The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Debt - PowerPoint PPT Presentation

Debt Measures • Total tax supported debt measures can skew the measurement of the amount of debt Massachusetts has outstanding as compared to other states • As of 10/31/2012, the Commonwealth had $18.6 bn G.O. debt outstanding or $2,817 per capita, an amount equal to 5.3% of state GDP (2011 GDP figures) • Calculations that include the non-recourse debt of the MBTA and the MSBA show per capita debt grows to approximately $4,138 and as a percent of GDP to approximately 7.8% • The sales tax debt of the MBTA and MSBA are not Commonwealth debt • The MSBA has no Commonwealth guaranteed floor for sales tax growth • There is also no county-level borrowing in Massachusetts as there is in most other states 9

Debt Measures • Examples from other states indicate how significant a skew this could be • This table reflects the debt burden of a resident living in a large city in each of these states (sources: FY2011 CAFRs) Massachusetts Population Total Debt FY2011 Debt Per Capita City of Boston 625,087 $1,132,907,000 $1,812 Mass School Building Authority 6,588,000 $4,488,535,000 $681 Commonwealth 6,588,000 $20,767,865,000 $3,152 $5,646 Florida Population Total Debt FY2011 Debt Per Capita City of Miami 408,750 $726,859,266 $1,778 Miami ‐ Dade County 2,554,800 $24,514,780,000 $9,596 Miami ‐ Dade County Schools 2,554,800 $3,282,389,000 $1,285 State of Florida 19,057,500 $30,110,852,000 $1,580 $14,239 Maryland Population Total Debt FY2011 Debt Per Capita City of Baltimore 619,493 $799,480,000 $1,291 City of Baltimore Public Schools System 619,493 $196,297,410 $317 State of Maryland 5,828,300 $21,554,246,000 $3,698 $5,306 • In reports, the State of Florida’s debt is described as “manageable…only slightly above the median…” • Maryland’s debt is described as “…moderate…” 10

Annual Borrowing & Debt Affordability  Strong debt affordability policies focus on annual bond cap and managing debt service ratios  The bond cap is managed to keep debt service within 8% of budgeted revenues and 10% of statutory limit of appropriations  The Commonwealth’s annual bond cap and its five-year capital improvement plan are periodically adjusted to account for changes in revenues  Reflecting changed economic conditions, the five-year total bond cap has been reduced by over $1.2 bn since July 2007 General Obligation Bond Cap ($mm) 1 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Bond Cap $1,750.0 $1,875.0 $2,000.0 $2,125.0 $2,125.0 Total Debt Service Obligations 2,123,962 2,475,157 2,543,845 2,649,731 2,903,323 Estimated Budgeted Revenues 32,310,021 33,604,667 34,611,145 35,648,368 36,715,024 Debt Service as % of Budgeted Revenues 6.57% 7.37% 7.35% 7.43% 7.91% Source: Executive Office for Administration and Finance, Debt Affordability Analysis published Oct-2012; Commonwealth Information Statement 1 Totals may not add due to rounding 2 Revenue Estimates as of release of FY 2031 bond cap. The Administration adjusts the bond cap at least annually to reflect revenues as necessary 11

New Debt Affordability Board  In the last legislative session, a new debt affordability board was created for the first time in statute  The board and its responsibilities were modeled after the debt affordability boards in Maryland and Delaware  Codifying the best practices enacted by A&F  The “Capital Debt Affordability Committee” will produce its first report in September 2013  It will be chaired by the Secretary of Administration & Finance and include six other voting members  The committee “shall review on a continuing basis the size and condition of the Commonwealth’s tax supported debt”  The committee will consider a number of factors, including: (1) the amount of state bonds that, during the next fiscal year will be outstanding and will be authorized but unissued; (2) the capital program prepared by the secretary of administration and finance; (3) capital improvement and school construction needs during the next 5 fiscal years, as projected by the Massachusetts School Building Assistance Authority; (4) projections of debt service requirements during the next 10 fiscal years; and (5) the criteria that recognized bond rating agencies use to judge the quality of issues of state bonds;  Analytical measures will include such things as debt service to general fund revenues, debt to personal income, debt to estimated full-value of property, and debt per capita; a comparison of the debt ratios for the 5 other states in New England, New York and 5 other states the committee determines to offer a fair comparison to the commonwealth; 12

FY2013 Plan of Finance 13

Bond Cap for Fiscal 2013  Like Fiscal 2012, for Fiscal 2013 the State Treasurer’s Office (STO) developed a formal “Plan of Finance” for the fiscal year’s expected borrowings  The Plan of Finance is really driven by the “Bond Cap” developed by the Executive Office for Administration & Finance (A&F)  As part of the Five-Year Capital Plan, the expected long-term borrowing needs for FY2013 include $1.875 bn in General Obligation borrowings and $360 mm in borrowings for the Accelerated Bridge Program  May also include some catch up borrowing from FY2012  From a statutory perspective, the STO has wide discretion as to the timing and structure of these borrowings  Borrowings can be done all at once or over the course of the fiscal year  Financings in FY2013 will be challenging given the market risks that are on the horizon, but there are also opportunities  How the STO ultimately sells and structures bonds is based on conservative, prudent debt financing policies and procedures 14

Fiscal 2013 Plan of Finance Considerations  The Commonwealth’s financing program can benefit from more long-term planning in terms of the:  Development of forward calendar, development of strategies  Early awareness of obstacles and challenges  There are a number of different factors considered when forming a plan of finance:  Timing of bond sales  Size of bond sales  Structure of bonds to be sold  Targeted investors  Market conditions 15

Asset Liability Match Program  The STO will continue to explore ways to manage interest rate risk from a full balance sheet perspective  Using an ALM approach, the use of variable rate exposure on the liability side of the Commonwealth’s balance sheet would actually reduce interest rate risk overall  Being fully hedged to interest rate risk would allow the Commonwealth to reduce risk, reduce budget volatility throughout all economic cycles, and reduce debt service interest costs  Currently, the Commonwealth has over $4 bn in assets that are exposed to short-term interest rates  At the same time, on the liability side of the balance sheet, the Commonwealth only has $376.5 mm in unhedged variable rate bonds  In addition, the large spread between the rate at which the Commonwealth borrows (mostly long, fixed- rate bonds) and reinvests creates significant negative carry on the balance sheet  To address those risks and volatility, the STO is committed to following an Asset Liability Management program over the long-term The Impact of Changes in Interest Rates Impact of Rising Interest Impact of Declining Asset / Liability Mix Rates Interest Rates Increase in rate sensitive Decrease in rate sensitive More interest rate sensitive interest earnings. Lower Net interest earnings. Higher assets than liabilities Interest Expense Net Interest Expense Increase in rate sensitive Decrease in rate sensitive More interest rate liabilities interest expense. Higher Net interest expense. Lower than assets Interest Expense Net Interest Expense Interest rate sensitive assets No impact on Net Interest No impact on Net Interest and liabilities are matched Expense Expense 16

The Commonwealth’s Variable Rate Debt & Interest Rate Risk  Variable Rate portfolio includes VRDBs ($1.6 bn), CPI Index FRNs ($197 mm), Libor Index FRNs ($845 mm), SIFMA Index FRNs ($534 mm), and ARS ($401 mm)  The existing variable rate portfolio is diverse, but most of the portfolio is hedged leaving the state’s full balance balance sheet exposed to interest rate risk – Only 2% of total outstanding debt is unhedged variable rate  The STO has intentionally issued nearly all fixed rate debt for new-money capital needs over last two years because long-term rates for fixed-rate bonds remained relatively low  This positions the Commonwealth to maximize its variable rate needs as long term interest rates move higher in coming years  For natural hedge of interest rate risk of the state’s balance sheet, the Commonwealth could issue more variable rate debt to reduce overall interest rate risk  Pro-actively looking at alternative structures that provide a natural interest rate hedge, including: – Additional variable rate structures, – Eliminating floating-to-fixed rate agreements as MTM’s approach $0 17

Short-Term & Long-Term Goals Going Forward Short-Term Goals  Lock in historically low rates as much as possible, saving variable rate capacity for future higher interest rate environment  Increase call optionality in the Commonwealth’s portfolio of outstanding debt through shorter call features (retail sales), to be addressed in a higher interest rate environment  Diversify variable rate portfolio in order to reduce LOC and product risk (use of FRNs, direct purchase structures), reduce “put” risk  Continue to improve the Commonwealth’s disclosure in order to set the standard for the market – Short-term and long-term benefits would be enormous – All state-level Massachusetts issuers should stress better disclosure, perhaps develop some sort of standardized/coordinated approach amongst state-level issuers Long-Term Goals  Balanced asset and liability match  Maintain as high a credit rating as possible  Continue to expand investor base (by structure, taxable vs. tax-exempt, investor outreach)  Diversify counterparties  Diversify the investor base 18

