While Governor Cuomo crawls further out on a fiscal limb, delaying threatened budget cuts in hopes of landing more federal aid, New York State is wrapping up its biggest short-term spring borrowing in 30 years.
As listed on the state comptroller’s current bond issuance schedule, the borrowing will take the form of $3.5 billion in Revenue Anticipation Notes (RANs) to be sold Thursday by the Dormitory Authority of the State of New York. The notes—essentially an IOU repayable by the March 31, 2021 end of the current fiscal year—will be secured by the state’s largest revenue source, the personal income tax. This will bring the state’s total short-term “liquidity financing” this year to $4.5 billion, including $1 billion in RANs issued by the Dormitory Authority on May 22. (**See note at end of post.)
Albany needs the money primarily because of the delay in tax payments caused by the federally driven three-month delay in the income tax filing deadline, from April 15 to July 15.
But the state’s pandemic-related borrowing won’t necessarily end here—and it won’t necessarily remain short-term, either.
As first noted here in April, legislation enacted with the FY 2021 budget authorized a total of $11 billion in new state borrowing, consisting of up to $8 billion in tax-backed revenue or bond anticipation notes and $3 billion to be raised in the form of “one or more line of credit facilities and other similar revolving financing arrangements.”
The bill provides that both forms of short term debt can be renewed once, for up to one year, or to a maturity date as far out as March 31, 2022. But it also goes beyond that. Under the following language, the debt is convertible to long-term bonds at the sole discretion of Cuomo’s budget director.
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]
Similar language follows the section authorizing the maximum $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 other words, Cuomo ultimately could fall back on up to $11 billion in long-term deficit financing, if he so chooses, with no legislative permission required.
There are only two other instances on record in which New York State has explicitly borrowed long (or long-ish) to pay current operating expenses, in both cases through public benefit corporations created especially for that purpose.
In 1990, under Governor Mario Cuomo, the Local Government Assistance Corp (LGAC) was established to issue up to $4.7 billion 30-year bonds to eliminate the state’s recurring annual “spring borrowing,” which reflected a structural deficit accumulated over the previous two decades. About $1.3 billion in LGAC debt remained outstanding as of 2019. The law creating LGAC capped future short-term borrowing in any single fiscal year at $4.7 billion—which (perhaps) explains why Cuomo, for now, has held his initial RAN issuance to $4.5 billion. The limit can only be exceeded if the governor and legislative leaders sign a certificate setting forth unanticipated “emergency or extraordinary factors” justifying the borrowing.
In 2003, under governor George Pataki, the state created the Tobacco Settlement Financing Corp. to issue $4.2 billion in bonds backed by payments still due to New York under the 1998 Master Settlement Agreement between states and cigarette manufacturers. The bonds were fully redeemed as of June 2017.
The state’s Budget Division’s latest Annual Information Statement confirms, yet again, that the state’s economic outlook is “bleak” and that its tax revenues have crashed, dropping more than $8 billion from FY 2020 and $13.3 billion below the original FY 2021 forecast, in the wake of business shutdowns under Governor Cuomo’s “New York State on PAUSE” order in mid March. Current projected revenues would require spending to be cut $7.3 billion, or 7.1 percent, below FY 2020 levels, easily the largest single-year cut since the Great Depression. Beyond this year, as the AIS points out:
To the maximum extent possible … the actions taken in FY 2021 [to reduce spending or otherwise balance the budget] must provide recurring savings or the State will need to close even larger budget gaps in FY 2022 and in the years that follow.
The budget gave the governor broad and unprecedented authority to “adjust and reduce” spending to the extent necessary to close deficits measured during the fiscal year, starting in the month of April. Even before the shortfalls developed as expected, Cuomo was loudly and repeatedly warning that he might need to cut as much as 20 percent from programs such as school aid. His description of what the state would need to avoid big cuts has ranged as high as $61 billion. As noted here, the real figure is probably closer to $8 billion, without even counting any of the $5 billion in coronavirus relief aid targeted to New York State, in the federal CARES Act, which might yet be used to offset some spending only indirectly related to coping with the public health crisis.
Yet nearly a quarter of the way into the fiscal year, Cuomo has yet to pull the trigger on any major budget cuts. His only notable money-saving action has been to delay about $1 billion in spending, including $350 million in scheduled May and June aid payments to cities other than the Big Apple (which, from the governor’s perspective, was the political and fiscal equivalent of pulling the wings off flies).
Congress is not expected to act on the next stimulus bill until July, perhaps weeks after the July 1 start of the next fiscal year for New York City and other cities across the state. Yet after stridently railing against Washington Republicans for failing to approve $500 billion in state and local aid as proposed by the National Governor’s Association, Cuomo has simmered down and now avoids fiscal topics in his still-daily Covid-19 news media “briefings.”
Yesterday’s briefing (featuring a guest appearance by actor Sean Penn), ended with this exchange between the governor and a reporter:
Question: … [R]egarding Washington— it seems like there’s not going to be any federal action regarding any kind of comprehensive stimulus, at least in the month of June. How long are you willing to wait this out before you think some of these cuts have to go into effect, the City of New York has to deal with their budget on June 30 …
Governor Cuomo: I do not believe that even this federal government— with all if its dysfunction— will turn its back on state and local governments across this nation at this time. I am that much of an optimist [gesture with two fingers a fraction of an inch apart] about this federal government. But I believe there’s a level below which they won’t sink and I think that we are at the bottom of the pond. Thank you very much, guys. Thank you.
In other words, he’d rather not talk about it for now.
Banking on federal aid that seems likely but is by no means guaranteed, Cuomo is playing a high-stakes game of budgetary brinksmanship—with long-term deficit borrowing as his ultimate fallback. But federal aid—whether a single year’s worth of relief, or in further installments over the next few years—will be only a stopgap, delaying the inevitable. Revenues have fallen billions of dollars below spending trends, and the underlying gap will only widen as time goes on.
** The May 22 and June 11 issues are standard RANs, underwritten by JP Morgan and Citigroup, respectively. Unlike Illinois, New York has not needed to tap the Municipal Liquidity Facility created by the Federal Reserve to buy short-term notes directly from states.
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