The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Debt - - PowerPoint PPT Presentation
The Commonwealth of Massachusetts 2012 Rating Agency Meetings: Debt & Investments Treasurer Steven Grossman James MacDonald, First Deputy Treasurer Delia Rissmiller, Investor Relations Manager Colin MacNaught, Assist. Treasurer for Debt
November 9, 2012
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1. Background & Fiscal 2013 Plan of Finance 2. Enhanced Investor Disclosure 3. Cash & Investments 4. 2012 Series D & 2012 Series B Refunding Bond Sales
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The State Treasurer’s Office (STO) is statutorily responsible for all of the borrowing needs of the Commonwealth of Massachusetts This includes short-term borrowings for cash flow purposes or for capital financings – Short-term borrowings are accomplished primarily through the sale of fixed-rate Revenue Anticipation Notes (RANs) and Commercial Paper RANs & CP BANs This also includes long-term borrowings to fund the state’s capital infrastructure needs – Long-term borrowings are accomplished through the sale of Commonwealth bonds Because long-term borrowings are typically large and involve pledging the state’s taxing powers, the STO is prudent in how it structures its borrowings to ensure that the costs are as low and as affordable as possible while also posing as little risk to the operation of the Commonwealth as possible
Mission Statement The main objective of the Debt Management department is to manage the Commonwealth’s debt programs effectively and efficiently to minimize the state’s borrowing costs that are supported by
will include a measurement of the risks associated with each financing method or proposal. The issuance
federal tax and securities laws, is within the guidelines of adopted policies of the department, and ensures that timely repayment of debt service can be accomplished in a fiscally appropriate manner.
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The Commonwealth’s debt is managed with an overall philosophy of taking a long-term approach in borrowing funds at the lowest possible interest cost The STO’s main objectives in the sale of debt are to: – Obtain the lowest possible cost of funds for each borrowing; – Minimize the Commonwealth’s exposure to market risks; – Enhance the long-term demand for Massachusetts bonds by enhancing the retail investor market; – Obtain the highest possible credit ratings; and – Maintain the required secondary market disclosure with rating agencies, investors and regulators To achieve these objectives, the STO will continuously work towards developing the optimal capital structure of its debt in view of the Commonwealth’s: – Risk tolerance to market fluctuations, – Capital market outlook, – Future capital funding needs, – Investor base, – Rating agency considerations, – Budget and cash flow considerations, and – Counterparty credit profiles
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General Obligation Bond Program - $18.6 bn outstanding (as of 10/31/2012) – General obligation bonds are secured by the full faith and credit of the Commonwealth – Issued for a variety of projects and purposes, such as highways, institutions, buildings, flood and pollution control, among others – Bonds are sold as consolidated loans, with allocation of bond proceeds to capital spending done in arrears – Bonds rated ‘AA+ / Aa1 / AA+’ by Fitch, Moody’s and S&P, respectively Commonwealth Transportation Fund Bond Program - $995.4 mm outstanding (as of 10/31/2012) – Bonds issued pursuant to Ch 233 of the Acts of 2008 and Section 2O of Chapter 29 to finance approximately $2 bn of the $3 bn Accelerated Bridge Program bond authorization through 2016 – Bonds secured solely by certain pledged revenues of the Commonwealth Transportation Fund, including a pledge of a portion of the Commonwealth’s 21-cent gasoline tax and Registry of Motor Vehicle fees and surcharges – Bonds rated ‘Aaa / AAA’ by Moody’s and S&P, respectively Grant Anticipation Notes Bond Program - $610.4 mm outstanding (as of 10/31/2012) – Chapter 121 of the Acts of 1998 authorized the original issuance of up to $1.5 billion in Federal Highway Grant Anticipation Notes (GANs) to finance a portion of the costs of construction of the Central Artery/Ted Williams Tunnel Project (the “CA/T Project”) – Debt service payments principally secured by all reimbursements and other federal assistance that the Commonwealth shall receive with respect to federally-aided highway construction projects – The Accelerated Bridge Program, authorized in Chapter 233 of the Acts of 2008, revised the GANs program – Senior lien GANs closed with issuance of new $100 mm GANs for Accelerated Bridge Program in December 2010, bonds back-stopped by excess CTF funds – Authorization to issue up to $1 bn in new GANs under the Accelerated Bridge Program – ABP GANs rated ‘AA+ / Aa2 / AAA’ by Fitch, Moody’s, and S&P respectively
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Special Obligation Revenue Bond Program - $337.5 mm outstanding (as of 10/31/2012) – Special obligation revenue bonds are issued under Section 20 of Chapter 29 of the Massachusetts General Laws and are secured by a pledge of a portion of the Commonwealth’s 21-cent gasoline tax – Statutory authorization limits aggregate issuance to $1.125 billion – The Commonwealth issued its fifth series of Special Obligation Bonds (and final) in June 2002 – Lien was closed with the original issuance of the CTF bonds in December 2010 – Bonds rated ‘AA / Aa1 / AAA’ by Fitch, Moody’s, and S&P, respectively Special Obligation Dedicated Tax Revenue Bond Program - $638.7 mm outstanding (as of 10/31/2012) – Bonds issued pursuant to Ch 152 of the Acts of 1997 to finance costs incurred for constructing or renovating three convention & exhibition centers in Boston, Springfield and Worcester – Bonds secured solely by certain pledged revenues levied within specified geographic areas, including excise tax receipts (hotel occupancy tax) and other dedicated fees and surcharges – Based on current annual revenues, Additional Bonds Test (ABT) of 1.50x does not allow for the issuance of additional bonds under the current indenture – Bonds are rated ‘A1 / A’ by Moody’s and S&P, respectively
