The Capital Question: Financing New York City’s Future Infrastructure

Prepared by Carol O’Cleireacain, economist and former New York City Budget Director, as consultant to the New York Building Congress. This publication is based on Ms. O’Cleireacain’s annotated study: Public Capital Spending in New York City, A Discussion Paper for the New York Building Congress September 2003.

Introduction

The terrorist attacks of September 11, 2001 laid bare the myriad of connections between private, public, utility, water, transportation and other infrastructure that make the City’s economy and neighborhoods work. This fabric is an inheritance, created by centuries of investments, that needs constant renewal.

We think it is important to ask:

1. Who is in charge of public infrastructure spending decisions?
2. Are there enough resources to fund our current and future infrastructure needs?
3. Can we make our capital spending less exposed to economic and budget cycles and more self-reliant on sustainable revenue streams?

The Facts

• There are a multitude of government entities functioning in New York City. Taken together – as the facing chart illustrates – they spent $15 billion on capital infrastructure in 2002.
  New York City spent an historic $6.3 billion. The Metropolitan Transportation Authority (MTA) spent $5.7 billion – more than was expected in 2003 and 2004.
• More than $1 billion each was spent by the State of New York and the Port Authority of New York and New Jersey (PANYNJ). Both are expected to increase to $1.5 billion in the next two years.
• About $600 million was spent directly by the federal government (largely on housing and Army Corps projects), in addition to the large amount of federal aid spent by both the State and the MTA.

The City’s historic high spending on capital projects in FY2002 was followed by $5.7 billion in FY2003 – still significantly above the boom years. In the coming years, the City is projecting to return closer to that $5 billion annual level. FY2002 spending was almost equal parts infrastructure (environment and transportation), schools, and government operations (safety and courts, buildings, parks, housing, libraries, etc.). Environmental Protection, the largest component of infrastructure spending, consists of water mains, water supply, water pollution controls, sewers and equipment. Its predominant role is the result of growing Federal and State mandates and the fact that water and sewer related projects draw on a dedicated source of funding – water charges backing Water Authority bonds. Consequently, water and sewer infrastructure needs do not compete directly for funding from ordinary City general obligation debt, the level of which is restricted by the State Constitution.

Capital projects are multi-year and go through many stages of development. The City’s annual Capital Budget stems from the Ten-Year Capital Strategy (presented with the Mayor’s Executive budget in odd-numbered years), which lays out the goals, policy constraints, financing assumptions and the criteria for assessing needs. The Mayor’s current capital strategy (April 2003), FY2004-2013, totals $49.3 billion. Of this, 57% is infrastructure; 20% is for schools (K-12 plus City University of New York); and 23% is for government buildings (including courts), housing and development. The City classifies about one-third of the amount as maintaining a “state of good repair;” one-third as program “expansion;” and one-third “replacement.”

An Increasing Reliance on Debt

Most capital investment is paid for through borrowing. This spreads the benefits across generations of users, who pay the taxes, fares, tolls and fees to service the debt. It also increases the total costs of projects. The result is a large, growing dependence on debt.
New York City government covers virtually all (95%) of its capital budget by borrowing, almost exclusively through General Obligation (GO) debt backed by City tax revenues. The City’s outstanding debt (including the Water Authority) of more than $60 billion is scheduled to grow to $71.5 billion by the end of FY2007. The mayor’s Ten-Year Capital Strategy requires the City to borrow almost $47 billion, with New York water bonds responsible for about a third.

The MTA has increasingly turned to debt, backed by fares, fees, tolls and/or promised aid, as State and City contributions have withered. According to the State Comptroller, the State’s contribution to MTA capital programs has declined from 18% in the MTA’s first two capital programs, to 7% in the 1995-1999 program, to zero now. The MTA’s current (2000-2004) capital program of $18.9 billion is financed about two-thirds from debt and one-quarter from the federal government – twice the level of borrowed money as the
previous program.

