CFO Conference: Fiscal Update

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CFO Conference Fiscal Update
November 18, 2004
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Overview

• Despite an economically sensitive tax base, the
  Commonwealth effectively and prudently managed
  its fiscal position during a business cycle
• Economic expansion (FY94-FY01)
• Built reserves
• Made capital investments
• Solved long-standing problems
• Economic contraction (FY02-FY04)
• Successfully managed revenue and expense
  positions
• Economic recovery (FY05)
• Rebuild reserves
• Implement reforms

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When revenues were strong, Massachusetts acted
prudently

• Saved surpluses or restricted their spending to
  one-time capital
• Fully funded Central Artery/Tunnel cost overruns
• Contributed cash from state surpluses
• Increased RMV fees to service artery-related
  state debt
• Installed improved management
• Increased pension funding to accelerate planned
  amortization of the unfunded liability from 2028
  to 2018

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Prudent action allowed Massachusetts to build up
its reserves
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These reserves were needed in FY02, when tax
revenue collapsed
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The Commonwealth acted decisively to address the
fiscal crisis

• Revenue Measures
• July 2002- Legislation to increase tax revenue by
  1.1-1.2 billion in FY03, 1.5 - 1.6 billion in
  FY04
• Tax amnesty legislation added 174 million
• Tax loophole legislation added 279 million in
  additional recurring revenue
• FY04 budget increased fees to raise 271 million
  yearly

• Spending Cuts
• FY02- Emergency 9C cuts reduced spending by
  120M
• FY03 Spending declined by 1.6 from FY02 (-361
  million) due to budgeting restraint and 420
  million of emergency 9C cuts
• FY04- Pro-forma spending grew by only 2.1 over
  FY03 (475 million)
• Increases FY04 statutory spending by 66
  million to account for FY04 expenses being paid
  with FY05 funds due to timing of supplemental
  budget

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Aggressive debt management

• Cooperative working relationships allow nimble
  management of debt to exploit the low interest
  rate environment and achieve debt service savings
  
• 14 transactions refunded over 9.5 billion in
  debt in the last five years
• 575 million of debt service savings, with a
  present value of 409 million
• Maintained discipline and transparency
• All transactions met 4 present value test
• Limited variable rate exposure
• Derivatives used for hedging only - no options or
  derivatives used to generate up-front cash

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The road not taken

• No deficit finance bonds
• No pension obligation bonds
• No tobacco securitization bonds
• No sale/leasebacks of government buildings

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FY04 - A much better year

• Fiscal Summary
• Revenue 23,988 million
• Spending 22,914 million
• Surplus/(Deficit) 1,074 million
• Stabilization balance 1,137 million, up 77
  from FY03

• Highlights
• Actual tax receipts exceeded January 2004
  estimate by 723 million
• 496 million net increase in the Stabilization
  Fund
• Limited deficiencies through strong financial
  management
• One-time solutions declined to 393 million

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Because FY04 revenue exceeded expectations and
spending was restrained, we replenished our
reserve balances
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FY04 Tax Revenue Growth

• Total 15.953 billion, up 989 million from FY03
  Actual growth 6.6 Baseline growth 7.6
• 723 million above January consensus estimate
• 113 million of FY04 tax revenue unlikely to
  recur, 110 million uncertain to recur. Both
  removed from tax base used to project FY05 tax
  revenue.

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FY05 Budget

• Fiscal Summary
• Revenue 23,820 million
• Spending 24,246 million
• Surplus/(Deficiency) (426) million
• Stabilization balance 1,109 million

• Highlights
• Expenditure for pension fund obligation increases
  by 529 million to account for lower asset values
  from market declines
• Debt service and contract assistance increase by
  321 million
• Medicaid spending increases by 691 million

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FY05 relies on some use of one-time revenue to
support recurring costs

• FY05 One-time solutions
• 270 million FMAP reserves
• 28.2 million Stabilization
• 28 million in trust fund balances
• 25 million surplus property
• 351.2 million total (1.4 of pro-forma
• estimated spending)

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Use of one-time solutions is declining
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FY06 and the road ahead

• Sustain vs. Expand
• Structural Balance Challenge
• Replenish Reserves

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Concluding thoughts

• Conservative revenue estimates
• Aggressive expenditure management
• Coordinated and controlled capital investment
  plan
• Focus on programmatic reform
• Limited use of one-timers, no deficit financing
• Proactive debt management strategies