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Operating Budget Data
($ in Thousands)
FY 02-04 FY 04-05
FY 02 FY 03 FY 04 Change FY 05 Change
Operations $612,792 $909,931 $536,819 -$75,974 $567,860 $31,041
Grants 0 0 0 0 0 0
Adjusted Grand Total $612,792 $909,931 $536,819 -$75,974 $567,860 $31,041
General Funds 103,455 92,684 0 -103,455 0 0
Special Funds 408,815 727,385 536,819 128,004 567,860 31,041
Reimbursable Funds 100,523 89,862 0 -100,523 0 0
Adjusted Grand Total $612,792 $909,931 $536,819 -$75,974 $567,860 $31,041
Annual % Change 48.5% -41.0% 5.8%
! Debt service costs are projected to increase $31 million in fiscal 2005, for an expenditure totaling
$567.9 million.
! The fiscal 2005 allowance assumes no general funds.
Note: Numbers may not sum to total due to rounding.
For further information contact: Patrick S. Frank Phone: (410) 946-5530
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Analysis in Brief
Major Trends
Fiscal 2003 Expenditures Were Unusually High Due to Bond Refunding: Fiscal 2003 actual
expenditures include $410.9 million in revenues generated through bond refunding.
Debt Service Costs Are Projected to Increase by $31 Million: In recent years the General Assembly
has authorized more debt, primarily to move PAYGO capital funded projects into the bond program.
The Fiscal 2005 Allowance Assumes No General Funds: As in fiscal 2004, debt service will
primarily be funded through property taxes.
Issues
General Obligation Bond Authorizations Are Increased by $100 Million: The administration’s
capital budget assumes an additional $100 million in general obligation bond authorizations. The
issue examines the cost of this additional debt. The Treasurer and the Department of Budget and
Management should brief the committees on expanding debt authorizations.
How to Pay for Debt Service: Property Taxes or General Funds? Currently State property taxes
support debt service. In the long term, property tax revenues do not keep up with debt service cost
increases. This will require the State to either increase property tax rates or provide a general fund
subsidy. The issue examines various long-term debt service revenue options. It is recommended
that the General Assembly adopt a provision in the budget reconciliation legislation to ensure
stable property taxes through fiscal 2006.
Spending Affordability and Capital Debt Affordability Committees Recommend Against Using
Bond Sale Premiums to Support Capital Projects: Legislation enacted in 2003 allows the State to
use bond sale premium proceeds to support an expansion of the capital program. The issue examines
the trade-offs between using the bond sale premiums to support debt service and using the bond sale
premiums to support an expanded capital program. It is recommended that language be adopted
that requires that bond sale premium proceeds may only support debt service and may not be
appropriated for other purposes.
How Long Can Maryland Continue to Expand Private Activity Projects in the Capital Budget and
Continue to Issue Tax-exempt Bonds? Currently, Maryland only issues tax-exempt bonds. To be
tax-exempt, private activity cannot exceed 5% of the bond sale or $15 million. The administration’s
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six-year Capital Improvement Program shifts private activity program funding into the bond
program. The issue examines potential costs associated with issuing taxable debt. The committees
should be briefed on the effects of these policies on debt service requirements.
Variable Rate Bonds Can Reduce Debt Service Payments, but They also Introduce Additional Risk
into the Portfolio: Legislation enacted in 2003 allows the State to sell variable rate debt. The issue
analyzes the potential cost savings and risks associated with variable rate bonds. The State
Treasurer should brief the committees on the State’s policies concerning the issuance of
variable rate bonds.
Rating Agency Considers GARVEE Bonds When Calculating State Debt Limits: The funding plan
for the InterCounty Connector proposes the issuance of Grant Anticipating Revenue Vehicles
(GARVEE) bonds. The issue examines the effect of this proposal on State debt limits. It is
recommended that the law be amended to clarify that the GARVEE bonds be examined by the
Capital Debt Affordability Committee.
Recommended Actions
Funds
1. Reduce general obligation bond debt service to recognize the $ 7,500,000
cancellation of the February 2004 bond sale.
Total Reductions $ 7,500,000
Updates
State Recognizes Bond Sale Premiums When Forecasting Revenues and Debt Service: Prior to the
fiscal 2005 allowance, the State did not estimate bond sale premiums in spite of generating over
$197 million in revenues since January 2000. The current allowance is estimating bond sale
premiums. The update examines this policy change.
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Analysis of the FY 2005 Maryland Executive Budget, 2004
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Operating Budget Analysis
Program Description
There are two programs in the Public Debt:
• debt service, which funds principal and interest payments on general obligation (GO) bonds. GO
bond debt service payments are supported by the Annuity Bond Fund (ABF). Funds are
generated from property tax revenues, general funds, and repayments from certain State agencies,
subdivisions, and private organizations. All property taxes generated by the State are deposited in
the ABF to support debt service. The fund can also receive reimbursable funds first appropriated
as general funds in the Maryland State Department of Education (MSDE) budget to pay debt
service on public school construction loans; and
• related expenses on State bonds, which includes arbitrage penalty payments and special funds
resulting from refunded bonds. The funds generated by refunding bonds are used to purchase
government securities that provide the debt service payment to the bondholders. For purposes of
setting debt limits, refunded bonds are not included in State debt calculations.
Governor s Proposed Budget
=
The fiscal 2005 allowance totals $567.9 million. Exhibit 1 shows debt service payments
increased 5.8%, or $31 million when compared to the fiscal 2004 payments. The increase is
attributable to higher GO bond authorizations in recent years. Net authorizations increased from
$460 million in the 2000 session to $505 million in the 2001 session, $720 million in the 2002
session, and $740 million in the 2003 session. Due to delays between the authorization and issuance
of bonds, as well as the policy to begin retiring debt in the third year after bonds are sold, increased
authorizations only slowly result in increased debt service. Issue 1 demonstrates how recent changes
in proposed authorizations affect debt service.
The allowance does not project any arbitrage penalties or bond refunding. Chapter 66, Acts of
2003 altered the accounting method for bond sale proceeds from a project to a cash flow basis. This
gives the Comptroller more flexibility when expending bond proceeds for the capital program. The
flexibility is expected to reduce future arbitrage penalties paid by the State. No bond refunding is
expected in fiscal 2005.
