The Commonwealth of Massachusetts November 2012 Live Investor - - PowerPoint PPT Presentation

The Commonwealth of Massachusetts

November 2012 Live Investor Conference Call: Credit Update & Review of 2012 Pension Actuarial Report

November 16, 2012

Investor Conference Call Presentation Participants

Commonwealth of Massachusetts Executive Office for Administration and Finance 617-727-2040

Scott Jordan Assistant Secretary scott.jordan@state.ma.us Mike Esmond Budget Director Michael.esmond@state.ma.us John Regier Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. 617-348-1720 JRRegier@mintz.com

2

Disclosure Counsel to the Commonwealth Office of the Treasurer and Receiver General 617-367-3900 Massachusetts Department of Revenue

Kazim Ozyurt, Ph D Director / Chief Economist DOR Office of Tax Policy Analysis

Public Employee Retirement Administration Commission (PERAC)

James Lamenzo Actuary jlamenzo@per.state.ma.us Colin MacNaught Ass’t Treasurer, Debt Mgment cmacnaught@tre.state.ma.us Delia Rissmiller Investor Relations Manager drissmiller@tre.state.ma.us

Disclaimer

3

This presentation has been prepared by the Commonwealth of Massachusetts to provide summary information relative to the general obligation credit of the Commonwealth. The presentation is incomplete. The presentation is not part of the Commonwealth’s Information Statement (Information Statement) and is qualified in all respects by reference to the most recently updated Information Statement that has been filed with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system. Investment decisions relating to Commonwealth general obligation bonds and notes should be based only upon the most recently updated Information Statement and the Official Statement of the Commonwealth relating to such bonds or notes. The provision of access to this presentation does not constitute an offer to sell or the solicitation of an offer to buy any bonds or notes that may be described or mentioned in the presentation. Commonwealth bonds and notes are sold only by means of an Official Statement and through registered broker-dealers. The information set forth herein includes information obtained from non-Commonwealth sources that are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Commonwealth. All information and expressions of opinion herein are subject to change without

• notice. The Commonwealth undertakes no obligation to provide any additional information or to update any of the

information or the conclusions contained herein or to correct any inaccuracies that may become apparent. This presentation contains certain forward-looking statements that are subject to a variety of risks and uncertainties that could cause actual results to differ from the projected results, including without limitation general economic and business conditions, conditions in the financial markets, the financial condition of the Commonwealth and various state agencies and authorities, receipt of federal grants, litigation, arbitration, force majeure events and various other factors that are beyond the control of the Commonwealth and its various agencies and authorities. Because of the inability to predict all factors that may affect future decisions, actions, events or financial circumstances, including, in particular, current adverse global financial market and economic conditions, what actually happens may be different from what is set forth in such forward-looking statements. Forward-looking statements are indicated by use of such words as “may,” “will,” “should,” “intends,” “expects,” “believes,” “anticipates,” “estimates” and others.

• 1. Economic Update
• 2. Fiscal 2012 Results
• 3. Fiscal 2013 Revenue Collections Update
• 4. Fiscal 2013 Budget
• 5. Big Topic: Review of 2012 Pension Actuarial Report
• 6. Debt / Capital
• 7. Questions

Agenda

4 4

• 1. Economic Update

5

Economic Update

6

Wealth Measures:

• 2011 Per Capita Income in Massachusetts was $53,621, or 129% of the US average

Unemployment:

• The 2011 Unemployment Average was 7.4% for MA vs. 8.9% for US
• As of October 2012, MA was 6.6% vs. 7.9% nationally

Economic Output:

• GDP grew at a rate of 2.2% in 2011 in MA vs. 1.7% for the US
• For the most recent quarter (Q3), MA GDP is estimated to have grown at an annualized

rate of 1.9% vs. 2.0% for the US

Source: US Depart of Commerce, Bureau of Economic Analysis Source: US Depart of Commerce, Bureau of Economic Analysis; MA Div of Unemployment Assistance Source: US Bureau of Economic Analysis June 2012 and http://www.MassBenchmarks.org

