State Debt Management Presentation Jennifer Hassemer | Assistant - PowerPoint PPT Presentation

State Debt Management Presentation Jennifer Hassemer | Assistant Commissioner for Debt Management April 7, 2017 | mn.gov/mmb

What is a Bond? • Municipal bonds are debt securities • Issued by states, cities, counties and other governmental entities • Finance capital projects • The bond issuer agrees to pay interest and the return on the investment, the principal, to the bondholders who have loaned the issuer money for the project(s) 4/7/2017 2

Characteristics of Bonds • Issuer • Purpose • Credit structure/source of repayment • Maturity structure • Price • Tax status • Interest rate • Term 4/7/2017 3

State Bond Issuers • Commissioner of MMB • Public Facilities Authority • Housing Finance Agency • Office of Higher Education • Minnesota State Colleges and Universities • Agricultural and Economic Development Authority • Rural Finance Authority • Iron Range Resources and Rehabilitation • Minnesota State Armory Building Commission • Minnesota Higher Education Facilities Authority 4/7/2017 4

Authority • State Constitution • Minnesota Statutes • Federal Regulations • Internal Revenue Service • Securities and Exchange Commission • Municipal Securities Rulemaking Board 4/7/2017 5

What Projects Are Eligible For State G.O. Bond Financing? • Article XI, Section 5, of the Minnesota Constitution contains the authority for incurring public debt (G.O. bonds) • Subdivision (a) authorizes debt “to acquire and to better public lands and buildings and other public improvements of a capital nature, and to provide money to be appropriated or loaned to any agency or political subdivision of the state for such purposes.” • In other words… • The project must be for a public purpose • The project must be publicly owned • The purpose of the bonds must be clearly set forth in the law • Project activities must constitute capital expenditures 4/7/2017 6

Other Purposes for Which G.O. Debt May be Issued • Repel invasion or suppress insurrection (1857) • Borrow temporarily (1962) • Refund outstanding bonds of the state or any of its agencies (1962) • Establish and maintain highways (1924) • Promote forestation and prevent and abate forest fires (1924) • Construct, improve and operate airports and other air navigation facilities (1944) • Develop the state’s agricultural resources by extending credit on real estate (1922) • Improve and rehabilitate public or private railroad rights-of-way and other rail facilities up to $200 million par value (1982) • As otherwise authorized in the Constitution 4/7/2017 7

Other Important Provisions Pertaining to G.O. Bonds • A full faith and credit obligation of the state – state will levy a tax if necessary to meet its debt service obligations • Maximum maturity of 20 years • Each bond issue must distinctly specify the purposes and maximum amount of proceeds authorized to be expended for such purposes • A special and separate state bond fund is maintained for payment of debt service (principal and interest) 4/7/2017 8

Debt Policies / Informal Practices • Capital Investment Guidelines • Tax compliance policies and procedures • Continuing disclosure policy • Refunding criteria • Use of competitive vs. negotiated sales • Use of an independent financial advisor • Timing of bond sales 4/7/2017 9

Purpose of Capital Investment Guidelines • Why have guidelines? • Guide decision making • Communicate policy goals • Demonstrate commitment to long-term capital and financial planning • Why these guidelines? • Consistent with other states and rating agency review • Inclusive of all debt obligations • Represent Minnesota’s strong financial management 4/7/2017 10

Capital Investment Guideline #1 • Guideline #1: Total tax-supported principal outstanding (sold) shall be 3.25% or less of total state personal income • Status: 2.73% • What debt is included? • State Issued Debt • General Obligation Various Purpose Bonds; General Obligation Trunk Highway Bonds; Appropriation Bonds • State-Supported Debt • State standing appropriations (University of Minnesota and Minnesota Housing Finance Agency); Lease- Purchase Financing for Real Estate 4/7/2017 11

Capital Investment Guideline #2 • Guideline #2: Total amount of tax-supported principal (both sold and authorized/unsold) for state general obligations, state moral obligations, equipment capital leases and real estate capital leases shall not exceed 6% of total state personal income • Status: 3.53% • What debt is included? • All debt types included in Guideline #1, plus • Moral obligations (Housing Finance Agency, Office of Higher Education) • Lease purchase financing for equipment 4/7/2017 12

Capital Investment Guideline #3 • Guideline #3: At least 40% of state G.O. bonds are to mature within 5 years and 70% within 10 years • Status: • 40.3% scheduled to mature within 5 years • 71.2% scheduled to mature within 10 years • Cost of bonding bills are realized more quickly 4/7/2017 13

