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"Never Follow a Disclaimer With |
Not a debt of the State…not liable thereon…not payable out of any funds other than those pledged therefore…neither the faith and credit nor taxing power of the State is pledged to payment...the Corporation has no taxing power…the bonds are not secured by the Project or any interest therein…In addition, the State has no continuing legal or moral obligation to appropriate money for payments due under any financing agreement. Earlier this month, these superlatives echoed in the rafters, as institutional and retail brokers pitched a $1.1 billion dollars worth of New York State Personal Income Tax Revenue Bonds issued by the New York State Urban Development Corporation. The bonds are an ingenious mechanism for entrapping the State’s payroll withholding taxes, until an amount equal to 25% of the estimated monthly NYS personal income tax receipts (or an amount of $6 billion, whichever is greater) have been deposited into a revenue bond tax fund for payment of debt service, a.k.a. “ the financing agreement payments.” Receipts of $8.9 billion for making the financing agreement payments– 4.4 times maximum annual debt service – were available in the Revenue Bond Tax Fund to meet the debt service requirement on all $20.75 billion PIT bonds that were outstanding on November 1, 2010. Despite the bold face appearance in the Official Statement seven times (7, count ‘em, 7) that PIT Bonds are not a debt of the State, despite the appropriation requirement which the Legislature is under no legal or moral obligation to make, Standard & Poor’s rates the State’s PIT bonds AAA, one full notch higher than the AA it assigns to New York State’s own general obligation bonds. A reasonable investor may ask, "Why does the State of New York make such a big deal about the personal income tax bonds not being debt of the State or payable through State taxes?" After all, the official statement for PIT Bonds makes it abundantly clear that their holders have first dibs on the State personal income tax for their payment. Although PIT Bonds have some of the characteristics of direct State debt through legislative enactments, agreements, pledges, requirements, and contractual relations among the parties, they do not enjoy as security for payment the time-honored "full faith and credit pledge" of State debt referred to in the State Constitution. However, from a credit quality standpoint, PIT Bonds are barely distinguishable from direct State debt. They are, at bottom, synthetic general obligations of the State, or android G.O.s. PIT Bonds exist because direct State debt, with limited exceptions, has to be approved by the voters. Given the high casualty rate of bond propositions brought before the voters, as the Constitution requires, the correctional facilities, youth facilities, court facilities, the computer chip research and development center, being financed by the Urban Development Corporation with PIT bonds, might not see the light of day or even make it to the ballot. The restraints on incurring debt in New York State’s Constitution, written in 1938, are a night-and-day remove from today’s progressive activism for government to provide and fund facilities for the blind, the mentally ill, the infirm, those seeking safe and affordable housing, environmental protection, and the quality of life people demand of Government, or have demanded up to now. The problem with any gesture of State largess is that the 1938 Constitution left in place the hard-nosed restraints on contracting State debt, first imposed in the Constitution of 1846 in popular revulsion, arising from the Panic of 1837, to the defaulted canal and railroad bonds backed by State guaranties. (For example, no debt could be issued over $1 million without a vote of the people.) Rather than fix the tight fisted debt provisions that followed in the 1938 Constitution, the Legislature has seen fit, enabled by a permissive judiciary, to construct financing regimes which mimic State direct debt but deftly avoid violating the Constitution. To build an android G.O., direct full faith and credit State debt must be disclaimed. The prominent features of G.O. debt are (i) debt service payments payable automatically without the need for appropriation in the year of payment, and (ii) taxes levied or imposed without limit as to rate or amount to make the payments. To make PIT Bonds not G.O. debt, the debt service payments must be appropriated each year debt service is payable. PIT Bonds grew out of the shotgun marriage of the Constitution of the State of New York and the Laws of Practicality. Would the legislature ever not appropriate the funds to pay debt service on a child of its own creation? Let the philosophers debate “would they? Could they?” The enabling law for PIT Bonds puts a gun to the head of the Legislature and dares it not to appropriate, by requiring that 25% of the personal income tax estimated to be collected each month be escrowed for PIT Bond debt service with the escrow remaining in place until debt service is appropriated. In effect, personal income taxes are trapped outside the State general fund (where they are supposed to G.O. for Government operations) until and unless the Legislature appropriates (referred to by the Court of Appeals in a wonderful understatement as "a powerful incentive”). The enabling act prohibits the use of the money in the Revenue Bond Tax Fund for any other purpose (except for payment of debt service, if necessary, on State general obligations) until all the required financing agreement payments of the PIT Bonds have been made. And in case there is still a problem herding the money to pay PIT Bond debt service (once it has already been appropriated), the State Comptroller is required to transfer money out of the State general fund without appropriation to pay PIT Bond debt service. Hence, the android G.O. An official statement is an amazing trove of everything you could conceivably want to know about investing in a bond, that a fast talking cold caller might not think to mention in the blood rush of selling. And here I now find myself talking faster than I like about a bond I love. And ignoring the one thing we all should remember, never follow a disclaimer with “Yes, but…” Guest Authors: Alexandra Lebenthal with a valuable assist by Kenneth W. Bond Alexandra Lebenthal is the President and CEO of Lebenthal & Co., LLC and James Lebenthal is the Director of Public Affairs for Lebenthal & Co., LLC.
Reprinted with permission of Ipreo |
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