Over the next couple of weeks, the legislature will make preliminary decisions about the Governor’s transportation plans — deciding how much additional revenue to raise to close operating gaps and to fund additional borrowing.
The governor has proposed to issue $13 billion in additional debt over the next 10 years to finance his 21st Century Transportation Plan. This investment will essentially double the baseline transportation capital plan for the coming decade.
I passionately support the proposed repairs and upgrades to public transit ($3.2 billion out of the $13 billion) and I feel that many other elements of the plan are sound. But we do have to have the conversation about how much additional indebtedness the Commonwealth can safely carry.
The additional $13 billion would be funded entirely by Commonwealth debt. The total proposed increase in annual costs of indebtedness works out to approximately $700 million, including (a) the debt service supporting the baseline borrowing plan, (b) the debt service supporting the additional $13 billion in borrowing and also (c) netting out the annual pay-down of previously-issued commonwealth bonds.
The Patrick administration has developed a debt affordability policy. The policy states that the Commonwealth can safely issue debt as long as total debt service costs stay below 8% of annual budgeted revenues. The Commonwealth’s total budgeted revenues in Fiscal 2013 are approximately $33.6 billion and total debt service amounts to $2.5 billion or 7.37%, consistent with the policy.
Mixing numbers from the debt affordability evaluation and the pro forma in the transportation plan, it appears that Commonwealth debt service related to transportation investments ($1.2 billion) accounts for a little under half of total debt service or 3.5% of total budgeted revenues in 2013. Assuming revenue growth averaging 3% over the next 10 years, a fairly conservative assumption, the net $700 million increase in transportation debt service would raise slightly to 4.2% the transportation share of budgeted revenues.
Given that there is some room under the 8% cap, if other borrowing costs are managed so as to grow no faster than revenues, then the transportation debt service increase (from 3.5% to 4.2% of budgeted revenues) can be absorbed within the 8% policy. Hence, the Patrick administration’s position that the 21st Century Transportation Plan is fiscally prudent.
The bond rating agencies are the closest thing we have to an outside evaluator of our financial plans. They have viewed the Patrick administration’s handling of debt in a favorable light. They like to see clear policies and an effort to project into the future. The Patrick administration deserves credit for shedding light on our long term financial condition.
Moody’s recently rated the Commonwealth’s debt AA1 — “of high quality and . . . subject to very low credit risk”. This is the same level as the governments of France and the United Kingdom and just one level below the top rating, AAA.
The rating agencies are not known for seeing around corners — they missed the need to downgrade billions in collapsing mortgage securities during the financial crisis. So we can’t take too much comfort from their seal of approval. But unless our whole theory of where we are economically and financially is wrong, the scale of the Governor’s 21st Century Transportation Plan seems reasonable.
The real question is not one of debt policy. Rather it is a budgetary question: Do we feel comfortable raising revenues enough to cover the plan and the transportation operating deficits and other our critical non-transportation priorities? While, as discussed last week, the plan details need vetting, my hope continues to be that we can make the plan happen at not far below the level proposed.