Bonds

Transcription below:
Chip Barnett:
Hi and welcome to another Bond Buyer podcast. I’m Chip Barnett and my guest today is New York State Controller Thomas DiNapoli. And we’re going to be taking a look at New York State, the challenges it’s facing and the opportunities that lie ahead. Welcome to The Bon Buyer Comptroller DiNapoli.

Thomas DiNapoli:
It is always great to have a conversation with The Bond Buyer and Chip. Thank you for inviting me to be on the podcast with you.

Chip Barnett:
Well, I’m glad you’re back with us again. So let’s dive right in and talk about debt. You recently unveiled a debt reform proposal and I was wondering why this is needed. Doesn’t New York State already have a debt cap?

Thomas Dinapoli:
You’re absolutely right. New York State has a debt cap that was part of the Debt Reform Act that was adopted back in the year 2000. But the challenge is that, by actions of the legislature and the governor, usually the context of the annual budget process, actions have been taken basically to put aside the debt cap, to not withstand the provisions of the debt cap. So there’s been a significant amount of debt issued outside of the cap because the cap is statutory, right? So when its statutory another act of the legislature can set it aside. So in effect we have a debt cap that from my perspective is meaningless. So that’s why we’ve talked about debt reform in the past. We updated our thinking on it in our proposal, which the fundamental of it is to have it be comprehensive, but also to be binding.

And by that I mean we’ve chosen to take the path of proposing debt reform via a constitutional amendment. So it would actually be an amendment to the state constitution, which would mean it can’t just be set aside by an act of the legislature. That also means that we’ll take more of an effort to actually have it adopted or enacted. But we think that it’s time, given the fact that New York by any measure, is one of the most indebted states in the nation, Moody’s ranks us second after California. It really is an issue that I think we have to focus on. In fact, just looking at some recent budgets nearly $18 billion in debt issuances have been enacted, excluded from the cap. So again, the basic point, Chip, is the statutory cap we have now has been rendered meaningless by the way we’ve managed debt. We need to take a fresh look at how we better control debt. One of the big points that we’re making is that the kind of backdoor borrowing through public authorities — that really has to be eliminated, there has to be more accountability to the public in terms of putting debt proposals before the voters. So it’s a comprehensive proposal in many ways, but we’re hoping it will spark the kind of conversation on managing debt at the state level that we haven’t done for a very long time.

Chip Barnett:
The state’s current statutory debt limit is 4% of state personal income. Wouldn’t your proposal for a 5% constitutional limit permit an even higher state debt burden?

Thomas DiNapoli:
Well, keep in mind the 4% that we have now, again is really not a meaningful cap because we have all this other debt that that’s not counted under the cap. So what we’re really saying is that we’re going to capture all the debt outstanding. We think of 5% number, while it may sound higher, in fact is a more realistic number based on what we have today, and there’s still would be some room and some flexibility, but it would be a hard cap of the 5% rather than the porous cap of the 4%, which we have now. So I think we settled on the right number, but I mean that is a fair question and that does come up. But by having a cap that in effect is binding it’ll be a real cap of 5% rather than a cap that says 4%, but in reality it’s not.

Chip Barnett:
I understand. Why is backdoor borrowing by public authorities bad? How would your proposal provide more accountability to voters and maybe establish responsible and sustainable debt practices?

Thomas DiNapoli:
Well, the way the state constitution was set up, the intent was for the voters to pass judgment on debt through bond acts. I mean, that was really meant to be the check and the balance, if you will, on not having excessive debt burden. But by using the public authorities as the vehicle to issue debt, what we call the backdoor borrowing, it really has evaded the scrutiny of the voters and that ultimate approval. So right now, when you look at state debt outstanding, about 97% of it, I mean virtually all of it, has been done by public authorities on behalf of the state. So I really think we’ve eviscerated what the state constitution had anticipated. Now, have there been some appropriate opportunities in terms of debt approval by the voters? Absolutely. In fact, last November, as you know, we had the Environmental Bond Act presented to the voters — it passed.

Sometimes people say, well, we got to do public authority barring because voters won’t vote in favor of debt. But I think in fact that’s a good example of if you explain it to voters, if it’s a responsible proposal, voters in fact will adopt it. And it was passed very by a very, very healthy margin. So what we would say is that go back to putting debt before voters to be issued by the state controller. Allow for, should it be required, multiple bond acts to be placed before the voters. I think this would be a much smarter way. And I should point out, Chip, we’re not saying that if it’s so-called conduit debt, if it’s debt that the public authority needs to issue for its own purposes, we’re not changing that. What we’re really saying is that the kind of debt that really should be before the voters, let’s have it be before the voters.

And I just think it’s a smarter way for us to manage our debt and frankly, a smarter way to control debt. And if it needs to be adjusted, I mean let’s say at a certain point 5% is not the right number. Again, what we would provide is that you have a mechanism, you go back to the voters. If there needs to be an adjustment for good purposes or good reason, maybe raise it to 5.5%, put that before the voters. So we are trying to come up with flexibility even within the context of a constitutional amendment.

Chip Barnett:
Why does New York need emergency debt powers?

Thomas DiNapoli:
Well, I mean there are certain emergencies that do happen, but under the state constitution there’s some very limited exceptions for emergency debt, debt to issue in the face of an insurrection as an example. I mean, despite the current crazy politics we’re going through, I don’t think anybody anticipates needing to borrow to deal with an insurrection. So what we would really propose to do is update the emergency powers to be more realistic for the challenges that we face today — terrorism, a public health emergency as we just went through or certainly a severe economic crisis. So what we would really say is we understand there may be instances where you do need emergency debt, where you don’t have the time to put it before the voters, but we think we really need to up update the list of what is allowed for in terms of defining an emergency and also provide some provisions in there that when you would declare an emergency for a debt borrowing that debt can’t be issued any more than three years after that declaration and that you would limit the maturity of the debt to just 10 years after it’s issued.

