DiNapoli Prevents Back-Loaded Borrowing by Public Authorities
Report Details $457 Million in Savings for Taxpayers and Ratepayers
State Comptroller Thomas P. DiNapoli’s review of three recent public authority bond issuances will save taxpayers and Long Island utility customers $457 million on a cash flow basis, or $176 million on a present value basis, over the life of the bonds, DiNapoli announced today at a news conference on Long Island to release a report on public authority debt structure. The bonds were initially structured with balloon payments at the end of the repayment period, but as a result of DiNapoli’s review, the bonds’ structures were modified.
“Public authorities are driving up debt service costs and forcing taxpayers and ratepayers to fork out millions of dollars in additional interest costs,” DiNapoli said. “Balloon payments are typically a bad idea for homeowners, and they’re a bad idea for taxpayers. We looked at three bond issuances and saved taxpayers $450 million. Our report highlights why public authorities have to stop back-loading principal costs.”
DiNapoli noted his office will not approve debt issues that substantially defer principal payments or back-load debt in the absence of compelling circumstances to do so. DiNapoli’s report also urges public authorities to adopt policies that require debt issues to be structured with a substantially level or declining debt service repayment schedule.
Earlier this year, DiNapoli’s office reviewed debt issues by three public authorities and advised the authorities to restructure their issuances so the majority of the payments would not be made in the final years of the issuance period. In doing so, DiNapoli’s office saved taxpayers and ratepayers $456.9 million on a cash flow basis over the life of the debt, which is $175.9 million when adjusted for inflation on a net present value basis.
Under state law, the state and local governments are required to have debt structures that have a generally level or declining repayment schedule. Public authorities do not have this statutory requirement, but DiNapoli does have approval authority over the issuance of certain authority bonds.
Metropolitan Transportation Authority
The Metropolitan Transportation Authority sought approval from DiNapoli’s office to issue $503 million in bonds in March 2010. The debt structure proposed by the MTA would have required payment of 100 percent of the principal in the final six years of the 30-year structure period.
After DiNapoli’s office raised concerns with the debt structure, the MTA restructured the debt to be paid on a level basis. This will result in a cash flow savings of $340.1 million, or a present value savings of $124.2 million, over the life of the bonds.
Long Island Power Authority
In January 2010, the Long Island Power Authority proposed issuing up to $210 million in bonds that would have deferred all principal payments on the debt until the final three years of the bond issuance, 2036 through 2038. After DiNapoli’s office voiced strong concerns over the balloon payments, LIPA restructured its bond issue. As a result, LIPA customers will save $102.8 million in additional debt service costs, which equates to $47.3 million in present value savings over the life of the bonds.
Water Authority of Western Nassau County
Earlier this year, the Water Authority of Western Nassau County sought to issue approximately $41 million in bonds with nearly the entire amount of principal payments to be made in 2027 through 2040. The Water Authority restructured the proposal after DiNapoli’s office expressed dissatisfaction with the back-loaded payments. This will save $13.9 million in additional costs on a cash-flow basis, or $4.4 million on a present value basis over the life of the bonds, for Nassau County residents served by the Authority.
DiNapoli’s report also recommends that state policy makers consider statutorily requiring public authorities to obtain approval from the Office of the State Comptroller of all public authority debt that is not structured with substantially level or declining debt service, and where a substantial portion of public funds will be required for repayment. This additional level of review and scrutiny would help to ensure that taxpayer resources are used effectively to maximize public benefit.
For a copy of the report click here.