Home MTA Economics The Great New York State Bond Swindle

The Great New York State Bond Swindle

by Benjamin Kabak

When the MTA announced last week that it was hoping to refinance its debt, the Bloomberg News reporters who covered the story let slip an oft-overlooked fact. Because of an obscure provision at the end of the New York State Public Authorities Law, the MTA must pay to the state $8.40 for every $1000 it borrows through the sale of government-backed bonds. In other words, if the MTA borrows $1 billion, it owes the state $8.4 million.

When we actually stop to think about that, it seems a bit contradictory. Public Authorities exist, to some degree, to allow states to escape constitutionally-bounded debt limits. States are often banned by their founding documents from taking out too much debt, but public authorities, quasi-state entities, can avoid those debt limits. Thus, the MTA can become one of the nation’s largest debtors while the New York State books are technically clear of these debt obligations.

On the other hand, the state is charging the MTA for its own ineptitude. Why is the MTA looking to issue another few billion dollars in debt? Because the state hasn’t come up with a better funding scheme and is happy to put paying for today’s upgrades on the shoulders of tomorrow. In a way, then, the MTA is paying double: It has to pay this so-called “cost recover” fee now while paying down debt later.

In The Daily News today, Pete Donohue reveals a shocking figure: The MTA has paid $105 million to the state in debt issuance fees since 2006. That’s enough to fund the 2010 service cuts and restore bus service for millions of New Yorkers. “These unnecessary fees add to our total debt and strain our ability to provide bus and subway service,” Allen Cappelli, an MTA board member, said. “Our riders deserve relief so that this money could be used to provide restorations and improved service.”

Donohue has more:

In the last fiscal year, the MTA paid the state nearly $20 million in bond issuance fees, according to data provided by the state controller’s office. In the fiscal year ending in April 2009, the MTA paid the state more than $30 million. Since 2006, the MTA has paid $105 million in fees. But the agency borrowed extra money to cover the cost of those fees. That debt adds up to $6.5 million in interest payments annually, authorities said.

The MTA this year plans to sell an unusually large amount of bonds to raise new money and refinance existing debt. It potentially could wind up paying the state another $75.4 million in fees. MTA Chairman Joseph Lhota has asked the state budget director to grant a waiver lowering that amount by tens of millions of dollars.

State controller Thomas DiNapoli said the bond issuance fee also is “an issue for other public authorities that issue debt. As the State moves toward greater fiscal discipline, this is a practice that should be reviewed.”

That’s a rich one: Not only must the MTA pay these unnecessary fees, it also has had to borrow additionally money to pay the state to borrow more money. If you think about it for too long, it becomes a blackhole of terrible and irresponsible fiscal policies.

This is a broken system. The state won’t adequately fund transit maintenance and improvements, and in fact, the state is levying a penalty on the MTA for trying to do so. The authority can ill afford to see Albany remove another $20 million from its budget, but without reform of this law, straphangers will continue to pay for political mismanagement by and from those we continuously send to Albany.

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Rob February 2, 2012 - 8:19 am

Any idea of the original purpose of this cost recovery fee?

Bolwerk February 2, 2012 - 9:16 am

Stealing from the public, particularly NYC. When a protection racket becomes legit, it gets called a “state.” It’s actually rather surprising this is news.

Ian Turner February 2, 2012 - 9:49 am

It lets the state budget run on debt, without the debt showing up on the state’s books (because the debt is held by the public authority).

Christopher February 2, 2012 - 11:37 am

Well aside from the snarky answers. I think it’s probably because the MTA can’t issue it’s own debt. So it has to pay the state to issue it for it. That’s a flaw either in the constitution of NYS or the way the MTA is set up. That would be my guess from other states.

Bolwerk February 2, 2012 - 3:23 pm

I wasn’t being snarky.

al February 2, 2012 - 1:08 pm

The fees are .084%, which is probably the state passing on some of the overhead cost of issuing debt. However, the rate might have been set when the fixed overhead costs to handle debt issuance warranted such a rate. Now that the MTA needs billions for capital funding and wants to refi billions more, the state might be overcharging the MTA.

al February 2, 2012 - 1:09 pm

correction: 0.84% not 0.084%

Streetsblog New York City » Today’s Headlines February 2, 2012 - 8:59 am

[…] Ben Kabak: Bond Fees an Often Overlooked State Scheme That Stiffs Transit Users […]

Today’s Headlines | Body Local NYC February 2, 2012 - 12:32 pm

[…] Ben Kabak: Bond Fees an Often Overlooked State Scheme That Stiffs Transit Users […]

John-2 February 2, 2012 - 12:42 pm

The MTA could probably bid out the contract for a bond consultant or hire an in-house one, though in the latter case I’m not sure if there would be some sort of conflict-of-interest problem (the consultant is supposedly there to offer unbiased advice on the need to/feasibility of selling the bonds which being an MTA employee could compromise) and in the former you’d have to be careful that you don’t end up with some chicanery from firms looking to secure the right (and the consulting fees) to handle the MTA’s issuance of paper.

Chris February 2, 2012 - 5:04 pm

The MTA is already hiring advisors/underwriters to handle the offering. The state’s fee isn’t for any service; it’s in addition to those advisory fees, the underwriter’s discount, payments to ratings agencies, accounting and counsel fees, printing costs, etc. which the MTA pays for itself. And probably the state’s fee equals all those other items added together, so it adds significantly to the cost of issuing debt.

That said I don’t much worry about this… even if the debt issuance fee was 5 times higher, the MTA would still be a net recipient of money from state taxpayers, so one can hardly claim it’s being swindled.

Bolwerk February 3, 2012 - 8:14 am

It’s not the MTA that should be anyone’s concern. It’s New York City taxpayers who are being swindled. About the only thing this can do is send money from NYC – okay, maybe other parts of downstate a little – to Albany.

Links roundup—extended edition « Public Authorities February 2, 2012 - 1:52 pm

[…] The MTA pays the state a bond issuance fee of $8.40 for every $1,000 it borrows—and over the last 6 years these fees have added up to $105 million. [NY Daily News] [2nd Ave. Sagas] […]

Lee Zakow February 2, 2012 - 11:50 pm

Thank goodness Morgan Stanley is not involved. Do read Matt Taibbi’s stuff on Rollingstone/com about what MS did to a county in Alabama.

Albany issues a temporary reprieve for onerous bond fee :: Second Ave. Sagas May 2, 2012 - 11:29 am

[…] Earlier this year, as the MTA went about securing its capital future, an infuriating state law concerning the issuance of debt rose to light. Even as New York State has required the MTA to issue debt, it is also takes a fee of about 8.4 cents per every dollar of debt issued. Thus, if the MTA issues $1 billion in debt, New York State, the body that required the MTA to issue the debt, takes in $8.4 million. As the state has collected over $100 million from the MTA over the years, I called it the great bond swindle. […]


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