When is a government’s debt not actually the government’s and the taxpayer’s debt?
That is the issue here in New York State, which has some of the highest debt levels in the United States.
It is also an issue in so many other places in the democratic world.
In modern democracies it is often easy for pols today to embark on big projects, often just before elections, and pass on the debts to succeeding generations. Often the debts are skillfully disguised or possibly don’t kick in until many years later when the pols who authorized the debt are gone.
So there is more to it than just a government running up debt. Governments in the modern democracy often create authorities, of which most voters—who may know their elected officials very well—often haven’t a clue.
Authorities have run up bills that taxpayers may or may not pay and which may or may not be counted as an official state debt. For example, critics note that, as a New York State taxpayer you’re on the hook for much more than the official $52 billion state debt that is listed by the governor’s office.
That is the complaint of critics of the current process of accumulating state debt in this administration as well as administrations going back to the 1960s, the years of governor Nelson Rockefeller. However, spokesmen for governor Andrew Cuomo say critics are over counting debt, which actually has been going down for years. That assessment is disputed by the state’s chief financial officer.
Do We Owe? Yes or No?
So New York State’s debt, how it is incurred, counted and whether it is constitutional, remains the subject of a battle between the governor and others as this year’s budget process begins.
That’s because much of New York’s debt, the second highest in the nation says the state’s chief financial officer, isn’t subject to enough public debate, critics claim. They say the spending and borrowing of its numerous state authorities aren’t as carefully reviewed as the state budget. And that must change, he says.
State Comptroller Thomas DiNapoli and some of his predecessors have targeted state borrowing practices for decades. The lack of public review, critics say, continues in the latest state budget proposed by Governor Andrew Cuomo. But the debt debate didn’t begin with the current governor.
The governor, critics say, is continuing a system of “backdoor” borrowing. He is using myriad state authorities—which are independent agencies recognized in the state constitution—to carry out projects never approved by the voters, according to critics. These authorities’ debts now dwarf the debt approved by the voters or through their representatives—often called general obligation debt–at a rate of about 19 to 1.
Indeed, in his latest report, DiNapoli targeted backdoor borrowing, a process by which authority debt is outstripping legislative approved debt in the last state fiscal years (SFY).
“General Obligation debt has ranged from nearly 16 percent of State-Supported debt in SFY 2006-07 to approximately 5.8 percent in SFY 2014-15,” DiNapoli wrote.
“Backdoor borrowing,” says DiNapoli in an interview I conducted for a recent article I wrote for the New York Post, “refers to the issuance by public authorities of debt for which the State is expected to provide the funds for repayment. Authorities also issue debt for their own purposes.”
Cutting Out the Voters
DiNapoli argues backdoor financing “eliminates the opportunity for voters to have input on major borrowing decisions that affect them financially, transferring a certain degree of control to public authority boards and thus further limiting accountability and transparency.”
Speaking on background, several officials in the Cuomo administration rejected DiNapoli’s analysis. They said taxpayers are not responsible for debts incurred by authorities, which are independent entities.
But what if an authority runs into trouble? Will state taxpayers have to ante up?
“We are not going to engage in speculation,” one Cuomo administration official told me.
Although not disputing that state authorities abused their borrowing powers in the 1970s, when both the state and city faced fiscal crises that nearly led to bankruptcy, the Cuomo official added that reforms, such as the creation of the New York State Authorities Budget Office, ensure problems won’t repeat.
Debt Declines, Governor Says
This comes at the same time that the Cuomo administration says the state’s debt, the general obligation part with authority numbers not counted, has been going down at an unprecedented pace.
“State debt has declined for four consecutive years for the first time in more than 50 years and our debt affordability ratio is at its best level since the 1960s,” according to Morris Peters, a spokesman for the New York State Division of the Budget.
He says the debt—not counting authority obligations—has declined by some $4 billion over the past four years and is now some $52 billion. This doesn’t include future pension costs and authority debt. Measuring for inflation, he adds the state debt is at the lowest point in about a decade.
The administration spokesman also notes that the three major bond rating agencies—which generally don’t take authority debt into consideration–recently have all given the state high marks on its credit.
So why the disagreement over New York’s debt?
What Are You Counting?
The controversy over Albany’s red ink is how to count it. The dispute is over state authorized debt—the debt approved through a legislative process—and state supported debt, obligations that can be run up by its many authorities.
Authority debts, critics warn, must be paid for by the taxpayers if an authority is not self-sustaining such as the Metropolitan Transportation (MTA), which runs commuter railroads, buses and subways. As a percentage of the overall state debt, the percentage of state authorized debt—that directly approved by the legislature or the voters through referendums– has been declining over the last 20 years while the percentage of state supported has risen.
