This post is the first in a planned series of resource posts related to our recent Housing Bill.
Capital vs operating spending
In Massachusetts, capital spending is controlled by the governor to a much greater degree than operating spending. For operating expenses, the legislature makes annual appropriations and the governor is expected to spend the full appropriated amount within the current year. By contrast, for capital spending, the legislature authorizes borrowing in amounts much greater than are likely to be actually borrowed and the governor uses discretion in choosing whether or not to borrow and spend as authorized over a period of years. See the legislative language examples below.
Operating budget language
Here is the general appropriation language from the annual operating budget for Fiscal 2025:
To provide for the operations of the several departments, . . . , the sums set forth in this act . . . are hereby appropriated from the General Fund . . . for the fiscal year ending June 30, 2025. . . .
H.4800, Section 1.
The annual operating budget includes projections of the various taxes and other revenues which flow by existing law into the states accounts are sufficient to cover the appropriations.
[I]t is hereby declared that the amounts of revenue set forth in this section, by source, for the respective funds of the commonwealth for the fiscal year ending June 30, 2025 are necessary and sufficient to provide the means to defray the appropriations and expenditures from such funds for fiscal year 2025 as set forth and authorized in this act. . . .
H.4800, Section 1A. [a list of revenue projections follows . . .]
This basic form for the operating budget is prescribed by statute.
Capital spending language (bond authorization)
Here is the funding language from the recent Housing Bond Bill:
To provide for a capital outlay program [for various housing purposes] the sums set forth in sections 2 to 2B, inclusive . . . are hereby made available . . ..
H4977, Section 1
To support the capital outlay program, the bill authorizes issuance of debt:
To meet the expenditures necessary in carrying out sections 2 and 2A, inclusive, the state treasurer shall, upon request of the governor, issue and sell bonds of the commonwealth in an amount to be specified by the governor from time to time but not exceeding, in the aggregate, $5,110,756,900. . . . To meet the expenditures necessary in carrying out section 2B, the state treasurer shall, upon request of the governor, issue and sell bonds in an amount to be specified by the governor from time to time but not exceeding, in the aggregate, $50,000,000. . . . provided, however, that all such bonds shall be payable not later than June 30, 2059.
H4977, Sections 131 and 132
The authorization for capital spending is subject to the Governor’s decision to request borrowing by the treasurer. The spending authorization is not per se time-limited except in so far as the bonded indebtedness must be paid back by 2059, which contemplates final spending in 2029 since borrowing would typically be timed to match the spending and the bonds for major structures commonly have a 30 year length. State and local governments generally do not borrow far in advance of a spending need and bank the funds because they will may run afoul of federal tax regulations that limit interest earnings on proceeds of tax-exempt bonds. The details of bond issuance are further regulated by statute.
Capital authorizations
The legislature passes bond authorization bills for various specific purposes — housing, transportation, economic development, environment, etc. These authorization bills are initiated by the governor periodically. For example, the last five bond bills for housing purposes were passed in 2024, 2018, 2013, 2008, and 2002.
As shown in the chart below, the bills issued for various purposes cumulatively authorize much more debt than can be issued within the prudential constraints further discussed below. The Commonwealth has currently $31.9 billion outstanding and issues roughly $2 to $3 billion (also retiring some). However, the Commonwealth also has another $45.4 billion authorized but unissued. This large unissued authorization gives the Governor great discretion as to which purposes she would like to apply the Commonwealth’s bonding capacity — she has over $45 billion authorized for various purposes, but in any given year will likely issue well under 10% of that amount in new debt. If authorizations were kept close to likely needs, they would cumulate to a lower multiple of annual issuance (perhaps 2x or 3x given a roughly five year re-authorization cycle, instead of 10x or 20x).
| Amounts as of March 31, 2024 | Billions |
|---|---|
| Authorized but unissued debt | $45.4 |
| Long term debt authorized, issued, and still outstanding | $31.9 |
| Long-term debt outstanding and counted against debt limit | $26.5 |
| Statutory debt limit | $30.7 |
| Average debt issued annually July 1, 2019 through June 30, 2023 | $1.9 |
| Debt issued July 1, 2023 through March 31, 2024 | $3.8 |
Debt limit
As noted above, the amount authorized by bond bills vastly exceeds the amount of debt issued — other constraints on debt are much stricter.