Economic Update

7

• As of September 2012, the 12-month change in the Federal Reserve Bank of Philadelphia’s State

Coincident Index was 3.18% for MA vs. 2.81% for the US

Federal Reserve Bank of Philadelphia State Coincident Indices

As of September 2012 Data

(Sept 2011-Sept 2012) (Sept 2011-Sept 2012)

State 12-month % Change State 12-Month % Change

Alabama 1.90% Montana 1.85% Alaska

• 0.70%

Nebraska 3.61% Arizona 3.17% Nevada 3.05% Arkansas 1.95% New Hampshire 0.95% California 3.70% New Jersey 1.08% Colorado 2.67% New Mexico 2.61% Connecticut 1.64% New York

• 0.83%

Delaware 0.29% North Carolina 2.79% Florida 1.47% North Dakota 2.01% Georgia 3.07% Ohio 10.09% Hawaii 3.06% Oklahoma 5.64% Idaho 3.99% Oregon 3.73% Illinois 3.06% Pennsylvania 3.60% Indiana 4.98% Rhode Island 1.75% Iowa 1.94% South Carolina 3.34% Kansas 3.01% South Dakota 1.57% Kentucky 3.89% Tennessee 2.45% Louisiana 1.63% Texas 4.30% Maine 0.69% Utah 3.09% Maryland 2.42% Vermont 1.47% Massachusetts 3.18% Virginia 1.60% Michigan 2.97% Washington 2.83% Minnesota 2.59% West Virginia 0.80% Mississippi 1.56% Wisconsin

• 0.08%

Missouri 1.85% Wyoming 1.87% United States 2.81%

• 2. Fiscal 2012 Close

8

Fiscal 2012 Results

9

• The FY2012 Comprehensive Annual Financial Report is expected to be released in

December

• However, the State Comptroller released the FY2012 Statutory Basis Financial Report

(SBFR) at the end of October

• A downloadable version of the SBFR has been posted to EMMA and has also been

uploaded to the Net Roadshow platform

• The SBFR shows the following results for FY12:
• $301 million FY12 “consolidated net surplus” (unreserved fund balance)
• $89 million FY12 budgetary gain (revenues minus expenditures)
• Budgetary Fund ending balance of $1.990 billion
• $117 million deposited to the Stabilization Fund at year-end
• In total, $273 million deposited to Stabilization Fund during FY12 (including year-end

deposit) – a 20% y/o/y increase over the Fiscal 2011 ending balance

• Stabilization Fund Balance at $1.652 billion – we had originally been projecting an

ending Stabilization fund balance of $1.539 bn

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

• $260

Annual Change in Stabilization Fund, FY1986-FY2013 ($ mm)

10

$1,652 $1,392

• 3. Fiscal 2013 Revenue Collections Update

11

Massachusetts Tax System and Tax Expenditure Budget

Topics:

• 1. Overview of Massachusetts Taxation
• 2. Sources of Massachusetts Tax Revenues

Personal Income Tax Corporate and Business Tax Sales and Use Tax All Other Taxes

• 3. Recent and Current Developments
• 4. Tax Revenue Trends in Recent Years
• 5. Fiscal 2012 Revenue Review
• 6. Fiscal 2013 Revenue Update

12

Overview of Massachusetts Taxation

Tax

Corporate & business Income Tangible property /net worth

Sales of tangible goods and telecom services

Estate Room

• ccupancy

Alcohol Deeds Cigarettes Motor Fuels Individual Income

13

Sources of Massachusetts Tax Revenues

14

Personal Income Tax

15

Corporate and Business Taxes

16

Sales and Use Tax

17

All Other Taxes

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

18

Recent and Current Developments: Personal Income, Corporate, & Sales/Use Taxes

Income Tax:

• Part B income tax rate is reduced to 5.25% from 5.3% on January 1, 2012
• Potential lowering of rate to 5.20% on January 2013
• Statutory requirement
• DOR Certification

Corporate Tax Reform:

• Combined Reporting
• Phased-in Rate Reduction from 9.5% to 8% for 2012

Sales/Use Tax:

• Rate change (5.0% to 6.25%)
• Sales Tax on Alcohol–Instituted and then repealed

19

Recent & Current Developments: Tax Expenditure Commission:

• Last year, the Legislature established and Governor Patrick approved a Tax Expenditure Commission to

study carefully for the first time the various exemptions, deductions, and credits in the Massachusetts tax code, and to recommend methods for measuring and reviewing their effectiveness.