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The Commonwealth Existing Debt Service Profile Fixed Rate G.O. Debt Optionality
Callable Bonds 23% Non-Callable Bonds 77%
The Commonwealth’s General Obligation Bond portfolio is made up primarily of fixed rate bonds – 82% of the G.O. Program’s debt is outstanding in a fixed rate mode – The remaining 18%, while in a floating rate mode, is largely structured as synthetic fixed rate tied to floating-to-fixed rate swaps Both the GANs program and CTF Bond program payments reflect a fixed annual obligation of the Commonwealth Increasing call optionality in the G.O. debt portfolio is a goal of the Commonwealth in FY13 to FY16
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The Commonwealth remains highly rated
Stable direct debt measures relative to economy
Commonwealth GDP and $2,817 per capita
“Tax supported debt” takes into account roughly $8.7 bn of non-recourse sales tax debt of the MBTA and MSBA Also, no borrowing at county level in Massachusetts Debt amortization is conservative and front- loaded (GO)
No pension obligation bonds No tobacco securitizations – tobacco settlement funds used for OPEB trust fund Massachusetts’ secondary market for tax-exempt bonds is deep and liquid, with strong recent expansion of bonds held by individual investors G.O. Debt Profile
Debt Outstanding ($mm) 10/31/2012 Credit Principal Outstanding General Obligation Bonds $18,558.0 Special Obligation Bonds 1,971.6 Federal Highway Grant Anticipation Notes 610.4 Total $21,140.0
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Massachusetts has outstanding as compared to other states
capita, an amount equal to 5.3% of state GDP (2011 GDP figures)
debt grows to approximately $4,138 and as a percent of GDP to approximately 7.8%
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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
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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
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 $1.2 bn since July 2007
Source: Executive Office for Administration and Finance, Debt Affordability Analysis published Oct-2012; Commonwealth Information Statement 1 Totals may not add due to rounding 2 Revenue Estimates as of release of FY 2031 bond cap. The Administration adjusts the bond cap at least annually to reflect revenues as necessary
General Obligation Bond Cap ($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%
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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;
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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
How the STO ultimately sells and structures bonds is based on conservative, prudent debt financing policies and procedures
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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
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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 Asset / Liability Mix Impact of Rising Interest Rates Impact of Declining Interest Rates More interest rate sensitive assets than liabilities Increase in rate sensitive interest earnings. Lower Net Interest Expense Decrease in rate sensitive interest earnings. Higher Net Interest Expense More interest rate liabilities than assets Increase in rate sensitive interest expense. Higher Net Interest Expense Decrease in rate sensitive interest expense. Lower Net Interest Expense Interest rate sensitive assets and liabilities are matched No impact on Net Interest Expense No impact on Net Interest Expense
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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
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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
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program amongst issuers in the municipal market
devoting additional resources to enhance its communications with investors
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
investor in general obligation bonds, including:
and expenditures, financial data, current and recent fiscal year information, long- term liabilities, capital investment plans, state workforce, and pending legal matters
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
the Municipal Securities Rulemaking Board, through its Electronic Municipal Market Access (EMMA) system
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and more predictability in disclosure publications
tatements, enhancing sections based on investor or regulatory feedback
NABL
tarting in 2012, the Commonwealth has moved away from Information S tatement S upplements
section
S EC Disclosure Document s” (1998)
disclosure more predictable: January, March, May, July, S eptember, November
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December 13th
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away from financings (New York, Chicago, San Francisco)
per call
Commonwealth of Massachusetts 2012/2013 Investor Disclosure & Conference Call Schedule
Disclosure Update Targeted Investor 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
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The 20 largest bondholders of Massachusetts General Obligation bonds are:
Top 20 Mass. G.O. Bondholders Rank Firm Location G.O. Bonds Par ($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
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
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Washington Oregon California Alaska Hawaii Idaho Montana Nevada Arizona Wyoming New Mexico Utah North Dakota South Dakota Colorado Nebraska Texas Kansas Ohio Michigan Oklahoma Minnesota Iowa Illinois Indiana Missouri Arkansas Alabama Georgia South Carolina North Carolina Tennessee Kentucky NJ Wisconsin MD DE West Virginia Mississippi New York Vermont NH Maine Pennsylvania Florida Louisiana
$300 MM-$500 MM Less than $100MM No Holdings $100 MM-$300 MM Above $500 MM
RI Virginia CT MA
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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
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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
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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.
