Posted by Doug Turetsky, April 12, 2013

Over the past few years, one of the biggest sources of city budget savings has come without any effect on municipal services. It’s involved no reduction in staffing. No cutback in program operations or number of New Yorkers served. The savings has come from debt service, the interest and principal the city pays on the money it borrows to build schools, fix roads, buy fire trucks, and the like.

Record low interest rates over the past few years have enabled the Bloomberg Administration to save a bundle. The cost to the city on money borrowed through variable-rate bonds has been relatively low, and the city also has been able to refinance some existing fixed-rate debt at lower interest rates than when those bonds were first issued. In IBO’s report on the Preliminary Budget for 2013, we estimated that the city had recognized $875 million in savings just on its variable-rate general obligation debt (the city also borrows large sums through an entity called TFA) due to lower than forecast interest rates in fiscal years 2010 through 2013.

Besides the $875 million in savings, there are two additional terms to focus on in that last sentence: “recognized” and “forecast.” When and how the Bloomberg Administration has been building these savings into the city budget is worth a closer look.

Take the city’s current budget plan, for example. The Mayor’s plan assumes interest rates on variable- rate general obligation bonds will be 2.45 percent through the rest of this fiscal year, which ends in June. In fact, as IBO’s Sean Campion points out, interest rates on these bonds (based on a Securities Industry and Financial Markets Association index) have been below 0.50 percent—about one-fifth of City Hall’s forecast—since April 2009.

And the Bloomberg Administration projection for this interest rate in fiscal year 2014? Try 4.15 percent. Yet there’s no indication this rate is poised to rise and the Federal Reserve has made clear its intention to keep interest rates low, at least in the near term.

While some might see the Bloomberg Administration’s interest rate projections as fiscal prudence others might view it as a bit of forecast sleight-of-hand.

Last month in IBO’s report on the Preliminary Budget for 2014, Campion estimated that if the city lowered its interest rate assumption for the rest of the fiscal year to a still-above-market-rate 0.30 percent for variable-rate bonds and issued no more of this debt in the remaining months of this fiscal year, debt service spending in 2013 would be $148 million less than currently projected. That savings won’t be recognized until late in this year’s budget cycle and will likely become part of the end-of-year surplus.

One way to look at these savings is as a cushion in case some revenue source comes in lower than expected, or some form of spending such as shelter costs for the homeless winds up costing more than budgeted. Having this type of savings tucked away in the budget plan can fill a last minute shortfall, although the city maintains a general reserve for just this purpose.

But another way to think about it is $148 million that could have been used elsewhere in this year’s budget. The considerably higher than likely projections of debt service enable the Mayor to “park” money out of sight and out of mind of Council Members and other elected officials who might want to use those funds for new or existing programs. With the much higher than likely forecast for interest rates in 2014, the amount of money that could be “freed up” in next year’s budget by a projection closer to recent trends would be even more substantial.

Despite the record low interest rates and the savings they ultimately produce in the budget, overall debt service spending under the Mayor’s budget plan continues to be one of the city’s fastest growing expenditures. Spending on debt service is projected to increase $1.7 billion from this year through 2017 (adjusted for the use of the 2012 surplus to prepay some of the 2013 cost), when debt service expenditures are expected to total $7.7 billion.

But if past is prologue, debt service costs will not grow by as much as in the budget plan. Still, costs will grow largely because of the plan for more borrowing. The Bloomberg Administration expects that the city’s total outstanding debt will grow from $68 billion this year to nearly $75 billion in 2017.