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Exhibit 1
Annuity Bond Fund Revenues
($ in Thousands)
FY 2003 FY 2004 FY 2005
Actual Work. Approp. Allowance
Special Fund Income
Beginning Balance $14,141 $20,295 $44,374
Property Tax Receipts 285,955 471,746 512,865
Refunds Related to Pipelines 0 -3,267 0
Interest and Penalties on Property Taxes 1,270 1,200 1,200
Local Loan Repayments 3,005 2,762 2,419
Miscellenaeous Receipts 1,939 200 200
Accrued Interest on Bonds Sold 0 278 0
Prior Year's Discount -23 0 0
Bond Premium 30,516 87,979 96,011
Transfer to Reserve -20,295 -44,374 -89,210
Subtotal Special Funds $316,507 $536,819 $567,860
General Fund Support
Appropriated in Annuity Bond Fund 90,500 0 0
Budgeted in MD State Department of Education 89,862 0 0
Subtotal General Funds $180,362 $0 $0
Total Funds for Debt Service $496,870 $536,819 $567,860
Penalty Expenditures and Refunded Bond Proceeds
General Funds – Penalty and Arbitrage 2,184 0 0
Special Funds – Refunded Bond Proceeds 410,878 0 0
Total Funds for Penalties and Refunding $413,062 $0 $0
Public Debt Total Expenditures
General Funds 182,546 0 0
Special Funds 727,385 536,819 567,860
Total Funds $909,931 $536,819 $567,860
Source: State Budget Books
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As in fiscal 2004, the fiscal 2005 allowance assumes that debt service will be supported by
property taxes and no general funds are proposed. Based on current projections, property tax receipts
are sufficient at the current rate ($.0132 per $100 of assessable base) to support debt service without
any general fund subsidy. Issue 2 addresses long-term, debt service funding issues.
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Issues
1. General Obligation Bond Authorizations Are Increased by $100 Million
The administration’s budget increases the GO bond authorizations by $100 million, when
compared to the amount previously recommended for the 2004 legislative session. This
recommendation is consistent with the recommendation of the Capital Debt Affordability Committee
(CDAC) which recommended that the GO debt limit be increased to $655 million for the 2004
session. This represents $650 million in GO debt within the affordability limit, and $5 million in
bonds supporting the tobacco buyout program. Chapter 103, Acts of 2001 excludes the tobacco
buyout bonds from the State limit. In its September 2002 report, the committee indicated that after
two years of authorization in excess of $700 million, future authorizations would revert to their
former levels. This would have meant a $555 million authorization for the 2004 session.
The recommendation to increase the authorization limit was first raised at the CDAC meetings.
Concerns were expressed that the level of debt proposed by CDAC in 2002 was insufficient to meet
the State’s needs. It was noted that spending pressures, such as prior commitments and the
administration’s priorities, exceed the resources available for the capital program. To meet these
needs, the committee recommended increasing the amount of GO debt authorized by $95 million and
excluding $5 million for tobacco buyout bonds. This results in a total increase of $100 million
annually from fiscal 2005 to 2009.
Exhibit 2 compares the levels and ratios reported for debt outstanding and debt service for both
the 2002 and 2003 Report of the Capital Debt Affordability Committee on Recommended Debt
Authorizations. In both cases, the State is well within the debt limits. As with the CDAC analysis,
the debt outstanding and debt service includes GO bonds, transportation bonds, Stadium Authority
Debt, and capital leases.
Exhibit 3 shows that increasing the authorization results in additional GO bond debt service
payments beginning in fiscal 2006.
The modest initial increase in debt service is attributable to the issuance stream and the State’s
policy of paying only interest in the first two years after issuing GO debt. Due to the planning
requirements associated with capital budget projects, CDAC assumes that not all debt is issued the
year it is authorized. For example, CDAC assumes that 31% is issued in the first year and 25% in the
second year. If the additional debt service supports projects with shorter planning periods, debt will
be issued sooner and increased debt service payments will be more substantial in the early years.
The State Treasurer and the Department of Budget and Management (DBM) should brief
the committees on why an additional $100 million in bonds is included in the capital budget.
The department should also discuss if the current debt levels recommended by the CDAC is
insufficient, appropriate, or excessive. The department should also address if it will be able to
manage the capital budget in the out-years without increasing debt authorizations.
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Exhibit 2
Capital Debt Affordability Committee
Comparison of 2002 and 2003 Recommendations
($ in Millions)
2002 Debt Levels Analyzed under Current
Financial Conditions 2003 Recommendation
Debt
New Debt New Serv./
Fiscal GO Debt Out- Debt/ Debt Serv./ GO Debt Out- Debt/ Debt Tax
Year Auth. standing P. I. Service Tax Rev. Auth. standing P. I. Serv. Rev.
2005 $555 $6,525 2.90% $820 6.45% $655 $6,556 2.92% $820 6.45%
2006 570 6,716 2.84% 834 6.23% 670 6,803 2.88% 836 6.25%
2007 585 6,848 2.75% 848 6.07% 685 7,011 2.81% 854 6.11%
2008 600 6,961 2.65% 877 6.00% 700 7,213 2.74% 888 6.07%
2009 615 7,081 2.55% 920 6.02% 715 7,428 2.68% 940 6.15%
Note: Debt Outstanding is end-of-year debt.
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Exhibit 3
General Obligation Bond Debt Service Requirements
2002 Recommendation Compared to 2003 Recommendation
($ in Millions)
CDAC CDAC Annual
2002 Recom. 2003 Recom. Additional Cummulative
Fiscal Year Debt Service Debt Service Debt Service Increase
2005 $560.0 $560.0 $0.0 $0.0
2006 610.3 612.4 2.2 2.2
2007 634.6 640.0 5.4 7.6
2008 659.7 671.1 11.4 19.0
2009 693.2 713.0 19.8 38.7
2010 715.1 743.9 28.8 67.6
2011 742.9 780.4 37.5 105.1
2012 764.1 809.1 45.1 150.2
2013 795.7 845.3 49.5 199.7
2014 821.9 874.3 52.4 252.1
2. How to Pay for Debt Service? Property Taxes or General Funds
GO bond debt service costs are supported by the ABF. The fund’s largest revenue sources
historically included property tax revenues, bond sale premiums, and general funds. Other revenue
sources include interest generated by fund balances and loans repayments for local bonds. When the
property tax receipts have not generated sufficient revenues to support all debt service costs, general
funds have subsidized debt service.
Until fiscal 2003, property taxes remained constant at $0.084 per $100 of assessable base. At this
level, property taxes supported approximately 55 to 60% of debt service costs. Any bond sale
premiums generated increased the fund balance. In subsequent years these accumulated fund
balances were reduced by appropriating the funds for debt service payments, which reduced the
general fund requirement. Since property taxes, bond sale premiums, and other revenues were
insufficient to pay the entire debt service amount, general funds were appropriated to support the
remaining debt service costs. Exhibit 4 shows that general funds supporting debt service ranged
from $152 million to $204 million from fiscal 1999 to 2003.
