash flows in years when project disbursements exceed federal grants, by borrowing against a portion of federal grants to be received in future years.

An Act Relative to Compliance with Life Safety Codes, Remediation of Environmental Hazards, and the Preservation and Management of the Commonwealth's Real Property Assets.

This legislation provides $125 million to the Division of Capital Planning and Operations for the maintenance and repair of the Commonwealth's public buildings to bring them into compliance with various federal and state requirements. This legislation will enable the Commonwealth to meet certain requirements including sprinklers for its high-rise buildings; environmental laws and regulations; the Americans with Disabilities Act; and scheduled repair and maintenance of state buildings. The bill will replenish existing general repair accounts that have been virtually depleted of funds.

An Act Relative to the Renovation, Reconstruction and Repair of Commonwealth Court Houses.

This legislation will reinforce the Administration's commitment to the Commonwealth's system of civil and criminal justice by authorizing a $583 million capital plan to acquire, construct, renovate, and repair courthouse facilities in the Commonwealth.

An Act Providing for the Development and Operation of the Devens Commerce Center.

Chapter 498 of the Acts of 1993 assigned to the Massachusetts Government Land Bank, in concert with the Towns of Ayer, Harvard, and Shirley, the responsibility for converting Fort Devens to civilian use, and developing the property into a major mixed use asset for the North Central Region of the Commonwealth. Chapter 498 expressly committed up to $200 million of state capital resources to the development, but did not formally authorize state financing of debt to provide these resources, pending the adoption of a Reuse Plan by the surrounding towns. On December 7, 1994, the three towns passed, by overwhelming majorities at special town meetings, the Reuse Plan which the Land Bank is implementing.

All three towns relied on the commitment of state resources in approving the Reuse Plan. In November, 1996, the Legislature enacted Chapter 414 of the Acts of 1997 which authorized $3.75 million of state operating funds to be transferred to the Land Bank to support the operation of the Devens Commerce Center. This statute requires the subsequent enactment of a capital outlay bill to finance the operation and development of the Devens Commerce Center.

The bill will authorize traditional state general obligation bonds, together with Land Bank bonds to be issued pursuant to a contract for debt service assistance between the Land Bank and the State Treasurer. Prompt passage of this legislation will ensure that the Land Bank continues the major infrastructure development program at the Fort Devens site. The private sector response to the work already completed has been far above expectations, and the potential for the Devens Commerce Center to have a major positive impact on the regional and statewide economies can only be realized by prompt passage of the bill.

Conclusion

Continued investment in the Commonwealth's infrastructure and facilities is critical for Massachusetts to maintain its economic viability into the next century. This need for constant investment must be carefully balanced with fiscal responsibility and the Administration's strong desire to minimize future increases in the amount of outstanding Commonwealth debt. The $4.5 billion five-year capital spending plan limits the Commonwealth's debt burden by controlling the relationship between current capital spending and the issuance of Commonwealth bonds. While the Legislature authorizes capital spending through capital appropriations typically supported by bond authorizations, the Weld/Cellucci Administration controls the rate at which capital expenditures occur through its discretion over the allotment of capital expenditures which is limited to $900 million per year on a rolling five-year basis.

The fact that the state could support higher debt service costs during the current period of relative fiscal strength is comforting, but does not justify greater capital spending supported by Commonwealth debt. The state's fiscal condition may be subject to significant stress during periods of general economic decline or stagnation. Therefore, the Weld/Cellucci Administration must continue to exercise fiscal restraint to prevent long-term debt service costs from increasing to such a degree that rapid and severe program spending reductions are required to balance the operating budget during times of economic weakness.

1 Report of the Consultant Team on the Joint Feasibility Study Regarding the Metropolitan Highway System, Commonwealth Capital Partners, Inc., et. al., December 1996.



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Executive Office for Administration & Finance
Budget Bureau
State House, Room 272
Boston, MA 02133
(617) 727-2081


Last updated on January 22, 1997

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