New York’s PIT (personal income tax) bonds
Public authorities were created, in part, to circumvent provisions in the state constitution that limit the issuance of “state debt”—particularly the requirement of voter approval, which can be an arduous and unpredictable process. Because public authorities don’t have to comply with these debt restrictions, they can borrow money and complete projects faster, and they never have to worry about whether the voters will see fit to approve a new bridge, public housing complex, wastewater system, etc.
The state, of course, still finances a lot of public authority debt, but so long as the state never promises to pay a public authority’s debts for more than a year, it’s never considered “state debt” and doesn’t have to comply with the constitution’s debt restrictions. It’s a little gimmicky, but the Court of Appeals approved these back-door borrowing schemes long ago. It’s enough that the state could theoretically decide not to make an annual appropriation, even if there’s no realistic chance of that happening.
If there’s a point where this sort of constitutional evasion becomes too blatant to ignore, the New York courts haven’t found it yet. They’ve never considered personal income tax bonds, however…
Personal income tax bonds—or PIT bonds, as they’re known—are essentially loans guaranteed by the state’s income tax revenues (yes, your tax dollars). Of course, it’s not that simple, because bonds backed by personal income taxes would seem to qualify pretty easily as “state debt.”
PIT bonds get around this problem because they’re not technically backed by personal income taxes. Instead, they’re backed by annual appropriations connected to a bond fund that’s made up of 25% of the state’s annual personal income tax revenues, and if the legislature doesn’t make an annual appropriation, then it can’t access this money. Additionally, if the amount of money in the bond fund ever falls below what’s needed to pay the debt service on outstanding PIT bonds, the comptroller is required to transfer enough money to cover the difference from the state’s general fund, without the need for further appropriations.
PIT bonds haven’t been around for very long. They were envisioned by former governor George Pataki as a way to lower interest rates and reduce the cost of borrowing, and legislation authorizing them was enacted in 2001 (N.Y. State Fin. Law sections 68-a to 68-c, and 92-z). Since then, about $29 billion in PIT bonds have been issued by the five public authorities that are permitted to use them (the Environmental Facilities Corporation, the Dormitory Authority, the Housing Finance Agency, the Thruway, and the Empire State Development Corporation). This works out to about 40% of the state’s outstanding securities.
Because they’re backed by personal income taxes, PIT bonds have been given AAA ratings by Standard & Poor’s—higher than the AA rating given to the state’s own general obligation debt and higher even than for U.S. Treasuries. These ratings reflect the safety of PIT bonds, which were backed by about $9 billion held in the revenue fund last year, an amount equal to nearly 15% of the state’s total tax receipts.
But tax revenues are subject to some fluctuation, as evidenced by recent declines in the debt coverage ratio for PIT bonds caused by the recession. Former Assemblyman Richard Brodsky, who helped get important public authorities reforms enacted in 2005 and 2009, has noted that this could cause serious problems: “If things were to go wrong—for example, if the economy suffers, or demands for services go out of whack—the statute essentially gives bondholders a priority over taxpayers and citizens.” Similarly, former Lieutenant Governor Richard Ravitch explained that “if the state pledges all of its income tax revenue as payment to debt then there will be nothing left to pay for everything else. That’s why we have to strike the right median….”
More information on PIT bonds:
- Martin Z. Braun, Cuomo Budget Fixes Prolong New York Tax Debt’s Biggest Rally: Muni Credit, Bloomberg, Jan. 6, 2012
- Pei Shan Hoe, How New York State borrows billions against your paycheck, out of public view, The New York World, Dec. 23, 2011
- E.J. McMahon, A Risky Debt ‘Reform’, The New York Post, Feb. 11, 2001
- Lebenthal’s Municipal Bond Education Center, “Never Follow a Disclaimer With Yes, But….”