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Exhibit 4
Annuity Bond Fund Activity
Fiscal 1999 – 2003
($ in Millions)
Revenues FY 1999 FY 2000 FY 2001 FY 2002 FY 2003
Property Tax Revenues $246.9 $250.8 $257.1 $270.0 $283.8
General Funds 151.8 189.3 204.3 203.6 180.4
Bond Sale Premium 6.3 5.2 5.5 18.4 30.5
Other Revenues 27.4 22.1 14.1 17.4 22.5
Total Revenues $432.4 $467.4 $481.0 $509.4 $517.2
Debt Service Expenditures $417.7 $459.2 $470.9 $495.2 $496.9
End-of-year Fund Balance 14.7 8.2 10.2 14.1 20.3
Note: Other revenues includes fund balance transfer from the previous year.
Source: Department of Budget and Management, September 2003
The State did not appropriate general funds for ABF in the fiscal 2004 budget. Consequently, the
Board of Public Works (BPW), which sets the property tax rate, increased the property tax rate to
$0.132 per $100 of assessable base. With these actions, the State moved from maintaining a constant
property tax rate and funding any remaining debt service with general funds, to funding the entire
debt service payment with property taxes (as well as some smaller revenue sources). With respect to
the fiscal 2005 budget, the administration did not include general funds in the Public Debt allowance,
thus continuing the policy of relying on property taxes to support debt service. In the long-term,
property tax revenues do not keep up with debt service requirements. This is at attributable to the
increased authorizations in recent years. By fiscal 2007, the State will have to either:
• increase the property tax rate to fund additional debt service costs; or
• appropriate general funds to maintain stable property tax rates.
Reliance on Property Taxes to Support Debt Service Costs
By excluding general fund appropriations from the ABF in fiscal 2005, the administration
continued a policy first adopted in fiscal 2004. Since property taxes do not generate sufficient
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revenues to support increasing debt service costs, the State may choose to periodically increase
property tax rates to fund debt service. If this policy is adopted, BPW is faced with two approaches:
• minimize annual property tax rates by adjusting the rates each year; or
• minimize the number of changes to property tax rates over a period of years.
If BPW were to minimize the property level taxes, the rates would need to be adjusted each year.
Exhibit 5 shows that BPW could lower property taxes to $0.111 per $100 of assessable base in
fiscal 2005 but would need to increase the rate to $0.145 per $100 of assessable base in fiscal 2006.
In the short term, recent bond sale premiums provide some additional revenues and keep property tax
rates somewhat lower. However, interest rates are expected to rise in the out-years, reducing the
spread between market rates and coupon rates resulting in smaller bond sale premiums. In the long
run, revenues do not keep up with expenditures without increases in the property tax rate.
Exhibit 5
Revenues Supporting GO Bond Debt Service
Variable Property Tax Rates and No General Fund Support
Fiscal 2004 – 2009
($ in Millions)
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Property Tax Receipts $472 $432 $608 $637 $668 $711
Bond Premium from Prior Years 76 96 0 0 0 0
(1)
Other Revenues 21 37 7 6 7 7
Total Special Fund Revenues Available $570 $564 $615 $644 $675 $718
ABF Fund Balance Transferred to Next Year 33 4 3 4 4 5
Subtotal Special Fund Appropriation $537 $560 $612 $640 $671 $713
General Fund Appropriations 0 0 0 0 0 0
Total Appropriations(2) $537 $560 $612 $640 $671 $713
Property Tax Rate per $100 of Assessable
Base $0.1320 $0.1110 $0.1450 $0.1420 $0.1410 $0.1440
(1)
Notes: Other revenues include fund balance transfer from the previous year.
(2)
Assumes cancellation of February 2004 GO bond sale.
Source of Property Tax Assessable Base: Department of Assessment and Taxation, December 2003
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The State could also attempt to keep property tax rates constant over a period of years. Exhibit 6
shows that the State could maintain property tax rates at the current level, $0.132 per $100 of
assessable base, through fiscal 2006. It is possible to delay property tax rate increases because the
high levels of bond sale premiums are projected to increase the fund balance. The premiums are
projected to be fully used by fiscal 2006, thus property taxes would no longer be sufficient to support
the growth in debt service, and the rates would need to be increased to $0.141 per $100 of assessable
base if no general funds are appropriated. By the end of fiscal 2009, the ABF would have a
$13 million fund balance.
Exhibit 6
Revenues Supporting GO Bond Debt Service
Minimize Tax Rate Changes and General Fund Appropriations
Fiscal 2004 – 2009
($ in Millions)
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Property Tax Receipts $472 $513 $554 $633 $668 $696
Bond Premium from Prior Years 76 96 0 0 0 0
(1)
Other Revenues 21 37 88 34 30 30
Total Special Fund Revenues Available $570 $645 $642 $666 $698 $726
ABF Fund Balance Transferred to Next Year 33 85 31 27 27 13
Subtotal Special Fund Appropriation $537 $560 $612 $640 $671 $713
General Fund Appropriations 0 0 0 0 0 0
Total Appropriations(2) $537 $560 $612 $640 $671 $713
Property Tax Rate per $100 of Assessable
Base $0.1320 $0.1320 $0.1320 $0.1410 $0.1410 $0.1410
(1)
Notes: Other revenues include fund balance transfer from the previous year.
(2)
Assumes cancellation of February 2004 GO bond sale.
Source of Property Tax Assessable Base: Department of Assessment and Taxation, December 2003
Appropriate General Funds and Stabilize Property Tax Rates
The State could also adopt the policy of keeping property tax rates stable at $0.132 per $100 of
assessable base indefinitely. Since debt service costs are increasing faster than property values, this
would require general funds to subsidize any shortfall in the ABF. This is the approach assumed
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by the administration in its out-year forecast. Exhibit 7 shows that property taxes can support debt
service through fiscal 2006. In fiscal 2007, $15 million in general funds would need to be
appropriated for debt service. This increases to $58 million in fiscal 2009.
Exhibit 7
Stable Property Tax Rates Remaining at $0.132 per $100 of Assessable Base and
General Funds Supporting GO Bond Debt Service
Fiscal 2004 – 2009
($ in Millions)
FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009
Property Tax Receipts $472 $513 $554 $593 $626 $652
Bond Premium from Prior Years 76 96 0 0 0 0
Other Revenues(1) 21 37 88 34 5 5
Total Special Fund Revenues Available $570 $645 $635 $623 $631 $657
ABF Fund Balance Transferred to Next Year 33 85 31 2 2 2
Subtotal Special Fund Appropriation $537 $568 $612 $624 $629 $655
General Fund Appropriations 0 0 0 15 42 58
(2)
Total Appropriations $537 $568 $612 $640 $671 $713
(1)
Notes: Other revenues include fund balance transfer from the previous year.
(2)
Assumes cancellation of February 2004 GO bond sale.
Source of Property Tax Assessable Base: Department of Assessment and Taxation, December 2003
It Is Recommended that Budget Reconciliation Legislation Include a Provision to
Ensure Stable Property Tax Rates
It is recommended that the State maintain a constant property tax rate of $0.132 per $100 of
assessable base through fiscal 2006. To assure that there are sufficient revenues available to
avoid a property tax increase or general fund subsidy in fiscal 2006, it is recommended that
budget reconciliation legislation include a provision that the ABF hold $62 million in reserve in
fiscal 2005 so that the funds can be used in fiscal 2006. This reserve is sufficient so that
property taxes can support the entire fiscal 2005 and 2006 debt service cost without raising
property tax rates.
