Debt Affordability Committee 1 Debt Affordability Committee August 15, 2013

Debt Affordability Committee 2 On or before September 10 of each year, the committee shall submit to the governor and the general court the committees estimate of the total amount of new commonwealth debt that prudently may be authorized for the next fiscal year The committee shall review on a continuing basis the size and condition of the commonwealth tax supported debt as well as other debt of any authority of the commonwealth…The estimate shall be made available electronically and prominently displayed on the official website of the commonwealth. -Massachusetts General Laws Chapter 29 Section 60B Debt Affordability Committees Charge

Debt Affordability Committee 3 Meeting Topics 1.Introductions – April 26, Tax Supported Debt – May 17, 2013 a.Tax Supported Debt Part 2 – May 31, Debt Ratio Comparisons – June 20, Debt Service and Authorizations – July 17, 2013 a.Public Hearing – July 17, Preliminary Recommendation – July 31, Recommendation – August 15, Final Report – September 4, 2013

Debt Affordability Committee 4 Introduction of attendees Vote on Minutes of July 31, 2013 Meeting Final Debt Ratio Review Historical Debt Ratios Current Administration Policies Rating Agency Review Recommendation Topics for Future Consideration Next meeting Todays Agenda

Debt Affordability Committee 5 July 31, 2013 – VOTE Minutes

Debt Affordability Committee 6 Pertinent Debt Ratios Statute –Debt service to General Fund revenues –Debt to personal income –Debt to estimated full-value of property –Debt per capita Other –Debt as a % of GDP –Debt service as a % of total expenditures –Debt service as a % of tax levy

Debt Affordability Committee 7 Debt Service to General Fund Revenues *Not included moral obligation debt at $4.5 billion ** "Annual Debt Service" assumes the FY13 projection as footnoted as no debt service was listed for 2012

Debt Affordability Committee 8 Update on County Debt Research and Debt Service Scenarios

Debt Affordability Committee 9 Debt as a % of Budget Revenues (historical and projected)

Debt Affordability Committee 10 Debt as a % of Budgeted Expenditures (historical and projected)

Debt Affordability Committee 11 Administration Affordability Assumptions Maximum Debt Service of 8% of Budgeted Revenues $125 million maximum increase of bond cap per year 2/3 issued as 20-year debt; 1/3 issued as 30-year debt Interest Rate:4.25% % Level Debt Service Rate of Revenue Growth

Debt Affordability Committee 12 Patrick Administration Long-Term Fiscal Policy Framework In May 2012, the Patrick Administration released the Administrations Long-Term Fiscal Policy Framework. The Long-Term Fiscal Policy Framework included three goals: –(1) structural balance; –(2) sustainable spending growth; and –(3) disciplined management of long-term liabilities. This Framework assumed debt service would grow at a rate of 4.4% per year. Using the Patrick Administrations FY2013-FY2017 Capital Investment Plan and debt affordability analysis assumptions, debt service will grow an average of 2.2% per year from FY2015-FY2019.

Debt Affordability Committee 13 Rating Sustainability: Standard & Poors Supporting factors for the Commonwealths rating include: –Ongoing progress in improving financial, debt, and budget management, –Formalized policies relating to debt affordability as well as multiyear capital investment and financial planning which are key improvements from a credit standpoint –A healthy budget stabilization fund (BSF) balance, has been key to managing budget volatility –High wealth and income levels; and –Deep and diverse economy, which continues to experience steady economic recovery. From Standard & Poors rating affirmation published May 23, 2013.

Debt Affordability Committee 14 Offsetting considerations to the Commonwealths rating: –high debt burden and significant unfunded pension and other postemployment benefit (OPEB) liabilities – View Massachusetts' total postretirement liabilities as relatively high, the commonwealth has been actively managing these liabilities with a focus on cost control and reform in recent years. –After significant contributions to the stabilization fund in 2011 and 2012, the expected use of reserves in the current fiscal year and planned reduction under the governor's proposed budget would diminish flexibility; [A&F Update] The required deposit of $501 million to the Stabilization Fund for FY13 brings the Fund's year-end balance to $1.603 billion - within $49 million of the balance from the beginning of FY13. The net withdrawal for FY14 is predicted to be $230.7 million. Rating Sustainability: Standard & Poors From Standard & Poors rating affirmation published May 23, 2013.

Debt Affordability Committee 15 Rating Sustainability: Stabilization Fund

Debt Affordability Committee 16 Recommendations Definition of Affordability: The ability to meet debt service requirements without raising tax rates to uncompetitive levels and without negatively impacting the provision of critical public services.

Debt Affordability Committee 17 Recommendations The Committee recommends an amount of between $__ billion and $__ billion as being the total amount of new Commonwealth debt that may be prudently issued in FY15 –Results in projected debt service in the range of $_____ billion in FY15, which is ___% of projected budgeted revenues –This amount of additional debt service is not predicted to cause the Commonwealth to raise tax rates nor negatively impact the provision of critical public services

Debt Affordability Committee 18 Topics for Future Consideration Pensions OPEB Ratings Other Topics

Debt Affordability Committee 19 Next Meeting Topics September 4th –Vote to finalize Report