Commonwealth Enhanced Disclosure & Investor Outreach 19

Disclosure Enhancements • The Commonwealth’s goal is to have the best investor disclosure and investor outreach program amongst issuers in the municipal market • Massachusetts’ disclosure practices have been very strong, but the Commonwealth is now devoting additional resources to enhance its communications with investors • Commonwealth was one of the first states to provide extensive disclosure to its bond investors, starting in the mid-1970’s. Preparation of investor disclosure is now an integral function of state government, spread across numerous agencies and departments • The Commonwealth Information Statement contains all information pertinent to an investor in general obligation bonds, including: • Government organization, budget and financial management controls, revenues and expenditures, financial data, current and recent fiscal year information, long- term liabilities, capital investment plans, state workforce, and pending legal matters • The Information Statement is signed by the State Treasurer and the Secretary of Administration and Finance, and those officials also deliver to the underwriters of Commonwealth general obligation bonds a “10b-5” certificate to the effect that the documents do not contain any material misstatements or omissions • All disclosure documents (financial statements, annual continuing disclosure filings, official statements and information statements and supplements) are filed promptly with the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access (EMMA) system 20 2

Disclosure Enhancements (con’t) • Being a leader in disclosure means b etter disclosure documents, better investor website and more predictability in disclosure publications • And focusing on investor outreach efforts • Investor Disclosure Documents • Continue to re-write/ improve Information S tatements, enhancing sections based on investor or regulatory feedback • Goal is to meet all of the disclosure recommendations of the NFMA, GFOA and NABL • S tarting in 2012, the Commonwealth has moved away from Information S tatement S upplements • Enhanced pension liability / asset sections in 2010, 2011 & 2012 • May 2012 pension disclosure modeled on NABL recommendations • Working to incorporate economic narrative, in addition to economic statistical section • Incorporated recommendations from “ A Plain English Handbook: How t o Creat e Clear EC Disclosure Document s ” (1998) S • Developed formal schedule of disclosure releases six times per year to make disclosure more predictable: January, March, May, July, S eptember, November • More voluntary filings on EMMA • Investor surveys 21 2

Disclosure Enhancements (con’t) • New Consolidated Investor Website • Website dedicated solely to investor needs, data consolidated from multiple websites • Target to go live at the second annual Massachusetts Investor Conference on December 13 th • Approximately 20,000 pages of downloadable information, including: • Debt schedules, bond authorizations, variable rate summaries, swap summaries • Cash flow and short-term investment reports • Monthly revenue reports • Operating & capital budgets • CAFRs, pension and OPEB actuarial reports • Forward consolidated issuer financing calendar • Disclosure and Official Statement archives • Live links to MSRB secondary market trading activity by CUSIP numbers 22 2

Disclosure Enhancements (con’t) • Investor Communication & Outreach • Inaugural annual investor conference December 2011, second conference Dec. 13 th • Ongoing targeting of investors in Boston and outside region for one-on-one meetings away from financings (New York, Chicago, San Francisco) • First state to implement regular investor conference calls • First investor call: Monday, May 21 st • Regular updates of revenue, budget, capital updates, as well as one “big topic” per call • Access to senior leadership of the state • Continue to seek investor feedback via third party surveys • Twitter feed for investors: @BuyMassBonds Commonwealth of Massachusetts 2012/2013 Investor Disclosure & Conference Call Schedule Targeted Investor Disclosure Update Conference Call "Big Topic" Participants 9-May-12 21-May-12 Disclosure Enhancements Treasury 20-Jul-12 27-Jul-12 FY12 Revenue Review Dept of Revenue 10-Sep-12 17-Sep-12 Review of Maj or Spending Categories Admin & Finance 7-Nov-12 14-Nov-12 Review of 2012 Pension Actuarial Report State Actuary, PERAC 7-Jan-13 14-Jan-13 State Financial Controls & Financial Statements State Comptroller 7-Mar-13 14-Mar-13 Review of Updated 5-Year Capital Plan Admin & Finance 23 2

Largest Massachusetts G.O. Bondholders  The 20 largest bondholders of Massachusetts General Obligation bonds are: Top 20 Mass. G.O. Bondholders G.O. Bonds Par Rank Firm Location ($MM) 1 Vanguard Group Malvern, PA $ 1,028.8 2 PineBridge Investments (AIG) New York, NY 641.1 3 Fidelity Management and Research Merrimack, NH/Boston, MA 303.6 4 The Travelers Companies St. Paul, Minnesota 302.3 5 BlackRock Financial Management Plainsboro, NJ 264.6 6 MacKay Shields New York, NY 224.0 7 Hartford Investment Management Hartford, CT 214.2 8 Liberty Mutual Insurance Boston, MA 209.2 9 Northern Trust Global Advisors Chicago, IL 188.2 10 Nationwide Insurance Columbus, OH 179.1 11 Capital Guardian Trust Los Angeles, CA 164.4 12 Nuveen Asset Management Chicago, IL 136.0 13 Deutsche Asset Management New York, NY 135.3 14 Columbia Management Investment Advisors Boston, MA 130.1 15 Chubb Corp Warren, NJ 126.2 16 AllianceBernstein New York, NY 116.8 17 Berkley Dean & Co, Inc. Greenwich, CT 109.7 18 Wells Capital Management Menomonee Falls, WI 101.1 19 BlackRock Fund Advisors San Francisco, CA 81.8 20 J.P. Morgan Investment Management New York, NY 74.5 24

Current Holders of Mass. G.O. Bonds by State of Origin Vermont Washington Maine Montana North Dakota Oregon Minnesota NH West Virginia Idaho MA South Dakota Wisconsin Wyoming New York Michigan RI CT Iowa Pennsylvania Nebraska NJ Ohio Nevada Illinois DE Indiana Utah MD California Colorado Missouri Kansas Kentucky Virginia North Carolina Tennessee Arizona Oklahoma New Mexico Arkansas South Carolina Georgia Alabama Texas Louisiana Alaska Mississippi Florida Hawaii Above $500 MM $300 MM-$500 MM $100 MM-$300 MM Less than $100MM No Holdings 25

Cash & Investments 26

Treasury Investment Policy Objectives and Authority  MGL Chapter 29, section 23 provides that “ The state treasurer shall manage all cash, funds, or investments under the control or jurisdiction of any state agency, other than non-appropriated funds held by a public institution of higher education. "State agency'' shall mean any department, office, commission, committee, council, board, division, bureau, institution, office or other agency within the executive or legislative department, excluding, however, the Massachusetts Bay Transportation Authority, the Massachusetts Department of Transportation, and the Massachusetts Port Authority. Funds shall be deemed to be under the control of a state agency from the date of the initial deposit into any commonwealth account until the date a check or draft drawn on a commonwealth account clears the disbursing bank.” The objectives of the Commonwealth’s cash management responsibilities are:  Safety – The Treasury seeks to preserve the capital investment through prudent management and sound investment policies and restrictions,  Liquidity – Treasury aims to maintain sufficient liquidity to meet reasonably foreseeable needs, and  Yield – The Treasury seeks to attain the highest possible level of current income consistent with the objectives of preservation of capital and liquidity. 27

Commonwealth Investments  The Commonwealth assets are diversified through a number of different investment vehicles, including a short-term money-market like fund, a short-term bond fund, and bank deposits  The different investment vehicles provide the Commonwealth with flexibility in managing its cash flow needs while also maintaining liquidity and its investment objectives  The Commonwealth’s cash flow experiences a relatively stable but somewhat lumpy cash outflow over the course of a fiscal year  Large expenditures, including state payroll, local aid, are known and regular – Local aid distributions of over $1 bn are made quarterly to cities and towns in arrears  Meanwhile inflows – largely tax collections, federal grants/reimbursements – are much less consistent – Tax collections driven by the economy, collection cycle 28

Bank Deposits: All Treasury Bank Deposits are Collateralized  A qualified depository bank may secure public deposits by pledging eligible collateral with a custodian in an amount that is no less than 102% of the public depositor’s uninsured public deposit.  A qualified depository bank may secure public deposits by the issuance of an irrevocable letter of credit to the public depositor from a federal home loan bank in the amount of the uninsured public deposit.  A qualified depository bank may secure public deposits through its membership in the Depositors Insurance Fund or Share Insurance Fund upon providing proof of membership in and coverage of the public deposit by said funds to the State Treasurer. Proof of membership and coverage shall be in such form and with such frequency as required by the State Treasurer.  We require banks competing for deposits to certify membership in the Depositors Insurance Fund, Share Insurance Fund or to provide approved collateral. 29

