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Debt Management

MnDOT Policy FM007
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Policy statement

The Minnesota Department of Transportation (MnDOT) manages debt service for no forms of debt obligations of the trunk highway fund may exceed 20 percent of annual state revenues to the trunk highway fund. Currently available forms of debt obligations for the trunk highway fund are:

  • Trunk highway bonds;
  • Loans from the transportation revolving loan fund;
  • Money advanced by local governments by agreement for trunk highway construction projects;
  • Other forms of long-term commitments are possible, for example, from forms of innovative financing

Reason for policy

Receipt of funds that involve incurring debt obligations are for use in current budget periods, repayment is in accordance with the terms of the debt obligation instruments in future years. Even if economic conditions (such as low interest rates, expected low construction cost, and the like) are favorable for using debt obligations, limits to the amount of bonds or other obligations are needed in order to protect future budgets from being required to make debt service payments that are so large that other portions of the budget must be adjusted.

Although careful planning may have occurred to limit total debt service to less than 20% of estimated state revenues to the trunk highway fund, estimated revenue is just that – based on estimates. Actual revenue in future years may vary significantly from estimates. Future events could occur that might substantially affect the receipt of actual revenue, such as major disruption of petroleum supplies and substantial economic recession. If the actual revenue were substantially less than was forecasted, the percentage of debt service could exceed 20%, despite management practices that limited the amount of debt obligations entered into.

In addition, legislation passed in 2010 that added statutory language requiring that MnDOT develop a debt management policy Minnesota Statute 167.60 "Debt-Financing Management Policy."

Who needs to know this policy

  • Commissioner
  • Deputy Commissioner/Chief Engineer
  • Deputy Commissioner/COO/CFO
  • Director, Governmental Affairs
  • Director, Transportation System Management
  • Financial Controller & Director, Financial Management
  • District Engineers
  • Office Directors

Procedures

The Budget Director and staff prepare a formal fund statement for the trunk highway fund in November and February of every fiscal year and as needed at the end of a legislative session. The fund statement covers the current fiscal year and two additional biennia into the future. These fund statements include total projected debt service amounts.

A related analysis calculated by using the percentage of total debt service as a percentage of total state revenues for the forecast period plus the one additional biennium. For years beyond the forecast period, forecasts of revenue are unofficial and the debt service forecast based on existing debt obligations in addition to forecasted future sales of authorized trunk highway bonds. Based on estimates for the last year of the forecast period, constant amounts for repayments of local government advances by agreement and loan payments for loans from the transportation revolving loan fund.

The Financial Controller & Director, Financial Management informs the Duty Commissioner/COO/CFO. If the estimated debt service in future years is projected to be 19% or greater, the Commissioner be informed.

As needed, the Commissioner, Deputy Commissioner/COO/CFO will develop strategies for reducing the amount of debt service as a percentage of total state revenues. The Transportation Program Investment Committee consults in developing these strategies. It should be noted that once the percentage of debt service reaches the 20% guideline, it will be very difficult to adopt any strategy to reduce the amount of debt service requirements, because they are based on actions that have already occurred (e.g., bond sales) that have legally obligated ongoing debt service payments.

Possible Strategies

  • Delay the sale of authorized trunk highway bonds programmed to state road construction projects, which would either involve delaying the scheduled letting of these projects or require identification of different sources of funding for these projects, which might affect other programmed projects.
  • Request the legislature to change any building projects already approved for funding with trunk highway bonds to use a continuing appropriation from the trunk highway fund.
  • Proposed building projects in the future contemplated for payment with trunk highway bonds convert to funding from appropriations from the trunk highway fund.
  • Propose legislation to increase revenues from state sources to the trunk highway fund by a sufficient amount to result in the percentage total debt service as compared to total state revenues to an amount less than 20%.
  • Another possible strategy would be to discontinue granting local government advances by agreement and loans from the transportation revolving loan fund until the overall debt service percentage is less than 18%.

Definitions

Arbitrage

Federal law prohibits retaining cash from bond sale proceeds for more than specified periods, which vary based on the type of bonds. Based on this, Minnesota Management & Budget (MMB) has implemented policy limiting the maximum retention time for trunk highway bonds proceeds. Failure to use proceeds within that period results in a severe penalty by the Federal Internal Revenue Service, authorized to levy the penalty.

Cash Flow Forecast

This consists of estimated expenditures of funds for projects funded with trunk highway bond proceeds over the period for the completion of the entire construction of the projects. These forecasts are prepared prior to scheduled bond sales and in conjunction with the state’s official November economic forecast each year.

Discount on Bonds

Trunk Highway Bonds carry a 5% coupon rate, but the market –based interest rates are typically different from 5%. If the market-based rate is greater than 5%, the amount of the estimated debt service transfer increases accordingly to reflect the difference in interest costs for the market-based rate and 5% over the twenty-year life of the bonds.

Money Advanced by Local Governments by Agreement

Minnesota Statutes §161.361 authorizes local governments to advance money to pay for programmed trunk highway construction projects, by agreement. Repayments to the local governments occur in the year the project is currently scheduled. The law provides for three different types of advances and limits total repayments related to each of these types of advances to $10 million per year.

Premium on Bonds

Trunk Highway Bonds carry a 5% coupon rate, but the market –based interest rates are typically different from 5%. If the market-based rate is less than 5%, the amount of the estimated debt service transfer reduces accordingly to reflect the difference in interest costs for the market-based rate and 5% over the twenty-year life of the bonds.

