February 7, 2020 Commonwealth Credit Review Replay Information - - PowerPoint PPT Presentation

The Commonwealth of Massachusetts Bond Financing Programs

February 7, 2020 Commonwealth Credit Review

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Replay Information

Please note that a replay of the investor broadcast associated with the following slides is

• available. The replay can be accessed by following the link below and will remain available

until February 7, 2021.

http://munios.com/live/MACommonwealth

The full slide deck for this call is found in the pages below. These slides as well as those

• f prior investor calls may also be accessed by visiting the Investor and Rating Agency

Presentation Archive on the Commonwealth’s investor website at: www.massbondholder.com

For audio, participants are asked to dial in using the following information: Dial-in: +1 (866) 791-7194 Passcode: 49354394

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Disclaimer

This presentation has been prepared by the Commonwealth of Massachusetts to provide summary information relative to the general obligation credit of the Commonwealth. The presentation is incomplete. The presentation is not part of the Commonwealth’s Information Statement (Information Statement) and is qualified in all respects by reference to the most recently updated Information Statement that has been filed with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system. Investment decisions relating to Commonwealth general obligation bonds and notes should be based only upon the most recently updated Information Statement and the Official Statement of the Commonwealth relating to such bonds or notes. The provision of access to this presentation does not constitute an offer to sell or the solicitation of an offer to buy any bonds or notes that may be described or mentioned in the presentation. Commonwealth bonds and notes are sold only by means of an Official Statement and through registered broker-dealers. The information set forth herein includes information obtained from non-Commonwealth sources that are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the

• Commonwealth. All information and expressions of opinion herein are subject to change without notice. The Commonwealth

undertakes no obligation to provide any additional information or to update any of the information or the conclusions contained herein or to correct any inaccuracies that may become apparent. This presentation contains certain forward-looking statements that are subject to a variety of risks and uncertainties that could cause actual results to differ from the projected results, including without limitation general economic and business conditions, conditions in the financial markets, the financial condition of the Commonwealth and various state agencies and authorities, receipt of federal grants, litigation, arbitration, force majeure events and various other factors that are beyond the control of the Commonwealth and its various agencies and authorities. Because of the inability to predict all factors that may affect future decisions, actions, events or financial circumstances, what actually happens may be different from what is set forth in such forward-looking statements. Forward-looking statements are indicated by use of such words as “may,” “will,” “should,” “intends,” “expects,” “believes,” “anticipates,” “estimates” and others.

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TREASURER DEBORAH B. GOLDBERG

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GOVERNOR CHARLES D. BAKER

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Economic Overview

Sue Perez

Deputy Treasurer

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Economic Update – Statistical Overview

Massachusetts United States Population Estimated Percent Change, July 1, 2010 – July 1, 2018 5.1% 5.8% Personal Income, Consumer Prices Per Capita Peronal Income, 2019 Q3 $74,818 $56,832 Annual Percent Change in CPI-U, 2019 1.9% 1.8% Annual Percent Change in CPI-U (NSA), November 2018- November 2019 2.1% 2.1% Employment Percent Change in Nonfarm Employment, December 2018 – December 2019 1.2% 1.4% 2019 Average Annual Unemployment Rate 2.9% 3.7% December 2019 Unemployment Rate 2.8% 3.5% Education 2017 Expenditure Per Pupil K-12, Public $16,592 $12,499 2018 Percent of Adults with at least a Bachelor's Degree 44.5% 32.6% Economic Base and Performance Percent Change in Annual Real Gross Domestic Product, 2018 Q3- 2019Q3 2.1% 2.4% Percent Change in International Exports, Nov 2018- Nov 2019

• 2.0%
• 1.8%

10 Year Average Annual Change in GDP 2008-2018 2.1% 1.8%

Source: UMASS Donohue Institute

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Economic Update – Unemployment

2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Monthly Unemployment Rate

MA US

Source: US Dept of Labor, Bureau

• f Labor Statistics

Source: US Dept of Labor, Bureau

• f Labor Statistics

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Economic Data: Per Capita Personal Income

127% 128% 129% 130% 131% 132% 133%

Massachusetts Per Capita Income as a Percent of US Average

Source: US Department of Commerce, Bureau of Economic Analysis 9

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Economic Update – Coincident Index

