New York State Has Limited Debt Capacity

The State is approaching its statutory debt limit, which will severely constrain its ability to issue debt to finance capital projects. The Debt Reform Act of 2000 caps state debt at 4 percent of personal income.² Based on the borrowing projected in the most recent update to the state financial plan, the State will have less than $1.4 billion in debt capacity available in fiscal year 2021, or 2.4 percent remaining of approximately $58 billion in total capacity.³ By fiscal year 2024 only $107 million in available debt capacity will remain. This forecast assumes that continued economic expansion and personal income growth will facilitate an approximate 4 percent annual increase in the State’s debt cap through fiscal year 2024.  If personal income stagnates or declines, the State could quickly reach the debt limit. The State should be very cautious about adding more debt to finance capital spending.

Capital Spending and Associated Debt Should be Limited to State Infrastructure Investments

Capital spending is frequently backed by state debt, generally issued by state authorities. Debt will fund more than half of fiscal year 2020 capital spending, with another 30 percent funded by current state resources (known as pay-as-you-go capital, or PAYGO), and 15 percent funded by federal PAYGO.⁴ 

State debt should only be issued for capital investments that are justified by need for repair or service enhancement identified through a systematic evaluation of state needs. Projects that generate a high rate of economic return on state investment may also be worthwhile. Use of debt is justified for such projects because future state taxpayers will also benefit from them. The duration of debt service payments should be equal to or less than the expected useful life of the investment in order to align the timing of the payment for the asset with the benefit of the asset’s use.

Some state capital spending supports projects that are not State-owned, do not have long useful lives, and are not justified by a critical need or high rate of return. The current capital plan includes lump-sum appropriations that are subsequently directed to small local projects, pejoratively known as political pork.  This pork often is funded by debt. The fiscal year 2020 adopted capital plan did not include any new lump-sum allocations for pork, although there is still substantial spending authority from prior authorizations. For example, the State and Municipal (SAM) Facilities Program is authorized to provide $1.9 billion in small grants to local governments and nonprofits based on extremely broad criteria.⁵  The capital plan also includes a $157 million reappropriation from 2008 for the New York State Capital Assistance Program, which is distributed according to a plan crafted by the Assembly Speaker to provide grants to local projects that Assembly members request.⁶ Both programs are to be funded through debt, but neither improves state infrastructure.⁷ If the State is going to add debt-funded capital appropriations, the additional spending should be limited to significant state infrastructure investments.

If state leaders add the same amount of SAM funding as in the fiscal year 2019 budget ($475 million), the State would hit the debt ceiling in fiscal year 2023.  Alternatively, if personal income grows 2 percent in fiscal year 2021 instead of 4 percent as projected, the State will reach its debt cap next year—meaning it will not be able to issue any additional debt.

Conclusion

New York State is approaching its statutory debt cap and there has not been a public needs assessment that justifies increasing or expanding the existing capital plan. Absent an emergency, State spending should be allocated during the budget process, when state leaders can adequately consider priorities and tradeoffs. It is not justifiable to add more debt to fund pork-barrel spending. The legislature should close out session without passing any capital pork.