What are you doing for the summer? New York state’s public authorities are borrowing — nearly $1.9 billion in new debt from now ’til September.
In a decade, this debt has soared 35 percent, to $141.9 billion. And it’s not just the amount that’s a danger — the confusing structure of the debt could sow a panic.
New York’s public authorities are like dozens of mini-Fannies and Freddies — that is, investors think that the state would step in to rescue them in a crisis. But if a crisis does seem to be coming, uncertainty about that question would soar. And that’s bad for bondholders and taxpayers.
New York’s debt smorgasbord is the result of good-government restrictions coupled with political cravenness. Under the state Constitution, Albany can’t issue debt without voter approval — a limit the politicians regularly end-run.
So if you look just at official, “general obligation,” debt, New York is a model of prudence. The Empire State has $3.5 billion in general-obligation bonds backed by “full faith and credit,” down from $4.1 billion in 2002.
But governors have gotten around this restriction with financing tricks every bit as “creative” as the worst of Wall Street.
Over the years, the state has built up a collection of 46 “public authorities” — state-created corporations that issue debt. These outfits range from the Metropolitan Transportation Authority and the Thruway Authority, which pay for trains and bridges, to the Dormitory Authority, which issues debt so that colleges and hospitals can build room for new beds.
And the state has massively ramped up spending via these authorities. The MTA, for one, has more than doubled its debt from $14 billion a decade ago to $31 billion — mostly thanks to then-Gov. George Pataki’s failure to stand up to powerful labor unions. Thruway debt has gone from $1.3 billion to $2.3 billion. Albany’s “authorities budget office” noted last week that more than half of the state’s public authorities ended last year in deficit.
On top of that, towns and counties have set up another 507 smaller authorities to borrow another $91.4 billion.
Some build stuff, like stadiums. But other local authorities’ sole purpose is to borrow. For example, they’ve borrowed $2.1 billion against money that comes in every year from Big Tobacco under the 1998 settlement with the states.
And the picture may be worse: The budget office noted “significant data inaccuracies in more than 18 percent of ‘authorities’ annual reports,” including “incorrect reporting of outstanding debt.”
To some, all this back-door borrowing is brilliant — because it’s at record-low interest rates. Last week, the Thruway Authority issued $1.1 billion (mostly refinancing) at a “historic” low interest rate of 4.19 percent annually for 30 years.
OK, the Federal Reserve has kept rates at near-zero since the 2008 collapse. So the state can borrow cheaply from investors desperate for anything that pays more.
But these investors believe that in a crunch, much authority debt would become the same as the state’s “full faith and credit” debt.
Yet the budget office notes over a third of that $141.9 billion in authority debt, $52 billion, “was issued at the direction of the state or backed by its moral obligation or direct appropriations” — not by New York state’s full faith and credit.
The state’s own $2.7 billion in tobacco-backed bonds, for example, carry an “appropriation” backup. If the tobacco money isn’t enough to pay the debt, the state is supposed to make up the shortfall, “subject to appropriation by the state Legislature.”
What if the Legislature doesn’t make an appropriation? The bondholders would lose, but the state itself wouldn’t be in default. The bonds aren’t “a debt or moral obligation of the state,” say the underwriters.
Historically, the state has stepped in to support important authorities in distress, from the Urban Development Corp. in the 1970s to the MTA (via a massive tax bailout) in 2009.
But that can change quickly. Nationwide, states are rethinking what it means to “support” debt that’s not officially state debt.
Rhode Island says it will make good on its “moral obligation” on bonds backing former Red Sox pitcher Curt Shilling’s videogame venture — but voters are mad.
But California has shut down 400 NY-style “redevelopment agencies,” sending interest rates higher on their debt as investors try to figure if cash-strapped towns now responsible for paying will do so. The state also let Stockton, a 300,000-strong city, go bankrupt.
If New York faces a financing crunch, bondholders will start wondering what the state won’t protect. Would it pick the MTA over the Dormitory Authority? What about state and local tobacco bonds?
What if bondholders doubted New York’s ability to bail out bondholders? Authorities — and the state — would have a hard time borrowing — and New Yorkers could see severe and sudden cutbacks on everything from subway service to health care.
The state should fix itself — before investors decide complexity is a vice, not a virtue.
Nicole Gelinas is a City Journal contributing editor.