Fiscal Policy Brief
New York City Independent Budget Office

The Clean Water/Clean Air Bond Act of 1996:
Fiscal Impact on New York City

Introduction

On November 5, 1996, New York State voters will have an opportunity to decide whether to authorize the State to issue up to $1.75 billion in general obligation bonds for the preservation, enhancement, restoration, and improvement of the State's environment and natural resources. As part of its mandate to provide information and analysis to the public regarding fiscal and budgetary issues facing the City of New York, the Independent Budget Office (IBO) has prepared this fiscal brief. Its purpose is to enhance New York City residents' understanding of the proposal by providing a clear, nonpartisan discussion of the proposal and an assessment of its likely fiscal impact on the City of New York.

Established earlier this year pursuant to the New York City Charter, IBO provides expert, nonpartisan analysis to both elected officials and the public on relevant fiscal and budgetary issues facing the City. The IBO will prepare fiscal briefs from time to time on a wide range of issues potentially affecting the fiscal well-being of the City. This brief is the agency's first such report.

The IBO's principal findings and conclusions are as follows:

• There is a great deal of uncertainty regarding exactly which projects would be funded that benefit the City. The Act does, however, specifically authorize certain items of direct benefit to the City (e.g., Fresh Kills landfill closure, conversion of coal burning furnaces in schools). While this uncertainty makes it particularly difficult to determine the City's share of the Act's benefits, it also provides flexibility to respond to changing State and local needs in the coming years.
• While the City potentially stands to benefit from an infusion of a significant amount of dollars for environmental capital projects, City taxpayers would contribute significantly to payment of principal and interest on bonds issued for this purpose.
• The State would incur a general fund cost of $2.96 billion to pay off both principal ($1.75 billion) and interest ($1.21 billion) on bonds issued to finance the Act. Annual debt service would rise gradually to reach a peak of about $150 million in State fiscal year 2012-13. These debt service payments would require either less spending on other State budget items or more total State revenues.
• The use of bonds – as opposed to pay-as-you-go financing – is appropriate because it ensures that the costs of public improvements are borne by the beneficiaries of those improvements. If the proposal were to be defeated, the alternative of funding environmental projects with debt issued by New York City would incur the City's higher cost of borrowing and exacerbate capital budget pressures as the City approaches its debt limit.

Background

If approved by voters, the proposal -- which will appear as Proposition One on the ballot -- would make effective the Clean Water/Clean Air Bond Act of 1996 which was passed by the New York State Legislature on July 12, 1996 and signed into law by the Governor on August 1, 1996. The Act proposes to use the bond proceeds to make long-term improvements to the State's environmental infrastructure and natural resources. While the Act does not preclude the financing of projects that could presently be funded by other sources such as the Environmental Protection Fund (EPF),¹ the Legislature has expressed its intent only to authorize projects lacking an identifiable funding source.

Although the bonds authorized by the Act are general obligations of the State, the Act would dedicate the real estate transfer tax to a special fund for payment of principal and interest to holders of the bonds beginning in State fiscal year (SFY) 1997-98. The transfer tax is imposed on each deed at the time of transfer from seller to buyer. The State collected $185 million in revenues from this tax during SFY 1995-96.

Potential Projects of Benefit to NYC

There are major elements of uncertainty – and flexibility – in the Act. While New York City and other municipalities across the State would have access to the $1.75 billion for environmental capital projects, it is not possible to determine exactly which projects would be funded. The Act would require State agencies responsible for implementing the provisions of the Act to promulgate regulations detailing the project application process after the proposal is approved. Until such rules are made and municipalities apply for funding, precise projects – with a few exceptions – are impossible to identify.

Since spending is authorized over a long period of time, the Act affords the State Legislature some flexibility to fund projects as needed to meet changing State and local needs. The Legislature has appropriated and allocated $275 million of bond proceeds; the remaining $1.475 billion would be subject to future legislative appropriation and allocation process. Further, the Act would permit the Legislature to reallocate amounts targeted for the Hudson River Plan, the Long Island Sound Plan, and the New York Harbor Plan to other water quality improvement projects across the State.

Figure 1 details the five broad categories of expenditures contained in the Act.

A synopsis of the five categories and potential projects benefiting New York City follows below.

Water Quality Improvement Projects. Although the projects funded in this category are subject to change, the category includes a number of projects that could potentially benefit the City. The Act earmarks $200 million for State assistance payments to municipalities for the cost of water quality improvement projects intended to implement the Long Island Sound Comprehensive Conservation and Management Plan developed pursuant to the federal Clean Water Act. Further, $25 million is allocated for State assistance payments to municipalities for projects intended to implement the New York/New Jersey Harbor Comprehensive Plan, developed pursuant to the federal Clean Water Act. In addition, $25 million could be used for projects intended to implement the Hudson River Estuary Plan.

Safe Drinking Water Projects. This authorization would be used for the capitalization of a State Drinking Water Revolving Fund to finance drinking water infrastructure projects, including financing the State match for federal grants. These funds and related projects could help the City meet the new federal standards for safe drinking water. Statewide, a total of $265 million would be used to make loans for eligible projects and $90 million would be available for the State's share of the cost of an eligible project, with preference being given to eligible projects that would not be feasible without financing from the Drinking Water Revolving Fund.