Fifty Small Business Banking Partnership Deposits as of October 31, 2012 Bank Name Amount Bank Name Amount Hampden Bank $ 5,000,000.00 Avidia Bank $ 2,000,000.00 Hometown Bank, A Co-operative Bank $ 5,000,000.00 Bank of Cape Cod $ 10,000,000.00 Hoosac Bank $ 5,000,000.00 BankFive $ 5,000,000.00 Leader Bank NA $ 10,000,000.00 BankGloucester $ 5,000,000.00 Lowell Cooperative Bank $ 5,000,000.00 Bay Coast Bank (formerly Citizens-Union Savings Lowell Five Cent Savings Bank $ 5,000,000.00 Bank) $ 5,000,000.00 Marlborough Savings Bank $ 5,000,000.00 Bay State Savings Bank $ 5,000,000.00 Belmont Savings Bank $ 10,000,000.00 Mechanics' Co-operative Bank $ 5,000,000.00 Berkshire Bank $ 5,000,000.00 Meetinghouse Bank $ 1,000,000.00 Beverly Cooperative Bank $ 1,000,000.00 Mutual Bank $ 5,000,000.00 Bristol County Savings Bank $ 10,000,000.00 Newburyport Five Cents Savings Bank, The $ 5,000,000.00 Cambridge Savings Bank $ 5,000,000.00 North Middlesex Savings Bank $ 5,000,000.00 Cape Cod Cooperative Bank $ 5,000,000.00 Nuvo Bank and Trust Company $ 250,000.00 Cape Cod Five Cents Savings Bank $ 10,000,000.00 Pentucket Bank $ 10,000,000.00 Century Bank and Trust Company $ 10,000,000.00 Reading Co-operative Bank $ 5,000,000.00 Chicopee Savings Bank $ 10,000,000.00 Rockland Trust Company $ 5,000,000.00 Commerce Bank & Trust Company (formerly Mercantile Rollstone Bank and Trust $ 2,500,000.00 Bank and Trust Company) $ 5,000,000.00 Savers Co-operative Bank $ 5,000,000.00 East Boston Savings Bank $ 5,000,000.00 Savings Bank, The $ 2,000,000.00 East Cambridge Savings Bank $ 5,000,000.00 Southbridge Savings Bank $ 5,000,000.00 East West Bank $ 5,000,000.00 South Coastal Bank $ 5,000,000.00 Eastern Bank $ 5,000,000.00 South Shore Savings Bank $ 10,000,000.00 Everett Co-operative Bank $ 10,000,000.00 Village bank $ 2,000,000.00 Fidelity Bank $ 5,000,000.00 Walpole Co-operative Bank $ 10,000,000.00 First Trade Union Bank $ 5,000,000.00 Westfield Bank $ 5,000,000.00 Greenfield Co-operative Bank $ 2,000,000.00 Haverhill Bank $ 5,000,000.00 $277,750,000.00 30

Massachusetts Municipal Depository Trust • The Commonwealth’s short-term investments are managed through the Massachusetts Municipal Depository Trust (MMDT) • MMDT is divided between a cash fund and a short-term bond fund • MMDT began operations in July 1977 and invests all funds prudently • Primary objectives of MMDT are: 1. Safety of capital, 2. Liquidity, 3. Investment income, and 4. Diversification • Investors of MMDT include cities, towns, school districts, public colleges & universities, and other public authorities • Since its inception, the MMDT has commingled local government funds with state fund investments in order to provide greater economies of scale in investing funds as well as to minimize the fluctuations in investment portfolio balances • The State Treasurer’s Office assumes the daily responsibility of overseeing investments and investment managers • Both credit quality and liquidity of the cash fund is actively managed and monitored through adopted policies and procedures 31

Massachusetts Municipal Depository Trust • Net assets of MMDT were approximately $7.966 billion as of October 2012 • $4.133 billion ( 51.9% of the total) represents Commonwealth assets • The Commonwealth’s two largest cash sources (general fund and stabilization fund) are invested in both MMDT’s cash portfolio and short-term bond fund • The current overnight liquidity target is 20% • There are 631 distinct participants in MMDT • 84.3% or 296 out of 351 cities / towns in the Commonwealth use MMDT • 153 Housing Authorities, 30 School districts, 16 Local Water Authorities, 15 Higher Education Entities, 12 Government Agencies, 7 Local Transit Authorities, and 102 smaller entities such as Land Banks, Education Cooperatives, Town Planning Commissions, and Town Library Funds also trust MMDT • Weighted Average Maturity (WAM) of the portfolio is 50 days as of October 31, 2012 • Indicative of management’s consistent emphasis on remaining highly liquid during period of budget revenue volatility • Average seven-day yield of the MMDT cash portfolio as of October 31, 2012 was 0.22%, down from 0.25% one year ago • Reduction in yield was intentional in order to improve both credit quality and liquidity • Following a competitive bid process, portfolio management of MMDT will transition in the first quarter of 2013 from Pyramis Global Advisors (a subsidiary of Fidelity Investments) to Federated Investors, Inc. 32

MMDT Review Process MMDT Monthly Review Process with the Commonwealth of Massachusetts External Manager: Fidelity Investments • Once the monthly approved list is constructed the Managing Director of Research sends the approved list to the Director of Investments and the Deputy Treasurer of Commonwealth of MA. • Fidelity and the Commonwealth hold monthly conference calls or face to face meetings to review the approved list. • Fidelity also prepares a review of the MMDT Cash and Bond portfolios containing the following: • Market Overview • Portfolio Positioning - Performance - Investment Strategy and Outlook Internal Process: Commonwealth of Massachusetts • The Deputy Treasurer and the Director of Investments reviews approved list and prepares questions to be asked during the monthly meeting with Fidelity. • When current events occur (example Greek Debt crisis) Fidelity holds on request conference calls with the Deputy Treasurer and the Director of Investments. 33

MMDT Summary of Investment Distribution & Holdings Cash Portfolio Maturity Distribution Time Period 9/30/2012 6/30/2012 9/30/2011 1-7 days 27.95% 28.16% 35.76% 8-30 days 22.37% 27.03% 26.89% 31-60 days 16.46% 16.82% 20.50% 61-90 days 8.77% 11.14% 11.31% 91-180 days 19% 11.32% 3.67% >180 days 5.80% 5.53% 1.88% % of Total Debt Instruments 100% 100% 100% As of October 31, 2012, the Cash Portfolio holdings were made up of: Certificates of Deposit (32.0%) Commercial Paper of Financial Companies (13.3%) Commercial Paper (6.1%) United States Treasury Obligations (11.9%) Federal Government Agency Obligations (2.9%) Medium-term Notes (3.6%) Government Agency Repurchase Agreements (22.9%) Repurchase Agreements (11.7%) Net Other Assets (-4.4%) 34

New MMDT Website: Enhanced Reporting & Data  The MMDT website will be redesigned as part of the transition to Federated from Fidelity with an expanded public information section. The transition is expected to take place in the first quarter of 2013.  The public site will contain portfolio information in four broad categories: Overview, Portfolio Characteristics, Performance, Literature.  The Overview section will provide readers with basic fund information and a link to the portfolio managers biography.  Portfolio Characteristics will provide expanded information to include: top ten holdings, credit quality, liquidity, portfolio composition and effective maturity schedule.  The performance section will break out average annual total returns for the following time frames: cumulative YTD, one month, three month, one year. Annualized returns will be provided for the following timeframes: three year, five year, ten year and Since inception.  The literature section will provide links to the annual reports, investment circulars and fact sheets.  The goal is to provide expanded public disclosure on the funds holdings, performance and management in one concise location.  The following “draft” screen shots display some of the planned enhancements. The data in the sheets is for display purposes only. 35

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Cash Flow Process  MGL Chapter 10, Section 10, states, “The State Treasurer shall prepare and submit to the House and Senate Committees on Ways and Means on or before the last day of August, November, February and May official cash flow projections for the current fiscal year and for the fiscal quarters beginning October 1, January 1, April 1 and July 1, respectively”.  Financial information is gathered from Administration and Finance (ANF), Office of the State Comptroller (OSC), Department of Revenue (DOR) and Treasury.  ANF staff focuses on projections adjusted for actual cash receipts and disbursements.  Projections include estimated spending and revenue, along with assumptions used to derive the estimates and identification of any cash flow gaps. 39

Cash Flow (Cont’d)  OSC provides data based on actual disbursements.  DOR provides actual and estimated tax revenue and refunds for the fiscal year.  Treasury calculates actual cash and investment balances at month end, tracks debt service and debt issuance, performs variance analysis, etc.  Treasury inputs the data and distributes the draft cash flow worksheet for the respective parties to evaluate.  Weekly meetings ensure constant communication and data flow.  All three agencies jointly engaged a consultant (KPMG) to improve the Cash Flow process in 2009 and 2010 40