• This Commission met publicly nine times from October 2011 until April 2012, reviewed reams of data and

analysis assembled by the Department of Revenue and others.

• The Commission concluded that Massachusetts tax expenditures have become quite complicated, and are

large when compared both with Massachusetts tax revenues collected and with other states’ tax expenditures in proportion to their revenues. The Commission indicated that while many Massachusetts tax expenditures serve important public policy objectives, some may not, and there is a lack of adequate data and of opportunity for regular review and consideration of existing tax expenditures’ cost and effectiveness by policymakers. Finally, the Commission specified that certain types of tax expenditures are worthy of more intense oversight and review. The Commission adopted formal findings and guiding principles, and ultimately several recommendations to the Governor and Legislature.

• The Commission’s report was posted on the DOR web site:

http://www.mass.gov/dor/tax-professionals/news-and-reports/tax-expenditure-commission-materials/

20

Recent & Current Developments: Tax Credit Transparency Reporting:

• Recently enacted tax legislation requires DOR to compile and disclose the recipients of benefits from

those tax expenditures that involve refundable or transferable tax credits (e.g., film, Brownfields, low income housing, historical rehabilitation, etc.).

• Calendar year 2011 credits are the first ones to which the new rules applied.
• DOR collaborated with administering agencies of those credits and compiled the necessary data and

information.

• As required by the statute, DOR disclosed the identity of the taxpayers and projects entitled to such

credits and the amount of the credits, among other information on its web site: http://www.mass.gov/dor/tax-professionals/news-and-reports/massachusetts-tax-credit-transparency- reports/

21

Tax Revenue Trends in Recent Years

Total Revenue Collections 19,736 20,879 18,259 18,544 20,517 21,115 22,011

22

Tax Revenue Trends in Recent Years

23

Background (FY09, FY10, FY11):

• After declining by 12.5% in FY09, due to the recent Great Recession, tax revenues began

to recover in FY10 especially in the last quarter of that fiscal year, reflecting an improvement in economic conditions in Massachusetts. But the recovery was weak and income tax paid on capital gains, dividends and interest, and withholding tax collections were all lower compared to FY09. Total tax collections increased by 1.6% actual but declined by 3.2% baseline.

• The FY11 performance drew on an underlying sound economy that generated year to year

increases in withholding, sales and corporate taxes, as well as an infusion of revenue from income tax on investment income. The increase of collections (10.6% actual and 9.3% baseline) reflects a Massachusetts economy that grew noticeably stronger during the fiscal year, as well as a strong recovery of the stock market.

• Note: Contribution of sales tax rate change (took effect in August 2009) to total

collections was significant (accounted for 4% of total collection in FY10 and 4.5% in FY11 and thereafter)

Tax Revenue Trends in Recent Years

24

Fiscal 2012 Revenue Review

• Tax revenues for fiscal 2012, ended June 30, 2012, totaled approximately $21.115 billion, an

increase of approximately $598 million, or 2.9%, from fiscal 2011, and $105 million above the benchmark.

• Fiscal 2012 increase in revenues is attributable, in large part, to

a) an increase of approximately $331 million, or 3.5%, in withholding collections, b) an increase of approximately $155 million, or 3.2%, in sales and use tax collections, c) an increase of approximately $92 million, or 4.1%, in corporate and business collections, b) a decrease of approximately $7 million, or 0.5% in income cash refunds, c) an increase of approximately $17 million, or 1.0% in income payments with returns and extensions, which were partly offset by d) a decrease of approximately $24 million, or 1.3%, in income cash estimated payments

25

Fiscal 2012 Revenue Review

• Fiscal 2012 tax collections were approximately $105 million above the fiscal 2012 benchmark tax

revenue estimate of $21.010 billion. Below benchmark performance in income tax collections were entirely offset by the above benchmark performance in sales, corporate and business, as well as estate and deeds tax collections in fiscal 2012.

