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A Risky Debt "Reform"


A Risky Debt "Reform"

February 11, 2001
Urban PolicyNYC

In his budget message last month, Gov. Pataki called for constitutional reforms to control New York state's debt and ban non-voter-approved "back-door borrowing." But at the same time he quietly proposed a new form of back-door debt -- potentially the most significant change in the state's borrowing practices in decades.

Specifically, Pataki wants the Legislature to approve the issuance of bonds backed by a pledge of state personal income tax (PIT) collections. Up to 25 percent of net PIT receipts would be set aside every year to pay debt service on the proposed new bonds.

The governor's main justification for the bonds: They would carry a lower interest rate, saving a projected $20 million next year, and would further reduce borrowing costs in the future "without increasing overall bonding levels," because the new bonds would displace already-authorized backdoor bonds on a dollar-for-dollar basis. But the fact remains that, in the wrong hands, PIT bonds would open yet another back door to considerably ignore state debt: That one-quarter share of the income tax works out to $6.4 billion -- enough to cover l 1/2 times what the state now pays to service its $37 billion-plus in outstanding bonds.

New York already has the heaviest state debt load in the nation -- almost as much as runners-up California and Massachusetts combined, reports Moody's Investor Service. And those figures don't even include a large pile of bonds issued by the Empire State's public authorities with backing from toll and fee revenues. Over the past two decades, the state has contracted (as "lease purchase" and "service contract" deals) with many of the same authorities to issue billions of dollars in bonds backed by budget appropriations. These deals have been widely criticized because they carry high interest costs and circumvent the state Constitution's requirement for voter approval of all state debt.

Pataki has made an effort to slow the growth of state debt, highlighted by the recent unprecedented use of $500 million in surplus funds to retire some obligations. Yet now he is seeking to open a whole now avenue for increased borrowing without voter approval.

Like many existing authority bonds, the PIT bonds would carry a prominent disclaimer to the effect that they are "not a debt of the state" -- and so technically comply with the Constitution. Of course, no one buys this. The new bonds would be attractive to investors precisely because they will be debt of the state-backed, for the first time ever, by a portion of the state's most lucrative revenue stream.

PIT bonds would be floated (with legislative approval) by the leading current issuers of appropriation-backed debt -- the state Urban Development Corp, the Dormitory Authority, the Thruway Authority, the Environmental Facilities Corp. and the Housing Finance Agency. At the same time, however, each of these public authorities could continue to issue appropriation-backed bonds.

Last year Pataki and the Legislature agreed to enact a new law tightening some debt restrictions and setting a cap on new state debt -- but the cap is fairly loose to begin with, and can be raised at any time. The only way to permanently control New York state's borrowing is with a constitutional amendment, for which the administration has pledged to fight "aggressively." In the meantime, the governor's bill memo says the new PIT bonds, subject to the statutory cap, will provide a "framework" for the kind of revenue debt his amendment would allow.

But even if the governor gets the Legislature to approve constitutional reforms this year, an amendment can't be placed on the statewide ballot for voter approval until November 2003, at the earliest. By making it easier for the state to borrow more at lower interest rates, PIT bonds would make it easier to avoid real debt reform. By giving the Legislature another way to skirt the Constitution, they would further remove New York's voters from the borrowing process. And once bondholders are given first dibs on a big chunk of PIT revenue every year, it will become that much harder for the state to cut debt by financing more capital projects on a "pay-as-you-go" basis.

Creating a new borrowing mechanism for New York state is like offering a free low-interest credit card to a member of Debtors Anonymous -- without even requiring him to cut up the old card first. Gov. Pataki seems determined not to abuse the privilege. But what about his successors? And what about the Legislature -- which almost every year presses for more debt than the governor proposes?

This bond proposal highlights a key shortcoming in Albany's "debt reform" debate: There's too much focus on how to borrow better -- and not enough on how to borrow less.