New York State's reputation for
creative financing is
welldeserved and rightfully
criticized. Unfortunately, the
much-vaunted state debt-reform package recently
passed by the state legislature
continues this penchant for gimmickry.
The first sign of something fishy
going on was the grandiose claims
made by the state's leading
politicians. Gov. Mario Cuomo declared
that the reform "in a single stroke
will rid the state of 'back-door
borrowing.'" H. Carl McCall, New
York's state comptroller, added:
"We've closed the door on
The proposed amendment, upon
closer review, does nothing of the sort.
To understand what should have
been done, and what was not done
under this new proposal, one needs to
be cognizant of the history of
"backdoor" borrowing in New York. For
decades, New York State's politicians
have felt overly restrained by the
constitutional requirement that voters
approve issuance of state general
obligation debt. In response, dozens
of public authorities were created
with the primary purpose of issuing
"back-door" debt that did not,
arguably, require approval at the
The types of back-door debt
included moral obligation bonds,
lease-purchase agreements, revenue
bonds, and service contracts.
debt has increased
from $3.5 billion to $5.1 billion, a
45.7% increase. By comparison, public
authority debt rose from $24.9 billion
to $62.8 billion, a 152.2% increase.
The most celebrated cases of
back-door borrowing include the sale of
Attica prison to a public authority; the
conversion of short-term debt -- used
to fund the state's accumulated general
operating deficit -- into long-term
debt through the Local Government
Assistance Corporation; the financing
of prisons through the Urban
Development Corporation (after the
voters rejected a prison bond issue);
"selling" highways to the state
Thruway Authority; and, just this year,
the proposed issuance of LGAC bonds
to pay tax refunds.
To implement the
borrow-and-spend agenda, back-door debt has
become even more important to the
state's politicians in the wake of the
voters' rejection of the 1990
environmental bond act and the 1992 jobs b bond act. Under this new legislation,
both of these bond issues could go
forward without voter approval.
The solution to this chicanery is
simple: a ban on any state borrowing
that the state's voters do not approve.
This ban, of course, would have to
apply to all public authorities.
This is not, despite the rhetoric,
what was done.
politicians crafted a
that would allow back-door borrowing
to continue, albeit in a slightly
different and tortuous process.
First, public authority revenue
bonds would be given a protected
status. These revenue bonds would not
require any voter approval
whatsoever. Considering the substantial
revenue streams of public authorities like
the Triborough Bridge and Tunnel
Authority, this is not a minor
Second, the state would be
authorized -- for the first time -- to issue
revenue bonds without voter approval.
State revenue bonds, unlike public
authority revenue bonds, would be
subject to a cap, but it would be
pegged at ridiculously high levels. In
the state's fiscal year 1996-97, which
begins April 1, the cap would equal
1.0% of the state's personal income. It
then would increase each year for 10
years when a 4.4% permanent cap
would be in place. The new cap would
allow the state to issue more than $5
billion of revenue debt in the first year
Third, unlimited borrowing by
public authorities, with the direct financial
support of taxpayers but without voter
approval, would be permitted in forms
other than revenue bonds if it met one of
the following tests:
* The debt would be issued to
address a "prolonged and material
impairment" of the state's economy.
* The debt would be issued for
mass transportation purposes.
* The debt would be used by
municipalities or private corporations
"for its purposes or for court
* The debt would be issued to
provide assistance to "distressed" local
All four exceptions are worded
broadly enough that a clever
bureaucrat could justify issuing a bond for
virtually any purpose or any amount.
Lastly, the proposed amendment
does not apply to any existing
back-door debt, nor would refinancing and
extension of current debt be restricted
in any way.
In sum, the much-heralded
constitutional amendment is full of loopholes
big enough to drive a municipal
finance department through.
One can't help but suspect that
what is really behind the proposed
constitutional amendment is a
clever effort to authorize, not ban,
back-door borrowing just in case
the state lost the pending lawsuit
brought by citizen activist Robert
Schulz. The suit challenged the
legal authority of existing
back-door borrowing. Much to the relief
of the politicians, however, the state
Court of Appeals last week ruled
against Schulz, thus allowing such
borrowing to continue.
The legislature's recently
approved state constitutional
amendment is not, however, a done deal.
Since the proposed amendment must
be approved by two consecutive,
separately elected legislatures and
submitted to the voters for approval (in
this case, November 1995 at the
earliest), the opportunity exists to start
over and draft a genuine ban on
back-door borrowing. This is an
opportunity that must be seized.