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3. Spending Affordability and Capital Debt Affordability Committees
Recommend Against Using Bond Sale Premiums to Support Capital Projects
Chapter 66, Acts of 2003 amended Section 8-125 of the State Finance and Procurement Article to
allow the use of the funds derived from a bond sale premium to support the costs of other capital
projects. As a result, the State could use bond sale premiums to support capital projects in
fiscal 2005. DBM advises that fiscal 2004’s projected end of year ABF balance will exceed
$44 million. This amounts to $44 million in bond sale premiums in the account that could support
capital projects.
CDAC recommended against using the bond sale premium to expand the capital program.
Instead the committee recommended that bond sale premiums stabilize property taxes or fund pay-as-
you-go (PAYGO) appropriations in the place of GO debt, thus reducing the amount of debt that is
authorized. The Spending Affordability Committee (SAC) concurred with the CDAC’s
recommendations. Specifically, SAC recommended that the “first priority for any bond sale premium
revenues should be stabilizing the property tax rate and minimizing general fund spending on debt
service in fiscal 2005 or future years.”
Concerns related to having bond sale premiums support an expanded capital program include:
• Use of bond sale premiums for the capital program increases the need for property tax or
general fund revenues. If the bond sale premiums support the capital program, the ABF’s
resources are reduced. This requires either higher property tax rates or additional general fund
subsidies. With respect to property taxes, $44 million in bond sale premiums translates to
approximately $0.01 per $100 in assessable base. With respect to general funds, every dollar of
bond sale premiums supporting the capital program increases the general fund subsidy by a dollar.
• Bond sale premiums are likely to decline in the out-years. Supporting the capital program
with bond sale premiums does not provide the program with a permanent funding source. If the
premiums supporting capital projects are overcommitted, the projects will need to be funded with
operating funds or debt.
It is recommended that the General Assembly concur with the CDAC and SAC
recommendations that bond sale premiums be used to support debt service payments and to
stabilize the property tax rates.
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4. How Long Can Maryland Continue to Expand Private Activity Projects in the
Capital Budget and Continue to Issue Tax-exempt Bonds?
The GO bonds that Maryland issues are tax-exempt bonds. Purchasers of Maryland bonds do not
have to pay federal income taxes on the interest earned from these bonds. Because the holders of tax-
exempt bonds do not pay federal taxes on interest earnings, the interest rates of tax-exempt bonds
tend to be less than taxable bonds. This reduces the State’s debt service expenditures.
Federal laws and regulations limit the kinds of activities that proceeds from tax-exempt bonds can
support. One such requirement limits private purposes of the bond proceeds to the lesser of 5% of the
bond sale’s proceeds or $15 million per bond sale. For a project to be subject to this limitation, there
must be both a private use and a private payment. Private use is the use of the tax-exempt financed
facility by any entity other than a State or local government agency, such as renting a section of a
building to a private company to operate a cafeteria. Private payment is payment for the privately-
used portion of the facility above the costs of maintaining and operating that part of the facility. This
occurs if the cost paid by the private entity is sufficient to pay debt service on the facility.
This requirement limits private activity to an estimated $30 million in fiscal 2005 (based on two
bond sales planned). If these requirements are violated, the bondholders would have to pay federal
income taxes on the bond interest. The State covenants with these bondholders to regulate the use of
the proceeds of the bonds and take such actions to maintain the bonds’ federal tax-exempt status. If
the State were to violate this covenant, the State would almost surely be legally liable.
Administration Proposes Permanently Adding Private Activity Programs in GO
Bond Program
Each year the administration proposes its GO bond funded capital program. The administration
provides an estimate of private activity projects or programs funded in the capital program. Private
activity usually represents a fairly small amount of the programs. The projects subject to private
activity also usually require about one to three years to complete. Programs with private activities
were typically funded in the operating budget, as opposed to the capital GO program.
In the recently released Capital Improvement Program (CIP), DBM projected that total private
activity projects would be $22.2 million in fiscal 2005. This provides the State with $7.8 million in
private activity capacity. Technically, private activity is within the limits imposed by federal
requirements.
However, a closer examination of total spending on private activity financed with bonds reveals a
shift in policy. In the capital budget, most of the private activity represents long-term commitments.
Exhibit 8 shows that the fiscal 2005 budget includes $17.9 million (out of $22.2 million) in GO
bonds for private activities that are long-term commitments (resulting in expenditures throughout the
entire six-year capital improvement program). In previous years, there were almost no long-term
commitments made to support private activity programs with GO bonds. Previously, most private
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Exhibit 8
Projected GO Bond Funded Private Activity as Proposed by Administration
Total Activity vs. Six-year Commitments
Fiscal 2000 – 2009
($ in Millions)
45
40
Proposed Spending by Administration
35
30
25
20
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Fiscal Year Allowance
Programs with Out-year Commitments Total Private Activity
Note: The fiscal 2004 allowance included a substantial increase in one-time support for private activity projects and
programs with GO bonds. At the time, only the Biological Sciences Research Building at the University of
Maryland, College Park required any commitment in fiscal 2006 to 2008.
Source: Department of Budget and Management, Maryland Capital Budget, Fiscal 2000 to 2005
activity supported short-term projects such as the Science Research Facility with Greenhouse at
Morgan State University, the new Arena at the University of Maryland, College Park, and the African
American Museum.
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Exhibit 9 shows that the long-term commitments extend through the entire six-year CIP and total
$76.7 million. Over the six-year period, these commitments average $15 million per year, with the
largest funding in the early years of the program. The plan assumes increased special fund support
for community legacy, rental housing, and homeownership programs in the out-years as GO bond
support wanes.
Exhibit 9
Projected Private Activity Issuances
Long-term Debt Commitments
Fiscal 2005 – 2009
($ in Thousands)
Dept. Program FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 Total
MDE Hazardous Substance Cleanup Program $1,500 $1,700 $1,700 $1,700 $1,700 $8,300
DHCD MD Historical Trust Revolving Loan Fund 250 350 350 350 350 1,650
DHCD Community Housing Programs 5,000 4,500 4,000 3,500 3,500 20,500
DHCD Rental Housing Programs 7,409 6,000 5,700 5,600 5,650 30,359
DHCD Homeownership Programs 2,989 1,950 1,850 1,200 1,250 9,239
BPW Public Safety Communications System 750 1,500 1,500 1,500 1,500 6,750
Total $17,898 $16,000 $15,100 $13,850 $13,950 $76,798
Source: Department of Budget and Management, Maryland Capital Budget Fiscal Year 2005, January 2004
This new policy raises a concern about managing private activity projects and programs within
federal requirements. Under previous policies, there were fewer planned projects and six-year
commitments were exceptional. This provided the State with a large cushion within which to manage
debt. The State was able to manage private activity even if the scope of projects changed or assets
were sold. Adding projects with six-year commitments complicates the State’s ability to manage
private activity projects and programs in the entire program period, and increases the chance that the
State could exceed the federal limits. It also reduces the State’s ability to fund new private activity
projects which may be proposed over the next few years.