• Capital gains tax collections declined by 67% in fiscal 2009 (from $2.175B to $0.717B), and it

further declined by 20.2% in fiscal 2010 (from $0.717B to $0.572B. These collections recovered significantly in fiscal 2011 (increase of 73%, from $0.572B to $0.991B). Although, preliminary fiscal 2012 figures indicate that the capital gain tax collections declined by 7.6%, it stood above $0.9B level, which is considered significant compare to where they were a few year ago.

26

Fiscal 2013 Revenue Update

• On January 12, 2012, a fiscal 2013 consensus tax revenue estimate of $21.950 billion was agreed

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

• The revenue estimate in the fiscal 2013 budget is $22.011 billion and reflects the consensus estimate
• f $21.950 billion adjusted for the impact of fiscal 2013 revenue initiatives enacted as part of the

budget, including a) one-year delay of the FAS 109 deductions ($45.9 million), and b) enhanced tax enforcement initiatives ($36.3 million), as well as the impact of the subsequently enacted two-day sales tax holiday on August 11-12, 2012 (-$21.55 million)

• Approximately $1.1 billion of the $22.011 billion tax estimate is assumed to be generated from taxes
• n capital gains. Under state finance law, $100 million of the projected capital gains tax revenue will

be required to be deposited into the Stabilization Fund and will not be available for budgetary purposes.

• According to MassBenchmarks(1), there are still risks that could affect the U.S. and Massachusetts

economies: the weakness in Europe, slowing growth in China, weak growth in the U.S. economy, and uncertainty about whether and how the looming "fiscal cliff" coming in 2013 will be resolved: So, it is likely that most states across the country will not be in a comfort zone with respect to their own economic growth and tax revenue collections for a while.

(1) http://www.massbenchmarks.org/publications/bulletin/23_bulletin_072712/index.htm and http://www.massbenchmarks.org/indices/indices.htm

27

Fiscal 2013 Revenue Update

• The chart below indicates that monthly year-over-year changes in collections have mostly been on

the positive side since October 2009, albeit the pace of revenue growth has slowed within last year.

($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

28

Fiscal 2013 Revenue Update

• Fiscal 2013 Year to Date Tax Collections: Preliminary tax revenues for the first four

months of fiscal 2013 totaled approximately $6.482 billion, a decrease of approximately $33 million, or 0.5%, over the same period in fiscal 2012, $256 million below benchmark.

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)

• 3.5%
• 1.6%

(94) 3,624 16 0.4% 2.9% (155) Income Withholding 777 (24)

• 3.0%
• 1.2%

(75) 3,081 (11)

• 0.4%

2.3% (129) Income Est. Payments (Cash) 22 (9)

• 29.8%
• 29.4%

(11) 507 29 6.0% 6.5% (1) Income Returns/Bills 98 25 35.3% 36.8% 13 179 16 9.5% 12.3% (10) Income Refunds (Cash) 93 22 30.4% 30.7% 20 148 23 18.4% 18.9% 21 Sales & Use - Total 440 13 3.0% 1.0% (20) 1,754 52 3.1% 3.2% (41) Sales - Regular 304 4 1.3% 0.4% (15) 1,194 20 1.7% 2.2% (36) Sales - Meals 81 6 8.2% 7.0% 332 21 6.9% 7.1% 1 Sales - Motor Vehicles 55 3 5.4%

• 4.6%

(6) 228 10 4.7% 3.4% (6) Corporate & Business - Total 8 (35)

• 80.9%
• 87.1%

(47) 506 (80)

• 13.6%
• 11.8%

(46) All Other 150 4 2.5% 2.3% (1) 598 (21)

• 3.4%
• 2.8%

(14) Total Tax Collections 1,401 (48)

