New York State’s politicians have found a magic way to reward their supporters lavishly without everyone else noticing how much they are being hurt: they borrow the money, and put off the cost to a future they don’t care about. Every year the debt rises, and our future is diminished. It may be that the state budget wouldn’t pass otherwise, because it is only by finding an unseen victim that everyone who matters can be more-or-less satisfied. But New York’s debts have grown so large that at this point current New Yorkers aren’t much better off at the expense of the future, they are simply less worse off as a result of the past, as the result of borrowing more. The bomb has been timed to go off during the next administration.
If you have read my earlier posts you know that generational equity is one of my issues, and the future that I, my children, and my neighbors will live in is one of my greatest concerns. I would stop the borrowing, but would continue to repair, maintain, and improve the state’s infrastructure using current revenues. And I would let the people know how much they have been hurt by the irresponsibility of the past, not by making speeches no one would listen to or issuing reports no one would read, but by funding the cost of New York’s excess debts through a separate “excess debt surcharge” that would appear right on the tax bill or fee for all to see. Once that surcharge appeared the legislature and local governments might feel some counter-pressure from those who aren’t planning to leave the state shortly, leaving as little behind as possible.
First, let’s define the scope of the problem. In 1990, before the most recent bout of extreme fiscal irresponsibility took hold, New York State’s total state and local debts totaled about $95 billion, or $137 billion adjusted into $2004 for inflation, according to data from the Governments Division of the U.S. Census Bureau. By 2004, that total has risen to over $219 billion. Former Governor Cuomo and New York City Mayor Dinkins borrowed heavily during the deep early 1990s recession. But their successors borrowed during good times and bad, shifting the cost of about $5.9 billion in spending per year to future generations. And the annual total has been rising. In 2004, the amount of state and local debt issued here exceeded the amount of retired by more than $8.7 billion, or $1,227 per household in the state. New York State residents were on average 1.2% better off, as a share of their personal income, as a result of cost deferred to the future, in fiscal 2004. That is how much the next Governor would have to make someone worse off, though higher taxes or diminished benefits and services, just to break even.
Then there is the existing debt, on which interest has been paid each and every year. At the end of Fiscal 2004, New York’s state debts (excluding transit) totaled 11.3% of the income of state residents, compared with a national average of 7.6%. Its local debts (excluding transit) totaled 27.2% of personal income in New York City and 10.5% in the rest of the state, compared with 12.5% nationally. It’s transit debt, which is classified as a hodgepodge of state and local debt but is nearly entirely attributed to Downstate’s MTA and Port Authority, totaled 2.0% of the income of all state residents, compared with 0.3% nationally. In fact, the MTA accounts for a huge share of the transit debt in the nation.
That much of the state’s debt burdens Downstate in general, and New York City in particular, is no surprise. Few would be willing to lend to declining upstate communities, and those communities with significant debts, like its older cities, are in no position to pay it back. So for 15 years the state has collected excess tax dollars in New York City and spent them elsewhere, while allowing New York City and the MTA to go deeper and deeper in the hole in exchange. For example, the STAR program, which New York City gets little of, was created as part of deal to float state bonds to pay for capital improvements for New York City’s schools. That bond issue didn’t happen. More than a decade later, under a new deal the City of New York will float bonds that the state promises to pay back but may simply decide not to. When New York City was devastated after 9/11, the rest of the state did not pay more in taxes or accept less in services to help. It “helped the city” by allowing it to go $5.5 billion further into debt just to accommodate current spending, with the state promising, but not certain, to help pay the interest on $2.5 billion of it. Both the State and the City cut off capital contributions to the MTA, which is going deeper and deeper into debt to make up the difference.
But Upstate did not get off scot-free. Cuomo set off the current feeding frenzy by burdening future New York Thruway toll payers with paying forever for a few years of borrowing in the early 1990s; the toll payers themselves added to that hole by benefiting from a multi-year toll freeze. A transportation trust fund was set up to maintain roads and bridges with dedicated transportation taxes and other transportation-related revenues. Those taxes were diverted to non-transportation uses, so money was borrowed for needed repairs. Now one-third of that trust fund is used for interest on past spending.
How much of New York’s added debt, which will burden future citizens, has been used for capital expenditures, which will benefit future citizens? Almost none of it, by an honest accounting. The model of a capital expenditure is this. You have an undeveloped area, with just a few scattered households and businesses. It will be developed into a new urbanized area, which will require new schools, water pipes, sewers, roads, sidewalks, parks, transit lines and vehicles and other public facilities. Clearly the few existing people and firms cannot pay up front for all the facilities required by their future neighbors, so money is borrowed so the future neighbors can pay instead. That isn’t what happens in slow-growing New York.