90.00 100.00 110.00 120.00 130.00 140.00 150.00 2010-01-01 2010-04-01 2010-07-01 2010-10-01 2011-01-01 2011-04-01 2011-07-01 2011-10-01 2012-01-01 2012-04-01 2012-07-01 2012-10-01 2013-01-01 2013-04-01 2013-07-01 2013-10-01 2014-01-01 2014-04-01 2014-07-01 2014-10-01 2015-01-01 2015-04-01 2015-07-01 2015-10-01 2016-01-01 2016-04-01 2016-07-01 2016-10-01 2017-01-01 2017-04-01 2017-07-01 2017-10-01 2018-01-01 2018-04-01 2018-07-01 2018-10-01 2019-01-01 2019-04-01 2019-07-01 2019-10-01

Coincident Economic Activity Index

Index is comprised of Non-farm payroll, Average hours worked (manufacturing), Unemployment Rate, and Salary disbursements deflated by the consumer price index MA CT NY US

Source: Federal Reserve Bank

• f St. Louis

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Department of Revenue

• Dr. Kazim P. Özyurt

Chief Economist, Director, Office of Tax Policy & Analysis

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Monthly year-over-year changes in collections:

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FY20 Year-to-Date (Through December) Tax Collections Update

12/2019 Actual Collections 12/2019 v. 12/2018 $ Fav/(Unfav) 12/2019 v. 12/2018 % Fav/(Unfav) 12/2019 Actual vs Benchmark $ Fav/(Unfav) 12/2019 Actual vs Benchmark % Fav/(Unfav) 12/2019 v. 12/2018 Baseline % Change 12/2019 YTD Actual Collections 12/2019 YTD

• v. 12/2018

YTD $ Fav/(Unfav) 12/2019 YTD

• v. 12/2018

YTD % Fav/(Unfav) 12/2019 YTD Actual vs Benchmark $ Fav/(Unfav) 12/2019 YTD Actual vs Benchmark % Fav/(Unfav) 12/2019 YTD

• v. 12/2018

YTD Baseline % Change Income Income Withholding 1,263 (56)

• 4.2%

(111)

• 8.0%
• 0.3%

6,664 228 +3.5% (33)

• 0.5%

+4.5% Income Est. Payments 141 20 +16.3% 15 +11.5% +17.1% 924 53 +6.1% 69 +8.1% +6.9% Income Returns/Bills 35 (2)

• 4.9%

(1)

• 2.5%
• 4.9%

351 15 +4.5% 25 +7.7% +4.9% Income Refunds Net (outflow) (7) 20 +75.2% 15 +69.1% +75.5% (258) 26 +9.1% (41)

• 19.1%

+7.6% Subtotal Non-withheld Income 170 38 +29.3% 29 +20.4% +30.1% 1,017 94 +10.2% 53 +5.5% +10.7% Subtotal Income 1,433 (17)

• 1.2%

(82)

• 5.4%

+2.5% 7,682 322 +4.4% 20 +0.3% +5.3% Sales & Use Sales - Regular 415 21 +5.4% (11)

• 2.5%

+3.0% 2,471 145 +6.2% (16)

• 0.6%

+5.0% Sales - Meals 101 9 +9.3% 3 +3.3% +8.9% 667 30 +4.7% (4)

• 0.6%

+4.7% Sales - Motor Vehicles 74 4 +5.4% (1)

• 1.9%

+1.8% 446 9 +2.1% (8)

• 1.7%

+2.1% Subtotal Sales & Use 590 34 +6.1% (9)

• 1.5%

+3.8% 3,584 184 +5.4% (28)

• 0.8%

+4.6% Corporate & Business - Total 388 20 +5.4% 53 +15.7% +7.8% 1,260 32 +2.6% 104 +9.0% +4.1% All Other 201 8 +4.4% (1)

• 0.4%

+1.7% 1,409 85 +6.4% 137 +10.7% +2.1% Total Tax Collections 2,612 45 +1.7% (39)

• 1.5%

+3.5% 13,934 623 +4.7% 233 +1.7% +4.7% Notes: (1) The figures above exclude Tax-Related Settlements & Judgments exceeding $10 million each. The certified total for these was $0.0 million in December 2019 and $12.5 million during FY20 YTD. (2) The December and year-to-date benchmarks reflect the full Fiscal Year 2020 benchmark of $30.099 billion.

