An Affordable Debt Policy for New York State and New York City
How much should New York State and New York City borrow to finance needed public infrastructure investments? In recent years this has become a complex and controversial question. This report seeks to clarify the nature of the issue, to present criteria for deciding how much state and local debt is affordable, and to recommend how these criteria should be applied to decisions by the State and the City. Nature of the Problem Debt has become controversial for four related reasons.
- Debt has grown rapidly.
- Debt has grown despite intended limits.
- New York's debt is greater than other jurisdictions'.
- The outlook is for even greater debt.
An Approach to Measuring Debt Affordability
Do New York State and New York City have too much debt? A sensible and realistic answer to this question should be rooted in the concept of affordability.
Debt affordability refers to the burden associated with repaying debt. To be affordable, the repayment of debt (a) should not cause a jurisdiction's tax rate to increase to uncompetitive levels in order to cover the debt service, and (b) should not require cutbacks in other public services that similarly cause the jurisdiction to become uncompetitive with other areas. That is, repaying debt should not require tax increases or service cutbacks that make a place less attractive than its competitors.
An important implication of this approach is that "too much" is defined relative to other places. The warning signal is not a particular number; rather, it is a position that is relatively far out of line with other places. A measurement of affordability can be thought of as having an upper bound that represents the beginning of a "danger zone" for states and cities.
A second implication of this approach is that affordability should be assessed as a relationship between the amount of debt and the resources available for repayment. Larger and wealthier places can afford more debt than smaller and poorer ones. Thus, affordability can best be measured in terms of a ratio between debt levels and resources available for repaying that debt.
Using this approach to derive policy guidance for New York State and New York City requires applying six analytic steps to the relevant jurisdictions:
- Identify the amount of relevant long-term debt.
- Adjust the amount of long-term debt to include unfunded pension fund liabilities.
- Identify the resources available in the state or local economy to repay the debt.
- Adjust the resources available to account for the division of service and financing responsibilities between the state and its localities.
- Examine the distribution of the ratio of adjusted debt to adjusted resources in order to identify a point that is sufficiently "out of line" with most jurisdictions' practices that it constitutes the beginning of a danger zone.
- Adjust the danger zone threshold to provide a safety margin for an economic downturn.
Each of these steps is described more fully in the report, and supporting data and technical information are presented in the Appendices.
When this analysis is complete, the data provide the basis for two informative calculations. First, one can determine how much debt New York State and New York City could have before entering the danger zone. The answer is that, in 1997, the year of the comparisons, the State should have had $29.2 billion in State-supported debt rather than the $33.1 billion that it actually had. In fiscal 1998, the year from which the City comparative data are drawn, New York City could have incurred $2.1 billion more in debt before reaching the danger zone.
Second, the data can provide a basis for estimating a danger zone threshold for the latest fiscal year, 2000. If the overall measure of resources available for repayment of debt grew at the same rate as the state's personal income, then New York State's debt could have grown from the 1997 threshold of $29.2 billion to $33.8 billion. In fact, New York State's debt grew to $36.8 billion and was therefore $3.0 billion above the projected threshold at the end of fiscal year 2000.
Projecting a growth in New York City's available resources equivalent to its estimated growth in personal income, would suggest that at the end of fiscal year 2000 New York City's actual debt of $36.6 billion was $2.2 billion below the projected danger zone.
The analysis in this report answers the question, how much debt is too much? Based on these findings, the CBC makes three recommendations.
1. New York State's elected leaders should bring the State's debt burden below the danger zone threshold identified in this report, and New York City's leaders should keep their debt below the relevant danger zone threshold.
2. New York City and New York State should create Debt Policy Committees to recommend long-run debt strategies and annual debt issuance limits.
3. The State Constitution should be amended to establish new limits on State and City debt.
The sole safety valve or exception to the limit set based on analysis of affordability should be the will of the electorate. If the voters opt to approve debt for a specific purpose, then such debt should be permitted above the limit set by the independent board. The will of the voters should be supreme, but it should be guided by information on the affordability of debt. The voters should be empowered to go beyond that limit, when and if they are convinced it serves an important public purpose.