Clean Air Quality Projects. This category includes funds available for initiatives related to air quality. Many of the approximately 280 schools in New York City which have coal-fired furnaces could expect to receive funds to convert to natural gas. Funds would also be available to upgrade the franchise bus fleet to natural gas.

Environmental Restoration Projects (Brownfields). Brownfields are abandoned industrial sites with varying degrees of contamination. There are approximately 100 brownfields in New York City. These sites could be eligible for funds from this category which would create a revolving fund to make loans available to cover 75 percent of the costs of restoring these sites. Localities would be required to provide 25 percent in matching funds.

Solid Waste Projects. This category includes $75 million earmarked for projects related to the closure of Fresh Kills landfill. The City could also be eligible for funds provided for infrastructure projects aimed at improving recycling capabilities.

Fiscal Effect

The Act would authorize the addition of $1.75 billion to New York State's capital budget. As shown in Figure 2, the funds would be committed over 10 years, with $275 million appropriated for SFY 1996-97. After that, expected annual appropriations (subject to legislative action) would be between $150 million and $200 million in SFYs 1997-98 through 2005-06. In contrast, bond issuance would stretch over 16 years, with $50 million issued in SFY 1996-97, and $110-$115 million issued annually over SFYs 1997-98 through 2011-12.² Blends of 10 year, 15 year, 20 year, and 30 year general obligation bonds (including some taxable bonds) would be issued over this period, with the last bonds retired in SFY 2041-42. Total debt service over a 45 year period would be about $2.96 billion ($1.75 billion principal and $1.21 billion interest).

Annual debt service would grow relatively slowly reflecting the fact that the bonds would be issued over a long period, rising by roughly $10 million a year until SFY 2012-13, at which point the combined debt service from all the projects funded by the Act would peak at around $150 million and then begin to gradually decline.³ By the same token, the extended issuance period means that bonding out the project expenditures would yield relatively modest near-term State general fund budget savings as compared with pay-as-you-go financing of the same projects. For example, debt service would cost about $47 million in SFY 2001-02, leaving $68 million more in the general fund than if that year's $115 million disbursement came out of the operating budget instead of the capital budget; by SFY 2007-08, rising debt service would roughly equal the amount that would have been disbursed from the operating budget if funding had been pay-as-you-go. In each subsequent year, debt service would exceed the amount that would have been disbursed under pay-as-you-go financing.

Using pay-as-you-go as opposed to capital financing, however, would not produce overall savings for the State. On a present value basis, there is no difference between $1.75 billion disbursed over SFYs 1996-97 through 2011-12 and $2.96 billion debt service stretched over SFYs 1997-98 through 2041-42. Moreover, the rationale of capital financing for projects providing a long-term stream of benefits is well established, because unlike pay-as-you-go, capital financing ensures that the costs of public improvement are borne by the beneficiaries of those improvements. Although New York State's high levels of outstanding debt and low bond ratings indicate a need to reform State fiscal management,⁴ it would be preferable to do so without cutting off capital financing for legitimate capital projects.

Net Fiscal Impact on New York City

The IBO estimates that the net fiscal impact of the Act on New York City taxpayers would be modest. While the City potentially stands to benefit from an infusion of a significant amount of dollars for environmental capital projects, City taxpayers would contribute significantly to payment of principal and interest on bonds issued for this purpose.

From the City's perspective, the cost of the Act is reflected in the amount of State general fund dollars otherwise flowing to the City that would be displaced by the increase in debt service. New York City currently receives approximately 45 percent of State general fund expenditures, including both intergovernmental grants and State spending that directly benefits the City.⁵ Thus, in SFY 2006-07 when debt service costs resulting from bonds issued under the Act would be about $100 million, other State funds flowing to the City would decline by roughly $45 million.

The net benefits the City would receive in return for its $45 million in costs depends on its share of the $115 million in bond project disbursements scheduled for SFY 2006-07. If New York City's share of the disbursements is also 45 percent, there would be no net fiscal impact on the City. If the share is 50 percent ($57 million), then the City's net fiscal gain would be roughly $12 million in that year. If New York City's disbursements share is 25 percent ($28 million), then the net fiscal loss would be $17 million. Such prospective net fiscal gains or losses would not be negligible, but they would not be large enough in any year to significantly impact the City's overall fiscal or economic well-being.

The fiscal impact equation changes slightly when one considers the costs the City might incur if there were not any State-level financing and New York City were instead forced to finance all required City-related environmental projects itself. This would be a strong likelihood given the stricter environmental standards mandated by recent amendments to the federal Clean Air, Clean Water, and Safe Drinking Water Acts. Because the City pays about 50-60 basis points (0.5-0.6 percentage points) more than the State pays on general obligation bonds, the City's debt service would be about 5 percent higher than the State's for a comparable bond issuance. Thus, if the City were to issue $800 million in additional debt,⁶ substituting City capital funding for State capital funding would add an extra $1 million to $3 million in debt service per year. Furthermore, because the City is approaching its constitutionally imposed debt limit, the need to incur debt for environmental projects could exacerbate existing capital budget difficulties, perhaps making it more difficult for the City to fund important projects involving schools, parks, roads, and bridges.

Footnotes