The Cost of Taxable Debt
To avoid issuing taxable bonds and keep debt service costs low, general fund PAYGO
appropriations historically supported private activity programs. Due to operating budget constraints,
the administration is no longer funding private activity programs with general fund PAYGO. Instead,
these activities are fully supported by the GO bond program. This may require the State to issue
taxable debt to support capital budget projects.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Over the six-year forecast period, the administration proposes an average of $15 million in private
activity programs in the GO bond program. To illustrate possible cost differences between taxable
and tax-exempt issuances, the cost of a $15 million taxable bond issuance is compared to a
$15 million tax-exempt bond issuance. Based on data provided by the Treasurer’s Office’s financial
advisor, the cost of taxable debt averages 192 basis points greater than tax-exempt debt. Exhibit 10
shows that this results in an additional $3 million in interest costs if the debt were issued in the spring
of 2005.
Exhibit 10
Comparison of Debt Service Costs of $15 Million Taxable and
Tax-exempt Bond Sales
Fiscal 2006 – 2020
($ in Thousands)
Taxable Bond Tax-exempt Bond NPV of
Fiscal Year Debt Service Debt Service Variance Variance
2006 $1,038 $750 $288 $274
2007 1,038 750 288 261
2008 1,788 1,595 193 167
2009 1,786 1,598 188 155
2010 1,786 1,598 187 147
2011 1,787 1,597 190 142
2012 1,788 1,598 191 136
2013 1,785 1,596 189 128
2014 1,788 1,597 191 123
2015 1,786 1,595 190 117
2016 1,788 1,596 192 112
2017 1,784 1,598 186 104
2018 1,785 1,598 187 99
2019 1,789 1,599 190 96
2020 1,786 1,596 190 91
Total $25,301 $22,259 $3,042 $2,152
Notes: (1) Assumes 5% coupon (interest) rate for tax-exempt bonds, which is consistent with last bond sales and
current coupon rate estimate.
(2) Assumes 6.92% coupon (interest) rate for taxable bonds, see Effect of Long Term Debt on the Financial
Condition of the State, November 2003, pages 56 to 57 for basis of coupon (interest) rate.
NPV = Net Present Value
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
The State Treasurer and DBM should brief the committees on:
• any policies limiting the use of the GO bond program to support projects or programs with
private activities;
• the safeguards that are in place to ensure that private activity is within federal limits so that
the bonds maintain their tax-exempt status;
• the effect of the long-term (six-year) commitment to fund private activity programs with
GO bonds on the State’s ability to manage tax-exempt GO debt within federal limits; and
• the likelihood that taxable bonds will be issued in the six-year program period and the cost
to the State of issuing taxable debt.
5. Variable Rate Bonds Can Lower Debt Service Payments, but They also
Introduce Additional Risk into the Portfolio
Chapter 325, Acts of 2003 authorizes the State Treasurer to issue variable rate bonds. The law
limits variable rate debt to 15% of the State’s outstanding GO bonds. More than 25 states have issued
variable rate debt, including AAA rated states South Carolina, Utah, and Virginia. There are different
variable rate bond arrangements that can be entered into, such as Variable Rate Demand Bonds
(VRDB) and Commercial Paper. The various instruments share key similarities. To keep the
discussion focused on key differences between fixed and variable debt, only VRDBs will be analyzed
and compared to fixed rate debt.
Maryland’s fixed rate bonds are 15-year agreements between the State and bondholders. The
interest rate and maturity is set when the bonds are issued. The State guarantees specific debt
services payments on specific days through the 15-year life of the bonds. Interest costs for fixed rate
debt is in part a function of the 15-year life of the bonds. Because of the long-term nature of the
bond, bond holders demand that the bonds provide a long-term interest rate, which is usually higher
than the short-term rates.
Variable rate bonds do not have fixed interest rates throughout the life of the bond. Instead,
VRDBs are issued with long nominal maturities that are constantly resold to lenders paying short-
term interest rates. Unlike fixed rate bonds, VRDBs do not have an underwriter; instead a
remarketing agent manages bond sales. Variable rate bonds are also not sold competitively which is
impractical because the bonds are constantly remarketed. Traditionally, a Request for Proposal (RFP)
is issued for the remarketing agent instead of issuing a Preliminary Official Statement.
Most VRDBs also have a liquidity provider. If the remarketing agent cannot find another buyer
for the debt, a liquidity provider is responsible for paying principal and interest for the bonds.
Liquidity providers are usually banks with credit ratings of at least AA. Liquidity providers would
also be competitively bid with an RFP.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Advantages of Fixed and Variable Rate Debt
Both fixed and variable rate bonds have advantages and disadvantages. The advantages of fixed
rate debt include:
• No upward interest rate risk. Since the rates are determined when the bonds are issued,
increases in interest rates during the life of the bonds do not affect debt service payments.
However, this can also be a disadvantage if interest rates decline.
• Budget certainty. Debt service payments can be calculated through the life of the bonds when
the bonds are issued. VRDBs have constantly changing interest rates which requires the issuer to
estimate debt service payments in the out-years.
• Current market conditions. Currently, low interest rates allow the State to lock into relatively
low interest rates until the bonds mature. Most economists expect that interest rates are more
likely to rise than fall. If interest rates rise the State is still locked into the lower interest rates.
There are also advantages to variable rate debt such as:
• Short-term rates are usually lower than long-term rates. Currently, short-term interest rates
are 1.43% (after fees are included) compared to 3.59% for long-term interest rates, which results
in lower debt service payments for VRDBs if short-term rates do not increase substantially.
• Short-term rates often track revenues better than long-term rates. Historically, interest rates
tended to decline during recessions if the rate of inflation is low. Current Federal Reserve policy
is to stimulate the economy with interest rates while maintaining price stability. In response to
the recent economic slowdown, the Federal Reserve has reduced short-term interest rates. The
Federal Reserve is expected to raise interest rates if there is sustained economic growth. If
inflation is minimized, these policies imply that interest rates (and VRDB costs) will tend to drop
during economic downturns. This is not the case with fixed rate instruments, which remain
constant and do not reflect economic conditions.
Assessment of Costs and Risks Associated with Variable Rate Bonds
Last year’s law change provides the State with an opportunity to issue variable rate debt. Insofar
as short-term interest rates tend to be lower than long-term rates, variable rate debt tends to provide
debt service savings.