December 2019 Tax Collection Summary (in $ millions)

Preliminary as of January 22, 2020

Month of December FY20 YTD as of December 13

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FY20 Year-to-Date (Through December) Tax Collections Update

• Fiscal 2020 tax collections through December
• Year-to-Date total: $13.934 billion
• +$623 million, or 4.7% from the same period in fiscal 2019
• $233 million above December Year-to Date benchmark
• above benchmark performance in
• income tax,
• corporate & business tax collections, and
• “All Other” taxes, incl. motor fuels, cigarettes, alcohol and deeds.

partially offset by

• slightly lower than expected
• sales tax

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FY20 Year-to-Date (Through December Tax Collections Update

More specifically:

• Withholding: $6.664B, +$228M, +3.5% actual, +4.5% baseline, and $33M
• r 0.5% below benchmark
• Non-withholding: $1.017B, +$94M or 10.2% actual, 10.7% baseline, and

$53M or +5.5% above benchmark

• Sales & use tax collections: $3.584B, +$184M, +5.4% actual, +4.6%

baseline, $28M or 0.8% below benchmark

• Corporate and business tax collections: $1.26B, +$32M, +2.6% actual,

+4.1% baseline; $104M or 9.0% over benchmark

• All Other taxes: $1.409B, +$85M, +6.4% actual, +2.1% baseline; $137M or

10.7% above benchmark

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Executive Office for Administration & Finance

Michael Heffernan

Secretary

Catharine Hornby

Undersecretary

Mark Attia

Assistant Secretary

Bran Shim

Finance Director

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Fiscal Year 2020: Operating Budget

Operating Budget for Fiscal 2020

• Since 2015 the Baker-Polito Administration has focused on returning structural

balance to the state budget, working with the Legislature to keep spending in line with revenue growth and rebuild the Commonwealth’s reserves.

• The fiscal 2020 budget, as approved by the Governor on July 31, 2019, provides for

approximately $43.3 billion, excluding transfers to the Medical Assistance Trust Fund, the pension liabilities trust fund, and other interfund transfers.

• Approximately 3.3% greater than fiscal 2019 estimated spending levels at the

time of the Governor’s approval.

• Projects a net increase of $476 million to the Stabilization Fund.
• Includes $1.1 billion in unrestricted local aid for cities and towns, up $183 million

since Fiscal Year 2015 (FY15).

• The Executive Office for Administration and Finance will continue to monitor revenues

and spending and implement measures as necessary to ensure that the Commonwealth’s budget for fiscal 2020 will achieve statutory balance.

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Fiscal Year 2021: Consensus Revenue Estimates

Consensus Revenue Estimates for Fiscal Year 2021

• On January 13, 2020, a fiscal 2021 consensus tax revenue estimate of $31.151

billion was agreed upon by the Secretary of Administration and Finance and the chairs of the House and Senate Committees on Ways and Means.

• This estimate reflects a projection of 2.8% tax revenue growth over the revised

projected fiscal 2020 tax revenue figure of $30.289 billion.

• The consensus revenue estimate for fiscal 2021 incorporates the statutory reduction
• f the Part B individual income tax rate to 5.0% effective January 1, 2020, and the

reinstitution of the charitable deduction effective January 1, 2021.

• After accounting for statutorily required transfers for pensions, and to the MBTA, the

MSBA and the Workforce Training Fund, the Secretary and Committee chairs agreed that $25.621 billion would be the maximum amount of tax revenue available for the fiscal 2021 budget.

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Fiscal Year 2021: Triennial Pension Funding Schedule

Triennial Pension Funding Schedule (Beginning in Fiscal 2021)

• On January 15, 2020, the Secretary of Administration and Finance filed the triennial

funding schedule for the Commonwealth’s employee retirement obligations with the House and Senate Committees on Ways and Means, which provides for a fiscal 2021 transfer amount of $3.115 billion, an increase of $274 million or 9.63% over the fiscal 2020 transfer amount.

• The assumptions underlying the funding schedule include valuation of assets and

liabilities as of January 1, 2019, an annual rate of return on assets of 7.25%, and appropriation increases of 9.63% per year through fiscal 2035 with a final amortization payment in fiscal 2036 (four years before the statutory requirement).

• The funding schedule also fully amortizes by fiscal 2027 the liabilities attributable to

the employee retirement incentive program approved by the Governor on May 4, 2015.

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Fiscal Year 2021: Governor’s Budget Recommendation (“H.2”)

Governor’s Budget Recommendation on January 22, 2020

• On January 22, 2020, the Governor filed his fiscal 2021 budget recommendation,

providing for a total of $44.6 billion in state spending, excluding $430.7 million in projected transfers to the Medical Assistance Trust Fund.

