4

William F. DwyerSTATE TREASURER

THE STATE OF NEW HAMPSHIRESTATE TREASURY

25 CAPITOL STREET, ROOM 121CONCORD, NH. 03301

603-271 -2621FAX 603-271-3922

E-mail: bdwyer@lreasuw.slate.nh.usTDD Access: Relay NH 1-800-735-2964

February 23, 2016

Honorable Chuck MorsePresident of the Senate

Honorable Shawn JasperSpeaker of the House

Dear President Morse and Speaker Jasper:

Attached is a copy of the debt affordability study for fiscal year 2015 prepared by theState Treasury and Public Resources Advisory Group, the State’s financial advisor. Indeveloping this year’s study we have examined the impact of debt issuance, changes to statute,and economic projections on the State’s net tax-supported debt ratios. Please note that this studyfocuses on net tax-supported (unrestricted General Fund) debt outstanding and does not considerdebt funded with Highway Funds or other self-supporting debt with a dedicated revenue source.

The Base Case presented on page 3 of the study recommends maintaining the level ofbonding levels authorized for the current biennium, followed by a reduction of $5 million inbiennial capital project General Obligation bonding beginning with the 2020-21 biennium.Therefore this analysis continues the recommendations made in the study prepared last year byproposing the following biennial authorizations: 2018-19 ($125 million), 2020-21 ($120 million),and 2022-23 ($120 million). Based on strong recent General Fund unrestricted revenueperformance, both in fiscal year 2015 versus 2014 (-‘-5.7%). as well as fiscal year-to-date 2016, Ihave also adjusted the Base Case annual revenue growth rate to 2.0% for fiscal years 2017through 2022, a modest increase from the 1.4% assumption used in last year’s study but stilllower than the 2.5% growth rate assumed in recent years.

The recommended amounts of new net General Fund debt in fiscal years 2017 through2022 would include any new authorizations for capital needs to be bonded and paid from GeneralFund unrestricted revenues. Also reflected in the attached analysis are the continued effect of theissuance of$13 I million in school building aid debt in fiscal years 2010 and 2011 and the recharacterization of Medicaid Enhancement Tax revenue from unrestricted to restricted, pursuantto the State’s settlement with hospitals and care providers as provided in 2014 SB 369.

One notable consideration in the biennial bonding authorizations recommended above isthe pledging of the incremental revenue generated by the 2014 SB 367 road toll increase for thepurpose of entering into the $200 million federal Transportation Infrastructure Innovation andFinancing Act program (TIFIA), as authorized in the 2015 HB 2 amendment to RSA 6:13-d, 1.As a result of this revenue pledge, the State Treasury is less concerned than one year agoregarding the risk ofa repeal of the 2014 road toll increase and its potential impact on overall nettax-supported debt levels.

‘S

Hon. Chuck MorseHon. Shawn JasperFebruary 23, 2016Page 2

Sensitivity 1, found on page 10 of the appendix, assumes the same debt issuance as in thebase case but assumes a flat revenue forecast for the period. The purpose of this alternativescenario is to examine how flat revenue performance might impact the State’s borrowingcapacity. Sensitivity 2 on page 12 of the appendix assumes the same debt issuance and revenuegrowth assumed in the base case but increases the interest rate by one percentage point. Both ofthese sensitivity analyses project that the State’s debt service to revenue ratio is expected toremain below 8% after fiscal year 2016, well below the 10% statutorily prescribed limit andrating agency warning level. However it is worth noting that from 2000 to 2010 the debt serviceratio averaged 6.13%, a level that the Base Case nearly reaches by 2022 using modestly decliningnet tax-supported debt authorization recommendations.

Lastly, we have presented on page 13 a final scenario to highlight the impact of stateguaranteed bonds combined with flat revenue growth. In the very worst case (and unlikely)scenario under which the State would be required to assume all guarantee liabilities in a stagnantrevenue environment, the debt service to revenue ratio nearly reaches the 9% level in 2019 and2020. The debt affordability ratios are clearly impacted by including guaranteed debt in theanalysis, but this is worth considering for credit rating purposes. While somewhat difficult toevaluate from a fundamental credit risk standpoint, the level of guaranteed debt does notpresently impact the State’s credit rating, in part reflecting the prior success of State guaranteeprograms.

The general funded debt service to unrestricted General Fund revenues ratio is the metricmost closely monitored by policymakers and the rating agencies as the best barometer of debtaffordability levels. This analysis indicates that the State’s debt service to unrestricted revenueratio, while inflated above recent historical levels (2000-2010), remains manageable under theBase Case scenario, while projecting to trend back toward recent historical lows using therecommendations provided here.

I am available to discuss this analysis in more detail with you at any time.

