State panel will recommend $70 million increase in capital spending

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BOSTON (STATE HOUSE) – Gov. Charlie Baker’s administration should boost state capital borrowing by no more than about 3 percent, a committee of state finance experts plans to recommend this week.

The Capital Debt Affordability Committee by Thursday is expected to report that Massachusetts can afford $2.26 billion of bonding for capital spending in fiscal year 2018, an increase of about $70 million or 3.2 percent over the current year, according to Executive Office of Administration and Finance officials.

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 levels or negatively impacting critical public services.”

The panel includes representatives of A&F, the Treasury, the comptroller, the Department of Transportation, an outside capital planning expert and others. It determined an administrative bond cap of $2.26 billion “balances demand for state infrastructure investment with recognition that increasing fixed obligations may limit fiscal flexibility in the future,” and the recommended level of debt “falls within targeted debt service to revenue ratio levels.”

If agreed to by Baker, the recommendation would keep the administration on a more conservative capital spending path compared to Gov. Charlie Baker’s prececessor, Gov. Deval Patrick. Those with a stake in capital spending are also monitoring President-elect Donald Trump infrastructure spending plans.

After at least five years of $125 million increases, the maximum allowable amount, the Baker administration held capital spending flat for fiscal 2016 and put a freeze on plans for a big expansion of the Boston Convention and Exhibition Center. Last year, the committee approved a $65 million, or 3 percent, increase in bonding for capital spending.

To get to its recommendation, the committee conducted an affordability analysis by measuring debt service spending as a percentage of budgeted revenue over the next 30 years. The formal policy, an A&F official said, requires that debt service not exceed 8 percent of budgeted revenue but the committee aims to keep it between 7 and 7.5 percent.

Assuming average revenue growth of 3.5 percent over 30 years and making what the A&F official described as “conservative” assumptions about the terms of debt issuance and interest rates, the committee concluded that its recommendation keeps debt service between 7 and 7.5 percent of budgeted revenue and keeps the projected discretionary budget above 25 percent of budgeted revenue.

And under A&F projections, the official said, the state’s statutory debt ceiling is unlikely to constrain the capital spending plan, thanks in large part to a recent change in law that moved some debt outside of the debt limit.

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 $21.7 billion for the current fiscal year.

As of Oct. 31, the state had approximately $25.2 billion in outstanding direct debt, according to state financial disclosure statements, $20 billion of which is subject to the debt limit.

A&F projects that Massachusetts will have $20.9 billion in outstanding debt subject to the limit at the end of this fiscal year. The debt ceiling will increase to $22.9 billion in fiscal 2018, which begins July 1, 2017.

Executive branch budget officials had projected that Massachusetts would hit the debt ceiling for the first time this fiscal year, but later said updated projections showed the state remaining just under the limit this fiscal year and bumping up against it in fiscal 2018.

The Legislature, on the last day of formal sessions this year, eliminated the debt ceiling as a cause for immediate concern.

A provision of a bill (H 4424) creating a new $50 million program to finance small bridge repairs exempted from the debt ceiling the Rail Enhancement Program — $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 — which budget trackers pointed to as a main reason the state was fast approaching its debt ceiling.

Sen. Brian Joyce, formerly chairman of the Senate Committee on Bonding, Capital Expenditures and State Assets, was the only legislator to vote against the bill, saying the decision to exempt the rail bonds from the debt ceiling “a bad idea, it is not necessary and it is not something we should have agreed to without rigorous review on the last day of the session.”

In September, the House Committee on Bonding, Capital Expenditures and State Assets concluded that because of low interest rates and the state’s AA+ bond rating, the cost of long-term borrowing “has not been as cheap as it is now in the lifetime of most people working in Massachusetts” and the state should borrow more money to make capital investments.

House Bonding Committee Chairman Rep. Antonio Cabral acknowledged that increasing how much the state borrows would also mean an increase in the state’s debt payments, one of the larger line items in an annual operating budget approaching $40 billion. But the chairman said he thinks the increase in borrowing would have “somewhat of an impact, not a great impact” on the operating budget.

At $2.64 billion, the fiscal 2017 debt service allocation is up $640 million — or 30 percent — over fiscal 2008, according to the Massachusetts Taxpayers Foundation.

On Tuesday, three days before the Capital Debt Affordability Committee is due to file its non-binding recommendation on the fiscal 2018 debt level, Cabral’s committee will hear testimony from Administration and Finance Secretary Kristen Lepore, Assistant Secretary for Capital Finance Jennifer Sullivan, economists, and advocates. The hearing is intended, Cabral’s office said, to determine whether the state invests enough in its infrastructure.

Copyright 2016 State House News Service