Fiscal Year 2013 Cash Forecast Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Total FY 2013 (millions) Act Est Est Est Est Est Est Est Est Est Est Est OPENING NON-SEGREGATED OPERATING CASH BALANCE: $2,096.7 $1,944.4 $1,367.2 $1,520.9 $1,822.2 $1,450.2 $1,293.2 $2,118.7 $1,641.7 $986.3 $2,651.6 $2,447.0 $2,096.7 OPERATING ACTIVITIES: Budgetary Funds: Tax Revenue $1,499.1 $1,421.8 $2,293.8 $1,748.3 $1,438.4 $2,112.5 $2,354.2 $1,376.8 $2,216.0 $3,190.9 $1,563.4 $2,506.7 $23,722.0 Federal Reimbursements $579.3 $764.8 $530.5 $575.0 $712.1 $736.6 $611.7 $597.4 $737.4 $716.4 $670.7 $755.7 $7,987.7 Other Budgetary Revenue $320.8 $178.6 $234.2 $385.6 $208.7 $363.9 $366.5 $206.6 $303.5 $623.5 $216.8 $350.8 $3,759.4 Transfer from/(to) Stabilization Fund $0.0 $0.0 $0.0 ($105.6) $0.0 $350.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $244.4 $2,399.1 $2,365.2 $3,058.5 $2,603.4 $2,359.3 $3,563.1 $3,332.4 $2,180.9 $3,256.8 $4,530.8 $2,450.9 $3,613.3 $35,713.5 Total Budgetary Revenue/Inflows Local Aid $0.0 $5.9 $1,224.7 $36.5 $21.9 $1,243.5 $25.3 $26.0 $1,226.2 $21.7 $28.3 $1,250.4 $5,110.4 Tax Refunds $42.1 $34.7 $56.2 $123.2 $99.7 $13.3 $145.7 $431.9 $316.1 $336.4 $107.6 $41.4 $1,748.4 Debt Service for General Obligation (incl CA/T) $149.7 $486.9 $190.8 $99.4 $451.5 $82.5 $128.9 $141.2 $76.1 $60.7 $109.1 $74.9 $2,051.8 Debt Service for Special Obligations $17.2 $0.0 $0.0 $0.0 $0.0 $28.8 $17.2 $0.0 $0.0 $0.0 $0.0 $75.9 $139.2 Debt Service for GANS $0.0 $0.0 $0.0 $0.0 $0.0 $12.1 $0.0 $0.0 $0.0 $0.0 $0.0 $6.0 $18.1 Other Budgetary Expenditures $2,152.7 $2,122.1 $2,312.1 $2,278.5 $2,057.5 $2,367.1 $2,049.5 $2,060.2 $2,315.3 $1,965.0 $1,951.1 $2,026.8 $25,657.9 $2,361.8 $2,649.6 $3,783.8 $2,537.6 $2,630.7 $3,747.3 $2,366.7 $2,659.4 $3,933.6 $2,383.9 $2,196.2 $3,475.4 $34,725.7 Total Budgetary Expenditures/Outflows Net Budgetary Funds $37.4 ($284.4) ($725.4) $65.8 ($271.4) ($184.2) $965.7 ($478.5) ($676.8) $2,147.0 $254.8 $137.9 $987.8 Non Budgetary Funds (Non Budgetary, Higher Ed and Trust Funds) : Lottery Revenue $36.0 $160.0 $130.0 $170.0 $140.0 $125.0 $130.0 $130.0 $170.0 $125.0 $140.0 $140.0 $1,596.0 Pension Receipts (PRIM and Annuity Receipts) $243.6 $205.0 $205.5 $210.0 $205.0 $205.0 $205.0 $205.0 $210.0 $205.0 $205.0 $205.5 $2,509.6 Transfer in for Non Pooled Fund Payments $147.1 $386.0 $236.0 $246.0 $246.0 $236.0 $276.0 $342.0 $322.0 $312.0 $268.0 $247.0 $3,264.1 Non Budgetary Tax Receipts $28.1 $46.6 $50.3 $53.4 $58.5 $30.7 $49.7 $24.1 $80.3 $48.1 $41.8 $59.8 $571.5 Other Non Budgetary Revenue $399.7 $190.0 $160.0 $210.0 $145.0 $280.0 $160.0 $168.7 $295.0 $135.0 $120.0 $185.0 $2,448.4 $854.6 $987.6 $781.8 $889.4 $794.5 $876.7 $820.7 $869.8 $1,077.3 $825.1 $774.8 $837.3 $10,389.6 Total Non Budgetary Revenue/Inflows Lottery Payments $18.1 $79.0 $79.0 $79.0 $79.0 $79.0 $79.0 $59.5 $63.0 $59.0 $56.0 $61.0 $790.6 MBTA Sales Tax $58.3 $65.0 $65.0 $65.0 $65.0 $65.0 $66.0 $66.0 $66.0 $72.0 $67.0 $66.5 $786.8 MBTA Assessments $0.2 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $37.0 $0.0 $0.0 $37.0 $74.2 MSBA Payments $58.3 $56.6 $58.6 $58.6 $58.6 $58.6 $58.6 $58.6 $58.6 $59.8 $58.8 $58.6 $702.3 Pension Payments $334.6 $405.0 $405.0 $405.0 $405.0 $405.0 $405.0 $300.0 $301.0 $305.0 $290.0 $306.0 $4,266.6 Non Pooled Fund Payments $315.5 $386.0 $236.0 $246.0 $246.0 $236.0 $276.0 $342.0 $322.0 $312.0 $268.0 $247.0 $3,432.5 Other Non Budgetary Expenditures $86.6 $97.0 $87.0 $89.0 $94.0 $81.0 $93.7 $78.2 $225.0 $111.0 $94.0 $160.0 $1,296.5 $871.6 $1,088.6 $930.6 $942.6 $947.6 $924.6 $978.3 $904.3 $1,072.6 $918.8 $833.8 $936.1 $11,349.5 Total Non Budgetary Expenditures/Outflows ($17.0) ($101.0) ($148.8) ($53.2) ($153.1) ($47.9) ($157.6) ($34.5) $4.7 ($93.7) ($59.0) ($98.8) ($959.8) Net Non Budgetary Funds Undesignated Revenue/Inflows and Expenditures/Outflows: General Fund Investment Earnings $1.1 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $12.1 Other Funds/3rd Party $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1.1 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $1.0 $12.1 Net Undesignated Revenue/Inflows and Expenditures/Outflows NET OPERATING ACTIVITIES $21.5 ($384.4) ($873.2) $13.6 ($423.5) ($231.1) $809.1 ($512.0) ($671.1) $2,054.3 $196.8 $40.1 $40.0 FEDERAL GRANTS: $168.4 $193.0 $193.0 $193.0 $193.0 $213.0 $193.0 $191.0 $222.0 $193.5 $194.0 $213.5 $2,360.4 Total Federal Grants Revenue/Inflows Total Federal Grants Expenditures/Outflows $242.6 $193.0 $190.7 $190.7 $187.0 $208.7 $193.0 $186.3 $220.0 $192.3 $192.8 $209.5 $2,406.6 ($74.2) $0.0 $2.3 $2.3 $6.0 $4.3 $0.0 $4.7 $2.0 $1.2 $1.2 $4.0 ($46.2) NET FEDERAL GRANTS CAPITAL FUNDS: Capital Revenue/Inflows: Capital Inflow from Federal Reimbursements $41.8 $50.2 $56.9 $57.7 $63.4 $135.6 $21.3 $51.4 $31.5 $11.2 $30.9 $94.1 $645.9 Capital Inflow from Financing Activities: Capital Inflow to General Fund from Segregated Bond Fund $111.0 $50.0 $50.0 $518.8 $206.3 $206.3 $207.0 $205.1 $205.1 $205.1 $205.1 $205.1 $2,374.8 $152.8 $100.2 $106.9 $576.4 $269.7 $341.8 $228.2 $256.5 $236.6 $216.3 $236.1 $299.2 $3,020.7 Total Capital Revenue/Inflows $252.4 $293.0 $282.3 $291.0 $224.1 $272.0 $212.0 $226.2 $222.8 $202.6 $234.3 $314.3 $3,026.8 Total Capital Expenditures/Outflows (99.53) (192.75) (175.47) 285.39 45.54 69.89 16.28 30.31 13.81 13.72 1.79 (15.13) ($6.2) NET CAPITAL FUNDS FINANCING ACTIVITIES: Cash Flow Financing Activities Inflows: Commercial Paper $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 Revenue Anticipation Notes (RANS) $0.0 $0.0 $1,200.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1,200.0 Total Cash Flow Financing Activities Inflows $0.0 $0.0 $1,200.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $1,200.0 Cash Flow Financing Activities Outflows: Commercial Paper – (Principal + Interest) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 RANS – (Principal + Interest) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $403.9 $404.4 $404.9 $1,213.2 Total Cash Flow Financing Activities Outflows $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $403.9 $404.4 $404.9 $1,213.2 $0.0 $0.0 $1,200.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 ($403.9) ($404.4) ($404.9) ($13.2) NET FINANCING ACTIVITIES $1,944.4 $1,367.2 $1,520.9 $1,822.2 $1,450.2 $1,293.2 $2,118.7 $1,641.7 $986.3 $2,651.6 $2,447.0 $2,071.1 $2,071.1 ENDING NON-SEGREGATED OPERATING CASH BALANCE: Capital Budget Bonding Activity: $411.7 $300.7 $250.7 $669.5 $150.7 $413.2 $207.0 $488.7 $752.3 $547.2 $342.1 $605.7 Opening Balance Segregated Bond Funds $0.0 $0.0 $468.8 $0.0 $468.8 $0.0 $488.7 $468.8 $0.0 $0.0 $468.8 $0.0 $2,363.7 Bonds BANs $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $411.7 $300.7 $719.5 $669.5 $619.5 $413.2 $695.7 $957.4 $752.3 $547.2 $810.8 $605.7 Segregated Bond Funds Available $111.0 $50.0 $50.0 $518.8 $206.3 $206.3 $207.0 $205.1 $205.1 $205.1 $205.1 $205.1 $2,374.8 Bond / BANs Proceeds Allocated $300.7 $250.7 $669.5 $150.7 $413.2 $207.0 $488.7 $752.3 $547.2 $342.1 $605.7 $400.6 Ending Balance Segregated Bond Funds 41