Respectfully,

William F. DwyerState Treasurer

Attachments

Cc:Honorable Margaret Wood Hassan, GovernorRepresentative Neal Kurk, Chair, House Finance CommineeRepresentative Gene Chandler, Chair, House Public Works and HighwaysSenator Jeanie Forrester. Chair, Senate Finance CommitteeSenator Gary Daniels, Chair, Senate Capital Budget CommitteeVicki Quiram, Commissioner, Department of Administrative ServicesMichael Kane, Legislative Budget Assistant

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Public Resources Advisory Group

39 Broadway, Suite 1210 . New York, New York 10006-2908 • (212) 566-7800

MEMORANDUM TO: The Honorable William DwyerTreasurerState of New Hampshire

FROM: Public Resources Advisory Group (“PRAG”)

SUBJECT: Debt Affordability Study Update

DATE: Fcbniary23, 2016

As requested, we have updated the debt affordability study for the State of New Hampshire. Thisstudy analyzes only net General Fund debt outstanding at June 30, 2015. The School Building Aid bondsare included in the study. The rating agencies opine that the State has ‘manageable debt levels with debtratios well below Moody’s 50-state medians” (Moody’s Investors Service report dated December 5,2014), “The state’s tax-supported debt is moderate” (Standard & Poor’s report dated October 9, 2015) and“debt strtteture is conservative with low debt levels, rapid amortization” (Fitch Ratings report datedDecember 8,2014). Thus, the credit agencies recognize the State’s fiscal prudence in regard to debt.

In this debt affordability study update, the term “Sensitivities” refers to the changes inassumptions related to General Fund unrestricted revenue growth and increased borrowing costs(Sensitivity I and 2, respectively). The term “Cases” refers to alternate scenarios in the event that theState is required to take on debt guarantees, as presented on pages 4 and 5 of this update.

Assumptions I

The following assumptions were used in preparing the base case analysis that projects the State’sfuture debt ratios:

1. No general obligation debt issued in FY 2016,

2. 562.5 milLion of tax-exempt general obligation debt to be issued in each of fiscal years2017 through 2019 and 560 million in each of fiscal years 2020 through 2022, Each issueis assumed to be amortized over 20 years and carry an interest rate of 5.00%, with 60% ofprincipal amortized in equal annual installments over the first ten years and 40% in equalannual installments over the remaining ten years. Future net tax-supported GO debtissuance includes the biennial authorizations for the University System of NewHampshire. however this analysis does not attempt to separately estimate specific USNHauthorizalion amounts for fiscal years 2017 through 2022.

3. General Fund Unrestricted Revenues reflect actual revenues for fiscal year 2015 with theportion of meals and room tax revenues designated for the debt service of school buildingaid included and an average annual growth of 2.0% in fiscal years 2016 through 2022.

4. Total personal income is based on 2014 figure of £70,020 million and is projected to growat an average annual rate of 3.6%,

5. Population is based on 2014 figure of 1,326,813 and is projected to grow at an averageannual rate of 0.2% per year.

L:\CLIENTS\NH\NH\NHO6\NH DAS Memo (Final)- 02.22.16docx

Public Resources Advisory Group

We have also projected the State’s debt ratios including certain State guaranteed debt, In doingso, we have made the following assumptions:

I. State guaranteed debt consists of debt issued for local Superfund sites, Business FinanceAuthority (“BFA”), and Pease Development Authority (“PDA”). The analysis excludesState guaranteed debt issued for water pollution control, local schools and local landfills.and Division of Water Resources (program eliminated).

2. Future issuances of State guaranteed debt are assumed to be as follows:

Expected Issuances of State Guaranteed DebtFiscal Year Dollar Amount Purpose

2017 S34.420.000 Superfund. 8F1\, Pease2018 34.420.000 Superfund. flEA, Pease

20)9 34,320,000 Superfund, BrA. Pease

2020 11,420,000 BFA

2021 I 1,420,000 BFA

3, New State guaranteed debt is assumed to be taxable with level debt service over 20 yearsat an average interest rate of 6.00%.

4. An analysis of each case is contained in the Appendix to this report.

Effect of General Obli2ation Debt Issuance on Debt Ratios

The Base Case (page 3 of the Appendix) shows the effect on the State’s debt ratios, based on theabove assumptions including the issuance of $62.5 million of tax-exempt general obligation debt in each offiscal years 2017 through 2019 and $60.0 million in each of fiscal years 2020 through 2022. Combiningthese issuances and repayments of outstanding debt, the total issuance is approximately $160 million lessthan retirements over the fiscal years 2016 through 2022, causing the State’s net general fttnd debt todecrease from 8768.254 million at June 30, 2015 to $608373 million at June 30, 2022, a total decrease of$160 million or 20.8%.