Here, much of the state is already developed, and most of the schools, water pipes, sewers, roads, sidewalks, parks, transit lines and vehicles and other public facilities already exist. As do most of the homes and businesses that pay for them. But even if they are well maintained, a rarity, a certain share of that infrastructure and public facilities wears out and must be replaced each year. If it isn’t, everything falls apart. If that “ongoing normal replacement” is funded by debt, rather than ongoing current revenue, eventually all the ongoing current revenue is going to pay interest on past debts. The ongoing normal replacement ceases. That is where New York State is heading, on the express track.
Even where you have new development, as in the suburbs Upstate, it is the result of the relocation of people and economic activities, not growth. So there are more infrastructure and public facilities to maintain – in the new location and the old – without more people and business to pay for it. Either it is not possible to afford the new infrastructure in the newly developed area, or the ongoing replacement of existing infrastructure in the already developed area (where some people, albeit fewer, still live), or both. Consider how absurd it is that New York’s debts are higher, as a share of its residents’ personal income, than that of fast growing states in the Sunbelt, where infrastructure and public facilities must be added at a rapid clip to keep up with population growth.
Given our situation, what are the options?
· Keep borrowing until not even all the current revenues are enough to offset the interest expense on past debts, expecting that disaster will occur far enough in the future that it won’t matter to you. That is the current state and MTA policy. This is the path of least resistance for the next Governor.
· Stop the ongoing normal replacement now, expecting that the decline in public services, perhaps irreversible or able to reversed only at great expense, will occur in a future you don’t care about. That is Mayor Bloomberg’s policy as to the required rate of street repaving. We won’t notice the consequences until he is gone.
· Bite the bullet before we bite the dust.
I would choose the third option. And I would make sure that, as a matter of fair disclosure, people were told how much of their taxes and fees were going to spending that actually benefits them, and how much has been foisted on them from the past, in excess of what might reasonable be expected, given the national average. Doing so would allow a future administration to pay the piper without taking the blame. Rather than raising base taxes, “deferred taxes” would be collected that would be ascribed to past administrations and legislatures, and identified as such. Once people see how much they were burdened by the past, perhaps they might be less likely to sit back and allow a fiscal disaster for the future to occur. I would cut state and local taxes to the amount required to pay for spending people can see, and debt service at the national average. And I would impose an “excess debt surcharge” equal to the cost of servicing any debt in excess of that average.
For MTA debts, an “excess debt” surcharge could be tacked onto the existing MTA dedicated taxes, allowing those taxes to be used for actual ongoing normal replacement. Whether the base taxes, fares or tolls would have to be higher as well to fund sufficient ongoing normal replacement would be considered. All existing MTA debt, save for that used for actual system expansions that are built and operating, would be considered excess and funded by the surcharge. After all, actual system expansions such as the Second Avenue Subway and East Side Access have yet to be built, despite all the money borrowed over the years. It has almost all been ongoing normal replacement.
For water and sewer utilities, the debt service as a share of water and sewer charges nationally would be compared with debt service as a share of water and sewer charges locally. Any local excess would appear as a separate “excess debt surcharge,” and the base water and sewer charges would be adjusted downward accordingly.
For school districts, as well, school debts would be compared with total school revenues nationally and locally. If the local share were higher, that share of the debt service would be collected as a separate “excess debt surcharge” on the property tax bill.
The excess debt surcharge for other local government debts could be added to the property tax bill as well – Census Bureau data allows one to separate the national taxes used for schools, transit, water and sewer and other purposes.
The excess debt surcharge for the rest of state government could be placed on the state tax income tax bill.
During the late 1990s, at the behest of lobbyists for big business and big labor, the state cut its unemployment tax rate and increased unemployment benefits, failing to run up a large unemployment insurance fund for the next recession, as almost all other states did. When the recession occurred, the state borrowed money (off the books) from the federal government to pay benefits, and raised unemployment insurance taxes drastically to make up the difference. These added taxes should be collected as an “excess debt surcharge.”
All of these surcharges would be in addition to the “early retirement” surcharge, which I discussed in a prior post.
Once the “excess debt surcharge” and the “early retirement surcharge” were imposed, and base taxes, transit fares and other fees reduced, people would understand why their taxes buy so little in services and benefits in New York. Much of the money goes not to such benefits and services, but to the past. That would be the first change of a series of changes required to get us, and future generations, out of the situation they will otherwise be in. The first step is to tell the truth – to everyone.