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Frequently Asked Questions About State Debt |
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As of March 31, 2006 New York State had approximately $48.5 billion of total State-Funded debt. This includes $3.5 billion in General Obligation bonds and notes outstanding and an additional $45.0 billion issued and outstanding by State public authorities. In addition to this State-Funded debt, public authorities had over $80.0 billion in other debt outstanding as of December 31, 2005. What kinds of debt does the State have? The State can only issue voter-approved General Obligation Bonds and notes. However, the State also has financing arrangements with certain public authorities whereby the State agrees to fund debt service on specifically authorized bonds issued by these authorities. State-Funded Debt This is the most comprehensive measure of State debt. It 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, debt issued to settle prior year school aid claims, debt associated with the sale of the State tobacco settlement revenue stream, and debt of the New York City Transitional Finance Authority secured solely by State Building Aid payments. State-Supported Debt This is the statutory defined measure of debt where debt service (principal and interest) is paid by the State. The State makes payments for State-Supported debt either directly to bond holders (General Obligation) or to a public authority or municipality (lease-purchase or contractual obligation) to enable it to make payments on its outstanding bonds. State-Supported debt includes:
It does not include debt issued to refinance New York City’s debt from the 1975 fiscal crisis, debt issued to finance prior year school aid claims, debt associated with the sale of the State tobacco settlement revenue stream, and debt of the New York City Transitional Finance Authority secured solely by State Building Aid payments. Costs for other types of "State" debt are not paid directly by the State. These include: Contingent Contractual-Obligation Debt - Used for distressed hospitals. Similar to back-door borrowing but the State only makes payments if the hospital does not have sufficient revenues. Moral Obligation Debt - Debt issued by public authorities which the State pledges to consider making debt service payments in the event of a default. The State is not obligated to make the payments. The largest moral obligation debt was issued by the Municipal Assistance Corporation (MAC) to help New York City during the City's financial crisis in the 1970's. State-Guaranteed Debt - This is debt authorized by the voters where the State unconditionally guarantees the payment for three authorities: the New York State Thruway Authority, the Job Development Authority and the Port Authority of New York and New Jersey. The State makes payments on this debt only if the original borrower fails to do so. All of the State-Guaranteed debt of the New York State Thruway Authority has been retired and no more debt of this type is authorized to be issued. Only JDA has this type of debt outstanding. The three authorities that issued this type of debt also issue other types of debt. What is General Obligation Debt? The State itself issues only General Obligation debt, authorized by the voters at a general election. These bonds carry the full faith and credit of the State, and may be paid without legislative action. General Obligation Debt has declined from nearly 35 percent of total State-Funded debt in 1990 to 7.2 percent in 2006. Since 1990, State voters have been asked to approve six different bond act proposals totaling nearly $13.6 billion. Only two of these proposals were approved by voters, totaling $4.65 billion. How does the State Issue General Obligation Debt? The State issues debt only after approval by the voters at a general election and authorization by the State Legislature. The Comptroller is constitutionally required to make debt service payments (principal and interest) on this debt even if the Legislature does not appropriate funds. The State issues debt either in the form of long-term bonds or short-term bond anticipation notes. Except in certain circumstances, the State issues General Obligation bonds through a competitive sale, following advertisement of the sale in a newspaper of the municipal bond industry (generally The Bond Buyer). The Comptroller accepts sealed bids from municipal underwriting firms to buy the bonds. The underwriting firms, following the purchase, sell the bonds to individual and institutional investors. If the State is selling variable interest rate bonds the sale is generally negotiated. In these cases , the terms of the bonds (i.e. coupons, yields ) are negotiated with a municipal underwriting firm that is selected through a request for proposals process. The coupon is the interest rate paid by the issuer on a bond or note. The yield is the actual rate of return to the investor, reflecting any premium (purchasing a bond or note at more than the face value) or a discount (purchasing a bond or note at less than the face value), on the security. This is debt issued by public authorities (public benefit corporations) without voter approval. The State has authorized numerous public authorities to issue debt which the State is contractually obligated to pay for the interest and principal. This debt is not approved by the voters but tax dollars are used to repay the debt. This debt was created in the 1960's after voters rejected many debt issuances. This type of borrowing makes up approximately 93 percent of outstanding State-Funded debt and increased $12.8 billion or 40 percent between 2000 and 2006. Public Authorities issue debt in two ways: Under a lease-purchase arrangement, the public authority issues its bonds to purchase, construct or rehabilitate a State facility. Title to the facility transfers to the public authority as security for the debt and the State makes annual lease payments until the authority's bonds are paid off, when title reverts to the State. Examples of this type of debt include the Thruway Authority's rehabilitation and preservation bonds for highway purposes and the Dormitory Authority's bonds for State University and City University education facilities. Under a contractual obligation arrangement, the State agrees to make payments to a public authority for purposes of paying off the authority's debt issued for a specific State purpose. Examples of this type of debt include the Thruway Authority's Consolidated Highway Improvement Program, the New York Local Government Assistance Corporation, and certain housing programs of the New York State Housing Finance Agency. Under a contractual-obligation arrangement, title to the facility does not transfer from the State to the public authority. What is non-State-Funded Debt? Public authorities also issue debt for which there is no pledge at all of State payment of debt service. For example, the State Dormitory Authority issues its bonds and notes for facilities at private colleges and universities. The debt service on these bonds and notes is secured by a mortgage with the college or university. The State is under no obligation, moral or