• The budget as filed represented an increase of 2.3% over projected fiscal 2020

spending and anticipated a deposit of $310 million to the Commonwealth Stabilization Fund in fiscal 2021.

• The Governor’s budget recommendation has been filed with the Legislature for

consideration in accordance with the Commonwealth’s annual budgeting process.

• The House of Representatives generally approves its version of the budget in April,

and the Senate generally approves its version in May.

• The differences between the two versions are then reconciled by a legislative

conference committee during the month of June, so that a final version can be enacted by the Legislature and sent to the Governor for his approval prior to the start

• f the new fiscal year on July 1.

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Capital Investment Plan: Fiscal Year 2020-2024

Climate Change Risk Mitigation

• The Baker-Polito Administration is committed to mitigating climate change and

preparing for its ongoing impacts. The fiscal year 2020 capital plan expands on the Administration’s commitment to responsible capital investing in the era of the climate change.

• The FY20 capital plan includes approximately $60 million in investments that are

targeted specifically at addressing the causes and effects of climate change, including:

• $20.9 million for state-owned facilities to reduce greenhouse gas emissions and

prepare for the impact of climate change.

• $12 million for repairs and reconstruction of Inland Dams and Seawalls.
• $11 million for grants to support cities and towns in planning for climate change

resiliency and to implement priority projects through the Municipal Vulnerability Preparedness program.

• $5 million for sustainability and resiliency improvements in public housing.

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Office of the Comptroller

Howard Merkowitz

Deputy Comptroller

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FY2019 Statutory Basis Financial Report (SBFR)

 The SBFR is presented on a budgetary or statutory basis – cash receipts and expenditures, including two months of an accounts payable and receivable period; excludes trust funds and most activity of so-called business-type activities such as unemployment and the Institutions of Higher Education  The SBFR does not include activity of “component units” such as the Massachusetts School Building Authority (MSBA), some of the Massachusetts Department of Transportation (MassDOT) such as the MBTA and RTA’s, and the Massachusetts Development Finance Agency (MassDevelopment)  SBFR determines whether the budget is balanced according to state finance law. Determines the calculation of the “consolidated net surplus” and the end of year transfer to the Stabilization Fund

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FY2019 Statutory Basis Financial Report (SBFR)

 FY19 ended with a “consolidated net surplus” (the statutory definition of balance) of $623 million in the budgeted funds  FY19 operating gain of $1.573 billion in the budgeted funds, compared to a $939 million operating gain in FY18  Budgeted fund ending balance of approximately $3.959 billion, of which $3.424 billion is in the Stabilization Fund  $1.423 billion was deposited in the Stabilization Fund in FY19  Stabilization Fund balance is $1.080 billion above its previous high point at the end of FY07  Total budgeted fund revenue (prior to transfers between budgeted funds) increased by $2.563 billion, or 5.8%, to $46.383 billion  Budgeted fund tax revenue increased by $1.862 billion, or 7.2%, from FY18, driven by healthy wage and salary growth and increases in capital gains and corporate taxes.

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FY2019 Statutory Basis Financial Report (SBFR)

 FY19 Tax revenue growth (continued)  Withholding increased $488 million, or 3.9%  Capital gains tax revenue increased $875 million, or 73.9%  Sales & use tax increased $253 million, or 5.5%  Corporate tax increased $516 million, or 21.6%  Estate tax increased $128 million, or 27.1%  Budgeted fund expenditures and other uses (prior to transfers between budgeted funds) totaled $44.810 billion, an increase of $1.930 billion, or 4.5%, from FY18

• Medicaid expenditures totaled $16.521 billion, an increase of $776 million, or

4.9%, with at least half of the growth due to changes in payment patterns

• Post-employment benefits (pension and health care) was $3.110 billion, an

increase of $219 million, or 7.6%, due primarily to increased pension contributions  Budgetary fund debt service was up $2.327 billion, or 0.2%, from FY18

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FY2019 Statutory Basis Financial Report (SBFR)

 $113 million deposited to the State Retirement Benefits Trust Fund (SRBTF) to fund Other Post-employment benefits (OPEB – mainly health insurance for retirees)  30%, or $71 million of tobacco master settlement proceeds received in FY19  Additional $42 million deposited in the SRBTF from capital gains tax revenue

