Mass. on track to hit its debt ceiling for the first time
By State House News Service | December 15, 2015, 14:12 EDT
STATE HOUSE — A sticking point in the D.C. donnybrook that led to a 2013 government shutdown, the national debt ceiling has become a perennial catalyst for political brinkmanship in Washington.
But Massachusetts has had its own debt ceiling since 1989, and the state is on track to hit it in the next fiscal year for the first time in the memories of state officials, according to the Executive Office of Administration and Finance and the state Treasury.
“With the proposed projected financing that we have, we will be bumping up against the statutory debt limit, if all comes to fruition, in fiscal year 2017, if there is no change to the statutory debt limit,” Assistant Treasurer for Debt Management Sue Perez told the News Service.
For the next fiscal year — which begins July 1, 2016 — the debt ceiling will be set at $21.735 billion, unless the Legislature decides to raise the limit.
The development could force the Baker administration and the Legislature to either revisit the debt limit or make difficult decisions about which capital projects to squeeze under that cap.
The state cannot issue debt in excess of the statutory debt limit, and hitting that limit would prevent the state from issuing certain types of bonds to pay for large-scale capital projects, therefore slowing spending on things like infrastructure improvements.
Since 1989, the state has had a statutory limit in place to cap the total amount of outstanding direct state debt. The limit automatically increases by 5 percent each year, and is fixed at $20.7 billion for the current fiscal year. As of Oct. 31, the state had approximately $20.3 billion in outstanding direct debt, according to state financial disclosure statements.
In August 2012, the Legislature amended state finance laws to change the definition of outstanding debt and effectively lowered the debt ceiling by more than $1 billion.
Jennifer Sullivan, the Baker administration’s assistant secretary for capital finance, said the state could stay below the debt ceiling in fiscal year 2017, only to hit it the following year.
“It’s unclear at this time what the spend rate will be in particular on the Rail Enhancement Program, so it may be that the statutory debt limit is not as much of an issue in (Fiscal Year) ’17 but maybe in the out years,” Sullivan said.
The Rail Enhancement Program, which both Sullivan and Perez acknowledged as a key contributor to the near-maximum debt level, was authorized in 2014 for $1.86 billion in bonding through 2020 to finance the Green Line Extension project, the purchase of new Red and Orange Line trains, the Knowledge Corridor rail extension, South Station improvements, and the South Coast commuter rail extension.
Not all state debt is subject to the statutory debt limit. When the Legislature passes a bond authorization bill, it can specify that the state can issue general obligation or special obligation bonds. Most special obligation bonds are exempt from the debt limit.
When the Legislature approved the bond package associated with its Accelerated Bridge Program it specifically exempted that debt from the limit. But the Legislature did not provide that same exclusion for debt generated from bonding for the Rail Enhancement Program, Sullivan said, despite it being a similar program.
Because it is not excluded from the debt ceiling, the Rail Enhancement Program, Perez said, is “the piece that tends to be putting us close to the limit.”
Secretary of Transportation Stephanie Pollack cautioned the MassDOT Board of Directors last month that the debt ceiling “is projected to constrain the issuance of transit special obligation bonds” during MassDOT’s five-year capital plan period, according to a copy of her report to the board.
Sullivan and Perez both said that the Executive Office of Administration and Finance, the Treasury and the Comptroller’s Office keep tabs on the state’s debt level, and have been monitoring its proximity to the debt ceiling and other controls designed to keep capital spending under control.
“It’s certainly been something we’ve been aware of and cognizant of when we’re planning. It’s better to know now than to panic the day before that level is reached,” Sullivan said. “This is a foreseeable issue based on our projections and has been foreseeable since 2014 when the Rail Enhancement Program bonds were authorized.”
Knowing the state’s debt load is nearing its limit, the Capital Debt Affordability Committee, which was established under the same 2012 law that effectively lowered the debt ceiling, on Tuesday noted in its recommendation for the amount of new state debt that “may be prudently authorized” for fiscal year 2017 that the debt ceiling “may constrain the affordable capital program without change in law.”
The committee — which includes Sullivan, Perez, a representative from the Comptroller’s Office, a MassDOT official and an outside capital planning expert — determined that the state can afford to issue $2.19 billion of bonding for capital spending next year, an increase of about $65 million or 3 percent over the current year.
To reach its recommendation, the committee used as a definition for debt affordability, “the ability to sustainably meet projected debt service within the budget without raising taxes to uncompetitive or negatively impacting critical public services.”
Sullivan encouraged Gov. Charlie Baker and lawmakers, in a letter to the governor and the House and Senate clerks, to view the committee’s recommendation as a starting point for their own determinations of affordable debt levels.
“Certain factors, such as increases or decreases in budgetary revenue or interest rates or specific emergent capital needs, may warrant more or less borrowing during the year than is initially recommended by the committee,” she wrote. “In addition, the statutory debt limit places a strict limit on outstanding qualifying debt of $21.8 billion for fiscal year 2017. The debt limit may constrain the affordable capital program without change in law.”
After at least five years of $125 million increases, the maximum allowable amount, the Baker administration last year held capital spending flat for fiscal year 2016. Gov. Baker also put a freeze on plans for a big expansion of the Boston Convention and Exhibition Center.
Even if the state were to keep capital bonding flat again, the debt ceiling would still present itself as an issue in fiscal 2017, Sullivan said.
If the state does hit the debt ceiling, state finance observers said, it could be something of a sign that the limit put in place by the Legislature is doing its job — holding debt at a pre-determined level and forcing lawmakers to invest wisely.
“Massachusetts is a high debt state and has been for quite a while. Lawmakers took some steps three years ago when they reduced the debt limit aware of that and trying to reduce our overall debt burden,” Massachusetts Taxpayers Foundation President Eileen McAnneny said. “If we’re up against that debt (limit) I think it does make us think twice about some of the capital projects we’re funding and if that is the optimal use of those dollars.”
— Written by Colin A. Young
Copyright State House News Service