legal, to pay debt service on this type of bond. These bonds may also be referred to as conduit bonds. A conduit bond is a bond sold by a public authority to benefit of a third party, generally non-governmental. For example, the New York State Energy Research and Development Authority (NYSERDA) sells its bonds for projects of public utilities. The security for the credit is in fact the responsibility of the public utility. NYSERDA merely serves as a conduit between the bond purchaser and the public utility. Although the State is not obligated to pay this debt, a default may affect other State debt by making it more costly for public authorities to borrow. As such, it might be financially advantageous for the State to make payments in the case of a default by a public authority. How Does Debt Impact Taxpayers? It depends on what kinds of debt it is. State-Funded - The State makes payments for State-Funded debt either directly or indirectly to bond holders with State resources. This category includes General Obligation bonds and other State-Supported debt as defined by Section 67-a of the State Finance Law, as well as obligations associated with the financing of the State tobacco settlement revenue stream (bonds inssued by the Tobacco Settlement Financing Corporation [TSFC]), debt issued by the Sales Tax Asset Receivable Corporation(STARC) to refinance New York City's Municipal Assistance Corporation (MAC) obligation from the 1975 fiscal crisis, amortized prior year school aid claims (bonds issued by the Municipal Bond Bank Agency [MBBA]) and Building Aid Revenue Bonds (BARBs) issued by the New York City Transitional Finance Authority. State-Supported - The State makes payments for State-Supported debt either directly to bond holders (General Obligation) or to a public authority or municipality (lease-purchase or contractual obligation) to enable it to make payments on its outstanding bonds. State-Guaranteed - The State makes payments on this debt only if the original borrower fails to do so. This is debt whereby the State unconditionally guarantees the payment for three authorities: the New York State Thruway Authority, the Job Development Authority and the Port Authority of New York and New Jersey. Only the JDA has this type of debt outstanding or can issue any new debt of this type. Moral Obligation - The State pledges to consider making debt service payments in the event of a default. The State is not obligated to make the payments. The largest moral obligation debt was issued by the Municipal Assistance Corporation, which it has since retired. Non-recourse and Revenue - The State is under no obligation to make payments to the public authority to meet debt service requirements on these bonds. Although the State is not obligated to pay this debt, a default may affect other State debt by making it more costly for public authorities to borrow. As such, it might be financially advantageous for the State to make payments in the case of a default by a public authority. Voters have authorized the use of State General Obligation bonds for numerous purposes including constructing roads and bridges; acquiring mass transit equipment and rehabilitating rail and airport facilities; acquiring land; resource recovery facilities; facilities for the improvement of air and water quality; hazardous waste remediation projects; and historic preservation projects among others. Public authority debt is used for similar purposes. In addition, the Legislature and Governor adopted several debt financed programs for purposes such as community enhancement and economic development; such programs include the Community Enhancement Facilities Assistance Program, Strategic Investment Program, and Bio-Tech Facilities to name a few. The use of debt to finance non-State capital needs has increased in recent years. Currently the State has nearly $15 billion (30 percent of outstanding State-Funded debt) in long-term obligations where there is no underlying State capital asset that will benefit both current and future taxpayers. Is there such a thing as "good debt?" There are times when the use of debt can be classified as "good". This is true for the State as well as for individuals if it is used for an affordable, long-term investment. For instance, the use of a mortgage to acquire a home can be considered "good" debt. In the case of the State, debt may be considered "good" if it has been approved by the voters of the State and the projects to be funded from the debt have a useful life at least as long as the final maturity of the debt. New York has relied on debt to finance its capital spending. In the most recent five year capital plan released in May, 2006, the Governor projects that the share of State-Funded capital funded with cash ("Pay-as-you-go-financing") will average 26 percent in the years 2006-07 through 2010-11. The remainder of State-Funded capital will come from borrowed funds. Heavy use of debt is reflected in statistics that compare New York's debt to other states. New York's $2,517 in debt per person is more than double the national average and ranks fifth highest among the states in tax-supported debt per person. The large amount of debt being issued also translates to higher debt service costs: debt service is one of the fastest growing categories of State spending and is projected to increase to $7.1 billion by 2010-11 reflecting an increase of $2.8 billion or 64 percent from SFY 2005-06. LGAC is the acronym for the New York Local Government Assistance Corporation. LGAC was created in 1990 to provide a means for the State to reduce its annual reliance on intra-year short-term borrowing for cash flow purposes (also known as the "spring borrowing") and to reduce its accumulated "GAAP" deficit. Pursuant to legislation, LGAC is authorized to issue up to $4.7
billion of its bonds, secured by a contractual obligation with
the State, to make payments to local governments and school districts.
The most significant component of this legislation is that as LGAC
issues its bonds, the amount of intra-year short-term borrowing
that could be undertaken by the State could not exceed $4.7 billion
reduced by the amount of bonds and notes issued by LGAC. Over the
years from 1959, the State's short-term intra-year borrowing had
increased to a high of $4.3 billion. The need to complete this
borrowing in order to make payments to school districts and other
municipalities placed the State at the mercy of the lending markets.
As the short-term intra-year borrowing increased, it became more
difficult, and costly, for the State to complete this borrowing.
Now, the State may conduct an intra-year short-term borrowing only
if a declaration of emergency is declared by the Governor and the
legislative leaders. If a borrowing occurs, it must be paid down
within four years following the declaration of emergency.LGAC completed
its mission during the State's 1995-96 fiscal year. There has been
no State intra-year short-term borrowing since the State's 1993-94
fiscal year. As of March 31, 2006, there was $4.4 billion in LGAC
debt outstanding, net of unamortized premiums, discounts, and deferred losses on refunding. |
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