August 15, 2011

Maryland close to hitting debt ceiling in 5 years

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By Megan Poinski
Megan@MarylandReporter.com

Treasury building in Annapolis

Treasury building in Annapolis.

Maryland could be within $43 million of hitting its debt ceiling in fiscal year 2017, according to projections presented to the Capital Debt Affordability Committee on Friday.

The committee, made up of financial officials from the executive branch and legislature, heard an overview of the state’s financial projections, debt obligations, and the direction that the money is flowing. They will weigh the state’s debt service, revenue projections and the economic outlook, and recommend how much more debt the state should go into next year.

Maryland has a self-imposed limit on debt service of 8% of all revenues received. This means that only 8% of revenues in a given year can go toward principal and interest on state bonds.

Currently, the state’s debt service payment is 6.9% of its revenues. By 2017, debt service is projected to be 7.8% of revenues. (By comparison, the interest on the federal debt this year is about 10% of total revenues.)

“There’s not a lot of flexibility,” said Patti Konrad, director of debt management for the State Treasurer’s Office.

Recession affected debt limit

The state is approaching its debt limit so quickly largely because of the economic drop off and subsequent recession in fiscal years 2009 and 2010.  Both years, the state saw a net decrease in its revenues. These decreases pulled revenue growth way down from a general upward trend, and the recession slowed the overall speed of the state’s economic growth.

While projections show the state’s debt service climbing rapidly toward the danger zone, Konrad said several items have been taken out of consideration when looking at the state’s total debt.

The $33 million in bonds to build a parking garage for the State Center complex in Baltimore are no longer considered because a lawsuit has stalled further development. Additionally, funds to purchase slot machines for casinos at Rocky Gap and in Baltimore City were pulled out of the debt calculation because neither project is moving forward right now. And the funds set aside for slot machines that will be purchased for the Arundel Mills casino were also reduced, based on machine purchases for the Ocean Downs and Perryville casinos.

Additionally, a new law passed by the General Assembly changed what is counted as debt service. Many environmentally friendly projects are no longer seen as adding to the state’s debt because developers are guaranteeing annual energy savings that exceed the debt service the state would have to pay. Nineteen projects have dropped out of debt calculations because of this new law.

Konrad and State Treasurer Nancy Kopp both stressed that these projections are not final. The world is in a time of financial uncertainty right now, with wild daily fluctuations in the world’s stock markets. Bond rating agencies have put the state on a negative credit watch — possible prelude to a rating downgrade — because of the large number of federal contractors based in Maryland. So the numbers presented to the committee on Friday – as well as the outlook they represent – could change dramatically in a matter of weeks.

Giant asterisk needed

“You need to make sure everything is communicated with this giant asterisk,” remarked Comptroller Peter Franchot.

The Bureau of Revenue Estimates, a division in Franchot’s office, is working to make accurate predictions of where the state’s revenues might be next year. In the meantime, the Capital Debt Affordability Committee will continue to work on their recommendations next month, presenting them by Oct. 1.

“Day to day the numbers are going to change because the world is changing so rapidly,” Konrad said.

Because of so much uncertainty, Franchot asked the Treasurer’s Office to research the state’s ability to pay off debt in the worst-case scenario of a double-dip recession, where revenues decline for another couple years. Konrad said she would run the figures and present them to the committee next month.

Despite the volatile financial situation, Kopp was optimistic that Maryland’s economy – dependence on Washington and all – would pull through.

“It’s not going to be like they say it is,” she said. Many of the government contractors in Maryland are involved with essential services, like cybersecurity. Additionally, agencies like the National Institutes of Health, disburse grant funds nationwide.