New York state has one of the nation’s highest debt levels, largely because measures to restrict the excessive use of debt have been circumvented over the years in state budgets. Since the Debt Reform Act was passed in 2000, state-supported debt outstanding increased by $25 billion. Over the next five years, this debt is projected by the Division of the Budget to increase by $26 billion, or 42%, from $61.9 billion in State Fiscal Year (SFY) 2021-22 to $88 billion in SFY 2026-27.

A new report by State Comptroller Thomas P. DiNapoli identifies policy and fiscal weaknesses that have allowed state debt to grow to troubling levels and offers a roadmap for state debt reform to improve debt affordability and protect New York’s fiscal health. Debt service is projected to consume an increasing share of State Operating Funds spending over the next five years, growing from 5.4 to 5.9%. This constricts flexibility in the operating budget and leaves fewer resources available for other priorities and programs.

“New York state has a history of misusing borrowing to pay for short-term needs while a backlog of long-term infrastructure projects languishes,” DiNapoli said. “Caps and other restrictions on debt set in statute have not worked to rein in our debt or stop inappropriate borrowing practices. New York needs comprehensive and binding debt reform to ensure more affordable borrowing levels, more responsible debt decisions, and greater accountability to the public.”

In a review released in June 2022, Standard & Poor’s cited New York’s “moderately high and growing debt levels” as one factor preventing it from achieving a higher credit rating. In September 2022, Moody’s ranked the state as having the second largest debt burden in the nation behind California. A lower credit rating translates into higher borrowing costs for the state. Excessive debt is costly to residents and misuse of debt can result in inadequate investments in needed capital projects.

DiNapoli says restoring prudent debt practices is an essential component for improving the long-term sustainability of New York state’s fiscal health, keeping debt costs down for taxpayers, and more effectively deploying the state’s resources to pay for infrastructure needs.

DiNapoli recommends the following debt reform measures:

• Establish Comprehensive, Binding Debt Limits. Meaningful debt reform needs to be addressed through a binding constitutional amendment to impose limits on all existing and future state debt. The calculation should be based on a rolling 10-year average of personal income growth which will provide enhanced stability and predictability for capital and debt financing plans.
• Provide Accountability to Voters. State debt limits should be subject to voter approval, and all state debt should be required to be issued by the State Comptroller. This would isolate long-term liabilities and their associated costs from the temptations of annual budget-cycle gimmicks and prevent short-sighted solutions for near-term budget relief.
• Establish Responsible and Sustainable Practices. All state debt should be required to be issued with a level or declining debt service structure, be limited to a final maturity of 30 years or less and must begin to be repaid within one year. The use of state debt should be precluded from solely benefiting private enterprise.
• Give Flexibility in Times of Emergency. The constitution’s emergency contingencies should be updated to account for the potential crises of the modern era, while establishing boundaries around such possible uses.

Capital and Debt Plan

The largest capital investments in the SFY 2022-23 Enacted Budget Capital Plan, released in May 2022, are for transportation, higher education, economic development, and the environment. The plan forecasts $92.8 billion in capital spending through SFY 2026-27, an average of approximately $18.6 billion annually. It relies heavily on debt to finance this capital spending.

Over the last 20 years, debt has financed 53.4% of New York state’s capital spending. Over the life of the current plan, debt will finance 53.9% of total spending, primarily from bonds issued by public authorities on behalf of the state (51.2%). Growth in debt outstanding is occurring because of higher capital spending levels, as well as an increasing share of such capital spending being financed with debt rather than pay-as-you-go resources.

Current State Debt Limits

New York has both constitutional and statutory limits on state debt. Under the constitution, state general obligation debt, which is issued by the State Comptroller, must be approved by the voters through a ballot proposal. Through the years, however, the constitutional limitation has been circumvented through the use of debt issued by state public authorities, known as “backdoor borrowing,” where voter approval is bypassed even though the state is contractually obligated to pay debt service for the bonds.

As of SFY 2021-22, nearly 97% of state-supported debt outstanding has been issued by public authorities, primarily personal income tax and sales tax revenue bonds issued on behalf of the state.

The state enacted the statutory Debt Reform Act of 2000 to impose caps on debt levels and debt service spending. The cap on debt outstanding was phased-in over eleven years and eventually limited debt levels to 4% of state personal income, while debt service spending was limited to 5% of All Funds receipts. The Debt Reform Act was intended to provide a comprehensive approach to limiting state debt, but loopholes have been exploited and statutory changes have been made to circumvent the limits.

Weakened Guardrails

To bypass the debt caps, new forms of state debt were created outside the definitions of the Debt Reform Act, including bonds paid from tobacco settlement receipts and bonds to pay for SUNY dormitory facilities. Other debt has been structured in a way that it does not meet the technical definition for being counted toward the cap.

The Debt Reform Act was significantly eroded by actions included in the SFY 2020-21 and SFY 2021-22 Enacted Budgets. These excluded any state-supported debt issued during those two years from the state’s statutory debt caps, totaling nearly $18 billion. Budget actions also allowed the use of debt for non-capital purposes and permitted up to 50-year maturities for bonds issued for MTA purposes. These actions made the state’s debt limits functionally meaningless.

Combined with debt that was initially excluded from the caps, nearly one-third of state-supported debt ($20 billion) was excluded from the state’s debt limits as of SFY 2021-22. Without these debt exclusions, planned issuances would have breached the state’s statutory debt cap by up to nearly $17 billion by the end of the five-year SFY 2022-23 Capital Plan period.

Report
A Roadmap for State Debt Reform

Related Reports
Strengthening New York’s Infrastructure: Spending Trends and Planning Challenges
The Case for Building New York State’s Rainy Day Reserves