Commonwealth of Massachusetts $230.54 mm General Obligation Refunding Bonds, and $100 mm General Obligation Bonds Consolidated Loan of 2011, Series 2011 D (SIFMA Index Bonds) 42

November Financings • The November financings will include a refunding/roll of the SIFMA Index Notes maturing on 2/1/2013 as well as a new money borrowing • The new money borrowing is expected to be sold as floating rate bonds as well, based on the SIFMA Index • The new money bond proceeds generated by the offering will be used to pay for capital projects consistent with the Commonwealth’s capital spending plan • Both series of bonds will be sold very short, in the 1 year to 5 or 6 year maturity range, taking advantage of the market demand for bonds at this point on the yield curve and the relative efficiency of this point on the yield curve (relative to fixed rate bonds) • The variable rate structure of the new money bonds will also be an important and continued step towards an ALM program • The ultimate size and structure of the bonds will depend on market demand • Optional redemption features to be determined at time of pricing but the SIFMA Notes will include some form of call optionality 43

Series 2012 B Refunding & Series 2012 D New Money Financing Schedule  The Commonwealth plans on offering the bonds the week of November 26 th and closing the transaction on December 5 th • Preliminary Financing Schedule (subject to change): November 9 th – Meeting with the rating agencies • November 13 th – Finance Advisory Board Meeting • November 14 th - Mail and Post Preliminary Official Statement • November 16 th - Institutional Investor Conference Call • November 16 th – Receive bond ratings, rating reports published • Week of November 26 th – Price bonds • December 5 th - Transaction Closing • 44

The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Budgeting & Financial Planning Secretary Jay Gonzalez Scott Jordan Mike Esmond Rob Dolan November 9, 2012 0

Fiscal Year 2012  Fiscal Year 2012 Highlights  Surplus of $116 million, from continued active budget oversight and controlling spending.  State Medicaid budget held nearly flat.  Limited investments continued for state education aid (Chapter 70) and controlling long-term health care costs.  $116 million rainy day fund deposit at the close of year  In combination with other Stabilization Fund deposit and withdrawal activity, the total net deposit into the Fund was $273 million.  Fund balance ended the year at $1.65 billion. The FY12 estimates released by NASBO in June 2012 indicate that Massachusetts’s Stabilization Fund will rank second in the nation in absolute size as well as second in the nation as a % of expenditures for states with over $10 billion in expenditures (behind only Texas by both measures).  The $116 million year-end deposit occurs after the state budget utilizes $78 million of surplus revenues for one-time investments and other non-recurring costs in FY 2013.  $78 million proposed for investments in the following areas to help spur economic growth and create jobs:  One-time spending in FY 2013 adopted in Legislature’s budget ($40 million)  Life Sciences Innovation Grants and Loans ($15 million)  Health Care Workforce Transformation Fund ($20 million) 1

Stabilization Fund Balance Stabilization Fund Balances by Fiscal Year 2,335 2,500 2,155 2,119 2,000 1,728 1,652 $s in millions 1,500 1,379 1,392 1,137 1,000 841 669 500 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fiscal Year (1)FY 2013 assumes $350 M in Stabilization Fund Transfer to the General Fund and $90 M in net capital gains proceeds in excess of $1 B. 2

Fiscal Year 2013  FY 2013 signed on-time, and in balance. FY13 budget spending totals $32.5 billion, an increase of 3.9%.  Reliance on estimated $616 million in one-time resources, down from $669 billion in FY12 and over $1.9 billion in FY11.  ANF continues its efforts to develop and improve long-term fiscal planning models and policies. Based on ANF’s long-term models, this level of non-recurring resources is safely within a sustainable level for the state’s annual budget.  The FY13 budget continues to reform, including such areas as, community colleges governance, accountability and effectiveness; programs and services for homeless families; state facilities managements; performance management and budget transparency; and, efforts to control health care spending for the state and employers across the Commonwealth.  Required deposits to Stabilization Fund. Building on the FY11 reform requiring annual capital gains receipts above $1 billion to be transferred to the Stabilization Fund, the FY12 budget represented the first year where the state must segregate all annual tax and other judgments and settlements above $10 million and transferring them to the Stabilization Fund. This change was fully implemented in FY12.  Spending controls continue. While the FY13 budget did not require the same level of reductions and related spending control measures as some previous budgets, state agencies must continue to find ways to limit growth in their costs and operate more efficiently. 3

Fiscal Year 2013  FY13 Revenues. On October 15, the Secretary for Administration and Finance certified that projected operating revenues (tax and non-tax) remained sufficient to support projected expenses for fiscal 2013.  He noted that while tax receipts, at the time of the certification, were $95 million below budgeted estimates, it was premature to conclude that tax revenues will end the year below the budgeted estimate or to estimate the extent of any such shortfall that might occur.  The Secretary also noted, however, that there were a number of risks to tax revenues meeting the budgeted estimate for the fiscal year, including slower than projected economic growth, a potential automatic reduction in the state’s income tax rate and the potential failure of the federal government to address the so-called “fiscal cliff”.  Therefore, the Secretary announced the immediate implementation of spending and hiring controls, and he launched contingency planning measures in the event a downward revision of the fiscal 2013 tax revenue estimate and corresponding budget reductions become necessary.  On November 5, 2012, the Department of Revenue reported that October tax revenues were $162 million below the budgeted estimate, resulting in year-to-date tax revenues that are $256 million below the year-to-date estimate.  The Secretary plans to analyze the October tax revenue results and updated economic forecasts and tax revenue projections for the rest of fiscal 2013 before making any final decisions regarding how to proceed.  Based on the October tax revenues reported by DOR, however, there is a strong likelihood that the Secretary will determine that a downward revision of the fiscal 2013 tax revenue estimate and corresponding budget reductions will be required soon. 4

Fiscal Year 2013  Federal Budget and the “Fiscal Cliff”. A&F is actively modeling what the impacts would be the Commonwealth and its economy should the fiscal cliff begin on January 2, 2013.  Budget Sequestration. Using guidance released by OMB and other analyses (e.g., FFIS) A&F has projected potential reduction scenarios that would result from the Budget Control Act’s sequestration. Tens of millions, if not more, of federal funding to state agencies and wider impacts would be likely among the state’s military, research and life sciences industries. Much of the specifics remain pending later updates from federal granting agencies.  Federal Tax Changes. A&F is continuing to work DOR’s forecast vendors to model FY13/FY14 impacts of the fiscal cliff, particularly with respect to the expiration of tax cuts that would be effective on January 2, 2013.  Debt Ceiling. In August of 2011, A&F prepared guidance for agencies should the US debt ceiling not be raised for a period of time. While that was not necessary at that time, we will be prepared to act if and when needed to respond to any impacts associated with interruptions to federal payments resulting from no change to the debt ceiling. 5

Fiscal Year 2014  House 1 Development. A&F is actively working with state agencies now to develop the Governor’s budget for next year.  With a continued uncertain revenue picture, A&F developed competing scenarios of potential impacts resulting from some or all of the fiscal cliff occurring on January 1, 2013.  The state FY 2014 tax consensus hearing process will begin on December 12 with the joint A&F and legislative hearing at which economic forecasters will provide testimony on likely revenues and related economic factors. Actual revenue forecasts for FY 2014 tax collections and related distributions of dedicated tax streams will not be finalized until early to mid January 2013.  The Governor’s budget will be filed on Wednesday, January 23, 2013. 6