Exhibit 11 shows that under current market conditions, issuing $45 million of variable rate debt
yields a savings of $1.6 million ($1.4 million in net present value) compared to the projected cost of
issuing fixed rate debt. A $45 million issuance is compared since it represents 15% of the bond sale
projected in July 2004. Fixed rate debt service is 3.59% based on the current rate for AAA bonds.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Exhibit 11
Comparison of Fixed Rate Bond and Variable Rate Bonds Debt Service Costs
Assuming a $45 Million Bond Issuance
($ in Thousands)
Fiscal Fixed Rate Variable Rate NPV of
Year Debt Service Debt Service Variance Variance
2005 $1,616 $959 $657 $634
2006 1,616 1,242 374 348
2007 4,391 4,175 216 194
2008 4,391 4,366 25 22
2009 4,393 4,349 43 36
2010 4,391 4,343 47 38
2011 4,395 4,352 43 34
2012 4,395 4,356 39 29
2013 4,391 4,356 35 25
2014 4,393 4,363 30 21
2015 4,390 4,365 26 17
2016 4,393 4,372 21 14
2017 4,391 4,375 16 10
2018 4,394 4,384 11 7
2019 4,397 4,392 6 3
Total $60,336 $58,747 $1,589 $1,434
Assumptions:
(1) Fixed interest rate is 3.59% based on 1/6/04 Delphins-Hanover Scale AAA rating.
(2) Variable interest rate is 1.43% based on Bond Market Association Index 52 week average on January 21, 2004,
and costs for remarketing agent and liquidity provider.
(3) Proxy for changes in market conditions is Economy.Com 10-year Treasury Bill forecast January 18, 2004.
(4) Variable interest rate is also adjusted 70 basis points to account for the large spread between fixed and variable
interest rates.
NPV = Net Present Value
VRDBs interest rates begin at 2.13%, based on current rates and costs for a remarketing agent and
liquidity provider, and increase consistent with forecasted market conditions. The True Interest Cost
of the variable rate bonds is 3.18%.
However, variable rate bonds also introduce risk into the State’s bond portfolio. Over the life of
the bonds, the volatile nature of short-term rates can result in increased debt service costs if market
conditions change. VRDBs’ primary advantage is that short-term interest rates tend to be lower than
long-term interest rates. Their disadvantage is that interest rates are volatile and sharp increases in
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
interest rates result in increased debt service. An example (albeit extreme) of volatile short-term
interest rates occurred in 1980 and 1981. The federal funds rate, which is the interest rate at which a
depository institution lends immediately available funds to another depository institution overnight,
increased from under 9% at the end of July 1980 to over 20% in January 1981. Over the same period,
rates on 10-year Treasury Bills increased from 10.20 to 12.36%.
Risks can be viewed in two ways: the short-term risks associated with market fluctuations and
long-term risks associated with a general rise in interest rates. Within a given year, short-term
interest rate fluctuates about 47 basis points, or 0.47%. If this trend continues over the life of the
variable bonds, there is an 80% probability that variable bonds will reduce interest rate costs.
Long-term risks are more difficult to quantify. To quantify the interest rate conditions in the
long-term, the model estimating the cost of variable debt assumes that market conditions will push
interest rates up 150 basis points. A major concern with this assumption is that inflation has a
substantial effect on interest rates and that inflation rates are difficult to forecast. For example, most
of the increase in short-term rates in the early 1980s was attributable to inflation. The model’s
interest rate forecast assumes a moderate level of inflation over the 15 years the bonds are issued.
This is based on the consensus among many forecasters that inflation will not increase substantially.
If this assumption is incorrect, interest rates could vary substantially and debt service costs for
variable rate bonds could be quite higher.
Tools that Minimize Risk
Variable rate bonds introduce risk into a bond portfolio. The concern is that rising interest rates
increase the cost of debt service. Rising debt service costs could strain State resources if the ABF
forecast did not take these costs into consideration. The risks can be reduced by:
• Maintaining a reserve in the ABF to support debt service if interest rates rise. If 15% of the
State’s bonds outstanding (e.g., $720 million out of a projected $4.8 billion at the end of
fiscal 2005) were variable rate bonds, increasing interest rates 1% would increase debt service
costs approximately $8 million. If the State were to issue variable rate bonds, holding reserves in
the ABF may be advisable.
• Including an interest rate cap with the variable bond issuance. Debt can also be structured so
that there is a cap on maximum interest rates. While reducing the exposure to risk, a cap would
increase debt service costs of the variable rate bonds.
• Converting the debt from variable debt to fixed debt. At the time the bonds are sold, the State
could include provisions that the variable debt be converted under specific circumstances such as
interest rates reaching a certain level.
• Selling derivatives as a hedge against increasing interest rates. Derivatives are financial
instruments whose underlying value depend on the performance of another security. Examples of
derivatives include options and futures contracts. To hedge against increases in interest rates, the
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
State could enter into an options contract that provides the State with revenues if interest rates rise
above a specific level. The State could enter into these contracts at any time during the life of a
bond. This would add to the cost of servicing the debt. Derivatives can be extremely complex
instruments that require a fair degree of financial sophistication to manage.
The common dominator that all these options share is that they can reduce risk if applied properly
and that they tend to reduce the projected savings associated with variable debt. Ultimately, variable
rate bonds are inherently more risky than fixed rate bonds. If the risk associated with variable rate
bonds is unacceptable, then issuing fixed rate bonds is the only acceptable option.
Conclusion
Currently, interest rates are at exceptionally low levels. The spread between long-term and short-
term interest is fairly high. In the near term, debt service costs can be reduced by issuing variable
debt. Also given the market condition over the last ten years, it appears likely that variable rate bond
will yield debt service savings. However, past performance does not guarantee future success.
Adding variable rate bonds to the State’s portfolio certainly introduces risk.
The State Treasurer should brief the committees on the State’s variable interest rate debt
policies. This should include a discussion of:
• any plans to issue variable interest rate debt;
• projected costs and benefits associated with issuing variable rate debt; and
• risks associated with variable rate debt, and any tools the State could use to minimize the
risk.
6. Rating Agency Considers GARVEE Bonds When Calculating State Debt
Limits
The Maryland Department of Transportation (MDOT), through the Maryland Transportation
Authority (MdTA), is developing plans to construct an InterCounty Connector (ICC) in Montgomery
and Prince George’s counties. MdTA’s preliminary financing proposal includes issuance of various
revenue bonds, such as Grant Anticipation Revenue Vehicles (GARVEE). They are bonds that are
issued by states and public authorities, backed by future federal-aid highway and transit
appropriations. While the source of funds used to repay GARVEEs originates with the federal
government, the federal government’s agreement to the use of its funds in this manner does not
constitute any obligation on the part of the U.S. government to make these funds available. If for any
reason federal appropriations are not made as anticipated, the obligation to repay the GARVEEs falls
entirely to the state agency or authority that issued them. To date, the State has not issued any
GARVEE bonds.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
GARVEEs are excluded from the CDAC analysis of State debt limits. As part of the review of
MdTA’s GARVEE proposal, rating agencies were consulted. Fitch Ratings advises that they will
take GARVEE bonds into consideration when they assess the State’s debt capacity and rate the
State’s GO bonds. While the funds supporting GARVEE debt service are federal, the rating agency
advises that they view these federal funds as a State resource. Using federal funds for debt service
creates an obligation against future revenues.