Critics also complain that the state is using backdoor debt not only for capital financing—to pay for roads and bridges as well as other projects that presumably improve the state’s economy—but sometimes even for the day to day expenses of authorities that taxpayers have never directly approved.
The governor’s spokesmen say it is part of the democratic negotiation that affects all state spending and debt. All authority budgets are reviewed by the state legislature, they note.
These state authorities are officially known as public benefit corporations. They include the MTA, the New York State Thruway Authority and hundreds of others. Many cities in New York also have their own authorities, any of which can have a potential effect on how much the taxpayers shell out.
Moses at the Backdoor
This so-called “backdoor” financing was a practice that was begun in the 1930s by the controversial builder Robert Moses. He was called by his biographer—Robert Caro, in the book “The Power Broker, Robert Moses and the Fall of New York”—the most powerful man in New York State. That’s despite never winning elective office. Moses ran once for governor in the 1930s and lost big to Herbert Lehman.
However, thanks to various appointments by governors and mayors—mayors and governors who knew he could finish projects in time for elections—he was arguably the most powerful man in New York for decades.
Backdoor financing was accelerated in the administrations of governor Nelson (“Rocky”) Rockefeller. Rocky was a popular republican governor known for big state spending projects such as the Albany Mall and a big expansion of the state university system.
These were projects that eventually caused taxpayer sticker shock in the 1970s. Rockefeller was re-elected three times, the last time in 1970 (See “Governor Rockefeller Perfected Backdoor Financing” at the end of this article). Rockefeller was someone who liked to spend a lot of taxpayer money.
In Richard Norton Smith’s biography of Thomas Dewey—one of Rockefeller predecessors as governor and nearly president of the United States—he quotes Dewey of saying about a young Nelson Rockefeller, “Nelson, I like you. But I can’t afford you.”
Authorities Are Key
Although legally separate from the state government, these authorities (See “What Is a State Authority?” at the end of this article) are important. The state is financially accountable for them and can be affected by their financial well-being, according to DiNapoli.
“Backdoor financing” has been challenged by some who complain it is unconstitutional. The New York State Constitution requires voter approval of state debt to ensure proper scrutiny of costs that are passed to the next generation.
Critics today and over decades argue governors have not counted authority debt even though the taxpayers are on the hook if an authority has problems. The MTA often does. The state Urban Development Corporation almost went broke in the 1970s along with New York City. Cuomo administration officials dismiss these fears. They argue reforms will prevent a recurrence of the crises of the 1970s.
However, the debt controversy has continued. For example, at the end of the state’s last fiscal year, voter approved debt was some $3 billion. In the same year, total state funded debt—which included public authority debt and other debts where is the state is responsible for making payments—was $63 billon, according to David Friedfel, director of state studies for the Citizens Budget Commission (CBC).
In the governor new proposed executive budget, DiNapoli notes that “certain borrowing, such as bonds issued under a recently authorized program for State University of New York dormitories would not be counted as State-Supported debt.” DiNapoli believes it should be. The governor’s people say they shouldn’t because the authority will be self-funded through fees.
The Comptroller Wants Change
DiNapoli says these backdoor practices, these battles over how to count debts, show New York State needs dramatic change.
Critics say administrations going back over decades have engaged in a constitutional end run through the use of the public authority debt. The state legislature tried to curb this backdoor financing in 2000, but DiNapoli recently warned the reform isn’t working.
“Albany has increasingly avoided voter approval. Instead, state-funded debt is issued through public authorities,” DiNapoli wrote in 2013.
“This backdoor borrowing — which the 2000 law did not stop — reduces public scrutiny and contributes to an environment where debt is more likely to be used inappropriately,” according to DiNapoli.
A spokesman for the governor complained that DiNapoli “is counting debt in ways no one else is.”
Still, DiNapoli, who previously served in the state assembly, is not the first state official to complain about this debt counting method.
The Historical Backdoor
In 2005 one of DiNapoli’s predecessors, Alan Hevesi, wrote, “backdoor borrowing is the most egregious method the state uses to accumulate debt because it is money frequently borrowed through public authorities, whose actions tend to be hidden from the public eye.”
Hevesi, over a decade ago, also noted a trend: Voted approved state debt, or general obligation debt, was 40 percent of state debt in the 1980s. By 2005 it was down to some 10 percent, according to Hevesi’s report, “New York State Debt Policy: A Need for Reform.”
Since then “the percent of voter approved debt has dropped to less than five percent,” according to E.J. McMahon, president of the Empire Center for Public Policy. McMahon advocates fundamental change in the state’s constitution to stop backdoor financing.
By the way, both the governor’s people and DiNapoli and his allies can agree on one point: Authority debts have become a bigger part of the state’s red ink. Still, administration officials say these debts are both legal and not binding on state taxpayers.
