Treasury officials discuss state debt, rating agency concerns

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STATE HOUSE — Months after being left frustrated by the Baker administration’s performance before his committee, a key House Democrat on Thursday resumed his questioning over the governor’s decision to limit capital spending – this time with a Treasury official.

Rep. Antonio Cabral, a New Bedford Democrat and chair of the House Bonding Committee, queried Assistant Treasurer for Debt Management Sue Perez on whether the Baker administration’s decision to freeze general borrowing in fiscal 2016 at $2.125 billion had any impact on the bond rating agency views of Massachusetts.

“I just wanted to see if it made sense. Sometimes it does, sometimes it doesn’t, but we don’t get to make those decisions, we just have to live with them,” Cabral said during a lightly attended hearing of his committee.

Perez said she didn’t think the rating agencies saw it as a positive or a negative. “I don’t think it’s been a highlight with them,” she told the committee.

Perez, who was joined by deputy assistant treasurer Drew Smith, appeared before the committee to present on the state’s long-term debt outlook, offering an overview of the state’s borrowing obligations.

Cabral used much of his time with Perez to see if he could get her to offer some kind of rationale or rebuttal of the administration’s policy in its first year in office to freeze borrowing. The Baker administration in June released a $4.1 billion capital spending plan for fiscal 2016 that included $2.125 billion in general obligation bonds, the same amount authorized last year, marking the first time in six years that the state’s bond cap won’t increase by $125 million over the previous year.

“We’ve had some difficulty getting some candor about these issues,” Cabral said.

Rep. David Vieira, an East Falmouth Republican and the only other member of the committee to stay throughout the hearing, seemed to push back on behalf of the administration, asking Perez instead whether the rating agencies might have looked favorably on the fact a new governor wanted to pause spending growth until he could feel comfortable with the level of debt the state was assuming.

Perez and Smith, again, said it was not something that came up in conversations with the three major rating agencies – Moody’s, Fitch and Standard and Poor’s.
Cabral said the suggestion that the state is overspending in its capital investment programs is “just an idea in some people’s minds.”

“The facts don’t speak to that. The numbers don’t speak to that,” Cabral said, later adding, “We are clearly not spending more than we ought to be spending.”

Cabral pursued a similar line of questioning in June when Administration and Finance Secretary Kristen Lepore went before the committee to testify on the administration’s capital plan and told lawmakers that additional borrowing could “crowd out” resources available for local aid and education. Lawmakers later vented frustration when Lepore left the hearing after an hour, before they were finished with questioning.

“The more we borrow now, the less we have available in the operating budget to spend on discretionary spending and the capital program, as you know, has grown significantly in the last few years,” she said.

Perez said that the state’s general obligation principal debt has grown at an annual rate of 4.4 percent over the last decade, and debt service has grown 4.1 percent, with $21 billion in outstanding debt.

Bond debt service accounts for about 6 percent of the fiscal 2016 state budget, according to Treasury, below the 8 percent cap.

“There is room if we wanted to do further investment and take advantage of the low interest rates,” Cabral said.

While Massachusetts ranks second in the country for debt per capita and fifth in terms of overall debt, Perez said the high debt load can be partially explained by the fact that the state is responsible for all borrowing for local projects – such as Chapter 90 road repairs – when other states rely on local or county government to do their own borrowing.

Next to low interest rates, which the Treasury expects to continue, Perez said maintaining the state’s bond ratings is the best way to keep borrowing costs low.

Among the strengths of Massachusetts, Perez and Smith said, the rating agencies look favorably on the size of the state’s stabilization account, its debt management policies, the diversified economy and the relative high wealth and education levels of residents.

On the negative side, Smith said the rating agencies are very interested “at the moment” in unfunded pension and retiree benefit liabilities. “The numbers there are what they are,” he said.

The use of “rainy day” funds to balance the budget during times of economic growth, as well as the suspension of automatic deposits into reserves are also viewed negatively, he said.

For the first time in years, Baker and the Legislature agreed to a budget in fiscal 2016 that did not rely on reserves, but they have twice suspended the automatic deposit to the rainy day fund of capital gains revenues above $1 billion to stabilize the fiscal 2015 budget and balance the fiscal 2016 budget.

The House and Senate on Wednesday passed a bill to close the books on fiscal 2015 that made a $120 million deposit into the “rainy day” fund, and Ways and Means Chair Brian Dempsey said it was important to replenish that fund, which helped the state weather the economic collapse in 2008. The deposit pushed the balance to approximately $1.25 billion.

“It’s great that we deposit but they’d rather not see a deposit if you’re ultimately going to take it out,” Perez said.

The Treasury Department is preparing to sell $450 million in Commonwealth Transportation Fund bonds next week, the first bond issued through that program of $1.86 billion authorized through 2020 to finance the new rail enhancement program.

Those bonds, according to officials, will be used to pay for projects such as the purchase of new Red Line and Orange Line cars, the Green Line Extension, the Knowledge Corridor rail extension, South Station improvements and South Coast Rail.

— Written by Matt Murphy

Copyright State House News Service