View all Articles
Commentary By Nicole Gelinas

Creative Credit

Cities, Economics New York City

ALBANY is once again reminding New Yorkers that "creativity" is a dirty word when wielded at budget time.

This year, state lawmakers are focusing their creative powers on conjuring up money for school construction. Their inventive solution to a straightforward issue has poor implications for the future of the state's - and the city's - fiscal health.

State Assembly Speaker Sheldon Silver and Senate Majority Leader Joe Bruno have signed off on a plan to provide Gotham with $11.2 billion over the next several years to build and repair public schools.

But even in this flush year (with the state running a surplus), the lawmakers have reached for a gimmick to fund the spending: massive back-door borrowing that's not approved by the voters, as state debt is supposed to be.

The first part of Albany's schools solution is "Excel," the "Expanding Our Children's Education and Learning" program. But "expanding our children's debt and tax-paying" is more like it. Albany will authorize one of its famously unaccountable public authorities, the Dormitory Authority, to issue $2.6 billion in new debt: $1.8 billion for city schools, and $800 million for other districts in the state.

Albany could simply give Gotham and other districts the $2.6 billion - the state has a $4 billion surplus. But then lawmakers would have to cut back spending in other areas. So, instead, Albany will borrow all of this money and pay it back over 30 years - meaning nearly $200 million in extra costs each year from now until 2037.

New Yorkers already understand that this is penny-wise and pound-foolish: They voted down a similar proposal nearly a decade ago. That's why Silver and Bruno are trying to sneak this one through the back door, via the public authority rather than regular state debt.

But back-door borrowing is business as usual in Albany - it's the second part of the school-construction plan that's truly creative: Albany will do its backdoor borrowing via the city, by allowing Gotham to add $9.4 billion to its own borrowing.

The twist is that the city will use state money - the money the state might normally give the city each year to fund school construction - to pay down about half of that new long-term debt. In other words, it goes on the books as city debt - but for practical purposes, half of it will be state debt.

This creativity has a precedent: It's similar to how the state continues to pay back all of Gotham's bankruptcy-era debt, which dates to the '70s. But it also sets a massive precedent of its own: It changes how Albany will provide school-construction money for the next 30 years.

In the past, Albany has only provided such aid in years when it had the spare cash to do so. Under the new plan, it will have to do so even in years of budget crisis, because it will need to come up with about $500 million each year to pay the fixed debt costs on what is effectively $7.3 billion in new state borrowing (including the Dormitory debt).

This is a long-term obligation on the state's part, so it should be subject to voter approval - but it's not.

Moreover, it's a good bet that other school districts will soon clamor for the same deal - likely representing another massive increase in state debt.

But why is all this money bad for Gotham?

First, the city will be responsible for paying down its own $4.7 billion in new debt. The deal effectively gives Gotham the right to push up its own legal limit on issuing bonds - hardly what the debt-laden city needs.

Second, the state match represents an unprecedented cash windfall to a city that has historically run its school-construction projects irresponsibly.

The new money will about fund Gotham's five-year schools plan - if the city can keep costs under control. That's a big if: On one large-scale capital plan in the 1990s, the city had to cut its work scope by about 30 percent, because projects overran their budgets.

Yes, Mayor Bloomberg has reformed the school-construction agency, but it's too soon to tell if those reforms will take: In November, six current and former employees of the agency were charged with taking bribes from contractors.

Third: It's great today that Albany will devote 30 years' worth of its regular school-construction aid to Gotham to fund projects over the next five years or so. But come 2012 or so, when the five-year plan is exhausted, Albany will still face another quarter-century of paying the debt costs for it. But Gotham likely will need more school-construction aid by then; where will that money come from, since the state still will be committed then to paying the debt it's taking out today?

The Legislature is likely to vote on the school-construction deal as part of the state budget - which means this heedless financing proposal soon will be in the hands of Gov. Pataki.

The governor should ask himself: The Empire State already has nearly $50 billion in debt. Does Pataki really want to leave office having added to that burden by nearly 15 percent, with one stroke of his pen?