Debt Service

The Patrick-Murray Administration’s capital investment program continues to be guided by three key principles: (1) affordability, (2) strategic prioritization of capital investments, and (3) transparency.  The Commonwealth faces a backlog of needed capital projects; at the same time, it faces the constraints of a challenging, albeit improving, economic climate and a high debt burden.  In light of these challenges, it is as critical as ever that the Commonwealth take a disciplined approach to capital budgeting that is guided by the three principles stated above. 

The Patrick-Murray Administration is the first Administration to develop a debt affordability analysis and policy to ensure that the amount of debt issued to fund the capital investment program is kept to affordable levels.  The debt affordability analysis is formally updated each year.  This report is the Administration’s sixth publication of the debt affordability analysis and five-year capital investment plan.  With respect to strategic prioritization of capital investments, the Patrick-Murray Administration is the first to engage in a thorough process of reviewing and prioritizing capital investment needs and developing a comprehensive five-year capital investment plan within the fiscal constraints prescribed by the debt affordability analysis and policy.  Finally, with respect to transparency, the Administration publishes its debt affordability analysis and its five-year capital investment plan (www.mass.gov/anf/budget-taxes-and-procurement/cap-finance/) in order to enhance public understanding of the Commonwealth’s capital investment program and thereby improve public discourse and accountability with respect to the capital budget. 

This debt affordability analysis addresses the first of the key principles guiding the Administration’s approach to capital budgeting – affordability.  The debt affordability analysis detailed below represents the analysis published in October 2012.  The Administration will continue to update this analysis at least annually to inform its annual capital budgeting process.

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.

In addition to reflecting the current fiscal environment, it is important that the debt affordability analysis continue to be based in part on longer-term, historic trends rather than simply being reactive to current economic conditions.  Trends reflecting experience over time are particularly relevant in the context of evaluating the affordability of long-term debt issued to fund investments in long-lived capital assets pursuant to a multi-year capital investment plan.

This debt affordability analysis is consistent with the basic analytical approach presented in the debt affordability analyses published previously.  All of the underlying assumptions have been reviewed and, where appropriate, updated to reflect new information and revised outlooks.

Based on the debt affordability analysis and policy, the Administration has set the annual borrowing limit - or “administrative bond cap” – to fund the Commonwealth’s regular capital budget for fiscal year 2013 at $1.875 billion.  This is the same bond cap level for fiscal year 2013 that was projected in the five-year capital investment plan published in November 2011. The Administration has conservatively constrained the bond cap in FY16 and FY17 at the FY15 level. Future debt affordability analysis may show sufficient revenue growth to allow increased bond cap in future plans.  The planned bond cap levels for fiscal years 2013 through 2017, together with the continuation of the planned borrowings for the Accelerated Bridge Program and self-supporting project financings, represent an affordable level of new debt that will allow the Commonwealth to responsibly invest in the general capital infrastructure needs of the state.