Presently, New Hampshire’s ratios of debt to personal income and debt per capita arc significantlybelow the 2015 Moody’s medians for states. New Hampshire’s net general flrnd debt service to revenuesratio at 8.2% for fiscal year 2015 was higher than the median of 5.3% but well below the level that creditanalysts use as a warning sign of excessive debt service burden of 10.0%, which is also the State’sstatutorily prescribed limit (RSA 6-C:2). By issuing general obligation debt over the projected period inthe amounts identified above, New Hampshire’s debt ratios would remain well under the 2015 Moody’smedians for states except for the debt service to revenues ratio, as summarized in the following chart:

Summan’ of Debt Ratios for Net General Fund Debt

Moody’s Median New Hampshire

2015 June 30, 2015 June 30, 2022 Est.

Debt to Personal Income 2.5% 1.1% 07%

DebtPerCapiia $1,012 $578 545)Debt ScMce to Revenues 5,3% 8.2% 63%

Ten percent is rule of thumb used by rating agency analysts as a warning level that should not be exceeded, asa greater relative amount would place too heavy a fixed end burden on the budget, thereby limiting fiscalflexibility.

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Public Resources Advisory Group

As can be seen, the ratio of debt service to revenues is projected to decrease to 6.3% at June 30,2022. Debt to personal income would decline over the period, from 1.1% at June 30, 2015 to 0.7% atJune 30, 2022 and debt per capita would decline from $578 to $451. These ratios relative to Moody’smedians form the basis for an assessment of the weight of the State’s debt position.

Sensitivity Analyses: Effects of Constant Revenues and Hi2her Interest Rates

Given the uncertainty regarding the economy and the markets, it is difficult to make forecasts.Accordingly, a sensitivity case for General Fund unrestricted revenues was developed, assuming no growthof revenues after fiscal year 2016. Under these assumptions, New Hampshire’s debt ratios would change assummarized in the chart below:

Debt Ratios Assuming Constant Revenues After Fl’ 2016

Summary of Debt Ratios for Net General Fund Debt

New Hampshire

Moody’s Constant RevenueMedian Base Case Assumption

FY 2022 FY 20222015 FY 2015 Est. FY 2015 Est.

Debt to Personal Income 2.5% 1.1% 0.7% 1.1% 0.7%

DebtPerCapita $1,012 $578 $451 $578 $451

Debt Service to Revenues 53%* 82% 6.3% 8.2% 7.1%

With the constant revenue, the ratio of debt service to revenues would decrease from 8.2% forfiscal year 2015 to 7.1% for fiscal year 2022, compared to 6.3% in the Base Case. At the 7.1% level, thisratio would be still well below the 10.0% rule of thumb. Other ratios would not change since the amountof bonds issued would not change. (The details of this analysis are shown on pages 9-10 of theAppendix).

A second sensitivity analysis was developed with regard to different market rates. It assumes thattax-exempt interest rates increase by 100 basis points. The results are as follows:

eN Ratios Assuming increased Tax-Exempt RatesSummary of Debt Ratios for Net General Fund DebtMoody’s Median New Hampshire

Base Case 1% Interest Rate Increase

2015 Fl’ 2015 FY 2022 Est. Fl’ 2015 FY 2022 Est.

Debt to Personal Income 2.5% . 1.1% 0.7% 1.1% 0.7%

DebtPerCapita $1,012 $578 $451 $578 $45!

Debt Service to Revenues 5,3%* 8.2% 6.3% 8.2% 6.5%

Ten percent is a rule of thumb used by rating agency analysts as a \vaming level that should not be exceeded, as a greaterrelative amount would place too heavy a fixed cost burden on the budget, thereby limiting fiscal flexibility.

The ratio of debt service to revenues would decrease from 8.2% in fiscal year 2015 in the BaseCase to 6.5% for fiscal year 2022, well below the lO% rule ofthutiib, although it would remain over 7.0%in fiscal years 2016 through 2020. Other ratios would not change since the amount of bonds issued wouldnot change. (The details of this analysis are shown on pages 11 and 12 of the Appendix).

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Public Resources Advisory Group

Effect of State Guarantees on Debt Ratios

Page 4 of the Appendix shows the effect of State guarantees on New Hampshire’s debt ratios inthe Base Case. For this analysis there was $84.2 million of outstanding guaranteed debt at June 30, 2015,which added to the State’s net General Fund debt bringing the total to $852.5 million, as shown in thetable below:

Net General Fund and Guaranteed Debt at June 30, 2015

(S in on/lions)

Net General Fund Debt 5768.3

Guaranleed Debt

Business Finance Authority 57.9

Qualified School Construction Bonds (QSCBs) 26.3

Total Guaranteed Debt $84.2

Total Net General Fund and Guaranteed Debt $852.5

There is approximately SI 26.0 million of authorized but unissued State guaranteed debt at June30, 2015, as shown in the table below:

Authorized But Unissued State Guaranteed Debt at June 30, 2015

Purpose Amount

(S in mi/ions)

Local Superfund Sites $20.0

Business Finance Authority 57.1

Pease Development Authority 48.9

Total $126.0

For this scenario, we assumed that: the Business Finance Authority would issue $11.42 million ineach of fiscal years 2017 through 2021; Pease Development Authority would issue Si 6.3 million in each offiscal years 2017 through 2019; and the Local Superfund would issue $6.7 million in each of fiscal years2017 and 2018 and $6.6 million in fiscal year 2019.