FY2013-2017 Capital Investment Plan  Statewide, five-year capital plan. The plan coordinates capital expenditures by state agencies and authorities that are funded primarily with Commonwealth debt, third party payments and federal reimbursements.  Limit on Borrowing, from all sources. The Administration limits bond-funded capital expenditures, known as the “bond cap.” FY13 bond cap is $1.875 billion with an additional $93 million in unused capacity from the prior fiscal year. Bond cap determination is based on the Debt Affordability Analysis and policies in which A&F sets the annual  borrowing limit at an amount sized to keep debt service within 8% of budgeted revenues The Administration has conservatively constrained the bond cap in FY16 and FY17 at the FY15 level. Future debt  affordability analysis may show sufficient revenue growth to allow increased bond cap in future plans. FY13-17 Capital Investment Plan Total Bond Cap 2,500,000,000 2,000,000,000 1,500,000,000 Unused Capacity 1,000,000,000 State Bond Cap 500,000,000 - FY12 FY13 FY14 FY15 FY16 FY17 7

Long-Term Fiscal Policy Framework: Background • The Administration has adopted a long-term fiscal policy framework to promote: • Achieving structural budget balance • The integration of long-term forecasting with current year budget development • Clear thinking about long-term fiscal impacts of policy decisions and proposals • A collaborative approach to maintenance and improvement of fiscal policy and planning, using data and input from all state government stakeholders • Policy goals: • Structural balance • Sustainable spending growth • Disciplined management of long-term liabilities 8 8

Long-Term Fiscal Policy Framework: Process Flow Commonwealth of Massachusetts Long-Term Fis cal Policy Framework Long-Term Tax Revenue Five Year Model Macro Assumptions Revenue / Spending Growth Caseload Forecasting and Policy Impact 9 9

Long-Term Fiscal Policy Framework: Update • Structural Balance : • FY13 forecast is in structural balance based on an estimated cyclical deficit of $1B and a projected use of $526M in one-time resources ($616M in one-time spending net of $90M in stabilization fund deposits). One- time spending in FY11 and FY12 was also substantially below the cyclical deficit. • The long-term revenue forecast will be updated in December, concurrent with the consensus revenue process, and will incorporate risk (fiscal cliff) scenarios. • Sustainable Spending Growth : • Five-year projections from May of this year indicated spending growth of 5.0% by FY17, leading to structural budget deficits based on projected long-term revenue growth of 4.0%. The rate of spending growth was driven largely by assumed high rates of growth in health care costs. • The base case five-year projections for the January 2013 update to the policy framework will incorporate lower rates of growth in spending based on the health care cost containment legislation. The risk of higher rates of health care cost growth will be captured in scenario analyses. • The updated five-year projections will also include the estimated impact of the Affordable Care Act as well as federal budget/deficit reduction initiatives (e.g. sequestration) • Disciplined Management of Long-Term Liabilities : • The updated policy framework will include an evaluation of the impact of pension reform and recent changes to the state’s pension valuation. • A comprehensive measure for long-term liabilities (debt, pension, OPEB, deferred maintenance) and the potential impact of recommendations from the OPEB commission are also being evaluated. 10 1

The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Revenue Collections & Outlook Kazim P. Özyurt, Chief Economist/Director Fushang Liu, Supervising Economist Manager November 9, 2012 0

Massachusetts Tax System and Tax Expenditure Budget Topics: 1. Overview of Massachusetts Taxation 2. Sources of Massachusetts Tax Revenues Personal Income Tax Corporate and Business Tax Sales and Use Tax All Other Taxes 3. Recent and Current Developments 4. Tax Revenue Trends in Recent Years 5. Fiscal 2012 Revenue Review 6. Fiscal 2013 Revenue Update 1

1. Overview of Massachusetts Taxation 2

1. Overview of Massachusetts Taxation Corporate & business Tangible Income Individual property Income /net worth Sales of Motor Fuels tangible goods and telecom services Tax Cigarettes Estate Room Deeds occupancy Alcohol 3

2. Sources of Massachusetts Tax Revenues 4

2. Sources of Massachusetts Tax Revenues 5

Personal Income Tax Sources of Income Tax Revenues (FY12 Total: $11.911B) Other Capital Gains Income $0.985B (Business, Interest/Divi 8% dend, Other) $1.229B 10% Withholding $9.767B 82% 6

Corporate and Business Taxes Sources of Corporate and Business Tax Revenues (FY12 Total: $2.320B) Corporate, Insurance Financial $0.318B Institutions, and 13.7% Public Utilities $2,002B 86.3% (*) Historical: Distribution of _________________________ Corporate and Business Tax (*) Due to combined reporting, Collections by Type: most payments from these Corporate 59-64% companies recorded under Insurance 13-17% corporate tax Financial Inst. 14-21% Public Utilities 4-7% 7

Sales and Use Tax 8

All Other Taxes All Other Taxes ($Millions) $1,824 Other Budgetary DOR collections $1,727 Motor Fuels 662 Cigarettes 451 Estate 293 Room Occupancy 122 Deeds 110 Alcoholic Beverages 76 Miscellaneous 13 Other Budgetary Non-DOR collections $97 Deeds, Sec. of State $49 Division of Insurance $24 UI Surcharges $21 Beano 3/5ths $1 Raffles/Bazaars $1 9

3. Recent and Current Developments 10

3. Recent and Current Developments: Personal Income, Corporate, and Sales/Use Taxes Income Tax: • Part B income tax rate is reduced to 5.25% from 5.3% on January 1, 2012 • Potential lowering of rate to 5.20% on January 2013 • Statutory requirement • DOR Certification Corporate Tax Reform: • Combined Reporting • Phased-in Rate Reduction from 9.5% to 8% for 2012 Sales/Use Tax: • Rate change (5.0% to 6.25%) • Sales Tax on Alcohol–Instituted and then repealed 11

3. Recent & Current Developments: Tax Expenditure Commission: Last year, the Legislature established and Governor Patrick approved a Tax Expenditure Commission to study carefully for the first time the various exemptions, deductions, and credits in the Massachusetts tax code, and to recommend methods for measuring and reviewing their effectiveness. This Commission met publicly nine times from October 2011 until April 2012, reviewed reams of data and analysis assembled by the Department of Revenue and others. The Commission concluded that Massachusetts tax expenditures have become quite complicated, and are large when compared both with Massachusetts tax revenues collected and with other states’ tax expenditures in proportion to their revenues. The Commission indicated that while many Massachusetts tax expenditures serve important public policy objectives, some may not, and there is a lack of adequate data and of opportunity for regular review and consideration of existing tax expenditures’ cost and effectiveness by policymakers. Finally, the Commission specified that certain types of tax expenditures are worthy of more intense oversight and review. The Commission adopted formal findings and guiding principles, and ultimately several recommendations to the Governor and Legislature. The Commission’s report posted on the DOR web site: http://www.mass.gov/dor/tax-professionals/news-and-reports/tax-expenditure-commission-materials/ 12

3. Recent & Current Developments: Tax Credit Transparency Reporting: Recently enacted tax legislation requires DOR to compile and disclose the recipients of benefits from those tax expenditures that involve refundable or transferable tax credits (e.g., film, Brownfields, low income housing, historical rehabilitation, etc.). Calendar year 2011 credits are the first ones to which the new rules applied. DOR collaborated with administering agencies of those credits and compiled the necessary data and information. As required by the statute, DOR disclosed the identity of the taxpayers and projects entitled to such credits and the amount of the credits, among other information on its web site: http://www.mass.gov/dor/tax-professionals/news-and-reports/massachusetts-tax- credit-transparency-reports/ 13

4. Tax Revenue Trends in Recent Years 14

4. Tax Revenue Trends in Recent Years Tax revenue collections by fiscal year and by categories ($ millions) 22,500 1,856 1,824 1,760 1,808 2,124 1,793 2,320 2,549 17,500 1,702 2,228 1,708 2,476 4,320 2,120 2,099 4,109 4,087 3,987 4,068 990 3,872 12,500 3,869 951 918 739 7,500 12,720 12,484 11,911 11,576 11,400 10,584 10,110 2,500 (2,500) FY07 FY08 FY09 FY10 FY11 FY12 FY13 GAA All Other 1,793 1,760 1,708 1,702 1,808 1,824 1,856 Corporate & Business 2,476 2,549 2,099 2,120 2,228 2,320 2,124 Sales Tax at rate of 5% 4,068 4,087 3,869 3,872 3,987 4,109 4,320 Impact of Sales Tax Rate 739 918 951 990 Increase Total Income 11,400 12,484 10,584 10,110 11,576 11,911 12,720 19,736 20,879 18,259 18,544 20,517 21,115 22,011 Total Revenue Collections 15

