The Legislature isn’t just delegating emergency spending control powers to Governor Cuomo as part of the new state budget. It’s also handing him a deficit-financing credit card with an $11 billion limit.
Buried in the Educational, Labor and Family Assistance (ELFA) budget bill are provisions authorizing up to $11 billion in added state borrowing in FY 2021.
This is an installment in a special series of #NYCoronavirus chronicles by Empire Center analysts, focused on New York’s state and local policy response to the Coronavirus pandemic.
That amounts to an 18 percent increase in previously planned levels of state-supported debt for the year. And while the short-term borrowing is justified as necessary to cover short-term cash needs and budget shortfalls, it is convertible to long-term bonds at the sole discretion of Cuomo’s budget director.
The added borrowing is specifically exempted from the state’s existing statutory debt limitations (Section 67-B of Finance Law), which caps state debt issued since 2000 at 4 percent of personal income and limits such debt solely to capital construction and acquisition purposes. The new borrowing also specifically is designated as “not a debt of the state,” to sidestep the state Constitution’s requirement for voter approval of general obligation (g.o.) bonds.
Beyond that, inexplicably**, the same provisions also exclude from the Section 67-B debt limits all forms of state-supported debt that the state issues in the normal course of business this year. Pre-pandemic, the state planned $7.7 billion in capital debt issuances for FY 2021—but the numerous debt cap increases added at the last minute to budget bills could boost that number higher.
The short and long of it
As detailed on pp. 247-253 of the ELFA bill, the new borrowing authorization comes in two chunks:
- $8 billion in bond anticipation notes, to be issued by the state Dormitory Authority and the Urban Development Corp., “for the purpose of temporarily financing budgetary needs of the state following the federal government deferral of the federal income tax payment deadline from April 15, 2020, to a later date in the calendar year,” and
- up to $3 billion to be raised in the form of “one or more line of credit facilities and other similar revolving financing arrangements,” which the budget director can draw upon one or more times “for the purpose of assisting the state to temporarily finance its budgetary needs.”
The bill also provides that both forms of short term debt can be refunded or renewed for up to one year, or to a maturity date of March 31, 2021. But the following passage converts short-term cash-flow borrowing into something else:
If on or before the maturity date of such notes or such renewal or refunding notes, the director of the division of the budget shall determine that all or a portion of such notes or such renewal or refunding notes shall be refinanced on a long term basis, such notes or such renewal or refunding notes may be refinanced with state personal income tax [PIT] revenue bonds in one or more series in an aggregate principal amount. [emphasis added]
Almost identical language follows the section authorizing the $3 billion line of credit or revolving loans, except the long-term refinancing of that amount can be in the form of either PIT bonds or “state service contract bonds,” another common form of appropriation-backed, state backdoor borrowing via public authorities.
In some recent daily briefings focused on the public health response to the pandemic, Cuomo and Budget Director Robert Mujica alluded to a need for short-term borrowing to cover a cash-flow slowdown resulting from the federal decision to extend the income tax filing deadline from April 15 to July 15, which effectively forced New York to move its PIT deadline to the same schedule.
But the final bonding language in the ELFA bill goes beyond the short term. Cuomo won’t just be authorized to borrow $8 billion and tap $3 billion in credit lines this year. He can refund or renew that borrowing for up to one more year. And then, before March 31, 2022, he can convert the total into 30-year bonds, payable out into the 2050s.
The risk of this approach is that it will burden New York taxpayers with massive added government debts they will struggle to pay off, even as Cuomo (or his successors) struggle to balance the budget.
If the pandemic is followed by a sharp, V-shaped, return-to-normal recovery, the borrowing will end there. But if, in fact, the state and the nation are entering a very deep and prolonged recession characterized by much slower economic growth for years to come, the borrowing will be a stopgap, not nearly enough to permanently balance the budget. Moreover, it will do nothing to help county and municipal governments that are now seeing massive holes open in their own budgets.
How will the municipal bond market greet this added state borrowing? It’s hard to say at the moment, because the market has been in turmoil.
Meanwhile, Moody’s Investor Service just revised its New York State credit rating outlook from “stable” to “negative,” explaining:
Today’s action … reflects the impact of the coronavirus crisis on the state of New York and our expectation that the crisis will have substantial impacts on state finances and the economy, eating into the state’s reserves and straining its ability to structurally balance its budget. The rating action also incorporates the mitigating impacts of substantial federal emergency assistance, which will bolster household income and spending and therefore tax revenue, provide aid to hospitals, reimburse state and local governments for coronavirus-related spending and could potentially provide additional federal Medicaid reimbursement if certain obstacles for New York are overcome.
New York City’s bond rating outlook was also downgraded to negative.
The MTA, too
This is hardly the only questionable borrowing provision in the new budget. The Transportation, Economic Development and Environmental Conservation (TED) budget bill includes a provision (see Part LLL, starting on page 122) authorizing the Metropolitan Transportation Authority to borrow up to $10 billion to cover operating expenses.
Nicole Gelinas, senior fellow at the Manhattan Institute, notes that this is “a LOT of money — two-thirds of what they were supposed to raise thru congestion pricing for capital.” And, she adds, it “could easily turn into a backdoor bailout of the state itself — e.g. way for state to withdraw [the MTA’s] payroll tax $ for MTA for state needs.”
** Well, maybe not so inexplicably, when you consider how much personal income is likely to shrink this year.