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ALBANY--New York's State-funded debt burden is relatively high and growing based on important measures of debt affordability, according to a study released Tueday by State Comptroller Alan G. Hevesi. Loopholes in the existing Debt Reform Act have allowed debt to grow faster than state income or population, indicating a trend of decreased affordability and the need for more meaningful reform.
The study analyzes New York's debt using three measures of debt affordability: debt per capita, debt as a percent of personal income and debt service as a percent of State revenues. It shows that, according to two of the three measures, New York's debt is substantially less affordable than it was four years ago. The study also compares New York to a group of 10 other large states and to the national median on each measure and finds New York's debt is among the highest by all three measures.
"It is essential to borrow to keep our infrastructure sound and our economy competitive, but there is a limit to how much borrowing we can do," Hevesi said. "This study shows that the state is past due implementing effective debt limits based on rational measures of what is affordable. The State's recent credit rating upgrade means borrowing will cost less, but it should not encourage us to borrow more. In fact, Moody's cited the state's above average tax-supported debt as a credit challenge for New York. I urge the Governor and Legislature to pass our debt reform program, which will bring debt under control gradually, without disrupting important construction projects."
Felix Rohatyn, former chairman of New York City's Municipal Assistance Corporation, said "The State of New York has consistently shown a significant lack of fiscal discipline. Comptroller Hevesi's reforms, including the concept of affordability of the debt, would provide an important improvement to the State's credit profile."
The study shows:
New York's Debt Burden Increasing. New York's debt grew from $36.8 billion in 2000 to $48.2 billion in 2005. More importantly, the measures show the debt is becoming more burdensome because it has increased both on a per capita basis and as a percentage of income.
Per capita debt increased from $1,937 in 2000 to $2,509 in 2005.
Debt as a percentage of income grew from 6.22% in 2000 to 7% in 2005.
New York appeared to improve on one measure, but only because debt costs were pushed to the future. Debt service as a percent of State revenue declined from 5.4 percent to 4.2%. This was due primarily to a large number of debt restructurings that postponed near term payments, resulting in an increased future debt service burden.
New York's Debt is Among the Highest. On all three measures, New York is higher than almost all the other 10 largest states and multiples above the national average.
New York Highest in Debt Service as a Percent of Revenues. New York has the highest debt service as a percent of revenues in the peer group of large states at 4.2%, followed by Illinois at 4.1%. New York's ratio is one and a half times the average for its peer group and 1.2 times the national average.
Debt as a Percent of Income. Within the peer group of large states, New York's debt as a percent of personal income of 7 is second only to New Jersey at 7.3. New York's debt is more than two times the median as compared to both the 10 largest states and the nation.
Debt Per Capita. New York's $2,509 per capita debt burden is second only to New Jersey at $2,901 within the peer group. New York's debt per capita is more than three times the peer group of 10 largest states and the national median.
The Comptroller's debt reform proposal would mandate an annual debt affordability study conducted by an independent debt management board. In the meantime, the Comptroller's Office will issue annual debt affordability studies, of which this is the first.
The report also noted the following:
Total debt. In the last five years, total state-funded debt has increased by $11.4 billion to $48.2 billion. Public authority debt issued for the State comprised approximately 92 percent of this debt or approximately $44.6 billion. While not included in this report, it is worth noting that public authority debt for their own purposes is an additional $81.6 billion.
Credit ratings. Although Moody's recently upgraded the state from A1 to Aa3, it continues to cite an above-average debt burden as a concern.
Future Debt Plans. Plans to issue an additional $19.6 billion in state-funded debt over the next five years will produce a net increase of $7.5 billion -- or 15.5%-- in new state-Funded debt as only $12.1 billion is scheduled to be retired.
The only way to stop New York's addiction to debt is to acknowledge we have a real problem and to take action to reduce our dependence," Hevesi said. "At some point, we will hit the limit of how much debt we can afford to repay. The recent transportation bond act approved by voters was the right kind of borrowing for the right reasons and will provide long-term assets for the State, but too much of our current debt has been issued for budget relief or to finance deficits.
