Impact of Debt and Solutions
New York State has relied far too heavily on debt for far too long. Ten years after enacting legislation to slow the growth in borrowing and end the use of debt for fiscal gimmicks, New York continues to rely heavily on debt. As a result, true debt reform is needed now more than ever. Despite attempted reforms, the State’s debt practices remain flawed:
- Since debt reform was enacted in 2000, our debt burden has grown rapidly and voters have approved almost none of the debt issued since then.
- A significant portion of the debt issued since 2000 has been for non-capital purposes.
- New York’s debt burden is among the highest of any state.
- Authority-issued debt lacks transparency and accountability in material ways.
- Capital planning is deficient.
Comptroller DiNapoli proposes a comprehensive debt reform program that corrects the fundamental deficiencies in the way New York borrows money. It imposes a real cap on debt, bans backdoor borrowing, and improves planning and transparency. Without strong reforms enacted via constitutional amendment, New York will continue its dangerous and unsustainable addiction to debt.
If used prudently and as part of a balanced strategy, borrowing is an appropriate way for governments to finance critical infrastructure. However, a high debt load significantly undermines government operations because debt service is a fixed, long-term cost that cannot be reduced during times of fiscal stress. A government using debt too heavily may be less able to respond to revenue shortfalls or fiscal pressures, a danger that is magnified when debt is issued to finance spending for non-capital purposes, such as operating expenses. Debt capacity is a limited resource and should be treated as one.
Although the Executive recommends slowing the growth in capital spending and borrowing, the State remains a national leader in debt burden with much of its debt having been issued for budget relief, not to fund capital investments. Debt service is one of the fastest growing major categories of State spending. Since the State imposed a debt cap in 2000 it has authorized more than $17 billion in bonds outside that cap. During this period, $7.6 billion in borrowing has been used to fund operating costs without making a single capital improvement to our infrastructure. Furthermore, nearly all State debt is now issued by public authorities, with little accountability and no voter input.
The Office of the State Comptroller provides the following comprehensive assessment of debt and offers an ambitious plan to reform New York’s borrowing practices.
Rapid Growth in Debt Burden
To accurately assess debt burden and the capacity to issue debt, it is necessary to use the most comprehensive measure of debt. This report uses a measure referred to as State-Funded Debt. State-Funded Debt includes any debt where the State provides funding to the debt issuer (e.g., public authority or local government) for the purpose of making debt service payments. Over the past five years, State-Funded Debt grew by 24.6 percent, increasing from $48.5 billion in State Fiscal Year (SFY) 2005-06 to an estimated $60.4 billion in SFY 2009-10. This is projected to rise to $67 billion in SFY 2014-15, an increase of $18.6 billion, or 38 percent, over the ten years. Debt service on State-Funded debt also has grown significantly. Over the ten years from SFY 2005-06 through SFY 2014-15, this annual cost is expected to increase by $3.4 billion, or 77.8 percent, to $7.7 billion. This growth has worrisome implications for future State budgets. If debt service as a percentage of All Funds revenue were held to the level of SFY 2005-06, it would total $6.0 billion in SFY 2014-15, leaving $1.7 billion for other vital needs.
The State also has shifted the way it finances capital projects by relying more on borrowing and less on current State tax dollars. For example, between 1985 and 1990 an average of approximately 55 percent of all non-federal capital spending was financed with current revenue. Over the next five years that share will fall below 36 percent.
Debt Is High vs. Other States
Aggressive borrowing has led to a high relative debt burden for New York, compared to the ten other most populous states. New York is third in the ratio of debt service to total revenue, surpassed by California and Illinois. On debt per capita, New York is second to New Jersey and three times the median of peer states. Finally, New York is second to New Jersey on the ratio of debt outstanding to Personal Income and more than twice the peer-state median.
New York’s Debt Cap Is Fundamentally Flawed
The Debt Reform Act of 2000 purported to limit new debt supported by the State but narrowly defined the debt subject to the cap. As a result, the cap covers only about 60 percent of the $60.4 billion of debt funded with State resources. Although much debt is excluded from the cap, the sharp growth in borrowing in recent years—approximately $40 billion in new debt has been authorized since SFY 2004-05—and the recent downturn in the economy means the State is rapidly approaching the cap, which will be fully phased-in during SFY 2010-11. The Division of the Budget projects that capacity under the cap will be just $1.2 billion in SFYs 2011-12 and 2012-13, limiting the State’s ability to meet its myriad capital needs.
2 Debt Issued for Non-Capital Purposes
The Debt Reform Act also purported to prohibit borrowing for non-capital purposes, but this too has proven ineffective. New York’s current debt portfolio includes nearly $9.8 billion in bonds used to finance operating expenses and deficits, 16.2 percent of all State-Funded debt. In fact, $7.6 billion of this amount was issued for operating expenses after enactment of the law prohibiting such debt. Debt service on these bonds will total $1.1 billion, nearly 20 percent of all State-Funded debt service in SFY 2009-10.
Although a large portion of this non-capital debt was issued in the aftermath of the September 11, 2001 attacks in conjunction with a broader recovery plan, State choices regarding the use of debt relative to using current tax dollars must be balanced so that when extraordinary circumstances arise, needs can be accommodated.
Backdoor Borrowing Limits Accountability and Transparency
New York State uses borrowing by public authorities to finance a large portion of the State’s Capital Plan. “Backdoor borrowing” circumvents voter approval and has become so commonplace that authority debt accounts for 94 percent of the State’s current debt burden, compared to only 60 percent in 1985. The Constitution mandates that only one bond act for a single work or purpose may be put before the voters each year. No bond act has been submitted to voters since 2005 and the Executive’s Five Year Capital Plan contains no new proposals for voter-approved debt.
Comprehensive Capital Planning Is Lacking
The State currently lacks a centralized and coordinated way to assess its infrastructure and prioritize its significant capital needs. Although nearly $27 billion in new StateFunded debt is projected to be issued over the next five years, it is not clear how this debt relates to our critical infrastructure needs. Although New York regularly borrows money to finance long-term projects such as roads, bridges, university buildings and mass transit, New York needs to improve the way it tracks these capital assets, plans for their maintenance, replacement or addition over time, and allocates various funding streams to address these needs. Comptroller’s Comprehensive Debt and Capital Reform
Although the Debt Reform Act of 2000 was supposed to address the State’s debt problem, it failed to restrain imprudent borrowing or control the growth of debt. The State’s capital planning and borrowing practices must be made more transparent and accountable, and its debt burden more affordable. State Comptroller DiNapoli proposes the following comprehensive reforms to New York’s debt and capital planning practices: ? Constitutionally ban backdoor borrowing and authorize new types of voter approved debt to be issued by the State Comptroller, with the same legal protections and controls that apply to General Obligation debt. ? Limit all State-Funded debt to 5.0 percent of personal income, with a phase-in of the cap.
- Amend the Constitution to restrict the use of long-term debt to capital purposes, with strict provisions allowing exceptions only for emergencies.
- Authorize multiple bond acts to be presented to voters each year.
- Create a Capital Asset/Infrastructure Council to develop comprehensive annual capital needs assessments and long-term strategic capital plans.