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Bank Name Amount
Avidia Bank $ 2,000,000.00 Bank of Cape Cod $ 10,000,000.00 BankFive $ 5,000,000.00 BankGloucester $ 5,000,000.00 Bay Coast Bank (formerly Citizens-Union Savings Bank) $ 5,000,000.00 Bay State Savings Bank $ 5,000,000.00 Belmont Savings Bank $ 10,000,000.00 Berkshire Bank $ 5,000,000.00 Beverly Cooperative Bank $ 1,000,000.00 Bristol County Savings Bank $ 10,000,000.00 Cambridge Savings Bank $ 5,000,000.00 Cape Cod Cooperative Bank $ 5,000,000.00 Cape Cod Five Cents Savings Bank $ 10,000,000.00 Century Bank and Trust Company $ 10,000,000.00 Chicopee Savings Bank $ 10,000,000.00 Commerce Bank & Trust Company (formerly Mercantile Bank and Trust Company) $ 5,000,000.00 East Boston Savings Bank $ 5,000,000.00 East Cambridge Savings Bank $ 5,000,000.00 East West Bank $ 5,000,000.00 Eastern Bank $ 5,000,000.00 Everett Co-operative Bank $ 10,000,000.00 Fidelity Bank $ 5,000,000.00 First Trade Union Bank $ 5,000,000.00 Greenfield Co-operative Bank $ 2,000,000.00 Haverhill Bank $ 5,000,000.00
Bank Name Amount
Hampden Bank $ 5,000,000.00 Hometown Bank, A Co-operative Bank $ 5,000,000.00 Hoosac Bank $ 5,000,000.00 Leader Bank NA $ 10,000,000.00 Lowell Cooperative Bank $ 5,000,000.00 Lowell Five Cent Savings Bank $ 5,000,000.00 Marlborough Savings Bank $ 5,000,000.00 Mechanics' Co-operative Bank $ 5,000,000.00 Meetinghouse Bank $ 1,000,000.00 Mutual Bank $ 5,000,000.00 Newburyport Five Cents Savings Bank, The $ 5,000,000.00 North Middlesex Savings Bank $ 5,000,000.00 Nuvo Bank and Trust Company $ 250,000.00 Pentucket Bank $ 10,000,000.00 Reading Co-operative Bank $ 5,000,000.00 Rockland Trust Company $ 5,000,000.00 Rollstone Bank and Trust $ 2,500,000.00 Savers Co-operative Bank $ 5,000,000.00 Savings Bank, The $ 2,000,000.00 Southbridge Savings Bank $ 5,000,000.00 South Coastal Bank $ 5,000,000.00 South Shore Savings Bank $ 10,000,000.00 Village bank $ 2,000,000.00 Walpole Co-operative Bank $ 10,000,000.00 Westfield Bank $ 5,000,000.00 $277,750,000.00
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Depository Trust (MMDT)
1. Safety of capital, 2. Liquidity, 3. Investment income, and 4. Diversification
authorities
investment portfolio balances
managers
policies and procedures
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MMDT’s cash portfolio and short-term bond fund
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
volatility
from Pyramis Global Advisors (a subsidiary of Fidelity Investments) to Federated Investors, Inc.
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External Manager: Fidelity Investments
Director of Investments and the Deputy Treasurer of Commonwealth of MA.
Internal Process: Commonwealth of Massachusetts
during the monthly meeting with Fidelity.
Treasurer and the Director of Investments. MMDT Monthly Review Process with the Commonwealth of Massachusetts
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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%)
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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.
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Slide 1
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Slide 2
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Slide 3
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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.
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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
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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 Total Budgetary Revenue/Inflows $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 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 Total Budgetary Expenditures/Outflows $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 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 Total Non Budgetary Revenue/Inflows $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 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 Total Non Budgetary Expenditures/Outflows $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 Net Non Budgetary Funds ($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) 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 Net Undesignated Revenue/Inflows and Expenditures/Outflows $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 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: Total Federal Grants Revenue/Inflows $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 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 NET FEDERAL GRANTS ($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) 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 Total Capital Revenue/Inflows $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 Expenditures/Outflows $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 NET CAPITAL FUNDS (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) 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 NET FINANCING ACTIVITIES $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) ENDING NON-SEGREGATED OPERATING CASH BALANCE: $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 Capital Budget Bonding Activity: Opening Balance Segregated Bond Funds $411.7 $300.7 $250.7 $669.5 $150.7 $413.2 $207.0 $488.7 $752.3 $547.2 $342.1 $605.7 Bonds $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 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 Segregated Bond Funds Available $411.7 $300.7 $719.5 $669.5 $619.5 $413.2 $695.7 $957.4 $752.3 $547.2 $810.8 $605.7 Bond / BANs Proceeds Allocated $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 Ending Balance Segregated Bond Funds $300.7 $250.7 $669.5 $150.7 $413.2 $207.0 $488.7 $752.3 $547.2 $342.1 $605.7 $400.6
42
43
well as a new money borrowing
Index
with the Commonwealth’s capital spending plan
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)
an ALM program
form of call optionality
44
The Commonwealth plans on offering the bonds the week of November 26th and closing the transaction on December 5th
Secretary Jay Gonzalez Scott Jordan Mike Esmond Rob Dolan November 9, 2012
1
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)
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(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.
1,137 1,728 2,155 2,335 2,119 841 669 1,379 1,652 1,392 500 1,000 1,500 2,000 2,500
$s in millions
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Fiscal Year
Stabilization Fund Balances by Fiscal Year
3
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
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.
4
FY13 Revenues. On October 15, the Secretary for Administration and Finance certified that projected
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.
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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
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
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.
6
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.
7
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
1,000,000,000 1,500,000,000 2,000,000,000 2,500,000,000 FY12 FY13 FY14 FY15 FY16 FY17
Unused Capacity State Bond Cap
8
planning, using data and input from all state government stakeholders
8
9
9 Commonwealth of Massachusetts Long-Term Fiscal Policy Framework Long-Term Tax Revenue Caseload Forecasting and Policy Impact Macro Assumptions Five Year Model Revenue / Spending Growth
10
$526M in one-time resources ($616M in one-time spending net of $90M in stabilization fund deposits). One- time spending in FY11 and FY12 was also substantially below the cyclical deficit.
and will incorporate risk (fiscal cliff) scenarios.
budget deficits based on projected long-term revenue growth of 4.0%. The rate of spending growth was driven largely by assumed high rates of growth in health care costs.
rates of growth in spending based on the health care cost containment legislation. The risk of higher rates of health care cost growth will be captured in scenario analyses.
federal budget/deficit reduction initiatives (e.g. sequestration)
the state’s pension valuation.
potential impact of recommendations from the OPEB commission are also being evaluated. 1
November 9, 2012
1
2
3
Sales of tangible goods and telecom services
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5
6
7
_________________________ (*) Due to combined reporting, most payments from these companies recorded under corporate tax Historical: Distribution of Corporate and Business Tax Collections by Type: Corporate 59-64% Insurance 13-17% Financial Inst. 14-21% Public Utilities 4-7%
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9
All Other Taxes ($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
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11
12
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/
13
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:
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15
Total Revenue Collections 19,736 20,879 18,259 18,544 20,517 21,115 22,011
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 Increase 739 918 951 990 Total Income 11,400 12,484 10,584 10,110 11,576 11,911 12,720 11,400 12,484 10,584 10,110 11,576 11,911 12,720
739 918 951 990
4,068 4,087 3,869 3,872 3,987 4,109 4,320 2,476 2,549 2,099 2,120 2,228 2,320 2,124 1,793 1,760 1,708 1,702 1,808 1,824 1,856
(2,500) 2,500 7,500 12,500 17,500 22,500
Tax revenue collections by fiscal year and by categories ($ millions)
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17
1
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.