4. Tax Revenue Trends in Recent Years 16

4. Tax Revenue Trends in Recent Years Background (FY09, FY10, FY11): • After declining by 12.5% in FY09, due to the recent Great Recession, tax revenues began to recover in FY10 especially in the last quarter of that fiscal year, reflecting an improvement in economic conditions in Massachusetts. But the recovery was weak and income tax paid on capital gains, dividends and interest, and withholding tax collections were all lower compared to FY09. Total tax collections increased by 1.6% actual but declined by 3.2% baseline. • The FY11 performance drew on an underlying sound economy that generated year to year increases in withholding, sales and corporate taxes, as well as an infusion of revenue from income tax on investment income. The increase of collections (10.6% actual and 9.3% baseline) reflects a Massachusetts economy that grew noticeably stronger during the fiscal year, as well as a strong recovery of the stock market. • Note: Contribution of sales tax rate change (took effect in August 2009) to total collections was significant (accounted for 4% of total collection in FY09 and 4.5% in FY10 and thereafter) 17 1

5. Fiscal 2012 Revenue Review 18

Fiscal 2012 Revenue Review  Tax revenues for fiscal 2012, ended June 30, 2012, totaled approximately $21.115 billion, an increase of approximately $598 million, or 2.9%, over the same period in fiscal 2011, and $105 million above the benchmark.  Fiscal 2012 increase in revenues is attributable, in large part, to a) an increase of approximately $331 million, or 3.5%, in withholding collections, b) an increase of approximately $155 million, or 3.2%, in sales and use tax collections, c) an increase of approximately $92 million, or 4.1%, in corporate and business collections, b) a decrease of approximately $7 million, or 0.5% in income cash refunds , c) an increase of approximately $17 million , or 1.0% in income payments with returns and extensions , which were partly offset by d) a decrease of approximately $24 million, or 1.3%, in income cash estimated payments 19 1

Fiscal 2012 Revenue Review • Fiscal 2012 tax collections were approximately $105 million above the fiscal 2012 benchmark tax revenue estimate of $21.010 billion. Below benchmark performance in income tax collections were entirely offset by the above benchmark performance in sales, corporate and business, as well as estate and deeds tax collections in fiscal 2012. • Capital gains tax collections declined by 67% in fiscal 2009 (from $2.175B to $0.717B), and it further declined by 20.2% in fiscal 2010 (from $0.717B to $0.572B. These collections recovered significantly in fiscal 2011 (increase of 73%, from $0.572B to $0.991B). Although, preliminary fiscal 2012 figures indicate that the capital gain tax collections declined by 7.6%, it stood above $0.9B level, which is considered significant compare to where they were a few year ago. 20 2

6. Fiscal 2013 Revenue Update 21

Fiscal 2013 Revenue Update • On January 12, 2012, a fiscal 2013 consensus tax revenue estimate of $21.950 billion was agreed upon by the Secretary of Administration and Finance and the chairs of the House and Senate Committees on Ways and Means. • The revenue estimate in the fiscal 2013 budget is $22.011 billion and reflects the consensus estimate of $21.950 billion adjusted for the impact of fiscal 2013 revenue initiatives enacted as part of the budget, including a) one-year delay of the FAS 109 deductions ($45.9 million), and b) enhanced tax enforcement initiatives ($36.3 million), as well as the impact of the subsequently enacted two-day sales tax holiday on August 11-12, 2012 ($21.55 million) • Approximately $1.1 billion of the $22.011 billion tax estimate is assumed to be generated from taxes on capital gains. Under state finance law, $100 million of the projected capital gains tax revenue will be required to be deposited into the Stabilization Fund and will not be available for budgetary purposes. • According to Mass Benchmarks (1) , there are still risks that could affect the U.S. and Massachusetts economies: the weakness in Europe, slowing growth in China, weak growth in the U.S. economy, and uncertainty about whether and how the looming "fiscal cliff" coming in 2013 will be resolved: So, it is likely that most states across the country will not be in a comfort zone with respect to their own economic growth and tax revenue collections for a while. • (1) http://www.massbenchmarks.org/publications/bulletin/23_bulletin_072712/index.htm and http://www.massbenchmarks.org/indices/indices.htm 22 2

Fiscal 2013 Revenue Update • The chart below indicates that monthly year of-over-year changes in collections have mostly been on the positive side since October 2009, albeit the pace of revenue growth has slowed within last year. MA State Tax Collections Year-Over-Year Changes by Month October 2006 - October 2012 $1,000 $800 $600 $400 $200 $0 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 ($200) ($400) ($600) ($800) ($1,000) 23 2

Fiscal 2013 Revenue Update Fiscal 2013 Year to Date Tax Collections: Preliminary tax revenues for the first four months of fiscal 2013 totaled approximately $6.482 billion, a decrease of approximately $33 million, or 0.5% , over the same period in fiscal 2012, $256 million below benchmark. October 2012 Tax Collection Summary (in $ millions) (Preliminary as of November 5, 2012) ----------------------- Month of October ----------------------- ------------------ FY13 Year-to-Date ------------------ 10/12 $ FY13 YTD $ Above/(Below) Above/(Below) 10/12 v. 10/12 v. Benchmark 10/12 FY13 Benchmark 10/12 v. 10/11 10/11 Based on FY13 10/12 FY13 10/12 FY13 10/12 FY13 YTD Based on FY13 10/12 10/11 $ Actual % Baseline % Estimate of YTD YTD $ YTD Actual Baseline % Estimate of Collections Change Change Change $22.011 Billion Collections Change % Change Change $22.011 Billion Income - Total 802 (29) -3.5% -1.6% (94) 3,624 16 0.4% 2.9% (155) Income Withholding 777 (24) -3.0% -1.2% (75) 3,081 (11) -0.4% 2.3% (129) Income Est. Payments (Cash) 22 (9) -29.8% -29.4% (11) 507 29 6.0% 6.5% (1) Income Returns/Bills 98 25 35.3% 36.8% 13 179 16 9.5% 12.3% (10) Income Refunds (Cash) 93 22 30.4% 30.7% 20 148 23 18.4% 18.9% 21 Sales & Use - Total 440 13 3.0% 1.0% (20) 1,754 52 3.1% 3.2% (41) Sales - Regular 304 4 1.3% 0.4% (15) 1,194 20 1.7% 2.2% (36) Sales - Meals 81 6 8.2% 7.0% 0 332 21 6.9% 7.1% 1 Sales - Motor Vehicles 55 3 5.4% -4.6% (6) 228 10 4.7% 3.4% (6) Corporate & Business - Total 8 (35) -80.9% -87.1% (47) 506 (80) -13.6% -11.8% (46) All Other 150 4 2.5% 2.3% (1) 598 (21) -3.4% -2.8% (14) Total Tax Collections 1,401 (48) -3.3% -3.1% (162) 6,482 (33) -0.5% 1.1% (256) 24 2

Fiscal 2013 Revenue Update Last year, income tax rate reduced from 5.3% to 5.25%, effective tax year 2012 and thereafter: • Pursuant to state law, the state income tax rate on most classes of taxable income was reduced from 5.3% to 5.25% (effective January 1, 2012), because a . the growth in fiscal 2011 inflation adjusted baseline revenues (as defined in state law) over fiscal 2010 exceeded the 2.5% growth threshold , and b . for each consecutive three-month period starting in August and ending in November, 2011, there was positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month period in calendar 2010. • The revenue impact of this rate reduction for fiscal 2012 was about $54 million. The revenue impact for fiscal 2013 (assuming no further rate reduction in calendar year 2013) is expected to be about $114 million. 25 2

Fiscal 2013 Revenue Update – Potential Future Considerations A Further Reduction in Income Tax Rate? The rate could be reduced further from 5.25% to 5.20% effective TY2013 if certain conditions are met: • The state income tax rate could be further reduced from 5.25% to 5.20%, effective January 1, 2013. In order this reduction to happen, similar to last fiscal year, a . the growth in fiscal 2012 inflation-adjusted baseline revenues, as defined in the law, over fiscal 2011 must exceed the 2.5% growth threshold, and b . for each consecutive three-month periods starting in August and ending in November, 2012 there should be a positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month periods in calendar 2011. • The fiscal 2012 inflation-adjusted baseline revenues grew by 2.77% from fiscal 2011, exceeding the initial trigger of 2.5% for the income tax rate reduction. • First two three-month period certifications indicated there was a positive inflation-adjusted baseline revenue growths • However, the Commissioner of Revenue has yet to issue two additional three-month period certifications. • The revenue impact for fiscal 2013: between $50 million and $64 million. The revenue impact for fiscal 2014 (assuming no further rate reduction in calendar year 2014): between $110 million and $124 million. • The fiscal 2013 tax revenue estimate of $22.011 billion does not assume any further income tax rate reduction for calendar 2013 and thereafter 26 2

The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Health Care Candace Reddy, Director of Health Care Finance Glen Shor, Executive Director of the Massachusetts Health Connector David Seltz, Special Advisor on Health Care Cost Containment November 9, 2012 0

Agenda • Massachusetts Health Care Reform – Chapter 58 of the Acts of 2006 • Why Health Reform? • More Affordable Insurance • Shared Responsibility • Conclusions • The Affordable Care Act and Massachusetts • Massachusetts Health Connector Future • Health Care Cost Containment – Chapter 224 of the Acts of 2012 • Setting the Stage • The Massachusetts Model 1

