Debt Service

Debt Service

Debt service is a significant component of the operating budget and arises from the issuance of debt to finance the Commonwealth’s capital investment plan.  The Patrick-Murray Administration recognizes the need for increased capital investment as a means to create jobs in the near term and create the environment needed to support job creation and economic growth over the long term.  The Administration also recognizes that the level of annual borrowing to support these capital investments must be set at affordable levels.

Debt Service Generally

Although a portion of the Commonwealth’s capital investments is funded from federal grants and other sources, including the American Recovery and Reinvestment Act of 2009, 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 obligates future annual operating revenue for repayment of the bonds.  Debt service is the annual payment of principal and interest on these borrowed funds.

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 the Executive Office for Administration and Finance (A&F), allocates the proceeds of the bonds to support authorized projects and monitors spending.

Fiscal Year 2011 Debt Service Budget

The Commonwealth’s budget includes several line items for the payment of debt service or other debt-like obligations, as described below.

Line Item

Description

FY11 Budget

0699-0015

Consolidated Long-Term Debt Service

For the payment of principal and interest on general obligation bonds (secured by a pledge of the full faith and credit of the Commonwealth) and special obligation bonds (secured by a pledge of receipts credited to the Commonwealth Transportation Fund (formerly the Highway Fund).

$1.63 billion, net of $299 million refinancing described below.

0699-9100

Short Term Debt Service

For the payment of interest on bond and revenue anticipation notes and for the payment of the fees associated with the costs of liquidity or credit support on outstanding variable rate notes and commercial paper.  Also for the payment of costs of issuance on bonds and bond and revenue anticipation notes.

$67.0 million

0699-0016

Accelerated Bridge Program

For the payment of principal and interest on bonds and grant anticipation notes issued to finance the Accelerated Bridge Program. 

$40.0 million

0699-2004

Central Artery/Tunnel Debt Service

For the payment of principal and interest on bonds issued to finance the Central Artery/Tunnel project. 

$90.1 million

0699-9101

Grant Anticipation Notes Debt Service

For the payment to a trust account of interest due on federal grant anticipation notes.  The principal of such notes is paid by future federal highway construction grants. 

$35.9 million

1599-0093

Water Pollution Abatement Trust

Contract Assistance

Funds the Commonwealth’s general obligation commitment to provide debt service assistance to bonds issued by the Water Pollution Abatement Trust that fund water infrastructure projects throughout the Commonwealth through the State Revolving Fund programs capitalized by federal grants and state matching funds.

$67.9 million

0599-1970 Massachusetts Turnpike Authority Contract Assistance

Funds the Commonwealth’s commitment to make contract assistance payments to Turnpike Authority or the Massachusetts Department of Transportation, as appropriate, for the purposes of defraying costs, including relating to operation and maintenance of certain roadways in the Metropolitan Highway System that were formerly maintained by the Commonwealth and debt service. 

$125.0 million

1599-0050

Route 3 North Contract Assistance

Funds the Commonwealth’s payment obligations associated with bonds issued to finance Route 3 North improvements.

$9.6 million

Refinancing Commonwealth Debt

As part of a comprehensive approach to managing the budget through the current economic challenge, the Governor is filing legislation that will allow the refinancing of $300 million of debt due in fiscal year 2011.  This will provide two benefits: 

  1. Smoothing an abnormal peak in debt service costs in FY11.  As a result of an unusual peak in outstanding principal due, and a steep increase in the cost of bank liquidity, the maintenance estimate for FY11 Commonwealth debt service jumps $201.7 million from our current expectation for FY10.  The Administration proposes refinancing $200 million of general obligation debt due in FY11 in order to “smooth” the total debt service profile over the next seven years.  Short term interest rates are currently very low.  Based on the current market, the cost of this strategy is estimated to be $1.2 million, present value, at an average interest rate of 2.1%.
  2. 2. Budgetary Relief. Because short-term interest rates remain low, refinancing an additional $100 million of principal due in FY11 is an inexpensive strategy to achieve additional budgetary relief, when compared to other financial strategies such as using additional Stabilization Funds or adjusting the pension schedule.  The Administration would undertake this transaction only if needed, following the October 2010 revenue estimate revision.  The combined cost of both the “smoothing” transaction and the “budgetary relief” transaction would be $2.5 million at a 2.1% interest rate.

See the “Debt Refinancing” section in the Budget Development section for more information regarding this proposal. 

Limitation on Commonwealth Debt

Statutory Debt Limits – Legislation enacted in December 1989 restricts the amount of the Commonwealth’s outstanding direct debt (M.G.L. Chapter 29, Section 60A).  This legislation imposed a “statutory debt limit” of $6.8 billion in fiscal year 1991 and set the limit for each subsequent year at 105% of the previous fiscal year’s limit.  The statutory debt limit is calculated according to certain rules and excludes several direct and contingent obligations of the Commonwealth.  The statutory debt limit on “direct” debt during fiscal year 2009 was approximately $16.4 billion, and the Commonwealth’s outstanding direct debt subject to the limit at June 30, 2009 was $14.7 billion.

Legislation enacted in January 1990 imposes a limit on debt service appropriations in Commonwealth operating budgets (M.G.L. Chapter 29, Section 60B).  No more than 10% of total budgeted appropriations may be spent on debt service (both interest and principal) on Commonwealth general obligation debt in any fiscal year.  Payments on debt not subject to the statutory debt limit described above are also excluded from the debt service limit.  In fiscal year 2009, budgeted debt service on debt subject to this limit was approximately $1.6 billion, representing 5.2% of total budgeted expenditures, which were approximately $30.7 billion.

Administrative Bond Cap – The statutory debt limit and debt service limits represent only an upper limit on the amount of direct debt the Commonwealth may incur, and they do not count many types of Commonwealth debt and debt-like obligations (e.g., contract assistance liabilities).  Since fiscal year 1991, A&F has established an “administrative bond cap” to limit annual bond issuance to affordable levels.  Prior to the Patrick-Murray Administration, the stated bond cap was not based on transparent, analytical measures of affordability.

Debt Affordability

The Patrick-Murray Administration is the first to engage in an affordability analysis which has resulted in 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 at 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 to fund the regular capital program is limited to not more than $125 million per year.  This policy ensures that the annual borrowing limit is informed by changing fiscal conditions – such as the challenging current economic conditions we have face for the last two fiscal years.

A $3 billion capital investment program, known as the Accelerated Structurally Deficient Bridge Program, was authorized in 2008 to rehabilitate and repair bridges in the Commonwealth that are structurally deficient or that would otherwise become structurally deficient within the next few years.  In an effort to achieve the public safety and cost savings benefits through the acceleration of investment in these bridges, the amounts to be borrowed for the Program will be in addition to the annual bond cap.  The debt service impact of financing the Program has, however, been taken into account for purposes of determining the affordable level of debt to fund the regular capital program.

The Administration will revisit the debt affordability analysis at least each year to reflect fluctuations in interest rates, revenues, and other changes impacting the Commonwealth’s debt capacity.  See “Debt Affordability Analysis” at mass.gov/capital for more information.