Capital Investment Guidelines Summary of Outstanding Principal as of 2/28/2017 As of February 2017 Budget and Economic Forecast Tax-Supported Debt (Guideline #1) Principal Outstanding Authorized, Unissued Total All State General Obligation Debt General Fund State General Obligation Debt $ 4,413,290,000 $ 327,723,500 $ 4,741,013,500 Trunk Highway Fund General Obligation Debt 1,997,825,000 350,823,100 2,348,648,100 Certificates of Participation (SWIFT/Integrated Tax) 24,420,000 0 24,420,000 BCA Bemidji Lease Revenue Bonds 2,910,000 0 2,910,000 Other Real Estate Capital Leases: Ag/Health Buildings 39,205,000 0 39,205,000 DHS Building 46,970,000 0 46,970,000 MHFA Supportive Housing 2008 26,015,000 0 26,015,000 MHFA Housing Infrastructure 2012 26,470,000 0 26,470,000 MHFA Housing Infrastructure 2014 73,210,000 0 73,210,000 MHFA Housing Infrastructure 2015 7,290,000 2,710,000 10,000,000 U of M: TCF Bank Stadium 85,490,000 0 85,490,000 Biosciences Facilities 177,170,000 0 177,170,000 State General Fund Appropriation Refunding Bonds 555,345,000 0 555,345,000 Professional Football Stadium Appropriation Bonds 445,330,000 0 445,330,000 Certificates of Participation - Legislative Office Facility 78,600,000 0 78,600,000 Lewis and Clark Regional Water System Bonds 11,790,000 7,210,000 19,000,000 Pay for Performance Appropriation Bonds 0 10,000,000 10,000,000 TOTAL - Tax-Supported Debt $ 8,011,330,000 $ 698,466,600 $ 8,709,796,600 Other Obligations (Guideline #2) Tax-Supported Debt (issued and authorized but unissued) $ 8,709,796,600 MHFA Moral Obligation Debt (1) 1,152,305,000 MOHE Moral Obligation Debt 467,970,000 Equipment Leases 25,586,953 Guaranteed Energy Savings Program (GESP) Equipment Leases 9,234,539 TOTAL - All Obligations $ 10,364,893,092 FY 2017 State Personal Income Estimate - IHS Forecast: 293,575,000,000 State Tax-Supported Debt as a Percent of Personal Income: 2.73% Estimated maximum additional principal capacity for all tax-supported debt @ 3.25% $ 1,529,857,500 All Obligations as a Percent of Personal Income: 3.53% Estimated maximum additional principal capacity for all obligations @ 6.0% $ 7,249,606,908 (1) MHFA has a $5 billion statutory debt limit. However, several of the MHFA bonding programs are not issued as Moral Obligation debt. The bond programs that are not included because they 4/7/2017 14 are not secured by a debt service reserve fund subject to replenishment from Legislative appropriation are the conduit multifamily revenue bonds and bonds issued under Home Ownership Mortgage-backed Exempt Securities and Homeownership Finance Bonds.

2017 Debt Issuance Plans • State General Obligation Bonds – July/August 2017 • Depending on Outcome of Legislative Session: • State Appropriation Bonds • MHFA Housing Infrastructure Bonds 4/7/2017 15

Bond Ratings • Bonds may be rated by one or more of the three major credit rating agencies: • Fitch Ratings • Moody’s Investors Service, Inc. • Standard & Poor’s • A bond rating is a measure of credit risk to investors • “AAA” is the highest rating; “D” bonds are in default • The higher the credit rating • The lower the risk, and • The lower the interest rate 4/7/2017 16

State of Minnesota Bond Ratings • General Obligation Bonds • Fitch: AAA (stable outlook) • Moody’s: Aa1 (stable outlook) • S&P: AA+ (positive outlook) 4/7/2017 17

Federal Considerations • Tax Exemption (IRS) • Arbitrage (IRS) • Disclosure (SEC) • Enforcement (IRS) 4/7/2017 18

Cancellations (M.S. §16A.642) • Commissioner of MMB issues cancellation report on January 1 of each odd- numbered year • Lists all bond and general fund capital appropriations enacted > 4 years previously with unspent and unencumbered balances • The 1/1/17 report showed amounts from 2012 bonding bill and earlier • Total of $17.5 million • Such balances are cancelled as of July 1 of the year of the report • Cancelled balances go to repay state bonds 4/7/2017 19

Thank you Jennifer Hassemer | Assistant Commissioner for Debt Management jennifer.hassemer@state.mn.us https://mn.gov/mmb/debt-management/ 651-201-8079 4/7/2017 20