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Debt Management

MnDOT Policy FM007
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Policy statement

Debt service for all forms of debt obligations of the trunk highway fund may not 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

When funds that involve incurring debt obligations are received for use in current budget periods, these monies must be repaid 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 impact 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.

Also, legislation was 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

The Commissioner and Deputy Commissioner need to be aware of this policy, because it provides a policy constraint to use in decision making about the degree of bond funds or other forms of debt obligations that is reasonable to undertake in current years. Proposals to use bond proceeds or other forms or debt obligations might be initiated by MnDOT or by the legislature. The Chief Financial Officer and the Director of the Office of Finance, along with direct reports, need to fully understand the policy and the potential actions that might result so they can provide expert counsel to the Commissioner and Deputy Commissioner. The division directors need to be aware of this policy in order to participate as part of the executive management team in evaluating potential uses of bonding or other forms of debt obligation. The Director of Government Affairs needs to be aware of this policy, because this person is regularly communicating with legislators and other persons attempting to influence transportation policy and legislation, which may include interest in use of debt financing. The Director of the Office of Capital Programs and Performance Measures needs to be aware of this policy, because this person’s responsibility includes planning and programming of trunk highway construction projects, some of which are funded with trunk highway bonds. Additionally, District Engineers and Office Directors must also be well-informed with the policy.

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 is also performed, by calculating 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 is based on existing debt obligations plus forecasted future sales of authorized trunk highway bonds and constant amounts for repayments of local government advances by agreement and loan payments for loans from the transportation revolving loan fund, based on estimates for the last year of the forecast period). This analysis is communicated to the Director of the Office of Finance and to the Chief Financial Officer. If the estimated debt service in future years is projected to be 19% or greater, the Chief Financial Officer will communicate this information to the Commissioner and Deputy Commissioner.

As needed, the Commissioner, Deputy Commissioner, and Chief Financial Officer will develop strategies for reducing the amount of debt service as a percentage of total state revenues. The Transportation Program Investment Committee will be consulted 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.

  • One possible strategy would be to delay the sale of authorized trunk highway bonds that have been 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 impact other programmed projects.
  • Another possible strategy would be to request the legislature to change any building projects already approved to be funded with trunk highway bonds to instead use a continuing appropriation from the trunk highway fund.
  • Any proposed building projects in the future that are contemplated to be paid for with trunk highway bonds could instead be converted to being funded with appropriations from the trunk highway fund.
  • Another possible strategy is to 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 of time, which vary based on the type of bonds. Based on this, Minnesota Management and Budget has implemented policy limiting the maximum time period that proceeds from trunk highway bonds may be retained. If proceeds are not used within that period of time, the federal internal revenue service is authorized to levy a severe penalty.

Cash Flow Forecast

This consists of estimated expenditures of funds for projects funded with trunk highway bond proceeds over the time 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 than 5%. If the market-based rate is greater than 5%, the amount of the estimated debt service transfer is increased 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

This policy is described in Minnesota Statute 161.361 "Advance Funding for Trunk Highway Projects." It basically allows local governments to advance money to pay for programmed trunk highway construction projects, by agreement. Repayments to the local governments are typically made 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 than 5%. If the market-based rate is less than 5%, the amount of the estimated debt service transfer is reduced 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 Commissioner, all six Division Directors, the District Engineer of the Metropolitan District, and the Chief Financial Officer. 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

This fund was created in Minnesota Statute 446A.085 Transportation Revolving Loan Fund to provide funding for a variety of activities related to transportation infrastructure construction and maintenance. Loans are provided at below market interest rates and repayments are specified in a formal loan agreement. MnDOT is authorized to enter into loans by Minnesota Statute 161.04, subdivision 4 "Trunk Highway Fund, Loan for Trunk Highway Project; Appropriation."

Trunk Highway Bonds

Trunk highway bonds are bonds authorized by the legislature under authority of Constitution of the State of Minnesota, Article 14, Section 11 "Highway Bonds" and Minnesota Statute 167.50 "Minnesota Trunk Highway Bonds," the proceeds of which must be used for capital projects that are part of or functionally related to the construction, 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. Annual transfers of funds to the Minnesota Management & Budget (MMB) debt service account in the state debt service fund are also made from this fund.

Trunk Highway Fund Debt Service

Debt service (payment of principal and interest) on trunk highway bonds is required by the constitution to be paid from the Trunk Highway Fund. In practice a transfer is made 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 are made. Also included in MnDOT’s debt service budget are required repayments of loans made 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 are based on estimated cash needs for each project, not the total project cost. Also, once the total amount has been sold, the amount of debt service declines fairly slowly because principal on bonds is reduced by only 5% each year.

Responsibilities

Commissioner and Deputy Commissioner

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 that is 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.

Chief Financial Officer

Provide information to the Commissioner and Deputy 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 and Deputy Commissioner about the effect that additional bond authorizations would have on estimated total debt service level. Assist in communicating concerns to legislative leadership as needed.

Director, Office of Finance

Ensure that updates to the information about the percent estimated total debt service is of annual state revenues to the trunk highway fund are 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 whenever proposals are made to propose additional trunk highway bond authorizations, either within the department or by external parties. When information about changes in the program of projects using trunk highway bond revenues is received from the Director, Office of Capital Programs and Performance Measures, develop revised estimates of cash flows for the projects and obtain revised estimates of the trunk highway debt service from Minnesota Management & Budget, which is responsible for providing official estimates of trunk highway fund debt service.

Director, Office of Capital Programs and Performance Measures

Monitor the program of construction projects for use of trunk highway bond proceeds. Notify the Director, Office of Finance, when changes to the program are made. These include changes to 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.

Transportation Program Investment Committee

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 only state revenue used in calculating the allowable total debt service percentage?

Federal funds are available on a reimbursement basis. Federal funds could not legally be used for debt service payments on trunk highway bonds. Also, there is a greater degree of uncertainty about the level of federal funds that might be available 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 "Debt Capacity Forecast". Also, debt service usually begins at relatively modest levels and grows to the maximum amount after several years, after which it declines relatively slowly. Because of this a longer time frame is needed to see the full effects of the use of trunk highway bonds proceeds.

Related information

This policy is highly related to the policies about Trunk Highway Fund Balance and the Use of Federal Highway Advance Construction Financing.

References:

History of policy updates or amendments

Supercedes

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

Effective date

Effective date as signed by responsible senior officer.

Ownership

Responsible Senior Officer

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

Policy Owner

Duane Leurquin
Director, Financial Management
duane.leurquin@state.mn.us
651-366-3165

Policy Contact

Kristi Schroedl
Budget Director
kristi.schroedl@state.mn.us
651-366-4859