• 3.3%
• 3.1%

(162) 6,482 (33)

• 0.5%

1.1% (256)

October 2012 Tax Collection Summary (in $ millions) (Preliminary as of November 5, 2012)

• ----------------- FY13 Year-to-Date ------------------
• ---------------------- Month of October -----------------------

29

Fiscal 2013 Revenue Update

Last year, income tax rate reduced from 5.3% to 5.25%, effective tax year 2012 and thereafter:

• Pursuant to state law, the state income tax rate on most classes of taxable income was reduced

from 5.3% to 5.25% (effective January 1, 2012), because

• a. the growth in fiscal 2011 inflation adjusted baseline revenues (as defined in state law) over

fiscal 2010 exceeded the 2.5% growth threshold, and

• b. for each consecutive three-month period starting in August and ending in November, 2011,

there was positive inflation-adjusted baseline revenue growth as compared to the same consecutive three-month period in calendar 2010.

• The revenue impact of this rate reduction for fiscal 2012 was about $54 million. The revenue

impact for fiscal 2013 (assuming no further rate reduction in calendar year 2013) is expected to be about $114 million.

30

Fiscal 2013 Revenue Update – Potential Future Considerations

A Further Reduction in Income Tax Rate?

• The fiscal 2012 inflation-adjusted baseline revenues grew by 2.77% from fiscal 2011,

exceeding the initial trigger of 2.5% for the income tax rate reduction.

• First two three-month period certifications indicated there was a positive inflation-adjusted

baseline revenue growths

• However, the growth for the most recent three-month period ending October 31, 2012 was

negative (-1.29%); it did not exceed the threshold requirement in the Statute of 0%. Therefore, the thresholds to lowering the Part B income tax rate as set forth in the Act have not been met, and that the Part B income tax rate will be kept unchanged at 5.25% for the tax years 2013 and thereafter.

• The fiscal 2013 tax revenue estimate of $22.011 billion does not assume any further

income tax rate reduction for calendar 2013 and thereafter

31

• 4. Fiscal 2013 Budget Update

32

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)

33

Stabilization Fund Balance

(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

34

Fiscal Year 2013

• FY 2013 signed on-time, and in balance. FY13 budget spending totals $32.5 billion, an increase of

3.9%.

• Reliance on estimated $616 million in one-time resources, down from $669 billion in FY12 and over

$1.9 billion in FY11.

• ANF continues its efforts to develop and improve long-term fiscal planning models and
• policies. Based on ANF’s long-term models, this level of non-recurring resources is safely

within a sustainable level for the state’s annual budget.

• The FY13 budget continues to reform, including such areas as, community colleges governance,

accountability and effectiveness; programs and services for homeless families; state facilities managements; performance management and budget transparency; and, efforts to control health care spending for the state and employers across the Commonwealth.

• Required deposits to Stabilization Fund. Building on the FY11 reform requiring annual capital gains

receipts above $1 billion to be transferred to the Stabilization Fund, the FY12 budget represented the first year where the state must segregate all annual tax and other judgments and settlements above $10 million and transferring them to the Stabilization Fund. This change was fully implemented in FY12.

• Spending controls continue. While the FY13 budget did not require the same level of reductions and

related spending control measures as some previous budgets, state agencies must continue to find ways to limit growth in their costs and operate more efficiently.

35

Fiscal Year 2013

 FY13 Revenues. On October 15, the Secretary for Administration and Finance certified that projected

• perating revenues (tax and non-tax) remained sufficient to support projected expenses for fiscal 2013.

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

36

Fiscal Year 2013

 Federal Budget and the “Fiscal Cliff”. A&F is actively modeling what the impacts would be the Commonwealth and its economy should the fiscal cliff begin on January 2, 2013.  Budget Sequestration. Using guidance released by OMB and other analyses (e.g., FFIS) A&F has projected potential reduction scenarios that would result from the Budget Control Act’s

• sequestration. Tens of millions, if not more, of federal funding to state agencies and wider impacts

would be likely among the state’s military, research and life sciences industries. Much of the specifics remain pending later updates from federal granting agencies.  Federal Tax Changes. A&F is continuing to work DOR’s forecast vendors to model FY13/FY14 impacts of the fiscal cliff, particularly with respect to the expiration of tax cuts that would be effective

• n January 2, 2013.

