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State Debt Management Presentation Jennifer Hassemer | Assistant Commissioner for Debt Management April 7, 2017 | mn.gov/mmb What is a Bond? Municipal bonds are debt securities Issued by states, cities, counties and other governmental

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State Debt Management Presentation

Jennifer Hassemer | Assistant Commissioner for Debt Management

April 7, 2017 | mn.gov/mmb

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What is a Bond?

  • Municipal bonds are debt securities
  • Issued by states, cities, counties and other governmental entities
  • Finance capital projects
  • The bond issuer agrees to pay interest and the return on the investment, the

principal, to the bondholders who have loaned the issuer money for the project(s)

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Characteristics of Bonds

  • Issuer
  • Purpose
  • Credit structure/source of repayment
  • Maturity structure
  • Price
  • Tax status
  • Interest rate
  • Term

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State Bond Issuers

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

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Authority

  • State Constitution
  • Minnesota Statutes
  • Federal Regulations
  • Internal Revenue Service
  • Securities and Exchange Commission
  • Municipal Securities Rulemaking Board

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What Projects Are Eligible For State G.O. Bond Financing?

  • Article XI, Section 5, of the Minnesota Constitution contains the authority for

incurring public debt (G.O. bonds)

  • Subdivision (a) authorizes debt “to acquire and to better public lands and buildings and other

public improvements of a capital nature, and to provide money to be appropriated or loaned to any agency or political subdivision of the state for such purposes.”

  • In other words…
  • The project must be for a public purpose
  • The project must be publicly owned
  • The purpose of the bonds must be clearly set forth in the law
  • Project activities must constitute capital expenditures

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Other Purposes for Which G.O. Debt May be Issued

  • Repel invasion or suppress insurrection (1857)
  • Borrow temporarily (1962)
  • Refund outstanding bonds of the state or any of its agencies (1962)
  • Establish and maintain highways (1924)
  • Promote forestation and prevent and abate forest fires (1924)
  • Construct, improve and operate airports and other air navigation facilities (1944)
  • Develop the state’s agricultural resources by extending credit on real estate (1922)
  • Improve and rehabilitate public or private railroad rights-of-way and other rail facilities up to $200 million

par value (1982)

  • As otherwise authorized in the Constitution

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Other Important Provisions Pertaining to G.O. Bonds

  • A full faith and credit obligation of the state – state will levy a tax if necessary

to meet its debt service obligations

  • Maximum maturity of 20 years
  • Each bond issue must distinctly specify the purposes and maximum amount of

proceeds authorized to be expended for such purposes

  • A special and separate state bond fund is maintained for payment of debt

service (principal and interest)

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Debt Policies / Informal Practices

  • Capital Investment Guidelines
  • Tax compliance policies and procedures
  • Continuing disclosure policy
  • Refunding criteria
  • Use of competitive vs. negotiated sales
  • Use of an independent financial advisor
  • Timing of bond sales

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Purpose of Capital Investment Guidelines

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

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Capital Investment Guideline #1

  • Guideline #1: Total tax-supported principal outstanding (sold) shall be 3.25%
  • r less of total state personal income
  • Status: 2.73%
  • What debt is included?
  • State Issued Debt
  • General Obligation Various Purpose Bonds; General Obligation Trunk Highway Bonds; Appropriation

Bonds

  • State-Supported Debt
  • State standing appropriations (University of Minnesota and Minnesota Housing Finance Agency); Lease-

Purchase Financing for Real Estate

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Capital Investment Guideline #2

  • Guideline #2: Total amount of tax-supported principal (both sold and

authorized/unsold) for state general obligations, state moral obligations, equipment capital leases and real estate capital leases shall not exceed 6% of total state personal income

  • Status: 3.53%
  • What debt is included?
  • All debt types included in Guideline #1, plus
  • Moral obligations (Housing Finance Agency, Office of Higher Education)
  • Lease purchase financing for equipment

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Capital Investment Guideline #3

  • Guideline #3: At least 40% of state G.O. bonds are to mature within 5 years

and 70% within 10 years

  • Status:
  • 40.3% scheduled to mature within 5 years
  • 71.2% scheduled to mature within 10 years
  • Cost of bonding bills are realized more quickly