MdTA’s conceptual financing plan for the ICC highway calls for the issuance of $900 million in
GARVEEs. If the GARVEEs are issued over a period of four to five years, the bonds are affordable
if included in the State’s debt limit. CDAC guidelines limit debt outstanding to 3.2% of personal
income. Currently this ratio peaks at 2.92% in fiscal 2005. If the State were to begin issuing
GARVEEs in fiscal 2006, the ratio would peak at approximately 3.10%.
One key element of CDAC’s mission is to protect the State’s bond rating. To effectively
accomplish its mission, the committee should reflect State debt consistent with rating agencies’
policies. Under current policies, the CDAC does not examine GARVEE bonds when evaluating State
debt. While Fitch is not recommending that GARVEE bonds be included in the debt outstanding to
personal income ratio, they do recommend that CDAC consider the level of GARVEE debt when
debt affordability is examined. To ensure that the CDAC thoroughly and accurately reflects the
State debt burden, it is recommended that the CDAC examine GARVEE bonds when reporting
on State debt. To effect this change, it is recommended that budget reconciliation legislation
amend Section 8-112 of the State Finance and Procurement Article to clarify that GARVEE
bonds are to be included in the Capital Debt Affordability Committee’s evaluation of State
debt.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Recommended Actions
Amount
Reduction
1. Reduce general obligation bond debt service to $ 7,500,000 SF
recognize the cancellation of the February 2004 bond
sale. The allowance includes $7.5 million in debt
service for the February 2004 bond sale. The
Treasurer’s Office advises that there will no longer
be a $150 million bond sale in February 2004. The
office also notes that capital project spending is less
than anticipated so the bond proceeds are not needed.
Total Special Fund Reductions $ 7,500,000
Analysis of the FY 2005 Maryland Executive Budget, 2004
26
X00A00 – Public Debt
Updates
1. State Recognizes Bond Sale Premiums When Forecasting Revenues and Debt
Service
GO bond debt service is supported by the ABF. ABF’s revenue sources can include general
funds, property tax revenues, interest generated by fund balances, loan repayments for local bonds,
and miscellaneous revenues generated from bond sales such as bond sale premiums. The purpose of
the fund is to support debt service.
Traditionally, more than 95% of ABF revenues are generated from either property tax receipts or
general fund appropriations. In recent years, bond sale premiums have been a substantial revenue
source for the ABF. From fiscal 2001 through 2004, the State generated over $197 million in bond
sale premiums. This is almost 10% of debt service expenditures over the same period.
In previous budgets, the State did not estimate bond sale premiums. This resulted in the State
substantially understating revenues supporting GO bond debt service. Recognizing the large amount
of revenues generated through bond sale premiums, the administration began estimating bond sale
premiums in the fiscal 2005 allowance. Bond sale premiums can be estimated because they are a
function of the amount of bonds that are sold, the interest rate on the bonds, and the prevailing market
interest rate on the date of the sale.
Bond Sale Premiums Have Increased as Interest Rates Have Fallen
When bonds are sold they have a par value (cost of the bond as shown in the Official Statement)
and a coupon rate (interest rate of the bond listed in the Official Statement). When the bonds are bid,
the Treasurer’s Office determines the value of the bonds sold and when the bonds mature. The
market determines the coupon rate and the sale price of the bonds. In the current low-interest rate
climate, the coupon rate has been substantially higher than the market interest rate, as measured by
the True Interest Cost (TIC). If the TIC is less than a bond’s coupon rate, the market tends to bid up
the price of the bonds to a level that his higher than par value. The difference between the par value
and the sale price of the bonds is a premium. Conversely, when the TIC is above the coupon rate, the
bonds cannot sell at par value and sell for less. This difference is referred to as a discount.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Maryland has received a premium for every bond sale since 1997. Having a premium ensures
that there are sufficient funds available for the capital projects being financed. Usually, the coupon
rate and market rate are close and the resulting premium is limited. However, in recent years the
premium has been quite large. Exhibit 12 shows that since January 1, 2000, the State has sold over
$2 billion in new GO bonds generating in excess of $197 million in bond premiums.
Exhibit 12
Bond Premiums
Fiscal 2001 – 2004
($ in Millions)
Fiscal Average True Interest Par Value of
Year Issuance Coupon Rate Cost (TIC) Bonds Sold Premium
2001 2000 1st 5.53% 5.05% $200 $8
2001 2001 1st 5.20% 4.37% 200 15
2002 2001 2nd 5.32% 4.41% 200 15
2002 2002 1st 5.34% 4.23% 200 19
2003 2002 2nd 5.25% 3.86% 225 28
2003 2003 1st 5.25% 3.69% 500 61
2004 2003 2nd 5.00% 3.71% 500 51
Total $2,025 $ 197
Source: Department of Budget and Management, September 2003
The increases in premiums are attributable to the difference between the bonds’ coupon rates and
TIC. The coupon rates have declined less than market interest rates (as measured by the TIC) in
recent years. Exhibit 13 shows that the difference between the coupon rates and the TIC increased
from about 48 basis points (coupon rate of 5.53% compared to a TIC of 5.05%) in 2001 to 156 basis
points (coupon rate of 5.25% compared to a TIC of 3.69%) in early 2003. Over the same period,
bond sale premiums increased from $4 million to $12 million per $100 million of bonds sold.
Analysis of the FY 2005 Maryland Executive Budget, 2004
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X00A00 – Public Debt
Exhibit 13
Difference between GO Bond Sale Coupon Rates and
True Interest Costs Effect Premiums
($ in Millions)
$14 2.0%
Coupon Rate Less TIC
$12
1.6%
$10
Premium
$8 1.2%
$6 0.8%
$4
0.4%
$2
$0 0.0%
d
d
d
t
t
t
t
1s
1s
1s
1s
2n
2n
2n
0
1
2
3
01
02
03
0
0
0
0
20
20
20
20
20
20
20
Bond Sale
Premium per $100 Million Par Value
Coupon Rate less True Int. Cost (TIC)
TIC = True Interest Cost
Source: Department of Budget and Management, September 2003
Bond Sale Premiums Are Projected to Generate Additional Revenues
Exhibit 14 shows that the fiscal 2005 allowance’s bond sale premium estimates total
$30.4 million. DBM assumes that the State will sell a total of $625 million in GO bonds at a coupon
rate of 5.00%. It is also assumed that interest rates will fluctuate between 4.25 and 4.50%. As
mentioned earlier, a rise in interest tends to reduce the premium. The February 2005 premium is
projected to be substantially less than the July 2004 premium even though the amount sold only is
reduced by $25 million. This is due to a projected 25 basis point increase in interest rates (from
4.25 to 4.50%). Conversely, increasing the coupon rate would increase the premium generated from
bond sales. If the coupon rate is increased to 5.25% for the next three bond sales, the estimated
premium is $11.9 million. However, raising the coupon rate is not without costs since higher coupon
rates mean higher debt services for the 15 years it takes the bonds to mature. Raising the coupon rate
25 basis points, to 5.25%, results in over $15.5 million in increased debt service costs.