 Debt Ceiling. In August of 2011, A&F prepared guidance for agencies should the US debt ceiling not be raised for a period of time. While that was not necessary at that time, we will be prepared to act if and when needed to respond to any impacts associated with interruptions to federal payments resulting from no change to the debt ceiling.

37

Fiscal Year 2014

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

38

FY2013-2017 Capital Investment Plan

 Statewide, five-year capital plan. The plan coordinates capital expenditures by state agencies and authorities that are funded primarily with Commonwealth debt, third party payments and federal reimbursements.  Limit on Borrowing, from all sources. The Administration limits bond-funded capital expenditures, known as the “bond cap.” FY13 bond cap is $1.875 billion with an additional $93 million in unused capacity from the prior fiscal year.

 Bond cap determination is based on the Debt Affordability Analysis and policies in which A&F sets the annual borrowing limit at an amount sized to keep debt service within 8% of budgeted revenues  The Administration has conservatively constrained the bond cap in FY16 and FY17 at the FY15 level. Future debt affordability analysis may show sufficient revenue growth to allow increased bond cap in future plans.

FY13-17 Capital Investment Plan Total Bond Cap

• 500,000,000

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

39

Long-Term Fiscal Policy Framework: Background

• The Administration has adopted a long-term fiscal policy framework to promote:
• Achieving structural budget balance
• The integration of long-term forecasting with current year budget development
• Clear thinking about long-term fiscal impacts of policy decisions and proposals
• A collaborative approach to maintenance and improvement of fiscal policy and

planning, using data and input from all state government stakeholders

• Policy goals:
• Structural balance
• Sustainable spending growth
• Disciplined management of long-term liabilities

40

Long-Term Fiscal Policy Framework: Process Flow

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

41

Long-Term Fiscal Policy Framework: Update

• Structural Balance:
• FY13 forecast is in structural balance based on an estimated cyclical deficit of $1B and a

projected use of $526M in one-time resources ($616M in one-time spending net of $90M in stabilization fund deposits). One-time spending in FY11 and FY12 was also substantially below the cyclical deficit.

• The long-term revenue forecast will be updated in December, concurrent with the consensus

revenue process, and will incorporate risk (fiscal cliff) scenarios.

• Sustainable Spending Growth:
• Five-year projections from May of this year indicated spending growth of 5.0% by FY17, leading

to structural budget deficits based on projected long-term revenue growth of 4.0%. The rate of spending growth was driven largely by assumed high rates of growth in health care costs.

• The base case five-year projections for the January 2013 update to the policy framework will

incorporate lower rates of growth in spending based on the health care cost containment

• legislation. The risk of higher rates of health care cost growth will be captured in scenario

analyses.

• The updated five-year projections will also include the estimated impact of the Affordable Care

Act as well as federal budget/deficit reduction initiatives (e.g. sequestration)

42

Long-Term Fiscal Policy Framework: Update (con't)

• Disciplined Management of Long-Term Liabilities:
• The updated policy framework will include an evaluation of the impact of pension reform and

recent changes to the state’s pension valuation.

• A comprehensive measure for long-term liabilities (debt, pension, OPEB, deferred maintenance)

and the potential impact of recommendations from the OPEB commission are also being evaluated.

