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

backdoor borrowing."

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

ballot box.

The types of back-door debt

included moral obligation bonds,

lease-purchase agreements, revenue

bonds, and service contracts.

Since 1982,

voter-approved

general obligation

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.

Instead, the

politicians crafted a

proposed amendment

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

loophole.

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

alone.

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

purposes."

* The debt would be issued to

provide assistance to "distressed" local

governments.

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.

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