The Maryland Capital Debt Affordability Committee (CDAC) is charged with reviewing the State’s bond issuances, including for areas like transportation, school construction, and higher education, and recommending the maximum level of debt authorization for the coming fiscal year. CDAC met on August 12 and began its FY 2013 deliberations, receiving updates on a variety of issues including: the State’s credit rating and debt affordability criteria, current amount of tax supported debt, and recent bond sale results. CDAC also discussed the activities of a workgroup charged with reviewing how State affordability criteria and assumption are made.
State Treasurer Nancy Kopp stated that despite these being “very busy and volatile times,” she felt that the rating agencies have recognized that Maryland has a well-managed and professionally run system.
Debt Management Director Patti Konrad noted that all three rating agencies (Moody’s, Standard & Poor’s, and Fitch) have confirmed Maryland’s AAA rating, although Moody’s did assign a negative outlook pending further review within 90 days. Standard & Poor’s stated that it will not review further until it knows what the federal reductions are and how the State will manage those reductions. Fitch stated that it will not review further until it knows what the federal reductions are.
State Affordability Criteria
The affordability criteria act as Maryland’s own “debt ceiling”, although the affordability criteria are not codified in statute. Currently Maryland uses two affordability criteria: (1) debt outstanding to personal income should not exceed 4%; and (2) tax supported debt to revenues should not exceed 8%.
Using current projections and assumptions, Maryland will come close to hitting its affordability criteria, requiring the State to either limit future debt issuances in the near future or raise its “debt ceiling”. [Note: Assumptions like personal income and revenue are currently subject to great volatility and changes in these areas will affect affordability projections.]
Debt outstanding to personal income is projected to peak at 3.47% in FY 2013, leaving $1.7 billion in additional debt capacity before the 4% benchmark is achieved. While $1.7 billion provides the State with an adequate capacity to issue additional debt, debt service to revenues is projected to peak at 7.81% in FY 2017, leaving only $43 million in additional debt capacity. This will limit the State’s ability to issue additional debt beyond the currently projected levels.
Maryland Comptroller Peter Franchot asked about the impact on the affordability criteria if bonding for the State Center Project was included. Ms. Konrad responded that given the size of the State Center Project, there would likely be a significant impact if the project were included.
Status of Workgroup Reviewing State Affordability Criteria and Assumptions
The State has charged CDAC with establishing a workgroup to examine and recommend process changes for setting debt limits and affordability criteria. The workgroup has recommended that certain energy performance contracts be excluded from State debt for affordability purposes and has also recommended what assumptions be used when the State calculates its affordability and debt levels in August.
Comptroller Franchot expressed concern about a perception that the affordability assumptions could be manipulated to achieve a desired outcome with respect to meeting the affordability criteria. Ms. Konrad responded that the entire purpose of the workgroup was to add transparency to the assumption process. She also stated that as CDAC release its projections, it also notes that the projections are based on assumptions that can be altered by daily market conditions, particularly in these fluid times.
Review of State Tax Supported Debt and Recent Bond Sales
CDAC also reviewed the level of various tax supported debt (general obligation bonds, consolidated transportation bonds, Bay Restoration bonds, etc.) and the favorable results of recent bond sales. As of June 30, 2011, the State has $6.98 billion of GO bond debt outstanding, with $2.36 billion of that total not yet issued.
August 15 MarylandReporter.com article on CDAC meeting