New York State to Hit Debt Limit Without Action, Budget Report Says

New York's enacted capital budget report for fiscal 2010 contained few surprises when it was released yesterday, but it was back to the future on projections that the state would exceed its statutory debt limit by fiscal 2013.

After officials disclosed last year that projected falling personal incomes would cause the state to surpass its debt limit in 2013 by $800 million, Gov. David Paterson proposed a budget that closed that gap.

Yesterday's report indicated that the cap would be breached again that year, this time by $314 million at current projections, because personal income has fallen more sharply than previously projected and is now forecast to grow at a more modest rate.

"In order to stay within statutory debt limits, the state expects to recommend further reductions in its bond-financed capital programs in the 2010-2011 executive budget," the report said.

New York's debt cap was established in 2000 and is still being phased in. The limit is based on ratios related to total personal income in the state and all-funds receipts. Projections for personal income in the state in fiscal 2013 has fallen to $1.02 trillion from $1.04 trillion in December.

Standard & Poor's analyst Robin Prunty said that the prolonged revenue decline has caused some states to readjust their debt affordability projections and that was not a credit concern at this time.

"It's really not unique to New York," she said. "They have some time to react."

The capital budget report also detailed some of the enacted changes to how the state will market the $5.9 billion of state-backed debt it expects to sell in the current fiscal year to partially finance $10.6 billion of capital spending. New York's fiscal year began on April 1.

One change is how the state plans to sell bonds for mental health facilities projects. The Dormitory Authority of the State of New York will continue to sell bonds for those projects but is now authorized to do so on the state's higher-rated personal income tax credit.

"The interest rate differential - spread - between these credits exceeded 100 basis points in March 2009, consistent with the state's experience over the past six months," the report said.

Standard & Poor's rates New York's PIT credit AAA, citing a stronger pledge on the personal income tax compared to the mental health bonds, which are subject to state appropriation and rated AA-minus.

Fitch Ratings assigns its AA-minus rating to the state's PIT credit and A-plus to the mental health bonds. Moody's Investors Service does not rate new PIT issues.

New York plans to sell $520.3 million of bonds for mental health facilities in the current fiscal year. The report suggests that the state could refinance $560 million of variable-rate mental health bonds with expiring liquidity facilities on the PIT credit, but does not provide details.

The greatest sectors of bond financing in the budget are transportation, with $1.6 billion, education, with $1.4 billion, and economic development, with $1.2 billion.

Capital spending in fiscal 2010 will grow by $1.5 billion compared to the previous fiscal year, of which officials attribute more than $1 billion to increased federal aid under the American Recovery and Reinvestment Act.

The state also disclosed that from March 2008 through March 2009, it terminated $2 billion of swaps, including $565 million that automatically terminated when Lehman Brothers Holdings Inc. went bankrupt in September. More swap terminations could be forthcoming as the state has appropriated $250 million for a menu of debt-related expenses including swap termination costs.

New York's total outstanding debt will rise to a projected $54.5 billion, a $2.8 billion increase from the previous year. Debt service in fiscal 2010 will rise to $5.8 billion. The state also plans to retire $3.1 billion of debt.

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