On The Right: State’s ‘back door’ borrowing

On The Right: State’s ‘back door’ borrowing

During the economic depression of the late 1830s, New York State almost became insolvent.  

The state defaulted on debt service payments on bonds it guaranteed for the building of capital projects, including the Erie Canal.

To prevent future governors and legislators from rashly issuing or guaranteeing debt, and burdening unrepresented future generations, a constitutional convention held in 1846 revised Article 7, Section 11 of the state’s Constitution to read: “no debt shall be hereafter contracted by or in behalf of the state, unless such debt shall be authorized by law, for some single work or purpose, to be distinctly specified therein.  No such law shall take effect until it shall, at a general election, have been submitted to the people, and have received a majority of all votes cast for and against it….”

For more than a century, those 64 words inserted in the Constitution kept Albany pols in check.  

But in the late 1950s, Gov. Nelson Rockefeller, frustrated by voter rejection of his bond issue schemes, found a way to get around the voters.  He created a shadow government in the form of authorities and agencies that have spent billions outside the state budget and without the approval or control of the legislature or the voters.

During his tenure, Rockefeller created 230 agencies and authorities that were empowered to perform “backdoor borrowing.”  

By the time he left office in 1973, Rocky’s numerous bureaucratic innovations would incur $12 billion in debt.

The most outrageous example of “backdoor borrowing” was the selling of Attica prison to the Urban Development Corporation in 1991.  

To help balance his budget, Gov. Mario Cuomo arranged for the UDC to buy the prison, using $200 million of bond proceeds.

To allow the UDC to meet the principal and interest payments on this debt, the state leased the facility and paid rent to the UDC. 

In effect, Mario Cuomo saddled the taxpayers with more than $560 million in payments over 30 years to get $200 million in one-shot revenues.

Gov. George Pataki beat Cuomo in 1994 running on a platform to end these financial abuses.  

However, he did not keep his pledge and continued the Rockefeller tradition of creative financing.  

During his three terms in office, state-funded debt jumped from $28 billion to $50 billion, causing annual debt service payments to be one of the state’s fastest growing budget expenditures.

To make matters worse, only half of the Pataki debt was actually dedicated to capital profits.  

The rest was used for one-shot “non-capital” assets to fund state budget deficits.

At that time, the state Comptroller’s office described this kind of borrowing as “the most egregious method the state uses to accumulate debt because it is money … borrowed through public authorities, whose actions tend to be hidden from the public eye.”

Since Pataki left office on January 1, 2007, it has been business as usual.  

In an interview with the New York Post in early March, state Comptroller Thomas DiNapoli pointed out that while voter approved debt has been declining and now stands at $3 billion, outstanding “backdoor borrowing” debt has hit $60 billion and will continue to grow.

“Back-door borrowing,” which DiNapoli referred to as “the issuance by public authorities of debt for which the state is expected to provide the funds for repayment,” does not include additional debt issued by government agencies for their own purposes.

The comptroller also pointed out that Gov. Andrew Cuomo’s proposed state budget for 2015-2016 is accelerating the use of the backdoor borrowing gimmick.

Cuomo, like his predecessors, is abusing state authorities to fund his operating budget.  

Sadly, he is rejecting his own critique of public authorities described in his 2010 book, The New N.Y. Agenda: “Accompanying the explosive growth in the Executive Branch of Government has been the emergence of New York’s so-called ‘Fourth Branch of Government’— public authorities … created primarily as a means to circumvent the Constitutional requirement of voter approval of state debt….  Many [Authorities] currently operate outside of their original purpose and engage in imprudent practices, such as excessive ‘backdoor borrowing.’”

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