Much of the State’s capital spending is directly supported by its own revenues, via GO debt, and through a large number of authorities. Grants from the federal government provided about one-third of State capital spending in FY2002 , primarily for highways and bridges, drinking water and water pollution control facilities, prisons and housing.

The Limits of Borrowing
There is a role for debt in the financing of long-lived assets. The City has relied on it, becoming the largest borrower in the municipal bond market. The MTA has also become
reliant on it. There have been constraints in the past and will be in the future.

Cost, of course, is an important constraint. With interest rates at post-World War II lows, costs must rise and savings from refinancing will disappear, regardless of credit ratings and market access. This is not a theoretical issue. One quarter of the current MTA capital plan (2000-2004) is financed by the $4.5 billion freed up by the 2002 debt restructuring, reflecting a strategy embarked on after the failure of the State’s November 2000 Transportation

Bond Act.
Borrowing capacity is another constraint. The State Constitution limits the amount of outstanding GO debt to 10% of the full value of real property; in 2002 that cap was $33 billion. In the late 1990s, as the City’s borrowing increased and the value of real property reflected the prior economic slow-down, the City’s debt neared the constitutional limit. So, the Legislature, in 1997, created the New York City Transitional Finance Authority (TFA), with borrowing authority backed by the City’s Personal Income Tax collections. Through the TFA the City effectively finances its capital program outside the constitutional debt limit. “Transitional” meant until the State Constitution could be amended. With that prospect unlikely, and the TFA’s current capacity of $11.5 billion headed for exhaustion by FY2005, the City and State now have to come to some agreement to extend the TFA. TFA debt, carrying a higher rating than GO debt, is cheaper (by about half a percentage point), has diversified the bond offerings that the City brings to the market, and has lowered GO debt costs by allowing better timing.

Ability to pay the debt is the ultimate constraint. For the City, debt service competes with all other services for tax dollars and represents a permanent commitment. According to the State’s Financial Control Board, the City has spent, on average, 16.5% of tax revenues for debt service over the course of the business cycle. In the past, when the budget year’s share of tax revenue used for debt service exceeded about 17%, the bond rating was threatened and the City warned to reduce borrowing.

With the FY2004 adopted budget, debt service consumes about 16% of tax revenues, rising to 17% in FY05. This assumes the State takeover of MAC debt service, saving the City approximately $500 million annually through 2008, which is not certain. The issue is being contested in the courts.

The MTA is struggling to afford its capital plans and raise its borrowing cap. The next five-year plan is not scheduled for release until July 2004. The MTA’s October 2003 Financial Plan, according to the State Comptroller, assumes: the 2005-2009 capital program grows to $26.6 billion (40% increase); bonds would fund 38% of the program, resulting in a doubling of debt service from 2003-2007; and debt service as a percentage of revenue would grow from 11.5% to 23.7%.

The MTA receives 80% of all federal transportation grants designated for New York City, but federal transit aid is under threat. Congress, at an impasse over reauthorization, has extended the Transportation Equity Act for the 21st Century (TEA-21) through April 2004. The Mayor’s Office has identified several large infrastructure projects at risk because they depend on federal transportation funds for completion. A further risk is that reauthorization will not result in a formula to distribute gasoline tax revenues that continues favorable treatment of New York City.

Conclusions & Recommendations
$15 billion of public capital spending in the City of New York represents a large investment. The level of spending will grow throughout the decade. As the economy improves and
technology advances, private spending will grow too, generating further demands for public infrastructure improvements. To meet this growing need, the City will have to look beyond traditional debt financing.

I. New dedicated revenues to support capital spending
The City’s transportation networks run on fares, tolls and fuel taxes. The City’s capital budget is modernizing the water and sewer systems thanks to water charges. In short, users of these services are bearing directly the costs of providing them. That lesson should be built on and replicated.

Streets and Bridges:
The Mayor has put future transportation pricing on the City’s agenda. Tolling the East and Harlem River bridges, at current pricing, would yield about $700 million annually, according to the Independent Budget Office (IBO). Technology has made toll collection efficient and environmentally feasible. This revenue stream, together with transportation aid, could remove the entire cost of maintaining the City’s bridges and streets (and the associated debt service) from the City’s budget, freeing up that amount for other priorities. The fiscal imperative, alone, makes a compelling case.