Analysis of the FY 2005 Maryland Executive Budget, 2004
29
X00A00 – Public Debt
Exhibit 14
Projected Bond Sale Premiums
Fiscal 2005
($ in Millions)
Fiscal Par Value of Coupon
Year Bond Sale Bonds Rate TIC Premium
2005 July-04 $325.0 5.00% 4.25% $18.7
2005 February-05 300.0 5.00% 4.50% 11.4
Total $625.0 $30.1
TIC = True Interest Cost
A concern with estimating premiums is that a sudden sharp increase in interest rates could
substantially reduce premiums. If rates rise to 5%, the State’s premium would be substantially
reduced. A second concern is that bond sales amounts can vary from what was previously projected.
When issuing bonds, the Treasurer’s Office attempts to sell sufficient amounts of bonds to fund all
capital projects that will need funding until the next bond sale. Ideally, the State should avoid issuing
too many bonds since this could result in a large fund balance in the account and excessive interest
payments in the out-years. If project cash flows are different than was projected, bond issuances
should be changed. For example, in its 2002 report, CDAC projected that bond sales would total
$800 million in calendar 2003. Instead bond sales were $1,000 million, which is $200 million more
than projected. If the next three sales are less than projected, the premium is likely to decline. For
example, canceling the February 2004 bond sale reduced projected bond sale premiums by
$11.7 million.
After examining the issue, SAC recommended in its December 2003 report that the State estimate
bond sale premiums when preparing the budget each year. DBM has complied with the SAC
recommendation. In spite of the inherent uncertainty in the forecasting process, it is appropriate to
estimate bond sale premiums when the budget is being prepared. Estimating bond sale premiums
provides a more complete and realistic assessment of the ABF which supports the Public Debt
program.
Analysis of the FY 2005 Maryland Executive Budget, 2004
30
X00A00 – Public Debt
Appendix 1
Current and Prior Year Budgets
Current and Prior Year Budgets
Public Debt
($ in Thousands)
General Special Federal Reimb.
Fund Fund Fund Fund Total
Fiscal 2003
Legislative
Appropriation $94,020 $311,357 $0 $89,862 $495,239
Deficiency
Appropriation 0 0 0 0 0
Budget
Amendments 0 425,766 0 0 425,766
Cost Containment 0 0 0 0 0
Reversions and
Cancellations -1,336 -9,738 0 0 -11,074
Actual
Expenditures $92,684 $727,385 $0 $89,862 $909,931
Fiscal 2004
Legislative
Appropriation $0 $532,819 $0 $0 $532,819
Cost Containment 0 0 0 0 0
Budget
Amendments 0 4,000 0 0 4,000
Working
Appropriation $0 $536,819 $0 $0 $536,819
Note: Numbers may not sum to total due to rounding.
Analysis of the FY 2005 Maryland Executive Budget, 2004
31
X00A00 – Public Debt
Fiscal 2003
Fiscal 2003 actual expenditures totaled $909.9 million, which is $414.7 million more than the
legislative appropriation. Significant changes include:
• $410.9 million added to expenditures in special fund budget amendments attributable to bond
refunding;
• $4.3 million in additional debt service costs ($14 million budget amendment less $9.7 million
reverted back to the ABF);
• $1.3 million reverted to the general fund attributable to actual arbitrage penalties being below
estimated penalties. Chapter 66, Acts of 2003 altered the accounting method for bond sale
proceeds from a project to a cash flow basis which allowed more flexibility and reduced penalties;
and
• $888,000 in additional special funds to support a sinking fund payment for Qualified Zone
Academy Bonds.
Fiscal 2004
In fiscal 2004 a $4 million special fund budget amendment was approved. The amendment added
funds to support higher than anticipated debt service costs.
Analysis of the FY 2005 Maryland Executive Budget, 2004
32
Object/Fund Difference Report
Public Debt
FY04
FY03 Working FY05 FY04 - FY05 Percent
Object/Fund Actual Appropriation Allowance Amount Change Change
Objects
13 Fixed Charges $ 909,931,291 $ 536,818,783 $ 567,859,625 $ 31,040,842 5.8%
Total Objects $ 909,931,291 $ 536,818,783 $ 567,859,625 $ 31,040,842 5.8%
Funds
X00A00 – Public Debt
01 General Fund $ 92,683,610 $0 $0 $0 0.0%
03 Special Fund 727,385,334 536,818,783 567,859,625 31,040,842 5.8%
09 Reimbursable Fund 89,862,347 0 0 0 0.0%
Total Funds $ 909,931,291 $ 536,818,783 $ 567,859,625 $ 31,040,842 5.8%
33
Note: The fiscal 2004 appropriation does not include deficiencies, and the fiscal 2005 allowance does not reflect contingent reductions.
Appendix 2
Fiscal Summary
Public Debt
FY04 FY04
FY03 Legislative Working FY03 - FY04 FY05 FY04 - FY05
Unit/Program Actual Appropriation Appropriation % Change Allowance % Change
01 Redemption and Interest on State Bonds $ 496,869,518 $ 532,818,793 $ 536,818,783 8.0% $ 567,859,625 5.8%
05 Related Expenses on State Bonds 413,061,773 0 0 -100.0% 0 0%
Total Expenditures $ 909,931,291 $ 532,818,783 $ 536,818,783 -41.0% $ 567,859,625 5.8%
General Fund $ 92,683,610 $0 $0 -100.0% $0 0.0%
X00A00 – Public Debt
Special Fund 727,385,334 532,818,783 536,818,783 -26.2% 567,859,625 5.8%
Total Appropriations $ 820,068,944 $ 532,818,783 $ 536,818,783 -34.5% $ 567,859,625 5.8%
34
Reimbursable Fund $ 89,862,347 $0 $0 -100.0% $0 0.0%
Total Funds $ 909,931,291 $ 532,818,783 $ 536,818,783 -41.0% $ 567,859,625 5.8%
Note: The fiscal 2004 appropriation does not include deficiencies, and the fiscal 2005 allowance does not reflect contingent reductions.
Appendix 3