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.
was significant (accounted for 4% of total collection in FY09 and 4.5% in FY10 and thereafter)
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19
Tax revenues for fiscal 2012, ended June 30, 2012, totaled approximately $21.115 billion, an increase
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
1
20
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.
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.
2
21
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by the Secretary of Administration and Finance and the chairs of the House and Senate Committees on Ways and Means.
$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)
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.
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.
2
23
the positive side since October 2009, albeit the pace of revenue growth has slowed within last year.
2
($1,000) ($800) ($600) ($400) ($200) $0 $200 $400 $600 $800 $1,000 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
MA State Tax Collections Year-Over-Year Changes by Month
October 2006 - October 2012
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2
Fiscal 2013 Year to Date Tax Collections: Preliminary tax revenues for the first four months
, over the same period in fiscal 2012, $256 million below benchmark.
10/12 Collections 10/12 v. 10/11 $ Change 10/12 v. 10/11 Actual % Change 10/12 v. 10/11 Baseline % Change 10/12 $ Above/(Below) Benchmark Based on FY13 Estimate of $22.011 Billion 10/12 FY13 YTD Collections 10/12 FY13 YTD $ Change 10/12 FY13 YTD Actual % Change 10/12 FY13 YTD Baseline % Change FY13 YTD $ Above/(Below) Benchmark Based on FY13 Estimate of $22.011 Billion
Income - Total 802 (29)
(94) 3,624 16 0.4% 2.9% (155) Income Withholding 777 (24)
(75) 3,081 (11)
2.3% (129) Income Est. Payments (Cash) 22 (9)
(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% 332 21 6.9% 7.1% 1 Sales - Motor Vehicles 55 3 5.4%
(6) 228 10 4.7% 3.4% (6) Corporate & Business - Total 8 (35)
(47) 506 (80)
(46) All Other 150 4 2.5% 2.3% (1) 598 (21)
(14) Total Tax Collections 1,401 (48)
(162) 6,482 (33)
1.1% (256)
October 2012 Tax Collection Summary (in $ millions) (Preliminary as of November 5, 2012)
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Last year, income tax rate reduced from 5.3% to 5.25%, effective tax year 2012 and thereafter:
from 5.3% to 5.25% (effective January 1, 2012), because
2010 exceeded the 2.5% growth threshold, and
there was positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month period in calendar 2010.
for fiscal 2013 (assuming no further rate reduction in calendar year 2013) is expected to be about $114 million.
2
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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:
fiscal 2011 must exceed the 2.5% growth threshold, and
there should be a positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month periods in calendar 2011.
the initial trigger of 2.5% for the income tax rate reduction.
baseline revenue growths
period certifications.
fiscal 2014 (assuming no further rate reduction in calendar year 2014): between $110 million and $124 million.
income tax rate reduction for calendar 2013 and thereafter
2
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
1
2
Massachusetts Health Care Reform
3
700,000 residents in Massachusetts were uninsured
represents approximately 7-8% of the MA population.
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).
4
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.
5
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)
6
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
7
subject to penalties.
families can afford health insurance, based on income and affordable health insurance premiums.
the full Minimum Credible Coverage standards.
8
Assessment
insurance premiums on a pre-tax basis.
through the Health Safety Net are subject to the Free Rider Assessment
time employees.
health insurance or the employer must contribute 33% to the premium.
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.
9
Pre-Health Care Reform FY06 Actuals FY07 Actuals FY08 Actuals FY09 Actuals FY10 Actuals FY11 Estimated 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% Health Care Reform Health Care Reform Financing
10
insured.
insurance, and employer offer rates have grown from 70 percent to 77 percent since implementation of reform.
supporting reform.
Massachusetts physicians believe reform improved, or did not affect, care or quality of care.
governments, busines. This will be discussed further in the presentation.