Are they?
Bob Williams, president of the non-partisan group Statebudgetsolutions.org, agrees that it is difficult to understand the costs of authorities so he doesn’t list them at his site (He says NYS’s debt is actually $388 billion because he counts future pension fund and health care obligations. He agrees with DiNapoli that New York has the second highest debt in the nation behind California).
“Even though it is not clear if these authorities’ debts are binding,” Williams says, “I think legislators should be given a firm number on these authorities along with the state general obligation numbers because some just don’t understand what is going on.”
What’s to Be Done?
So is there any way to end the bitter backdoor financing debate? “The only way to permanently control New York state’s borrowing is with a constitutional amendment,” McMahon says.
Citizens Budget Commission officials believe, as long as authorities continue, there should be basic changes. (Please see sidebar: “The CBC Authority Solutions”).
However, DiNapoli agrees with McMahon that a constitutional amendment reining in authorities must happen.
“That means,” the comptroller says, “better planning for capital investments; a ban on backdoor borrowing and use of debt for non-capital purposes; a return to authorizing new debt via voter approval; and a much more effective debt cap that will protect future taxpayers. Only an amendment to the state Constitution can lock in these essential reforms.”
A spokesman for the governor said he has not taken position on a constitutional amendment.
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Governor Rockefeller Perfected Backdoor Funding
Governor Nelson Rockefeller—governor from 1959-1973—didn’t create the state authority, but he used it more frequently than any previous governor.
“Although public authorities didn’t originate with Nelson Rockefeller, under his leadership they mushroomed in number and size throughout the state,” according to Peter D. McClelland and Alan L. Magdovitz. They studied state spending and debt policies from the end of World War II to the early 1980s in the book “Crisis in the Making: The Political Economy of New York State since 1945.”
The authors tell a story of the governor Rockefeller losing spending votes in the state legislature or in bond referendums but going ahead with big projects through state authorities. They concluded state debt through authorities far outpaced state debt incurred by lawmakers, who faced constitutional limitations.
“During Rockefeller’s last 12 years as governor, for example, public authority debt outstanding quadrupled in size. At $13.3 billion in 1973, it was almost four times the debt of the state itself.”
But backdoor debt practices continued through both republican and democratic administrations. For instance, in 2005, the then state comptroller Alan Hevesi warned that, despite a celebrated budget reform in 2000, backdoor debt persisted.
What Is a State Authority and Can It Reach into Your Wallet?
State authorities are public benefit corporations, legally separate entities that are not operating state departments. The corporations are managed independently, outside the appropriated budget process. So their powers generally are vested in a governing board. Corporations are established for the benefit of the State’s citizenry for a variety of purposes such as economic development and public transportation.
However, they are not subject to state constitutional spending restrictions on the incurrence of debt, which apply to the state itself. These corporations may issue bonds and notes within legislatively authorized amounts.
Defenders argue that authorities are still subject to review by the legislature. Critics complain they still run up debts that aren’t counted as state authorized debt, thereby avoiding constitutional cap limitations.
Although legally separate, these authorities are important because the state may or may not be financially accountable for them. The state’s highest court has affirmed their legality and that the state carries no moral obligations to pay its debts.
However, the state may be affected by their problems as happened with the Urban Development Corporation in the 1970s, which needed taxpayer help to survive and almost pulled the state into budget hell.
Indeed, the state has provided financial assistance, to certain corporations for operating and other expenses because many run in the red each year.
So the state often provides help in the form of appropriated loans, contributed capital or operating subsidies.
The CBC Authority Solutions
The Citizens Budget Commission (CBC), in a report on public authorities, contended that some authorities have been misused by elected officials. CBC says they circumvent State constitutional limits on debt and to take on more debt than is reasonably affordable by taxpayers.
Particularly troubling about “backdoor” debt,” CBC officials write, is that a significant amount has been applied to cover the State’s operating expenses rather than for capital investments.
What’s to be done? The CBC offers five reforms:
(1) “Eliminate the misuse of authorities’ debt powers by setting comprehensive constitutional limits on the amount of State-supported and City-supported debt that can be issued by the State of New York and by the City of New York.”
(2) “Improve the oversight of non-State-funded authority debt by eliminating the PACB review process and replacing it with more comprehensive capital planning and project feasibility studies subject to professional, transparent review.”
(3) “Improve the effective use of tax-exempt conduit debt by requiring more explicit advance allocation of its purposes and more competition among private entities for its benefits.”
(4) “Make authorities more accountable by effectively implementing new laws and regulations seeking to make available more complete and accessible financial and other information.”
(5) “Enhance the governance of authorities by making their board members more independent of short-term political pressures.”
