Back in the early 1800s, New York State went on a capital spending spree. But the 1837 depression brought it to a halt - the state found itself on the brink of bankruptcy when canals and railroads built with bonded debt defaulted.
To address the crisis, a constitutional convention was convened. Reform measures were adopted permitting debt to be incurred only if approval was obtained in a voter referendum. The 1846 convention codified the Jeffersonian principle that unapproved debt that mortgaged future generations was antidemocratic. Convention delegate Michael Hoffman summarized the view of the majority with these words:
"We will not trust the legislature with the power of creating indefinite mortgages on the people's property ... And ... that whenever the people were to have their property mortgaged for a State debt, that it should be done by their own voice, and by their own consent."
To further protect the citizenry from overzealous politicians, the 1884 state constitutional convention limited long-term borrowing by local governments for capital projects to 10% of the value of taxable property. Incurring bonded debt to balance general operating budgets was forbidden.
In New York City, political leaders from La Guardia to Lindsay devoted their energies - often with the blessings of Albany - to evading these constitutional limitations. It was Mayor Robert F. Wagner who expressed the political view that prevailed in the 1950s, 1960s, and early 1970s. He stated, "I do not propose to permit our fiscal problems to set the limits of our commitments to meet the essential needs of the people of the city."
Budgetary gimmicks, phantom revenues, capitalizing of expenses, and rolling over accumulated deficits led to a situation where in 1975 New York City's expenditures totaled $12.8 billion and revenues $10.9 billion. Fifty-six percent of locally raised taxes were appropriated for debt service, pension, and Social Security payments. In addition, short-term debt, which in 1965 was $536 million (10% of total debt), ballooned to $4.5 billion (36% of total debt) by 1975. With short-term debt needs projected at $7 billion for 1976, the financial markets closed their doors to New York City.
To alleviate the city's technical default on short-term debt in 1975, the Municipal Assistance Corporation was created. This was New York's first non-self-supporting public corporation. Its sole purpose for being was to evade provisions of the state constitution.
MAC was to serve as a conduit to convert the defaulted notes into long-term bonded debt. Unlike other public corporations that built self-supporting bridges, tunnels, housing, or power plants, the corporation was a financial gimmick. It permitted New York City to pawn off its fiscal follies on the next generation of taxpayers without voter approval.
Instead of pointing out the constitutional violations, the courts went along with the charade. The New York Court of Appeals ruled "we should not strain ourselves to find illegality in such programs." (Wein vs. City of New York, 1975). In 1976, (Wein vs. New York State) the court concluded that the state in creating the Municipal Assistance Corporation had "been driven to the brink of valid practice." And in Wein vs. Carey (1977), the court declared that debt issued in violation of the state constitution still had to be repaid.
The victory of the local leviathan confirmed James Madison's 1795 observation that "debts and taxes are the known instruments for bringing the many under the domination of the few."
New York State has, during the past 20 years, emulated the city's fiscal chicanery. Although the state must have a balanced budget, it gets around this constitutional provision by financing deficits with the annual short-term "spring borrowing." Between fiscal years 1982 and 1991, the state's accumulated deficit grew to $6.3 billion from $2.9 billion.
The Citizens Budget Commission described these practices as follows:
"First, it violates the fundamental principle that budgets should be balanced to maintain the social contract between a government and its citizens; second, it adds substantially to taxpayer costs since interest must be paid on the short-term borrowing; and third, it places the State at the mercy of market conditions. If the State were to lose market access, it would be unable to pay its bills."
In June 1990, Albany cloned MAC and created the Local Government Assistance Corp. Although hailed by Gov. Mario M. Cuomo as "the most sweeping fiscal reform in a generation," LGAC is just another gimmick to circumvent the will of the people.
LGAC, like MAC, is a non-self-supporting corporate governmental agency dependent on annual appropriation of state sales tax revenue. It is authorized to bond out $4.7 billion of New York State's accumulated deficit.
After years of reckless spending, the politicians are once again sticking it to the taxpayers - this time with billions of dollars of interest payments to be paid out over the 30-year life of the bonds.
This "reform" legislation doesn't eliminate Albany's budgetary abuses. The governor and the Legislature can pile up new deficits since the budget doesn't have to be balanced according to generally accepted accounting principles. Also, they can finance cash shortfalls by issuing "deficit" notes.
LGAC merely permits the state to clean the slate of accumulated deficits so it can start the process all over again.
The state continues to flagrantly spend more than it takes in. For example, the state ended the 1991 fiscal year (when the assistance corporation commenced issuing debt) with a GAAP operating deficit of $1.03 billion.
While elected officials applauded these smoke and mirror financing techniques, activist taxpayer Robert Schulz filed suit challenging the constitutionality of nonvoter-approved bonded debt backed by annual legislative appropriations.
In October 1993, New York's appellate court ruled that "the bonding plan, as well as the sale of appropriated debt by the state, is based on firm legal precedent established in the so-called Wein cases of the late 1970's."
There you have it. The Wein case, a decision that exempted politicians from the democratic process, is now quoted as judicial authority! The court has sanctioned fiscal anarchy. State and local governments can continue to be expensive, inefficient, and uncontrollable
The delegates to New York's 1846 constitutional convention thought they had brought public debt and fiscal policy under the control of the written constitution. But Mario Cuomo, the state Legislature, and the courts have managed to destroy New York's constitutional order and to oppress the middle class with onerous taxes. They confirmed James Madison's observation that "whenever there is interest and power to do wrong, wrong will generally be done."