11
The Affordable Care Act and Massachusetts
12
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 health care system share in the costs and changes in the market. The Exchange was the biggest part
13
many other states Massachusetts has many of the elements of National Health Reform already in place such as:
14
15
16
enrollee premiums
subsidized programs and subsidized employer sponsored insurance (20% for a family plan; 33% for an individual plan)
bid for FY13 are all lower than capitation rates for FY11; ~10% aggregate decrease)
than 50
(sole source), the Voluntary Plan (non-group Section 125 plan employees), and the Contributory Plan (closed pilot program) – no fee for businesses to enroll
17
PT2, and a $60 copay for PT3)
which differ by income bracket)
narrower network as well
standardized plans in all)
Affordable Care Act
18
19
20
21
22
avoid tax penalties in Massachusetts
23
available “affordable” MCC-compliant insurance
reviews and determines exemptions from the individual mandate penalty due to hardship in advance
HC form
MCC Regulation, the plan may be submitted to the Health Connector for review
24
25
insurance to residents receiving unemployment benefits up to 400% FPL
savings
dramatically improving benefits with below-trend rate increases
effectuate payment and delivery system reform through coverage for state and municipal employees and retirees
26
Gateway to Coverage for the Uninsured Over 230K covered through Health Connector (9/12) since enactment of Chapter 58 – 98% MA insured Force for Cost Savings and Competition Annual avg. premium trend <2% in Commonwealth Care New market entrants in Commonwealth Care and Choice Fair, Effective Steward of Individual Mandate Only 1.2% of tax filers assessed a penalty (2009) Approved 65% of penalty appeals Expert on Purchasing Health Insurance Saved $ on health insurance for students and others Platform for Garnering Support for Reform Through outreach and education and public awareness campaigns, more than 60% of MA residents support MA HCR
27
The Affordable Care Act (ACA) vision for the Exchange is largely built on the Massachusetts model Under the ACA, the Health Connector will still facilitate access to subsidized and unsubsidized insurance for individuals, families and small groups The Health Connector will continue to serve in a policymaking role and will also manage appeals from the federal individual mandate It will also continue to conduct outreach and education and continue to work with Brokers and advocate groups to do so
28
application that accesses state and federal data sources to determine eligibility
Medicaid expansion, APTCs)
Connector and obtain private health insurance coverage with the assistance of federal tax credits
exceeds 9.5% of their income or does not meet minimum value requirements (60% actuarial value)
value
29
specified benefits selected by each state that meet a core set of benefits defined by the feds
Connector’s Business Express plan, which is a sole-source product offering)
salaries of less than $50K; visit www.IRS.gov for more information
Exchange
30
Health Care Cost Containment
31
While the 2006 health care reform was successful at providing near universal coverage, it did not take on cost control. Health Care costs are a problem nationally but are particularly concerning in Massachusetts. Massachusetts spends more per capita on health care than any other state in the nation, with per capita personal health care spending of $9,278 in 2009. Health care spending growth has far outpaced inflation. Without significant cost containment, total health care spending in Massachusetts will increase from an estimated $68 billion in 2010 to $123 billion in 2020.
32
ACTUAL AND PROJECTED MASSACHUSETTS TOTAL PERSONAL HEALTH CARE EXPENDITURES, 1991-2020
SOURCES: Centers for Medicare & Medicaid Services, Health Expenditures by State of Residence, CMS, 2011; Massachusetts Division of Health Care Finance and Policy, “Massachusetts
Health Care Cost Trends, Historical (1991-2004) and Projected (2004-2020),” November 2009.
Year
33
PER CAPITA PERSONAL HEALTH CARE EXPENDITURES, 2009
NOTE: District of Columbia is not included. SOURCE: Centers for Medicare & Medicaid Services, Health Expenditures by State of Residence, CMS, 2011.
34
Chapter 224 signed into law
passed, Health care transparency and e-Health
Small business health care relief
Health Care Reform
Insurance Reforms, Community Rating, Guaranteed Coverage
35
Chapter 224 of the Acts of 2012, an Act Improving the Quality of Health Care and Reducing Costs Through Increased Transparency, Efficiency and Innovation, was signed into law on August 4, 2012 by Governor Patrick and is set to become effective on November 5, 2012. It represents a historic step forward for Massachusetts.
36
37
Key Provisions of the Law
programs;
38
Improved Affordability, Accessibility, and Quality
Health Information Technology System‐wide redesign / Integrated care Health Insurance Plan Design Innovation Comprehensive payment reform Increased Transparency Malpractice Reform Health Resource Planning Prevention of illness and Promotion of Good health Payment Reform
39
PROJECTED MASSACHUSETTS TOTAL PERSONAL HEALTH CARE EXPENDITURES, 2010-2026
40
PROJECTED MASSACHUSETTS TOTAL HEALTH CARE EXPENDITURES AS A PERCENTAGE OF GSP, 2011-2026
41
Martin Benison, Comptroller of the Commonwealth Howard Merkowitz, Deputy Comptroller Kathy Sheppard, Deputy Comptroller November 9, 2012
1
2
Topic Disclosure Statements Financial Statements Budget Documents (Executive, Legislative and Enacted) Pension Actuarial Valuations OPEB Actuarial Valuations Workers Comp Actuarial Valuations Quarterly Cash flows Monthly Tax Collections Stabilization Fund History Economic Information Web HotLink
State Treasurer
Commonwealth
Valuation Reports
3
Comptroller on October 30th
deposit)
4
budgetary funds; $175-$200 million in ARRA expected in FY13
final revenue estimate
time solutions in FY11
budget – all were deposited directly to the Stabilization Fund per legislation enacted in the FY12 budget that requires all $10+ million settlements to be deposited directly to Stabilization
5
FY97, due in large part to savings initiatives implemented during FY12.
that were not repeated in FY12. Between FY10 and FY12, budgetary debt service grew at an annual rate of 1.7%.
spending for universal healthcare
6
contributions were up 2.5% and state employee health insurance costs grew by 3.8%.
7
budget
legislation enacted in November 2011.