Massachusetts Health Care Reform 2

Why Health Care Reform in Massachusetts? • Health care reform was enacted in April, 2006 • At the time that health care reform was enacted, various surveys projected that between 372,000 and 700,000 residents in Massachusetts were uninsured • Stakeholders generally agree that there were between 450-500K uninsured at the start of reform. This represents approximately 7-8% of the MA population. • Lack of health insurance means: • Sporadic emergency room care rather than preventative care. At the time of health care reform (in 2007), over $600M was being spent on “free care” for the low-income uninsured. This cost was being divided among hospitals ($160M), insurers ($160M), and the Commonwealth ($280M). • Less healthy and productive workforce 3

More Affordable Health Insurance: Commonwealth Care  Commonwealth Care is a state subsidized program for individuals under 300% FPL that do not have access to Employer Sponsored Insurance (ESI) and are not categorically eligible for MassHealth.  Over 40% of Commonwealth Care's membership pays a portion of the health insurance costs through enrollee premiums.  The Commonwealth Care program offers a comprehensive benefit package through five Medicaid Managed Care Organizations. 4

More Affordable Health Insurance: MassHealth  Expansion of Medicaid (“MassHealth”) for children up to 300% FPL  Expansion of Insurance Partnership Program, which provides insurance subsidies to low- income workers and small firms  Increase/eliminate enrollment caps on programs for long-term unemployed adults, disabled working adults, and individuals living with HIV  Restoration of dental, vision, chiropractic and other benefits to adults (optional benefits cut during the last fiscal crisis)  Creation of new wellness benefit/incentive program  Increase fee-for-service rates for physicians and hospitals (contingent on meeting pay-for- performance benchmarks) ($90M/year for three years) 5

More Affordable Health Insurance: Private Insurance Market Reforms  Merged non-group and small group insurance markets  Creation of Young Adult Products (YAPs) for adults 19-26 years of age (sold exclusively through the Connector)  Expand dependent coverage up to age 26 years of age or two years after loss of IRS dependent status, whichever is earlier  “Non-discrimination” requirement  Minimum creditable coverage – new benefit standards set by the Connector 6

Shared Responsibility: Individuals • Individual Mandate • Health care reform requires most adults 18 and over who have access to health insurance to obtain it. Individuals who are deemed able to afford health insurance but fail to comply are subject to penalties. • The Connector establishes standards that determine whether individual, married couples, and families can afford health insurance, based on income and affordable health insurance premiums. • Can you afford ESI (if offered)? • Are you eligible for state-subsidized health insurance? • Can you afford to buy a CommChoice bronze plan on your own? • Can you demonstrate a hardship through appeal? • As of 2009, to satisfy the individual mandate, a resident must have an insurance plan that meets the full Minimum Credible Coverage standards. 7

Shared Responsibility: Employers • There are two principal responsibilities for employers with 11+ FTE’s: • Contribute to health insurance for their full-time employees • Employers who do not contribute to health insurance are subject to the Fair Share Assessment • Set up a section 125 plan (cafeteria plan) that allows individuals to pay their portion of health insurance premiums on a pre-tax basis. • Employers who do not comply with this requirement and whose employees access free care through the Health Safety Net are subject to the Free Rider Assessment • Penalty = Fair Share • Employers must make a “fair and reasonable” contribution to the health insurance of their full- time employees. DHCFP defines “fair and reasonable” through regulations. • DUA collects and enforces this assessment. • • Initially, the requirement for employers was that 25% of their full-time employees must take up health insurance or the employer must contribute 33% to the premium. • Employers that did not comply with this rule would be charged $290 per FTE. • In July 2008, the Fair Share test was changed. Currently, an employer with less than 50 employees must pass the same test as above on a quarterly basis. Employers with 50+ employees now must satisfy both the 25% take-up and 33% contribution tests, or have 75% take-up. 8

Cost of Health Care Reform Health Care Reform Financing Pre-Health Care Reform Health Care Reform FY11 Estimated FY06 Actuals FY07 Actuals FY08 Actuals FY09 Actuals FY10 Actuals Spending MassHealth Spending $ - $ 511 $ 657 $ 856 $ 796 $ 820 Commonwealth Care $ - $ 133 $ 628 $ 805 $ 716 $ 822 Aliens With Special Status $ - $ - $ - $ - $ 33 $ 50 Uncompensated Care Pool/Health Safety Net Trust Fund $ 656 $ 665 $ 416 $ 417 $ 420 $ 420 Total Spending $ 656 $ 1,309 $ 1,701 $ 2,078 $ 1,965 $ 2,112 Health Safety Net Provider Assessment and Insurer Surcharg $ 320 $ 320 $ 320 $ 320 $ 320 $ 320 Federal Financial Participation (FFP) $ 303 $ 816 $ 895 $ 1,307 $ 1,336 $ 1,386 Total Revenue $ 623 $ 1,136 $ 1,215 $ 1,627 $ 1,656 $ 1,706 Total State Share $ 33 $ 140 $ 453 $ 418 $ 276 $ 373 Total Budget (including Pensions) 25,584.60 28,922.90 30,808.40 30,606.60 30,423.60 31,948.00 % of State Spending (Net) 0.13% 0.50% 1.53% 1.44% 0.96% 1.23% 9

Conclusions to Date • 439,000 more Massachusetts residents have health insurance coverage than did before reform. • Massachusetts has the highest rate of insurance in the country with 98.1 percent of residents insured. • There has been no evidence of subsidized coverage “crowding out” employer-sponsored insurance, and employer offer rates have grown from 70 percent to 77 percent since implementation of reform. • Public support for Massachusetts health reform has remained strong with two out of three adults supporting reform. • Most employers believe health reform has been good for Massachusetts and 88 percent of Massachusetts physicians believe reform improved, or did not affect, care or quality of care. • The cost of health care and the annual rate of increase remains a problem for state and local governments, busines. This will be discussed further in the presentation. 10

The Affordable Care Act and Massachusetts 11

Affordable Care Act • In March 2010, congress passed and the President signed into the law the Affordable Care Act, which puts in place comprehensive health insurance reforms that will hold insurance companies more accountable, lower health care costs, guarantee more health care choices, and enhance the quality of health care for all Americans. • The National Law was mirrored very much to the state’s health care reform law in which many parts of the health care system share in the costs and changes in the market. The Exchange was the biggest part of the Federal legislation that copied the way Massachusetts does business through the Connector. • Massachusetts is now in process of working to implement the law. • There are a variety of issues and choices that need to be made at the state level. 12

Affordable Care Act • Many states have a lot of work ahead of them to be ready for January 1, 2014 implementation. But unlike many other states Massachusetts has many of the elements of National Health Reform already in place such as: • An Exchange • Medicaid Expansion • Individual Mandate • Employer Responsibility requirements • Insurance Reforms and Consumer Protections • We are going to focus on the transition of our Exchange the Connector. 13

Massachusetts Health Reform – “Health Connector 1.0” • Created in 2006 by Massachusetts health reform law (Chapter 58 of the Acts of 2006) • Quasi-public agency with eleven-member Board, chaired by Secretary of Administration & Finance • Four ex-officio: A&F/GIC/DOI/MassHealth • Four Gov. appointees: small business/actuary/health economist/broker • Three AG appointees: consumer/labor/Taft-Hartley • Staff of 40+ FTE’s: mix of private health care industry and public sector experience • Annual operating budget of ~$30M+ • State, private and federal matching/grant financing 14

The Role of “Health Connector 1.0” • The Role of “Health Connector 1.0” • Health insurance exchange facilitating access to private health insurance coverage Commonwealth Care – non-group, subsidized • Commonwealth Choice – non-group, small-group (Business Express), unsubsidized • • Policymaking and appeals related to the Massachusetts individual mandate • Outreach and public education about health insurance, how to access it and why to have it • State procurement partnerships State Division of Unemployment Assistance • Massachusetts public higher education institutions • Others • 15

“Health Connector 1.0” – Program Eligibility • Commonwealth Care • Subsidized program partially funded through an 1115 Medicaid waiver and further offset by progressive enrollee premiums • Open to residents at or below 300% FPL not otherwise eligible for Medicaid, other government subsidized programs and subsidized employer sponsored insurance (20% for a family plan; 33% for an individual plan) • Competitively re-procured each year at an annual average premium trend of less than 2% ( n.b., rates bid for FY13 are all lower than capitation rates for FY11; ~10% aggregate decrease) • Commonwealth Choice • Non-subsidized program for individuals and families without access to ESI and small businesses less than 50 • Individuals and families may enroll in non-group coverage or Young Adult Plans; no fee to enroll • Small Businesses may provide their employees access to health insurance through Business Express (sole source), the Voluntary Plan (non-group Section 125 plan employees), and the Contributory Plan (closed pilot program) – no fee for businesses to enroll 16