43

• 5. Big Topic: Review of 2012 Pension Actuarial Report

44

Commonwealth Actuarial Valuation

 State, Teachers, Boston teachers and Local COLA reimbursements  Annual Actuarial Valuations since 2000  January 1, 2012 most recent

45

Funding

• Prior to 1990, pay as you go
• Original schedule 40 year (to 2028)
• Schedule updated at least every 3 years
• In good times, schedule reduced (2018)
• Later extended to 2023 then 2025
• In wake of 2008 loss, schedule extended to 2040 / Provides responsible relief

46

Valuation Results (in millions)

• 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

47

Unfunded Actuarial Liability

 Unfunded actuarial liability (UAL) $23.6 billion  History of UAL- page 6 of report  Dollar basis- doesn’t show progress

48

Funded Ratio

 Funded ratio 65.1%  Funded ratio history- page 7 of report  Better measure of progress made  Overall, better than anticipated

49

Actuarial Assumptions

• 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

50

• 6. Debt / Capital

51

Five-Year Capital Plan

 In October, the Executive Office for Administration & Finance released the FY2013-FY2017 Five-Year Capital Investment Plan (CIP)  The CIP lays out the Commonwealth’s capital budget by project category, and by funding sources  Most of the CIP will be funded via long-term bond financings, including General Obligation bonds (“Bond Cap”) and bonds issued for the Accelerated Bridge Program

“Commonwealth of Massachusetts FY13 – FY17 Five-Year Capital Investment Plan, October 2012

FY 2012-2016 Capital Investment Plan Total Bond Cap ($ Thousands) FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 5-Year Total % of 5-Year Total

Community Investments 291,743 285,456 277,117 273,286 273,212 1,336,585 14% Corrections 37,384 55,3503 56,500 63,500 76,500 320,129 3% Courts 20,170 75,874 127,674 147,674 114,168 347,637 5% Economic Development 138,240 128,920 138,500 150,000 148,000 660,780 7% Energy and Environment 138,005 159,329 114,179 89,346 87,346 552,198 6% Health and Human Services 167,141 37,615 69,575 75,400 102,000 357,305 3% Higher Education 177,420 259,928 293,172 287,700 281,900 1,231,211 13% Housing 179,500 169,500 169,500 169,500 169,500 865,500 8% Information Technology 174,380 101,973 118,822 120,897 119,614 455,375 6% Public Safety 28,083 37,530 66,780 66,930 51,180 177,310 2% State Office Buildings 73,553 64,103 72,835 58,951 68,0560 348,649 3% Transportation ,,,652,9594 624,423 620,348 624,817 633,525 3,495,486 31% Total Bond Cap 1,968,155 2,000,000 2,125,000 2,125,000 2,1250,000 10,343,155 100%

52

Annual Borrowing & Debt Affordability

• The CIP also includes an update to the debt affordability analysis
• Strong debt affordability policies focus on annual bond cap and managing debt service ratios
• The bond cap is managed to keep debt service within 8% of budgeted revenues and 10% of statutory

limit of appropriations

• The Commonwealth’s annual bond cap and its five-year capital improvement plan are periodically

adjusted to account for changes in revenues

• Reflecting changed economic conditions, the five-year total bond cap has been reduced by over

$1.2 bn since July 2007

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 FY 2017 Bond Cap $1,750.0 $1,875.0 $2,000.0 $2,125.0 $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 2,688,323 Estimated Budgeted Revenues 32,310,021 33,604,667 34,611,145 35,648,368 36,715,024 37,829,139 Debt Service as % of Budgeted Revenues 6.57% 7.37% 7.35% 7.43% 7.91% 7.11%

53

New Debt Affordability Board

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

54

Debt / Capital

55

• The State Treasurer’s Office (STO) continues to issue debt periodically to fund the state’s

capital budget, following the guidelines of the Executive Office for Administration & Finance’s (A&F) Debt Affordability Analysis

• For Fiscal 2013, the STO has executed one borrowing of $400 mm which was completed in

September

• The STO is preparing for the Commonwealth’s Q2 General Obligation borrowing
• The financing schedule is still being developed but the borrowing is expected to take place

at the end of November or early December

• Disclosure has been updated
• The Commonwealth has met with the rating agencies (11/9/2012)
• The borrowing is expected to include both a refunding and a new-money component
• The refunding is expected to focus on the Commonwealth’s outstanding SIFMA Index Bonds

that mature on 2/1/2013

Debt / Capital

56

• For the new-money portion of the Nov/Dec financing, the STO is contemplating selling

additional SIFMA Index Bonds

• The STO may also consider LIBOR Index Bonds, and/or some amount of fixed rate bonds
• The goal of a new-money floating rate bond issue would be to improve the Asset Liability

match between the two sides of the Commonwealth’s balance sheet – reduce interest rate risk overall