Projected Stabilization Fund Balance
(1) As of close of FY12, including final transfer from FY12 surplus
$1,379
$0 $500 $1,000 $1,500 $2,000 $2,500 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Stabilization Fund Balance, FY1986-FY2013, ($ mm)
$709
($1,300) ($800) ($300) $200 $700 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
$273
Annual Change in Stabilization Fund, FY1986-FY2013 ($ mm)
8
$1,652 $1,392
9
Texas and Alaska, whose high balances are due to oil revenues
significantly higher than the median of 1.9% of expenditures nationally
ranks second in sized and as a percentage of expenditures, behind only Texas (source;
NASBO Spring Survey of the States)
2.4% - MA reserves levels as a percent of budget are more than double
median is 4.1% - MA reserve levels as a percent of budget are 134% of the AAA average
10
$0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 Alaska Texas Massachusetts New York West Virginia Wyoming South Carolina Maryland Minnesota Louisiana Iowa Florida New Mexico Colorado Nebraska North Dakota Georgia Tennessee Virginia North Carolina Illinois Michigan Missouri Ohio Utah Delaware Rhode Island Washington Kentucky South Dakota Mississippi Indiana Vermont Oregon Maine Nevada Hawaii New Hampshire Alabama Arizona Arkansas Connecticut Idaho Kansas Montana New Jersey Oklahoma Pennsylvania Wisconsin
Peer States (AA+/Aa1/AA+): MN, OH, WA, KS, OR
Rainy Day Fund Balances as of FY2012 ($ millions)
Source: NASBO Spring Survey. MA figures are actual based on SBFR
Target States (AAA/Aaa/AAA): MD, IA, GA, VA, NC, MO, UT, DE
11
pension accounting standards, GASB 67 and GASB 68
and do not address how plans are to be funded
changes to reporting requirements for defined benefit pension plans (e.g., the Commonwealth’s Pension Reserves Investment Fund, or PRIT)
12
a certain date, required discount rate after that date is equal to rate based on AA/Aa 20 year municipal bond index, which averaged about 4.5% in CY2011 and 3.8% in CY2012. Whether this will affect Massachusetts discount rate assumptions is still being analyzed by PERAC.
affects the way governments account for and report defined benefit pension plans
the Commonwealth’s balance sheet
Contribution (ARC) shortfall – is recorded as a liability – that liability was $1.2 billion in FY11, $1.4 billion in FY12
13
asset smoothing methodology
estimate (already assumed by Commonwealth)
recognition of changes in liability
(RSI)
pension funding methodology
14
Cash Management Cash Flow Forecasting Revenue Enhancement Prompt Pay Discounts
15
Joint project of Comptroller (CTR) and Treasurer (TRE) Replaced legacy Cash Management System with state accounting system (MMARS) module – integrates CTR and TRE systems Automated previously manual work More accurate and timely financial data on state’s cash position One source for cash forecasting
16
17
18
What is Intercept?
MassTax refund system daily.
external debts.
19
Program Inception Through FY12 -- $ 93,576,743
19
History of Comptroller and DOR Managed Intercept Program
20
Commonwealth departments not currently using it
21
entities
22
842 1,377 1,799 2,140 2,648 3,177 3,636 4,279 4,836 5,375 6,119 6,974 683 979 1,288 1,640 2,028 2,492 2,920 3,291 3,830 4,275 4,784 5,525 555 929 1242 1581 1,873 2,187 2,544 2,883 3,236 3,629 4,057 4,654
500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 7500 8000 July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Cumulative Discounts Taken Comparison FY2010, FY2011 and FY2012 (In $Thousands)
FY2012 Discount Amt FY2011 Discount Amt FY2010 Discount Amt
23
Nicola Favorito, Deputy Treasurer / Executive Director S.R.B. Greg Mennis, Executive Office for Admin. & Finance James Lamenzo, Actuary, PERAC Henry Dormitzer, Chair, Special Commission on Retiree Benefits Michael Trotsky, Executive Director/CFO, PRIM November 9, 2012
1
COMPONENTS:
agencies
** (Massachusetts municipal and county employees participate in one of 104 separate, local or regional retirement systems that are not part of the Commonwealth System)
2
system for purposes of retirement benefits
3
contribute 8, or 9% plus additional 2% (on compensation >$30k), or 11%. (Public School Teachers hired on or after July 1, 2001 contribute 11%)
7.1 percent (employer) and 7.6 percent (employee). Sources: Public Plans Database (PPD) (2009); Towers Watson (2009); and Vanguard (2010). (Contribution Schedule for system members: Joined prior to 1/1/1975 5% 1/1/75 – 12/31/1983 7% 1/1/84 - 06/30/1996 8% After 1/1/1996 9% Members who joined system after January 1, 1979 also contribute an additional 2% on any portion of salary over $30,000.00)
4
$41.5 b (as of 9/30/12)
5
6
State, Teachers, Boston teachers and Local COLA reimbursements Annual Actuarial Valuations since 2000 January 1, 2012 most recent
7
8
Complete results page 9 of report Total normal cost $1,358 Employee contributions $1,023 Net normal cost $ 335 Actuarial Liability $67,547 Assets (Actuarial Value) $43,942 Unfunded Liability $23,605
9
Unfunded actuarial liability (UAL) $23.6 billion History of UAL- page 6 of report Dollar basis- doesn’t show progress
10
Funded ratio 65.1% Funded ratio history- page 7 of report Better measure of progress made Overall, better than anticipated
11
Investment return 8.25% determined by Legislature PERAC “standard” assumption 8.0% since 1997 Recommend 8.0% for 1/13 (page 5) Other assumptions determined by experience studies State and Teachers’ studies in progress Mortality changes included in 1/12 results Salary change expected to have significant impact
12
Pension & OPEB Reform
13
20 years
schedules
*Source: “Revenue Demands of Public Employee Pension Promises”, Robert Novy-Marx and Joshus D. Rauh
Pension Funding Discipline
14
double dipping
system to study further structural reforms.
Pension Reform Act Passed in November 2011
15
there shall be a special commission to investigate and study retiree healthcare and other non- pension benefits. The commission consists of 13 members including 3 private citizens, appointed by the governor, 2 of whom shall serve as co-chairs of the commission, and the secretary of administration and finance, or the secretary’s designee.
finance shall commission a comprehensive, independent analysis of the costs and benefits of further structural reforms to the current pension system that will provide a public benefit while ensuring the ability to attract and retain public employees.
