State debt capacity remains below guideline limits in February forecast, MMB says

Jennifer Hassimer, assistant commissioner at Minnesota Management and Budget, told the Senate Capital Investment Committee on March 25 that the state remains well under its three statutory debt guidelines in the agency’s February debt capacity forecast.

“this measure was 1.9%,” Hassimer said, referring to guideline number 1, which measures outstanding state debt compared to state personal income and carries a limit of 3.25% or less.

The February forecast showed guideline number 2— which measures both outstanding debt and authorized-but-unsold debt— at 3.59% of state personal income, below its 6% limit. Hassimer said the state currently has about $8,400,000,000 in outstanding debt and roughly $2,500,000,000 in debt that has been authorized but not yet sold, with roughly half of that split between general fund–supported and trunk highway–supported general obligation debt. She also said outstanding annual appropriation debt totals about $1,500,000,000.

A key change between the November and February forecasts was a reduced assumption for a 2025 bonding bill: the forecast now assumes $700,000,000 in new bonding for 2025, down from $790,000,000 in November. Hassimer attributed that reduction to higher projected interest rates: “In November, our future interest rate assumption for 2025 was just over 4%, so 4.05% was what was factored into the November forecast. That increased to 4.45% for our February forecast,” she said.

Hassimer explained the third guideline, which looks at how quickly general obligation bond principal is scheduled to be repaid: at least 40% within five years and 70% within 10 years. She said those repayment percentages did not change between the November and February forecasts and will next change after the state sells bonds later in the year.

Committee members asked technical questions about amortization and how MMB’s assumptions relate to the state economist’s interest-rate forecasts. Hassimer said the capital-budget assumptions carried in the forecast are based on a 10-year historical lookback at capital budgets that passed previously and are not directly adjusted for short-term interest-rate changes; by contrast, the projected debt-service costs in the forecast do reflect the macroeconomic firm’s interest-rate assumptions that the state uses for its larger revenue and budget forecast.

Hassimer also described how the agency works with state agencies each summer to update project spending timelines so bond sales can be scheduled to meet actual cash needs. She said the February forecast includes assumptions about future even- and odd-year bonding activity—just over $1 billion for future even-year bonding bills and $165,000,000 for future odd-year bills under the existing convention—but emphasized that actual debt-service results depend on project spending timelines and later bond sales.

Hassimer concluded by offering to provide additional breakdowns if the committee requested them and to update the figures after bond sales later this year.