Capital Debt Affordability Committee Recommends Lower FY 2012 Debt Authorization

The Capital Debt Affordability Committee (CDAC) met on September 22 and recommended a general obligation bond authorization level of $925 million for FY 2012.  The recommended authorization level is a decrease from last year’s recommendation of $1.14 billion.  CDAC also recommended a limit of $27 million for new academic facilities for the University of Maryland System.  CDAC may revisit its recommendations when it meets in December after the release of revised fiscal estimates for the State.

Maryland Comptroller Peter Franchot stated that the debt authorization recommendations were the result of a consensus approach.  He felt reducing the authorization from last year’s recommendation was the correct approach but urged caution due to the ongoing volatility of the market and the State’s continued budgetary challenges.  State Treasurer Nancy Kopp clarified that the authorization recommendation is different from the bond issuance amount and that the State will be taking advantage of low-interest rates and market competition for secure investments (as previously reported on Conduit Street, Maryland has maintained its “AAA” bond rating).

CDAC has established debt affordability benchmarks for the State that serve as limits on the amount of debt the State can safely issue.  Currently, debt affordability ratios must not exceed 4% of tax supported debt outstanding to personal income and 8% debt service to revenues.  As one possible option for meeting those ratios, CDAC’s projections for future authorizations assume level authorizations through FY 2017 of between $925 million and $955 million.  In FY 2018, the projected authorization would increase to $1.2 billion and rise to $1.32 billion in FY 2021.

If this option is followed, CDAC projects that there will still be excess debt capacity under the 4% benchmark through FY 2021, with tax supported debt to personal income at 2.87%.  However, the State will come very close to hitting the 8% benchmark in FY 2017, with a debt service to revenue ratio of 7.92%.  This will drop back down to 7.29% in FY 2020 due to projected revenue increases and diminishing payments for Grant Anticipation Revenue Vehicles (GARVEE) bonds.  Current GARVEE bond payments are expected to zero out in FY 2020.

CDAC also heard the recommendations from a workgroup charged with studying various topics and proposing legislation.  The workgroup voiced concern about a proposed change by the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) that would require all operating lease agreements to be considered debt.  The State made approximately $63.9 million rent payments for FY 2009.  Such a change would impact debt assumptions for the State, local governments, and private businesses.  The workgroup also recommended legislation to exclude capital leases for energy performance contracts funded with energy savings from being counted as tax-supported debt.

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