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Pennsylvania House of Representatives
https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20170&cosponId=21276
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House of Representatives
Session of 2017 - 2018 Regular Session

MEMORANDUM

Posted: December 9, 2016 03:00 PM
From: Representative John A. Lawrence
To: All House members
Subject: Repaying Pennsylvania's Debt More Responsibly
 
Dear Colleagues -

In the near future, I will reintroduce legislation that will accelerate the retirement of the Commonwealth’s General Obligation debt; decrease the amount of interest we pay on such debt; and put the State on a path to improve its overall bond rating.

SUMMARY:
This legislation will require the principal for new issuances of state debt to be repaid in equal amounts over the (generally) 20 year term of the bond. Currently, the state uses a repayment scheme with lower principal payments in the first few years, with much higher principal payments as the loan matures. This forces difficult budgeting decisions farther into the future.

DETAILS:
Currently, the Capital Facilities Debt Enabling Act allows the Commonwealth to engage in either a “Level Annual Debt Service Plan” or “Equal Annual Maturities Plan” in the retirement of General Obligation debt. Since 2001, the Commonwealth has been using the Level Annual Debt Service payment methodology. The "benefit" of using this method is that it is less expensive to service the debt in the first few years, making it easier to budget debt payments in the short term. Payments become more expensive in the latter years of the term. Effectively, this method “front loads” the interest payments, and “back loads” the principal payments. It is similar to a 30-year mortgage on a house.

Prior to 2001, the Commonwealth used the Equal Annual Maturities Plan or Level Annual Principal method to retire debt. Under this method of debt repayment, principal payments are made in equal amounts over the life of the debt. While the debt service is higher in the initial years, the annual debt service in years 10 through 20 is actually lower than the current “Level Annual Debt Service” method.

There are two major benefits to repaying debt using the Level Annual Principal method:
· The principal is paid down faster, which means the Commonwealth’s overall debt obligation is paid off sooner.
· The interest paid over the course of the repayment period is substantially lower.

My legislation will require the Commonwealth to use the more responsible, Equal Annual Maturities Plan method on all new debt obligations incurred under the Capital Facilities Debt Enabling Act. This simple change will reduce the debt we pass on to future generations and end one of the “buy it now, pay for it (much) later” policies that have been negatively impacting Pennsylvania’s credit rating for years.

Thank you for your attention to this co-sponsorship memo. I urge you to add your name to the list of cosponsors of this important legislation. Please do not hesitate to contact me if you have any questions.



Introduced as HB83