The first of these constraints is the statutory debt limit:
For the fiscal year starting July 1, 2011, such limit shall be $17,070,000,000. For each subsequent fiscal year, the limit shall be the product of the limit established for the previous fiscal year and 1.05.
General Laws, Chapter 29, Section 60A
This formula chains to $30.7 billion in Fiscal 2024. As shown in the chart above, the categories of debt that count towards that limit are below the limit, so the statutory debt limit is not currently a binding constraint, although is much closer to being binding than the unissued bond authorization total.
Prudential constraints on debt issuance
Prudence, as judged by the Debt Affordability Committee, is the primary constraint on debt issuance. The Committee was established by statute and includes as voting members finance experts and the state’s key financial executives — the treasurer, the comptroller, the secretary of administration and finance. Each year the committee makes a determination as to how much debt the Commonwealth may prudently issue in the following fiscal year. The most recent recommendation was filed in early 2024 for Fiscal 2025.
The Debt Affordability Committee is charged with considering the prudent amount of new debt based on a wide range of considerations. However, it starts it consideration from two traditional guiding policies. The first policy is that annual debt service payments should not exceed 8% of revenues. Applying this policy requires consideration of alternative scenarios for future interest rates and revenues. The most recent analysis considers four scenarios and finds that the 8% limit will not be exceeded except in the highest stress scenario — low revenue growth but high interest rates — and, even in that, scenario not until 2038.
The second traditional policy is that the amount of new debt issued should not go up by more than $125 million year over year. This number is not an absolute and should be expected to grow over time. In the current year, the committee decided to allow an additional $87.2 million to cover the recent escalation of construction costs, so allowing a total increase of $212.2 million. In its scenario analysis, the committee modeled different annual increases of debt issuance and found that even if this increase were repeated annually, the 8% policy would not be violated (except in the highest stress scenario).
With this increase allowed, the “bond cap,” goes up from $2.905 billion in Fiscal 2024 to $3.117 billion in Fiscal 2025.
Capital Budget
The debt proceeds allowed by the bond cap policy, as recommended by the Debt Affordability Committee, are the largest component of the state’s capital spending plan, the annual publication of which is required by statute.
FY2025 Amounts from State Capital Investment Plan for 2025-29
| Investment Category | State Bond Cap | Non-Bond Cap | Operating Funds | Federal Funds | Other Funds | Total |
|---|---|---|---|---|---|---|
| Community Investments | 456,039,560 | 5,000,000 | 4,000,000 | 65,882,600 | 93,795,209 | 624,717,369 |
| Corrections | 21,260,931 | – | – | – | – | 21,260,931 |
| Courts | 28,550,200 | – | – | – | – | 28,550,200 |
| Economic Development | 252,525,000 | – | 573,188 | 1,500,000 | 23,816,666 | 278,414,854 |
| Energy And Environment | 219,236,451 | 11,800,000 | 305,000 | 52,288,889 | 133,037,546 | 416,667,886 |
| Health And Human Services | 210,420,000 | – | 8,130,000 | 85,600,000 | – | 304,150,000 |
| Higher Education | 173,591,185 | 4,328,047 | – | – | 19,676,000 | 197,595,232 |
| Housing | 370,743,194 | – | – | – | – | 370,743,194 |
| Information Technology | 190,405,000 | 110,450,000 | 11,000,000 | 109,707,035 | 56,562,219 | 478,124,254 |
| Public Safety | 169,487,401 | 10,892,335 | – | 20,257,749 | – | 200,637,485 |
| State Government Infrastructure | 178,447,278 | 10,000,000 | – | – | – | 188,447,278 |
| Transportation | 846,493,800 | 255,360,128 | 409,796,805 | 1,131,360,111 | 107,484,505 | 2,750,495,349 |
| TOTAL | 3,117,200,000 | 407,830,510 | 433,804,993 | 1,466,596,384 | 434,372,145 | 5,859,804,032 |
Resources
- Commonwealth’s May 2024 “Information Statement” for Bond Holders
- Additional bond statements
- Bond rating reports.
- Debt Affordability Committee’s Bond Cap recommendation for 2025
- Commonwealth’s Capital Plan for FY25-29
- CThru link for actual spending in capital accounts
- MassBudget publication “Massachusetts Capital Budget 101”