STATE OF NEW YORK

OSC No. _

MEMORANDUM

RE

CONCURRENT RESOLUTION OF THE SENATE AND ASSEMBLY

proposing amendments to article 7 of the constitution, in relation to  authorization of debt in times of public emergency, a limit on the total amount of state debt, the establishment of a debt management board, and refunding of state debts

PURPOSE:

This proposed constitutional amendment allows for emergency borrowing in times of public emergency, prohibits “back-door borrowing,” limits total State debt to no more than 5% of total personal income in the State, and establishes a Debt Management Board to prescribe an annual Debt Affordability Level.

SUMMARY OF PROVISIONS:

Section 1 of the resolution proposes an amendment of section 10 of article 7 of the Constitution to add disasters, including those caused by acts of terrorism, to the existing list of purposes for which debt may be incurred on an emergency basis.  Emergency borrowing would, however, require the approval of the Governor, the Comptroller, the Attorney General, and two-thirds of the Senate and two-thirds of the Assembly.  The amendment prescribes a procedure for the Governor to propose emergency borrowing and for the Comptroller, the Attorney General, and the Senate and the Assembly to give their approval or disapproval.

Section 2 eliminates “back-door borrowing” and, effective with State fiscal year 2014-15, establishes a cap on the total outstanding principal amount of State debt that would be equivalent to 5% of the total personal income in the State.  Except for short-term revenue anticipation notes permitted by section 9 of Article 7 of the Constitution, emergency borrowing permitted by section 10 of Article 7, and refundings permitted by section 13 of Article 7, no indebtedness could be incurred for State purposes or to finance State grants unless the debt falls below the 5% cap.  To eliminate “back-door borrowing,” this section defines State debt to include debt supported by any financing arrangement whereby the State agrees to make payments which will be used, directly or indirectly, for the payment of principal, interest, or related payments on indebtedness incurred or contracted by the State itself for any purpose, or by any State agency, municipality, individual, public or private corporation or any other entity for State capital or operating purposes or to finance grants, loans or other assistance payments made or to be made by or on behalf of the State for any purpose.  Among other provisions, the prohibition will apply (i) whether or not the obligation of the State to make payments is subject to appropriation or is otherwise contingent, or (ii) whether or not debt service is to be paid from a revenue stream transferred by the State to another party that is responsible for making such payments.

The amendment also allows up to 5 bond acts to be presented to the voters at one time.

The amendment requires the establishment of a Debt Management Board, consisting of the Governor, the Comptroller, and a third person to be selected jointly by the Governor and the Comptroller.  The Debt Management Board will have the duty of prescribing a Debt Affordability Level at an appropriate amount to prevent overburdening present or future generations, and the Debt Affordability Level will be binding on the State budget for the next fiscal year and will forecast a level to be used as a benchmark in planning the 2 succeeding fiscal years.  Once the 5% constitutional debt limit is in effect, the Debt Affordability Level must be set below it.

Bond issuances in the aggregate amount of $1 billion a year, or 3% of the amount determined to be equal to 5% of total personal income in the State, whichever is greater, would be permitted without voter approval, but only if the total outstanding principal amount of State debt resulting from such an issue would not exceed either the 5% cap or the Debt Affordability Level.

The amendment requires that, with the exception of refundings and short term notes and emergency borrowing permitted by sections 9 and 10 of Article 7, respectively, all future State debt will be permitted only for capital purposes.  Except for constitutionally guaranteed debt, all new debt, and most refunding debt, will be required to be issued by the State Comptroller.

The amendment also prohibits, after its effective date, the issuance of any debt supported by financing arrangements where the State’s obligation to make payments that are to be used for debt service is conditioned upon the insufficiency of other revenues available for the payment of debt service. 

The amendment also changes section 13 of Article 7 to prohibit any refunding that results in dissavings in any year.

STATEMENT IN SUPPORT:

            Debt reform is one of the most important challenges facing New York State.  The future of the State's finances depends in large measure on its ability to manage debt in a way that is disciplined and effective.  Debt reform must impose meaningful caps to ensure that future debt is affordable.  

Since 1990, outstanding debt has grown from $14.4 billion to $45.4 billion in 2004, representing a 215 percent increase. From 1996 to 2001, while experiencing unprecedented surpluses, the State continued to borrow rather than utilizing surplus dollars and responsibly paying for capital expenditures through more pay-as-you go (PAYGO) spending. 

            Furthermore, New Yorkers bear one of the highest debt burdens in the country.  New York is ranked second only to California in total debt outstanding. According to Moody’s 2004 State Debt Medians, New York is fourth highest in debt per capita just behind Connecticut, Massachusetts and Hawaii.  New York’s $2,420 debt per capita is over two and one-half times the national average of $944. According to the U.S. Census, New York ranks second only to Alaska for state and local combined debt per capita. 

            This proposed constitutional amendment establishes strict limits on debt. All financing arrangements in which the State agrees, even indirectly, to make payments on indebtedness incurred by the State or by a municipality, public authority or private corporation or other entity on behalf of the State would be subject to a cap equal to 5% of total personal income of the State, beginning in 2014.  Additionally, a new Debt Management Board would annually prescribe a Debt Affordability Level, and no new debt could be authorized or issued if it would cause the Debt Affordability Level to be exceeded.  The dual restrictions would close loopholes in the existing statutes governing debt and assure long-term planning and affordability of the State’s debt service burden.

“Back-door borrowing”, or borrowing outside of constitutional strictures, has been used by New York State to circumvent the requirement for public referendum. As of March 31, 2004, “back-door borrowing” accounted for approximately 92 percent of the $45 billion in outstanding State-supported obligations.  Only $3.8 billion was approved by the State’s voters and issued as General Obligation debt. This proposed constitutional amendment restores accountability and transparency to the decision to incur State debt by requiring voter approval of most future debt, thereby insuring that the decision to obligate future generations of New Yorkers will be subject to full public debate. 

New York State’s capital spending on transportation, mental hygiene facilities, State park improvements, State housing programs and other programs will approach $6 billion in State fiscal year 2004-05, with nearly half of that amount financed through debt issued by public authorities on behalf of the State.  When this proposed amendment is in place, New York State will likely support its capital plan with a combination of General Obligation debt issued by the Comptroller or “pay-as-you-go” dollars appropriated in the State budget.  A total of $1 billion, or 3% of the amount determined to be equal to 5% of total personal income in the State, whichever is greater, could be issued as General Obligation debt without voter approval.  Any additional debt issuance would be required to be approved by the State’s voters.

There is a suitable time and an inappropriate time to utilize debt.  This amendment would promote the appropriate use of State debt by capping its levels, closing loopholes in the existing statutes and restoring the accountability and transparency associated with the requirement for public referenda on the issuance of debt.

The New York State Comptroller respectfully urges passage of this concurrent resolution to amend the New York State Constitution.