HD72 - Annual Report of the Debt Capacity Advisory Committee


Executive Summary:
In this report, we reaffirm our use of the Debt Capacity Model as the means of calculating the Commonwealth's tax-supported debt affordability. The Model calculates the maximum amount of incremental debt that may be prudently issued by the Commonwealth over the next ten years. The Model uses the ratio of tax-supported debt service as a percentage of revenues as its base calculation. We reaffirm that the ratio of debt Service as a percentage of revenues should be no greater than 5%. In our view, 5% is the maximum ratio consistent with maintaining the current premier credit ratings on the Commonwealth's debt. The Debt Capacity Model is attached as Exhibit A.

The concept of debt capacity management and the 5% maximum ratio were introduced in An Assessment of Debt Management in Virginia, a report issued by the Secretary of Finance in December 1990. The report also recommended the creation of the Debt Capacity Advisory Committee. The Debt Capacity Advisory Committee adopted the 5 % maximum measure in 1991 and has fully endorsed this ratio every year since that time. The credit ratings assigned to the Commonwealth's obligations are, in part, based upon its sound debt management policies. In a report issued in September of this year, Moody's Investors Service specifically referenced the Commonwealth's financial and debt management policies in determining its ratings, as follows:

"Conservative financial management and strong oversight of debt issuance have been a Commonwealth tradition. This tight management of its finances served the state well through the economic downturn of the early 1990's and continues to play an important role in the Commonwealth's creditworthiness. The Debt Capacity Advisory Committee created by executive order in 1991, annually estimates the amount of tax-supported debt that may be authorized and issued within the constraints of the state's resources. A history of positive financial results, spending restraint during economic weakness, prompt attention to adverse financial events, and planned, moderate debt issuance have contributed to the long record of high quality creditworthiness." (Moody's Investors Service, Municipal Credit Research, New Issue Report, September 24, 1999).

In 1999, the Committee approved criteria that govern which liabilities are included in the Model. Certain liabilities classified for accounting purposes as tax-supported debt and shown as such in the Commonwealth's Comprehensive Annual Financial Report (CAFR) do not meet the Committee's criteria for inclusion in the Model. These items include compensated absences, pension liabilities and other liabilities as shown on pages 5 and 7 of Exhibit C. The criteria are included along with other assumptions and variables included in the Model on pages 2 through 4 of Exhibit A. The Model incorporates the official revenue estimates contained in the Governor's proposed budget submitted December 17, 1999.