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February 1, 2005

 

Hevesi Proposes Sweeping Debt Reform, Including Constitutional Amendment, New York’s Use Of Debt Still Out Of Control
2000 Reform Act Said No Debt for Operating Costs;
Since Then State Issued $7.7 Billion for Operating Costs, Total Debt Keeps Growing

State Comptroller Alan G. Hevesi today issued a comprehensive debt control reform program, including a proposed constitutional amendment, which would finally bring New York’s runaway debt under control. Hevesi also issued a 115-page report providing an historical analysis of State debt practices.

“Today, I am proposing a seven-point plan of constitutional and statutory changes that would effectively reform and control New York’s debt practices,” Hevesi said. “Properly used, debt plays an essential role in government. It provides reserves to build schools, hospitals, highways and mass transit and it creates jobs. Misused, debt creates a burden that reduces government’s ability to respond to vital needs and transfers costs we should pay now to our children and grandchildren. It is especially dangerous that the State continues to use massive amounts of debt to pay for day-to-day operating expenses. That’s what led to the near-bankruptcy of New York City in the 1970s.”

Key findings of the report include the following:

  • Total debt. State debt has grown from $14.4 billion in 1990 to $46.9 billion in 2004 and an estimated $49 billion in 2005.
  • Back-door borrowing. Voter-approved debt has decreased from 40 percent of the State’s debt portfolio in 1985 to eight percent today. Under the State’s constitution, all general obligation borrowing is supposed to be approved by voters.
  • Public Authority Debt. Most State funded debt is issued through authorities, $43 billion of the $46.9 billion. In addition, public authorities have another $70 billion of debt that is not supported by State revenues.
  • Debt per capita. New York ranks second highest in state and local debt per capita after Alaska, a state that benefits from its huge oil reserves.
  • Loopholes in 2000 reform. Because the Debt Reform Act of 2000 was riddled with loopholes, New York State has actually issued debt at a faster rate since the Act’s passage than it did before.
    • Since 2000, State debt has grown by $12.2 billion, bringing total State debt to an estimated $49 billion in 2005 from $36.8 billion in 1999-2000.
    • The Act set a goal of limiting debt to four percent of personal income, but since the law passed debt has actually increased from six percent to 6.5 percent of personal income. That’s because the Act does not count towards its limit all debt issued before 2000 and still outstanding and most of the debt issued since then.
  • Debt not counted in limits. Of the $12.2 billion issued since 2000, $7.7 billion is not counted as State debt, even though it is a State obligation: $4.6 billion tobacco borrowing, $2.6 billion to stretch out debt of New York City’s Municipal Assistance Corp., and $500 million to finance payments to 19 school districts for old claims. This debt represents 16 percent of the State’s $49 billion in outstanding debt.
  • Debt for operating costs. The 2000 Act properly mandated no borrowing for operating expenses. Despite that, the same $7.7 billion was borrowed to pay for operating expenses for the State, New York City and 19 school districts.
  • Borrowing in good times. Between 1996 and 2001, the State had annual surpluses of between $450 million and $3 billion. Instead of using those surpluses to reduce debt, the State actually increased borrowing. During that time, outstanding debt increased an average of 5.1 percent a year, while State spending increased an average of 4.4 percent a year.
  • Borrowing for legislative initiatives. The State separately authorized $2.8 billion for member items and local economic development from fiscal 1997 through fiscal 2005. These projects may be worthwhile and some are for local capital projects, but they do not create state-owned capital assets and should be paid for without borrowing, especially when the State has a surplus.
  • Pay-as-you-go. New York slashed its pay-as-you-go cash support to the capital program by almost half from 1994 to 2004, a period during which the state often had surpluses.
  • Bond rating. New York has the second-lowest bond rating in the nation, according to Moody’s.
    The sale of Attica prison is a case study in the irresponsible use of debt. The State borrowed $200 million to sell the prison to itself in 1990 and used the funds for operating expenses. Since 1990, the State has paid $242 million in debt service on the Attica debt, but due to refinancings, it still owes $323 million in principal and interest. So the total cost of providing $200 million in one-shot budget relief in 1990 will be at least $565 million, assuming the debt is not refinanced again.