Commissions and Studies Mandated by Pension Reform Legislation
16
provide resources for the trust
health care costs
OPEB: Steps Taken to Date
17
future cost of providing them;
commonwealth and employees;
employee healthcare the commission deems appropriate; and
purposes.
Representative Jay Barrows Henry Dormitzer, Co-Chair Shawn Duhamel, Retirees Assoc. Al Gordon, Treasurer’s Designee Senator John Hart Senator Michael Knapik Dolores Mitchell,
Gregory Mennis, Designee of Administration and Finance Secretary Daniel Morgado, Shrewsbury Town Manager Andrew Powell, Massachusetts AFL-CIO Representative John Scibak Anne Wass, Co-Chair
18
18
19
& Poor’s, and actuarial firms Aon Hewitt and Segal Co.
Center for Retirement Research at Boston College.
municipalities (output will include summary results and over 200 pages of supporting detail).
20
Independent Analysis of Pension System: Deliverables
to stress-test the financial solvency of its retirement systems.
Commonwealth’s current pension benefit system in comparison to the cost of retirement income benefits provided by public employers in other states (80+) and relevant private sector comparables.
local retirement systems in the Commonwealth.
have implemented to provide defined contribution or hybrid plans, or related design modifications that re-allocate risks, costs, and benefits between employees and the employer.
21
Pension Assets
22
Pension Reserves Investment Management (PRIM) Board 9 Appointed and Elected Trustees PRIT Fund - $50.8 billon as of 9/30/2012 22 Public Securities Managers Investing 27 Portfolios 14 Real Estate, Timber & REIT Managers 100+ Private Equity and Private Debt Managers, 200+ Partnerships 5 Hedge Fund-of-Funds Managers, 21 Direct Hedge Fund Managers Public Markets (Long Only), Private Equity, Hedge Fund and Real Estate Consultants PRIM Staff - 26 Professionals Beneficiaries: 88% of All Retirement Boards: Mass Teachers’ Retirement System State Employees’ Retirement System & 91 Local Retirement Systems Investment, Real Estate, Administration and Audit and Compensation Committees 17 Industry Professionals & Board Members
23
Treasurer or designee (Chair)
Governor or designee
Treasurer’s private citizen appointee
Governor’s private citizen appointee
Governor’s public safety union appointee
Teachers’ Retirement Board’s Elected Member
State Retirement Board’s Elected Member
Member elected by Teachers’ Retirement Board
Member elected by State Employee’s Retirement Board
24
Investment Committee
Treasurer Steven Grossman PRIM Board Chair
Cambridge Associates Michael Even, CFA President/CEO Numeric Constance M. Everson, CFA Capital Markets Outlook Edward W. Kane HarbourVest Partners Gregory R. Mennis, CFA PRIM Board Member Paul E. Shanley, Esq. PRIM Board Member Glenn P. Strehle, CFA MIT (Retired) Timothy L. Vaill Chair/CEO Boston Private Financial Holdings Real Estate Committee Treasurer Steven Grossman PRIM Board Chair Alexander E Aikens, III, Chair PRIM Board Member Jill S. Hatton, CRE Blackrock (Retired) Garlan Morse, Jr. CRE Morris & Morse Co, Inc. William F. McCall, Jr. McCall & Almy, Inc. Peter F. O’Connell Marina Bay Company Jack Lutz, PhD Forest Research Group Audit & Administration Committee Treasurer Steven Grossman PRIM Board Chair Robert L. Brousseau, Chair PRIM Board Member Theresa F. McGoldrick, Esq. PRIM Board Member Theodore C. Alexiades Hingham Retirement Patrick E. Brock Hampshire County Karen E. Gershman, CPA COO, Health Advances Shanti A. Fry Finance Professional Renée M. Landers, Esq. Suffolk University Law Michele A. Whitham, Esq. Foley Hoag Compensation Committee Treasurer Steven Grossman PRIM Board Chair Robert L. Brousseau PRIM Board Member Patrick E. Brock Hampshire County Shanti A. Fry Finance Professional Ruthanne Fuller Newton Alderman / Ward 7 Gregory R. Mennis, CFA PRIM Board Member Michele A. Whitham, Esq. Foley Hoag
25
Fund Advisors
Independent Auditors
Custodian
26
Executive Director Chief Investment Officer Michael G. Trotsky, CFA August 18, 2010 Chief Investment Officer Michael G. Trotsky, CFA August 18, 2010 Senior Investment Officer Real Estate and Timberland Timothy V. Schlitzer March 21, 2005 Investment Officer Real Estate and Timberland John F. LaCara August 4, 2008 Senior Investment Officer Private Equity OPEN Senior Investment Officer Private Equity OPEN Investment Officer Private Equity Scott L. Hutchins January 4, 2010 Investment Officer Private Equity Peony K. Keve, CFA, CAIA July 21, 2008 Deputy Chief Investment Officer Public Markets and Director of Strategic Initiatives Hannah Gilligan Commoss August 2, 2004 Investment Officer Public Markets Sarah N. Samuels, CFA June 27, 2011 Investment Analyst Public Markets Michael Carritte October 13, 2011 Senior Investment Officer Hedge Funds OPEN General Counsel Christopher J. Supple July 26, 2011 Senior Client Service Officer Paul W. Todisco November 5, 1984 Senior Risk Management Officer David M. Gurtz, CPA, CFA January 31, 2008 Risk Management Officer Donald R. Payne November 6, 2006 Chief Financial Officer Thomas A. Hanna, CPA May 22, 2000 Director of Finance and Manager of Human Resources Deborah Coulter, CPA August 1, 2012 Manager of Client Reporting and Cash Management Jennifer L. Cole February 11, 2002 Senior Financial Analyst Eileen A. Molloy July 22, 2002 Manager of Investment Reporting and Systems Administrator Yisroel "Izzy" Markov, CPA February 16, 1998 Senior Financial Analyst Catherine M. Hodges March 8, 2004 Financial Analyst Veronica Williams January 9, 2006 Office Administrator Alyssa Smith February 17, 2004 Compliance Analyst Ellen M. Hennessy April 30, 2012 Administrative Assistant Accounting and Communications OPEN Director of Private Investment Accounting & Manager Information Systems Anthony J. Falzone January 3, 2006 Financial Reporting Manager Qingmei Li, CPA August 18, 2011 Executive Assistant Samantha Wong October 4, 2010
27
Performance and Asset Allocation
28
29
10.46% 4.44% 14.57% 8.95% 0.90% 8.83% 10.09% 4.35% 14.96% 8.16% 1.38% 8.67% 0.37% 0.09%
0.79%
0.16%
0% 2% 4% 6% 8% 10% 12% 14% 16% CYTD FYTD 1 Year 3 Years 5 Years 10 Years PRIT Fund Policy Benchmark Value Add
Notes: 1) Performance is gross of fees. 2) Total assets of $50.8 billion as of September 30, 2012. 3) Since inception (2/28/1985), the total PRIT Core has had an average annual return of 9.47%, as of 9/30/2012.