The table below compares the ratios in three cases. The first case is the Base Case, withoutguaranteed debt. The second case (Case 2 in the table below), which is a more pessimistic scenario,shown on page 4 of the Appendix, includes all the outstanding and additional debt issuances for Stateguaranteed debt described above. In this second case, the State’s exposure would reach approximately$777.0 million at June 30, 2022, which is $169.0 million more than the net General Fund debt expected toremain outstanding at that time (Base Case). The last “worst case” (Case 3 in the table below) scenariocombines outstanding and additional issuances of State guaranteed debt with a flat revenue assumption(Sensitivity 1), shown in the Appendix on page 13. The resulting debt ratios are summarized in the chartbelow:

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Public Resources Advisory Group

Summary of Debt Ralios Including Stale Guaranteed Debt

New Hampshire

Including Guaranteed Debt

Case 3Moody’s Case I (Base Case) Case 2 All Guaranteed Debt andMedian Net General Fund Debt All Guaranteed Debt Flat Revenues

2015 FY2015 FY 2022 Est. FY 2015 FY2022 Est. FY 2015 FY 2022 Est.

Total Debt Outstanding (000,000) 5768 $608 $852 $777 $852 $777

Debt to Personal Income 2.5% 1.1% 0.7% 1.2% 0.8% 1.2% 0.8%

DebtPerCapila $1,012 S578 $45! $641 $576 $64! $576

Debt Service to Revenues 53%* 8.2% 6.3% 8.8% 7.4% 8.8% 8.4%

*Ten percent is a rule of thumb used by rating agency analysts as a warning level that should not be exceeded, as a greater relative amountwould place too heavy a fixed cost burden un the budget, thereby limiting fiscal flexibility.

As would be expected, all debt ratios rise as a result of additional State guaranteed debt issuanees.At June 30, 2022, the States debt to personal income would be 0.8% in Case 2 as opposed to 0.7% in theBase Case. Debt per capita would be $576 in Case 2 versus S45 1 in the Base Case; and debt service torevenues would be 7.4% compared to 6.3% in the Base Case while reaching 8.4% in fiscal years 2016 and2019. With an assumption of no revenue growth added to Case 2, the “worst case” scenario, debt service torevenue ratio increases to 8.4% in fiscal year 2022 while reaching 8.9% in fiscal years 2019 and 2020. Debtper capita and debt to personal income ratio would remain below the 2015 Moody’s medians in all eases.

Conclusion

The State’s debt ratios are considered “manageable” to “low” by the rating agencies. If the Stateissues $367.5 million of net general obligation debt in fiscal years 2017 through 2022, as outlined above,the amount of debt outstanding would fall and the effect on the debt ratios would be as follows: debt topersonal income would decrease from the current level of 1.1% to 0.7% at the end of fiscal year 2022;debt service to revenues would decrease from 8.2% to 6.3% at June 30, 2022; and debt per capita woulddecline from S578 to $451. At these levels, the debt ratios would remain “manageable”, and would, infact, improve.

Sensitivity analyses show that with constant revenues the debt service to revenue ratio would be7.1% in fiscal year 2022, above the 6.3% level in the Base Case, and it would be 6.5% in the scenariowith increased interest rates. At these levels, the debt service to revenue ratios in the two sensitivity caseswould still be well below the warning level for excessive debt service burden of 10%.

When existing and additional State guaranteed debt are added to the Base Case scenario, debt topersona! income is projected to decline from the fiscal year 2015 level of 1.2% to 0.8% in fiscal year 2022,debt per capita is projected to decrease from 5641 in fiscal year 2015 to $576 in fiscal year 2022 and debtservice to revenues ratio is forecast to decline from 8.8% in fiscal year 2015 to 7.4% in fiscal year 2022.Under the “worst ease” scenario of zero General Fund unrestricted revenue growth and the addition of Stateguaranteed debt, the projected ratio of debt service to revenues would rise from the projected Base Caselevel of 6.3% in fiscal year 2022 to 8.4%.

The State’s ratio of debt service to revenues remains above the Moody’s median level and should beclosely monitored so corrective actions can be taken if revenue growth falls below projections. Thisbecomes particularly important if the 10% “warning level” is approached. At this time, however, there areno concerns, as this ratio is projected to decline over the projected period through fiscal year 2022 and toremain well below 10%.

-5-

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7,5

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