“Debt is an indispensable tool for creating essential assets, such as a modern transportation infrastructure and cutting-edge educational facilities we need for our economy to remain competitive. Used correctly it also helps the State economy during recessionary periods. But if debt is used irresponsibly, it isn’t available for those vital purposes,” Hevesi said. “For too long, we have used debt to permit unsustainable levels of government spending. This is simply wrong. Our reforms will ensure that New York State only issues as much debt as it can afford.”

Hevesi’s proposed reforms include:

  • Constitutionally define state-funded debt to include all debt. This will close the loopholes created in the 2000 debt reform act and provide taxpayers with a complete picture of the State’s debt.
  • Limit outstanding State-funded debt to five percent of personal income. The current limit of outstanding debt applied to only money borrowed after April, 2000.
  • For nine years, statutorily limit new borrowing to 95 percent of previous year debt. This will reduce the total amount of debt outstanding and bring it to the five percent limit by 2014.
  • Create an independent debt management board and publish annually a realistic measure of debt affordability. The board’s job would be to police the annual use of debt – setting borrowing levels to address economic conditions and keeping the cost of borrowing to what the state can afford. This is done in many states that have higher bond ratings and lower borrowing costs.
  • Require voter approval for annual issuances exceeding $1 billion, authorize multiple ballot initiatives and consolidate the issuance of State-funded debt. By subjecting most annual debt issuance to public approval, the taxpaying public will have more influence on where their tax dollars are spent and how.
  • Improve accountability and transparency by expanding oversight of the Public Authorities Control Board to more than 200 public authorities from the current 11 public authorities. Terms and conditions of all negotiated sales would be subject to the Comptroller’s review.
  • Use standards and guidelines to mandate fairness to future generations and efficiency in current debt issues. Taxpayers should not pay for assets they cannot use. So, for example, debt would only be issued for as long as the useful life of the asset provided. And debt would only be used for capital, not operating expenses.

Roger Benson, president of the Public Employees’ Federation (PEF), said "PEF supports the Comptroller’s legislation that will help put the state’s fiscal house in order by setting realistic limits on debt public authorities issue without voter approval. This legislation will help bring public authorities out of the shadows and make them more accountable to the state's taxpayers."

Daniel B. Walsh, president/CEO of the Business Council of New York State, Inc., said "New York State's high and rising debt is a symptom of high and rising spending. The debt limit and other reforms proposed by Comptroller Hevesi would force the state to hold its borrowing to more responsible and affordable levels. That's the kind of reform New York needs."

Diana Fortuna, Executive Director of the Citizens Budget Commission, said “The Citizens Budget Commission applauds Comptroller Hevesi’s efforts to advance debt reform. His proposal contains the key to achieving long-term debt reform in New York State: debt defined comprehensively and brought under an effective constitutional limit.”

Dick Dadey, executive director of Citizens Union, a good government reform organization, said "Comptroller Hevesi's proposal deserves serious consideration and support as he tries to bring needed order and compliance to the alarming issue over how the state accounts for and handles its burgeoning debt.”

The current role of the Office of the State Comptroller is limited to approving only the terms and conditions of each bond issue, such as the appropriateness of fees and interest rates, and only for negotiated debt issued by some of the public authorities and local governments. The Comptroller recently issued a Policy Statement on Debt Issuance Approval in order to provide clear guidance to public authorities and local governments, to ensure that all factors contributing to the cost of borrowing are considered in the review of negotiated or private sales, and to streamline and improve the Office of the State Comptroller's oversight process. The debt guidelines are designed to help debt issuers hold down borrowing costs. Data about costs collected during the process will be made available to all issuers, so they can use this information to negotiate a better deal for themselves.

 

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