State Revenue

Revenue from constitutionally dedicated highway taxes (motor fuel taxes, motor vehicle registration taxes, and 60% revenue from the motor vehicle sales tax) that are transferred from highway user tax distribution fund to the trunk highway fund, and other sources of revenue (such as investment income) that are deposited directly into trunk highway fund.

Transportation Program Investment Committee

This committee has nine voting members, consisting of the Deputy Commissioners, all Division Directors, the District Engineer of the Metro District. The committee’s main purpose is to provide strategic management leadership for all aspects of MnDOT’s trunk highway construction program.

Transportation Revolving Loan Fund

Minnesota Statute §446A.085 provides funding for a variety of activities related to transportation infrastructure construction and maintenance. Loans provided at below market interest rates and repayments specified in a formal loan agreement. MnDOT is authorized to enter into loans, Minnesota Statutes §161.04, Subd. 4.

Trunk Highway Bonds

Trunk highway bonds are authorized by the Constitution of the State of Minnesota, Article 14, Section 11 "Highway Bonds" and Minnesota Statutes §167.50. The proceeds go to capital projects that are part of or functionally related to the construction, and improvement or maintenance of the state trunk highway system.

Trunk Highway Fund

This fund is the principal operating fund for MnDOT, and to some extent for the Department of Public Safety. It is a governmental fund that accounts for public monies used to construct, maintain, and operate Minnesota’s trunk highway transportation infrastructure. In addition, annual transfers of funds to the Minnesota Management & Budget (MMB) debt service account in the state debt service fund.

Trunk Highway Fund Debt Service

Payment on debt service (payment of principal and interest) on trunk highway bonds required by the constitution comes from the Trunk Highway Fund. A transfer occurs in November of each year from the Trunk Highway Fund, to the Minnesota Management and Budget (MMB) debt service account in the state debt service fund, from which actual payments of debt service.

Also included in MnDOT’s debt service budget requires repayments of loans from the transportation revolving loan fund for trunk highway purposes, and repayments of money advanced by local governments by agreement for trunk highway construction projects.

Debt service on trunk highway bonds will usually start at lower levels compared with total cost of projects, because sales based on estimated cash needs for each project, not the total project cost. Once sold, the total amount, the amount of debt service declines slowly because principal on bonds reduced by only 5% each year.

Responsibilities

Commissioner and Deputy Commissioners

  • Ensure that proposed budgets and other actions that might result in new authorizations of trunk highway bonds will not result in future, total debt service estimated to be greater than 20 percent of annual state revenues to the trunk highway fund.
  • If legislative committees propose new authorizations of trunk highway bonds that would result in the total debt service estimated to be greater than 20 percent of annual state revenues to the trunk highway fund, communicate with appropriate legislative leaders and Minnesota Management & Budget.

Deputy Commissioner/COO/CFO

  • Provide information to the Commissioner about the currently estimated percent that total debt service is of estimated annual state revenue to the trunk highway fund.
  • Provide information to the Commissioner about the effect that additional bond authorizations have on estimated total debt service level.
  • Assist in communicating concerns to legislative leadership as needed.

Financial Controller & Director, Financial Management

  • Ensure that updates to the information about the percent estimated total debt service is of annual state revenues to the trunk highway fund provided each time a formal forecast for the trunk highway fund is prepared.
  • Obtain official forecasts of trunk highway debt service from Minnesota Management & Budget (MMB) whenever proposals made to propose additional trunk highway bond authorizations, either within the department or by external parties.
  • Changes in the program of projects using trunk highway bond revenue.
  • Develop revised estimates of cash flows for the projects and obtain revised estimates of the trunk highway debt service from Minnesota Management & Budget (MMB), which is responsible for providing official estimates of trunk highway fund debt service.

Director, Office of Transportation System Management

  • Monitor the program of construction projects for use of trunk highway bond proceeds.
  • Notify the Financial Controller & Director, Financial Management regarding changes to the program. Changes include scheduled letting dates for projects that shift the project or projects into a different fiscal year and changes in estimated project costs that are greater than $10 million.
  • Report any concerns that may arise to the Transportation Program Investment Committee (TPIC).

Transportation Program Investment Committee (TPIC)

  • Take action to modify the schedule of highway and bridge construction projects proposed for use of trunk highway bonds as needed.

Frequently asked questions

Why is state revenue used to calculate the allowable total debt service percentage?

Federal funds are available on a reimbursement basis. Use of federal funds for debt service payments on trunk highway bonds is illegal. The level of federal funds is uncertain in future years.

Why is the level of the trunk highway fund total debt service projected for beyond the official forecast period?

MnDOT’s practice was recently modified to be consistent with the debt capacity forecast requirements contained in Minnesota Statute §16A.105. In addition, debt service usually begins at relatively modest levels and grows to the maximum amount after several years, after which it declines slowly. Consequently, to see the full effects of the use of trunk highway bonds proceeds requires a longer period.

Related information

MnDOT Advance Construction Policy
MnDOT Fund Balance Policy

References:
Minnesota Statute §167.60
Minnesota Statute §161.04, Subd. 4
Minnesota Statute §161.361

History of policy updates or amendments

Amended

Policy FM007 – Debt Management, established 4-17-2013

Supercedes

Policy 2.6 – Debt Management, established 7-1-10

Ownership

Responsible Senior Officer

Tracy Hatch
Deputy Commissioner/COO/CFO
tracy.hatch@state.mn.us
651-366-4811

Policy Owner

Duane Leurquin
Financial Controller & Director
duane.leurquin@state.mn.us
651-366-3165

Policy Contact

Kimberlie Kildal
Budget Director
Office of Financial Management
kimberlie.kildal@state.mn.us
651-366-4886