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FY2019 Statutory Basis Financial Report (SBFR)

Certain Lottery Withholding Taxes $429 Investment Earnings $52,913 Transfer of Abandoned Property Revenues $3,673 Transfer of 10% of Casino Gaming Revenues (MGM & Encore) $6,231 Transfer of 10% of Encore Casino fines $3,550 Capital Gains Tax Transfers (Net of Pension & OPEB Transfers) $763,559 Consolidated Net Surplus Transferred to Stabilization Fund $592,722 Stabilization Fund Balance as of June 30, 2019 $3,424,376 Memo: Change in Stabilization Fund Balance, FY18-19 $1,423,077

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FY2019 Comprehensive Annual Financial Report (CAFR)

 Given the delay in issuing the SBFR, the FY19 CAFR has also been delayed. Comptroller has provided KPMG with a final draft of the CAFR, and expects to file the report within the next few days after KPMG completes its audit.

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Office of the State Treasurer Debt / Capital Presentation

Sue Perez

Deputy Treasurer

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Financing Update

• Since the last investor call in August, the Commonwealth sold $825 million in new money GO
• bonds. These were sold in two series, $425 million (Series G) of tax-exempt bonds and $400

million (Series H) of index-eligible taxable bonds.

• Additionally, in August, the Commonwealth sold more than $1 billion of refunding bonds that

generated almost $234 million in gross debt service savings. These were sold in two series $858 million (Series D) of index-eligible taxable bonds and $189 million (Series E) tax-exempt bonds.

• In October, the Commonwealth sold $1.4 billion in Revenue Anticipation Notes (RANS) with

maturities in April, May and June of 2020.

• In November, the Commonwealth sold $53 million in GANs for its Accelerated Bridge Program

and $200 million of Commonwealth Transportation Fund bonds, primarily for its Rail Enhancement Program. Both series of bonds were for new money and tax-exempt.

Series Par Amount Sale Date Award/Bookrunner Maturity Range Avg Life All-In-TIC

GO 2019 D Refunding (Federally Taxable) $858.4 MM 8/26/2019 BofA Securities 2039, 2043 19.0 2.77% GO 2019 E Refunding $189.5 MM 8/27/2019 Goldman 2020-2027 6.1 1.25% GO 2019 H (Federally Taxable) $400.0 MM 9/4/2019 Morgan Stanley 2049 29.2 2.92% GO 2019 G $425.0 MM 9/5/2019 Morgan Stanley 2025-2039 14.0 2.48% RANS 2019 A, B and C $1,400.0MM 10/23/2019 VARIOUS 2020 0.6 1.19% CTF 2019 A (ABP/REP) $200.0 MM 11/14/2019 Citigroup 2049 28.7 3.77% GANS 2019 A (ABP) $53.5 MM 11/13/2019 JP Morgan 2026-2027 7.1 1.89%

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Upcoming Transactions

Plan of Finance *

Month Par Amount Structure Type Credit Method of Sale

February 2020 $800 MM Fixed-Rate Tax Exempt New Money GO Competitive Q2 2020 $650 MM Fixed-Rate Tax Exempt New Money GO Negotiated Q3 2020 $600 MM Fixed-Rate Tax Exempt New Money/Refunding GO TBD Q3 2020 $300 MM Fixed-Rate Tax Exempt Commonwealth Transportation Fund New Money CTF Negotiated Q4 2020 $500 MM Fixed-Rate Tax Exempt New Money GO TBD

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Issuance Timeline*

• The Commonwealth expects to sell the following series of bonds in February
• $800 million 2020 Series A (new money) on February 19th to be priced on a competitive

basis

• Our current Information Statement is available at www.massbondholder.com. The Preliminary

Official Statements have also been posted to our website.

• To receive email notifications of our investor events please send us an email at:

massbondholder@tre.state.ma.us or follow us on Twitter @BuyMassBonds

2020 Series A General Obligation Bonds

* Preliminary, subject to change

2020 Series A General Obligation Bonds GO Competitive Sale Date February 19, 2020 GO Closing Date February 26, 2020

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Contact Information

Questions, please contact:

Office of State Treasurer Division of Debt Management Sue Perez Deputy Treasurer sperez@tre.state.ma.us (617) 367-3900 ext. 816 Kathy Bramlage Senior Debt Analyst kbramlage@tre.state.ma.us (617) 367-3900 ext. 494

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QUESTIONS

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