• Currently, the Commonwealth has more than $4 bn in assets that are exposed to interest

rates

• Despite the size of the Commonwealth debt portfolio overall, and the sizable variable rate

portfolio – unhedged floating rate bonds total only about $375 mm

• This mismatch creates negative carry on the Commonwealth’s balance sheet
• The exact structure of bonds to be sold as new-money in the upcoming sale – fixed vs.

floating, the index used if floating, etc – will be determined closer to pricing and will depend on market conditions

• The new-money borrowing is expected to be $200 mm to $450 mm
• Details of the sale will be posted on the Treasurer’s website in the coming days

* Preliminary and subject to change

Disclosure Enhancements

57

Investor Communication & Outreach

• Inaugural annual investor conference December 2011; 2012 conference is scheduled for

Thursday, December 13th at the Boston Convention & Exhibition Center in South Boston, MA

• Ten Massachusetts issuers, including the Commonwealth, will be presenting, new

website will go live that day

• MA has successfully implemented regular bi-monthly investor conference calls
• Scheduled for roughly 7 days after disclosure is updated, six planned per year
• Regular updates on the economy, revenues, budgets, capital updates, as well as one “big topic”

per call

• Access to senior leadership of the state
• Twitter feed for investors: @BuyMassBonds

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 23-Jul-12 30-Jul-12 FY12 Revenue Review Dept of Revenue 10-Sep-12 17-Sep-12 Review of Major 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

Next disclosure & call:

Disclosure Enhancements

58

• The Commonwealth is committed to being the disclosure leader in the municipal market
• We are committed to building the top disclosure program through a “bottom up” process
• To wit, we are relying on continuous feedback from investors as to how we can improve
• ur disclosure practices
• The STO has recently sent out an anonymous survey via Survey Monkey
• The feedback will be incorporated into our Information Statement, website, and investor

calls

Results of Recent Investor Survey

59

• Q: Does the Commonwealth's Information Statement provide enough detail to help you

efficiently review and understand the Commonwealth's credit?

• Q: Is the Information Statement easy to read? Is it written in "plain English"?

Very good detail Good detail Needs more detail Yes- easy to read and well written No- some sections are too dense and need more work

Results of Recent Investor Survey (2)

60

• Q: The Commonwealth has moved from publishing shorter Information Statement

Supplements for its disclosure to regularly publishing the full Information Statement each time it updates disclosure. Do you find this change useful?

• Q: The CAFR, SBFR, and quarterly economic report are included as exhibits to each

Information Statement rather than by reference. Do you find this change useful?

Yes No Yes No

Results of Recent Investor Survey (3)

61

• Q: Have you participated in any of the Commonwealth's investor conference calls?
• Q: If yes, please rate the usefulness of the content provided on these calls.

Yes No Very Useful Useful Not useful

Results of Recent Investor Survey (4)

62

• Q: Please rate the usefulness of the presenters on the investor conference calls.
• Q: The Commonwealth is in the process of planning its second annual investor
• conference. Are you interested in attending?

Very useful Useful Not useful Yes No

Results of Recent Investor Survey (5)

63

• Q: If yes, would you prefer to hear more credit presentations from state-level

Massachusetts issuers or more panel discussions between issuers and investors on timely topics in the municipal bond market?

• Overall, please rate the Commonwealth's disclosure and investor outreach efforts.

Credit presentations Panel discussions Both Very Strong Strong Average Below Average

• 7. Questions & Follow-Up

64

Contacts

65

Delia Rissmiller

Investor Relations Manager (617) 367-9333 extension 527 drissmiller@tre.state.ma.us

To receive e-mail notifications of our investor events please send us an email at: massbondholders@tre.state.ma.us

• r follow us on Twitter @ “Buy Mass Bonds”