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Tax-Supported Debt (Guideline #1) Principal Outstanding Authorized, Unissued Total All State General Obligation Debt General Fund State General Obligation Debt 4,413,290,000 $ 327,723,500 $ 4,741,013,500 $ Trunk Highway Fund General Obligation Debt 1,997,825,000 350,823,100 2,348,648,100 Certificates of Participation (SWIFT/Integrated Tax) 24,420,000 24,420,000 BCA Bemidji Lease Revenue Bonds 2,910,000 2,910,000 Other Real Estate Capital Leases: Ag/Health Buildings 39,205,000 39,205,000 DHS Building 46,970,000 46,970,000 MHFA Supportive Housing 2008 26,015,000 26,015,000 MHFA Housing Infrastructure 2012 26,470,000 26,470,000 MHFA Housing Infrastructure 2014 73,210,000 73,210,000 MHFA Housing Infrastructure 2015 7,290,000 2,710,000 10,000,000 U of M: TCF Bank Stadium 85,490,000 85,490,000 Biosciences Facilities 177,170,000 177,170,000 State General Fund Appropriation Refunding Bonds 555,345,000 555,345,000 Professional Football Stadium Appropriation Bonds 445,330,000 445,330,000 Certificates of Participation - Legislative Office Facility 78,600,000 78,600,000 Lewis and Clark Regional Water System Bonds 11,790,000 7,210,000 19,000,000 Pay for Performance Appropriation Bonds 10,000,000 10,000,000 TOTAL - Tax-Supported Debt 8,011,330,000 $ 698,466,600 $ 8,709,796,600 $ Other Obligations (Guideline #2) Tax-Supported Debt (issued and authorized but unissued) 8,709,796,600 $ MHFA Moral Obligation Debt (1) 1,152,305,000 MOHE Moral Obligation Debt 467,970,000 Equipment Leases 25,586,953 Guaranteed Energy Savings Program (GESP) Equipment Leases 9,234,539 TOTAL - All Obligations 10,364,893,092 $ FY 2017 State Personal Income Estimate - IHS Forecast: 293,575,000,000 State Tax-Supported Debt as a Percent of Personal Income: 2.73% Estimated maximum additional principal capacity for all tax-supported debt @ 3.25% 1,529,857,500 $ All Obligations as a Percent of Personal Income: 3.53% Estimated maximum additional principal capacity for all obligations @ 6.0% 7,249,606,908 $

Capital Investment Guidelines Summary of Outstanding Principal as of 2/28/2017 As of February 2017 Budget and Economic Forecast

(1) MHFA has a $5 billion statutory debt limit. However, several of the MHFA bonding programs are not issued as Moral Obligation debt. The bond programs that are not included because they

are not secured by a debt service reserve fund subject to replenishment from Legislative appropriation are the conduit multifamily revenue bonds and bonds issued under Home Ownership Mortgage-backed Exempt Securities and Homeownership Finance Bonds.

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2017 Debt Issuance Plans

  • State General Obligation Bonds – July/August 2017
  • Depending on Outcome of Legislative Session:
  • State Appropriation Bonds
  • MHFA Housing Infrastructure Bonds

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Bond Ratings

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

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State of Minnesota Bond Ratings

  • General Obligation Bonds
  • Fitch: AAA (stable outlook)
  • Moody’s: Aa1 (stable outlook)
  • S&P: AA+ (positive outlook)

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Federal Considerations

  • Tax Exemption (IRS)
  • Arbitrage (IRS)
  • Disclosure (SEC)
  • Enforcement (IRS)

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Cancellations (M.S. §16A.642)

  • Commissioner of MMB issues cancellation report on January 1 of each odd-

numbered year

  • Lists all bond and general fund capital appropriations enacted > 4 years

previously with unspent and unencumbered balances

  • The 1/1/17 report showed amounts from 2012 bonding bill and earlier
  • Total of $17.5 million
  • Such balances are cancelled as of July 1 of the year of the report
  • Cancelled balances go to repay state bonds

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Thank you

Jennifer Hassemer | Assistant Commissioner for Debt Management

jennifer.hassemer@state.mn.us https://mn.gov/mmb/debt-management/ 651-201-8079

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