Sanitation:
A Sanitation Authority could charge for residential garbage and recycling collection, a service that residents now treat as “free.” The City faces large, looming costs to set up state-of-the-art marine transfer stations and containerization of the City’s collections. A per-head building fee could take the Department of Sanitation’s $1 billion operation, plus the annual debt service for the capital improvements, off
the City’s budget, freeing up equal resources.

Schools:
The Mayor has proposed a 5-year, $13.1 billion, facilities improvement program, which represents a City commitment of $6.5 billion, with an appeal to the State for an equal amount. Effectively, this represents $2 billion of new City spending (compared to the existing plan), half of which is pay-as-you-go capital ($200 million annually). This is an important step forward and the Mayor should be commended for it.

We encourage the School Construction Authority, in its development of facilities projects, to expand its consultation with the private sector. There is potential to treat unique or special facilities creatively. The use of lease financing and other public-private partnerships are one example. Combined use facilities, where schools share space with housing and/or stores offer another.

All Public Investment in New York City

2002 Total: $15 Billion*

New York City: The Single Biggest Player

Historically, the City’s capital spending has ebbed and flowed, with its ability to borrow (severely restricted in the period from 1975-1985) and its ability to pay debt service. During the recent economic boom (FY1998-FY2002), the City spent more than $25 billion on capital projects – averaging about $5 billion/year.

Transportation: Majority of Capital Spending

Transportation amounts to almost 60% of all public capital spending in the City. It is the entire mission of the MTA and the PANYNJ. More than half of the State’s direct spending goes to transportation. Of the non-federal players, City government in FY2002 spent the smallest share on transportation – just under $1 billion or 14% of its capital budget.

* This is a best estimate. Neither the federal nor state government can apportion fully their capital projects to the City jurisdiction . Our apportionment of State capital spending, from a variety of data sources, is based on historic patterns. Federal direct spending captures the major, large and obvious projects in the City, but it is likely incomplete. We have made every effort to avoid double-counting in the case of intergovernmental aid.

Rebuilding from the Terrorist Attacks

Much of this decade will be dominated by the need to rebuild lower manhattan. The Lower Manhattan Development Corporation (LMDC) is serving as the coordinator for the federal recovery funds appropriated to New York City after the terrorist attacks.

The LMDC is not a capital spending entity; rather it facilitates the planning and tracks the availability of funds to the spending entities – the MTA, the PANYNJ, the State and

the City of New York and private developers. This effort illustrates the number of players involved on the City’s turf, the overlapping jurisdictions, difficulties inherent in these processes, and the need for formal agreements.

The federal government is administering all funds through a single agency – the Federal Transit Administration – and has placed a special team in the City devoted exclusively to these projects. The Governor has a list of priorities recommended by a Transportation Working Group, composed of representatives of the State, City, MTA, PANYNJ, and the State DOT.

Already identified is $4.55 billion to reconstruct transportation in lower manhattan. Three major projects are in various states of readiness: $750 million is expected to be spent by the MTA to rebuild the Fulton Street Station, beginning in 2003. $2 billion is expected to be spent by the Port Authority to rebuild the PATH Station. The temporary station was completed and placed in operation in November 2003. $400 million is expected to be spent by the MTA for renovation of the South Ferry terminal, including some State DOT repair of West Street.

All of these projects will take a number of years. No agreement has been reached on the disposition of a remaining $1.5 billion of promised federal aid. In addition, the LMDC has authority to parcel out about $1.2 billion in federal Housing and Urban Development money, which has yet to be allocated.

Federal resources, added to the traditional City players, increase significantly the funds available for capital projects in the City in the near future, even if some substitution for local funds occurs.

The lesson of the LMDC has underscored the many actors who shape the look and functioning of the City and demonstrated the need to gain cooperation among them, to focus and set priorities, and to proceed through cooperation and consensus.