Study looks at New York’s $103 billion municipal bond debt

What is New York State’s debt outstanding and how is it issued? The answer for curious investors is “It may be more than you imagine.”

The nonpartisan Volcker Alliance released a background paper Feb. 3 that takes an in-depth look at Empire State municipal bonds and other debts the state owes to the federal government and future state government retirees.

New York’s practice of providing services through independent public authorities that issue bonds makes its overall debt structure more complex than most other states, according to the “New York: State of Debt” report. , written by Matt Fabian and Lisa Washburn of Municipal Market Analytics. Inc.

The state and its entities, such as the New York Metropolitan Transportation Authority and the New York State Dormitory Authority, have approximately $102.91 billion in municipal bonds outstanding. Its leverage profile stands at $186.57 billion when other liabilities such as unfunded repos and OPEBs are added.

Fabian and Washburn say the government’s borrowing practices contributed to its average D rating for fiscal years 2015-2019 in what the report calls “fiscal maneuvers,” or one-off actions, which are used to balance its annual budgets.

New York is one of only four states to receive the second-lowest possible rating for its reliance on some of these potentially unsustainable maneuvers. The other three were New Jersey, Illinois and Kansas.

Despite an improving economy, New York’s use of one-time actions to break even accelerated during the study period, they said.

The report is the first in a series of studies that will examine state and local budgeting in the age of COVID-19.

“Even with trillions of dollars in federal pandemic assistance to the U.S. economy, COVID-19 has revealed new, long-term fiscal challenges for states and municipalities,” says William Glasgall, chief financial officer public of the Alliance. “As we have done in our annual “Truth and Integrity in State Budgeting” assessments since 2015, this issue paper identifies budget practices that need improvement and highlights best practices that states and localities should follow to ensure their continued financial stability.”

General government bond bonds are rated Aa2 by Moody’s Investors Service and AA-plus by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.

In 2021, New York ranked third in the ranking of bond issues in the United States. State, city, county and related agencies sold more than $48.21 billion in debt last year.

DASNY ranked the top issuer of municipal bonds in 2021. DASNY sold more than $8 billion in bonds last year that funded school districts, higher education, and nonprofit organizations.

Writing in a commentary piece for The Bond Buyer, Fabian, Glasgall and Washburn said there were two sides to government debt.

“Without borrowing, the Metropolitan Transportation Authority would not have been able to keep the subway running during the COVID-19 pandemic and the state unemployment trust fund would not have had enough money. money to pay for benefits that have kept many residents afloat during the layoffs,” they write.

However, the state has been a habitual user of debt to balance its budgets, which they said is a financially risky strategy avoided by most other states.

“Under New York State’s diversified debt structure, investors may have made artificial distinctions among state borrowers and overallocated their portfolios to bonds of New York issuers than their limits. usual risks of risk would not otherwise allow it,” the document states. “This can pose challenges in New York in the event of a budgetary or financial crisis. In such a crisis, investors could ignore the distinctions between securities – as they did in the Detroit and Puerto Rico bankruptcies – and trigger a wave of selling just when the state needed it most. access credit markets.

Looking at states that use traditional debt practices, such as California, Florida, Michigan and New Jersey, the paper recommends a series of reforms New York can undertake.

The report said:

  • New York uses many state agencies to borrow and relies heavily on tax structures and dedicated state enterprises. For this reason, government borrowing is not realistically limited by common measures on debt and debt service.
  • California has a highly centralized borrowing program and the highest amount of general bond debt issued of any state.
  • Florida borrows through various departments and agencies, but the state itself retains strong centralized control. The State relies on dedicated tax structures and parameters to limit total emissions.
  • Michigan issues debt through several entities, including the state itself and its Department of Transportation. The state uses ownership and lease-backed debt when issuing through other authorities and entities; and
  • New Jersey makes extensive use of a moderate number of state agencies for direct borrowing and what effectively constitute government bonds. It also carries a large and troublesome non-bond debt burden for pensions and OPEBs.