8.25% Actuarial Rate
30
Global Equity 43.0% Core Fixed Income 13.0% Value-Added Fixed Income 10.0% Private Equity 10.0% Real Estate 10.0% Timber/Natural Resources 4.0% Hedge Funds 10.0% Portable Alpha Wind Down 0.0%
31
Former Current U.S. Large Cap 17% 15% U.S. Small/Mid Cap 4% 4% International 21% 17% Emerging Markets 7% 7% Total Global Equity 49% 43% Core Bonds 10% 10% TIPS 3% 3% Total Core Fixed Income 13% 13% High Yield/Bank Loans 2% 3% EMD (Dollar Denominated) 1% 1% EMD (Local Currency) 0% 2% Private Debt 3% 4% Total Value Added Fixed Income 6% 10% Private Equity 10% 10% Real Estate 10% 10% Timber 4% 4% Hedge Funds 8% 10% 5-7 Year Expected Return* 7.7% 7.9% 30 Year Expected Return* 9.1% 8.4% Risk (Std. Deviation) 12.4% 12.1% Sharpe Ratio 0.42 0.55
*Expected Return Amended February 7, 2012
32
Global Equity Breakdown Domestic Equity 19.6% International Equity 17.3% Emerging Markets Equity 7.0%
33
Risk Management
34
The Barra system helps us describe: “What the PRIT Fund looks like and how it might behave” Utilizing Barra risk analysis to improve investment decisions – Measure total portfolio risk – Identify most risky investments – Simulate portfolio performance – More accurately track manager performance and strategy implementation Launched a new relationship with MIT Sloan School of Management with a focus on integrating risk management techniques into PRIM’s investment management process
35
will be between -2.8% and +15.7% at the 95% confidence level; or a cumulative return of between -15.2% and 107.2%
5 10 15 20 25 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 PRIT Fund S&P 500 Barclays Agg 15.49 13.67
36
Achievements and Initiatives
37
1. The Direct Hedge Fund Program implementation is nearly complete. Four Hedge Fund of Fund investment managers were terminated and assets being transferred to the 21 Board-approved direct hedge fund managers. When this transition is complete, direct hedge funds will represent 85% of the hedge fund portfolio, and one hedge fund-of-fund manager (PAAMCO) will comprise the remaining 15%. PAAMCO focuses on emerging hedge funds. Investment management fee savings of approximately $36 million per year are expected as a result of this transition to direct hedge funds. 2. The Board approved the first emerging markets debt (local currency) investments, allocating $250 million to Investec, $400 million to Pictet, and $250 million to Stone Harbor. 3. The Board approved two emerging markets equity small capitalization investments, allocating $60 million to Acadian Asset Management LLC and $140 million to Wasatch Advisors, Inc.). 4. The Board approved the first non-core real estate investments, allocating $50 million to Carlyle Realty Partners Fund VI and $50 million to DivcoWest Fund III. 5. The Board approved the hiring of Chatham Financial for Real Estate Loan Advisory services to assist PRIM staff and the Real Estate Committee in implementing a leverage program that seeks to borrow approximately $1 billion for new real estate acquisitions. 6. Russell Implementation Services, a leading foreign currency execution (FX) investment manager, was hired to execute trades that were previously executed by our custodian bank; this change is expected to result in cost savings of $1.2 million per year. 7. The Risk Management Dashboard, designed by staff utilizing the MSCI BarraOne tool, was launched in December 2011 and is now utilized to measure total portfolio risk, identify the riskiest investments, simulate portfolio performance under different scenarios, and more accurately monitor manager performance and strategy implementation.
38
8. The Board approved Callan Associates as the “long only” public markets investment consultant, and The Townsend Group as the Real Estate/Timber consultant 9. The Board updated its emerging manager policy, which now states that PRIM may consider hiring investment managers with less than $2 billion of assets under management, that have shorter track records, or are minority-owned or women owned firms.
where there is zero diversity, in terms of gender and race, on boards of directors, PRIM will vote against
maintain a policy of political non-partisanship, 3) PRIM will call for lobbying expenditure disclosure that supports a level of transparency parallel to that for political contributions.
39
Asset Allocation: New asset allocation study planned for December Rebalancing study ongoing – How frequently? – How large are the bands? – New methods – Goals Public Markets: New manager search process – More staff involvement – Identify for ourselves who the best managers are and seek them out – 2 new databases New manager monitoring discipline – Buy/hold/sell ratings
Real Estate: Non-core strategy Portfolio leverage program Timberland: New emerging markets exposure Australia