Will city leaders use 9/11 as an excuse to saddle future taxpayers with debt to close part of next year’s $4 billion budget gap?

That possibility exists because, five years ago today, state officials expanded New York City’s power to borrow money for capital construction projects–and, in the wake of the World Trade Center attack, that power was further expanded to potentially include borrowing to cover operating expenses.

As Mayor Michael Bloomberg grapples with the city’s biggest budget shortfall in at least a decade, the elephant in the room is the beefed-up bonding capacity of the Transitional Finance Authority (TFA), an agency created in February 1997 to get around the city’s constitutional debt limit.

Before 9/11, the TFA couldn’t issue more than $11.5 billion in bonds, and much of that already had been spent on new school buildings, water and sewage facilities and other infrastructure.

But two days after the attack, the state Legislature authorized the TFA to borrow up to $2.5 billion more to cover “all costs in the city’s budget (whether or not included or includable in the city’s capital budget) which are, in the judgment of the mayor, related to or arising from” the catastrophe.

Such bonds can be backed by the same city taxes as normal TFA capital financing–without requiring any promise of recovery aid from Washington or Albany.

The mayor may not even acknowledge this possibility in the preliminary budget he’ll unveil Wednesday. But it seems likely that the deficit financing idea will at least be floated–if not by Bloomberg, then by City Council members or by municipal unions, which surely will want to minimize their own share of budget-cutting pain.

It will no doubt be justified as an extraordinary response dictated by extraordinary circumstances. But if pursued, it will also be an extraordinarily dicey proposition.

Issuing long-term debt to cover operating expenses is among the deadliest of fiscal sins for any city–the municipal equivalent of taking out a second mortgage to pay your food, phone and cable-TV bills.

In light of New York’s brush with bankruptcy in the mid 1970s, the law is quite clear on this point: If the city runs a deficit greater than $100 million in any year, New York state can take control of its finances, as it did after the fiscal crisis a quarter-century ago.

However, because the TFA is a quasi-independent state agency that stands completely outside the city budget, it offers Bloomberg a narrow path around the state control trip-wire. TFA bond proceeds could be booked on the revenue side of the city’s balance sheet, to the extent that Bloomberg is willing to identify some portion of the budget gap as being “related to or arising from” the Sept. 11 attack.

Even if the city can overcome potential legal and technical objections to such a move, there are three reasons why it’s still a dangerous idea:

1. It could harm the city’s bond rating. The TFA bonds themselves are a very popular item with municipal investors and will sell easily under any circumstances. But the city’s general obligation bond rating, now mediocre, could easily get worse if it looks like New York is returning to the bad habits of its past. Which leads to a second concernŠ

2. It will make a bad debt problem worse. Before Sept. 11, the city’s skyrocketing bonded indebtedness was a source of mounting concern to fiscal monitors and had inspired Giuliani to develop a new plan for capping borrowing. Resorting to TFA bonds to close part of the budget gap would put Bloomberg in the position of adding to the debt even while making deep cuts in capital spending for everything from prisons to cultural facilities and school buildings. In effect, bonds for operating expenses would be crowding out bonds for bricks and mortar.

3. The bonds would amount to another one-shot revenue in a budget that is already likely to be overly reliant on non-recurring funds.

Bridging the 2003 gap with one-shots is not necessarily bad policy so long as the far end of the bridge rests on solid fiscal footings in 2004 and thereafter. In other words, using long-term borrowing to cover part of next year’s shortfall will be appropriate only if it is part of a comprehensive strategy for permanently reining in the cost of city government–for example, by using bonds to finance retirement buyouts and other incentives designed to reduce the workforce.

Bloomberg will need up-front, productivity-enhancing concessions from municipal unions to assure taxpayers, bond raters, Gov. Pataki and the legislature that TFA bonds could be used appropriately to close part of the budget gap. Until such concessions materialize, he should resist the temptation to exploit this loophole.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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