Proposed reforms include making the state clear about which debts are the direct responsibility of the state government, adopting administrative controls over the overall debt portfolio, and increasing transparency over all categories of debt. debt.
In addition, the document recommends that New York’s unfunded liabilities, such as retiree health care, be consolidated within existing debt limits for better management and oversight.

The document also urges the state to create a centralized entity to collect data on all state debts.

In a webinar hosted by the Alliance on Thursday, Fabien said that while government debt is high, that doesn’t mean more debt is necessarily bad.

“The question is always whether there is transparency with regard to the loan and is the loan paid?” he said.

Additionally, New York has historically been reluctant to ask voters to approve bond referendums for general bond debt due to the perception of a debt-averse electorate wary of future tax increases. related to full faith and covenant of credit on obligations. So the state has sought to find other ways to raise capital without going through voters, such as creating a personal income tax revenue stream structure to issue bonds.

“You would think voters would be a barrier to the ability to issue debt, which is why a lot of these other states are using these other forms of debt to escape the limits of general obligation debt,” he said. Washburn. “But we found that’s not the case at all in California. Voters have been very dovish in terms of approving the debt.”

New York Governor Kathy Hochul speaks about a $4 billion government bond referendum on Thursday during a panel sponsored by the Jeb E. Brooks School’s Institute of Global Affairs and Politics of Public Policy from Cornell University.

Governor of New York

Speaking Thursday at Cornell University, Governor Kathy Hochul noted that her new initiatives for environmental programs will be supported by a referendum on the $4 billion GO Bonds that voters will decide in November.

“We have an opportunity to really make an impression. Not just on our state or on our county, but on our planet by the decisions we make today,” she said.

She added that the state is pushing to build resilience into its infrastructure and requiring buildings to adopt green policies.

“But it’s also about putting money on the table,” she said.
Government bond totals do not include debt issued by New York City.

At the end of the second quarter of fiscal 2021, the city had approximately $38.57 billion in GO debt outstanding, not including the various city authorities that issue debt.

The New York City Transitional Finance Authority has $41.64 billion in outstanding debt, while the New York City Municipal Water Finance Authority had $31.12 billion in outstanding debt.

The city’s GOs are rated Aa2 by Moody’s, AA by S&P, AA-minus by Fitch, and AA-plus by Kroll.

In the Big Apple, the mayor and comptroller have been on different sides of the debt debate, with a proposal by the mayor to increase the NYC TFA’s debt capacity causing a rift between the two men.

Mayor Eric Adams has called for state legislation to increase the amount of debt the TFA is allowed to issue. City Comptroller Brad Lander opposes the request, saying additional link capacity is not needed at this time.

Testifying before the state Legislature in Albany on Wednesday, Adams asked for state support “to authorize an increase in the borrowing capacity of the Transitional Financial Authority to bring back the debt power of the city to its pre-pandemic level”.

New York City Comptroller Brad Lander meets with Mayor Eric Adams at City Hall on January 31.

New York City Comptroller’s Office

He noted that it was not the same proposal that former mayor Bill de Blasio made two years ago.

“It is not the borrowing request proposed in 2020, which asked for borrowing authority to cover operating expenses,” he said. “This new request relates to the City’s capital program and is necessary due to the decline in commercial property values, which is related to the borrowing capacity of our capital program. It costs the state nothing and will provide support for the city to complete its much-needed long-term capital plan.

He also requested that the state codify the debt service provision into state law to maintain the city’s strong credit ratings.

“It will be important to signal to investors that New York will always be a safe investment,” Adams said.

Lander refuted the need for an increase in TFA link capacity during his testimony.

“I urge you to reject the city’s request to increase the Transitional Financial Authority’s debt ceiling by $19 billion, more than double the current authorization of $13.5 billion. This request is premature – the city’s projections show sufficient borrowing capacity over the next three years,” he said. “Any request for an increase in the city’s borrowing capacity must be based on a clear assessment of the city’s infrastructure needs, available funding sources and gaps in current capital project management plans. “

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