"Lawmakers must proceed with caution as they move forward with the upcoming budget negotiations to avoid more debt for the wrong reasons," Hevesi said.
The study notes that the Debt Reform Act of 2000 failed to control debt. Since the Act was passed, the State has added an additional $11.4 billion of State-funded debt outstanding, including $7.7 billion inappropriately borrowed for deficit financing and budget relief that is not included within the statutory definition of State-supported debt and, therefore, is not counted against the statutory cap. Furthermore, in setting up the limits, the law ignored all $35 billion of the debt outstanding at the time of its passage. If the State were to count all debt that is supported with State resources, it would have exceeded the statutory debt cap from the moment the law was enacted.
"This study clearly shows that our debt is out of line with the rest of the nation, and that we can't afford to maintain this much debt if we are going to be competitive with other large states," Hevesi said. "The costs of debt are threatening to crowd out the critical services taxpayers will need in the future."
Hevesi's debt reform proposal would mandate the fiscal discipline that is lacking in the Debt Reform Act of 2000. Under his proposal, the State would issue $1.8 billion less by State Fiscal Year 2009-10, resulting in $1.7 billion less State-Funded debt outstanding than currently planned and include the following provisions:
Constitutionally define State-funded debt to include all debt supported with State resources.
Limit outstanding State-funded debt to 5% of personal income.
Statutorily limit new borrowing to 95 of previous year issuances until state-funded debt outstanding is no higher than 5% of personal income.
Create an independent debt management board and publish annually a realistic measure of debt affordability.
Require voter approval for annual issuances exceeding $1 billion, authorize multiple ballot initiatives and consolidate the issuance of state-funded debt.
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.
Mandate intergenerational equity and efficiency through the use of standards and guidelines.
Hevesi's study provides a comprehensive accounting of State-funded debt, which includes all debt where debt service (principal and interest) is paid directly or indirectly with State resources. Unlike other measures used for debt, this includes not just general obligation bonds and debt issued by public authorities on the State's behalf, but also debt issued to refinance New York City's debt from the 1975 fiscal crisis, borrowing for prior year school-aid claims and debt associated with the sale of the State tobacco settlement revenue stream.
"The debt reform law was riddled with loopholes, which means that existing policies and limitations will never effectively restrain the growth of debt," Hevesi said. "Firm policies are needed now to ensure that our children and grandchildren will be able to afford the debt we are forcing them to repay in the future."
Other facts about the state's debt:
Debt for Capital Purposes. Only about 50% of state debt has been issued to finance State-owned capital assets. Approximately 25% has been issued to finance deficits or provide budgetary relief with the remainder issued for non-State capital assets, such as grants to private corporations and not-for-profit organizations.
Debt Service Costs. State-funded debt service is relatively unchanged when comparing SFY 2000-01 to SFY 2004-05 despite significant growth in State-funded debt outstanding. This is primarily due to the restructuring of debt through refundings that include the deferment of principal payments to future years, the increased use of variable rate debt and interest rate exchange agreements, and lower interest rates.
State-Funded Debt Per Capita. This is projected to increase by 10% from 2006 to 2010, from $2,584 to $2,847.
Pay-As-You-Go. In 1985 the state used pay-as-you-go financing for as much as 75 percent of its State-Funded capital plan. The State's current capital plan assumes that current resources will fund only 28 percent of the capital plan. By increasing the use of debt rather than using cash during good economic times, the State created higher debt levels that will become more burdensome during downturns in the economy.
The study established a peer group that is composed of those states with the highest populations: California, Texas, Florida, Illinois, Pennsylvania, Ohio, Michigan, Georgia, New Jersey and North Carolina. Click here for a full copy of the report.
12-20-05
© 2005 North
Country Gazette
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