So again, we’re trying to provide flexibility, given the challenges of the times, but have appropriate guardrails around it.

Chip Barnett:
What are the prospects of getting this through the legislature or having the governor agree to this?

Thomas DiNapoli:
Well, keep in mind, as I said, we’re proposing this as a constitutional amendment, so it’s a different process than if you were just passing a law or a statute. So under our New York State constitution, this would require passage by two successive legislatures. So it would have to go through two cycles of an elected legislature and then it would have to be put before the voters. So obviously it’s a multi-year effort, which I know sometimes sounds a little daunting, but I still think that it is the smart way to go in terms of having it be a debt cap that’s real, to have a debt cap we have now that is always punctured it, it’s really rendered meaningless. So I think the constitutional amendment is the way to go. In terms of its prospects, so constitutional amendments always are a challenging process. I’ve gotten some phone calls from some legislators who are intrigued by our proposal and are interested in it.

I think right now the focus is more on getting the budget done for the coming year rather than dealing with this amendment. But I’m hoping that what we put forward will be introduced and will be considered. I mean, look, I was in the legislature for two decades, so I know that it’s very rare that any proposal survives as initially written. So we’re certainly open to negotiation and discussion. But I think the basic thrust of having a debt cap that’s real, that’s enshrined in the constitution, that is comprehensive in terms of assessing the debt outstanding, that provides an appropriate exemption, exceptions when need be, that restores power to the voters. I mean I think those are the essentials that I’d like to see in any debt reform. And we certainly would look forward to working with the governor and the Senate and the Assembly in advancing a debt reform proposal that will achieve those broad goals. And I’m hoping the specifics of what we laid out will be the basis for a solid proposal in this area.

Chip Barnett:
Ok, and we’ll be right back after this important message. And we’re back talking with New York State Comptroller Thomas DiNapoli.

Could you comment on the New York State budget, which you just alluded to — what are the challenges and opportunities the state is going to be facing this year?

Thomas DiNapoli:
Well, the governor put forward a very ambitious spending plan with this $227 billion state budget. There’s a lot in there, particularly building on past priorities — education, healthcare particularly, some new initiatives related to mental health, which obviously is a growing concern. The legislature’s going through their ways and means and finance budget hearings right now. There will be a lot of give and take. I am sure that we’re in an interesting time because we actually are very strong now in terms of state revenues. The Division of Budget is forecasting a current year surplus of about $8.7 billion. We still see strong tax collections, but we know there’s a lot of uncertainty in the economy and certainly many of the data points that are out there are somewhat contradictory and there’s still a view of many that we are headed for at least a short and hopefully shallow recession, although that’s not clear that that’s what’s going to happen.

So when you look at the long-term picture, the outyear budget gaps now are growing $5.7 billion for 2024-2025 growing to $9 billion the year after that. So I think one of the challenges with this year’s budget is that we’re in a strong position now because the recovery is continuing. Not that we’re where we want to be, but certainly compared to where New York was at the depths of the pandemic and what that did to state revenues we’re in much better shape. The federal money has still been of great benefit to state and local governments and New York City though that money is being spent down and certainly will not be there as we start to look at outyears. But the challenge I think for the legislature is not to spend more than they should, understanding that if you make commitments for programs that are going to be a recurring nature, we have significant out year budget caps that you don’t want to make even larger than the appear to be already.

One of the parts of the budget proposal that I’m pleased about is the governor is continuing our commitment to build up our reserve funds. New York has as a state, has not done as well as many other states in putting money aside for the contingencies of a downturn in the economy. So seeking to have more deposits to the reserve funds, accelerating that process trying to grow it to $19.5 billion dollars. I mean that really follows through on something that we’ve recommended for the Comptroller’s Office over a number of years. So having that kind of a cushion I think will help us should in fact we go into a recessionary time or if those outyear budget gaps get even larger. So we always take the perspective in the Comptroller’s Office that we don’t tell the legislature how to spend the money. That’s really the prerogative of the governor legislature.

We really more look at the big picture. So I guess my concern would be right now, Chip, is that we not approach the future assuming that we’re going to have a kind of money that we have right now. So be careful in terms of recurring spending that in fact we are not going to throw future budgets out of balance, because this time of year everybody has an idea on how to spend the money that you have and then spend some more and then you get into the debate about whether to cut other programs to make money for some new initiatives, do you raise taxes more? And of course what happens too often when you don’t want to cut programs, you don’t want to raise taxes, you end up borrowing. And that’s why we end up with the high debt burden that we have, which is why we advanced our debt proposal that we talked about earlier. So I know there’s a lot of pressure on the legislature. They got to get the budget done by April 1st, and this is a time of year in Albany where you have a lot of folks knocking on the door and looking for money. And especially when they see the numbers and that we’re in pretty strong shape right now. I think that’s only building even greater anticipation about being responsive to the spending requests that are out there. But the out years aren’t looking as rosy as where we’re sitting right now, so we need to be mindful of that.

Chip Barnett:
Looking at New York City, you’ve noted that the spending priorities have shifted during the pandemic. Could you explain ?

Thomas Dinapoli:
The pandemic changed the outlook for government just as it did for everyday New Yorkers. So certainly funding particularly for public health, for social services, for those were really impacted because of industries closing down and unemployment and obviously education, keeping the very important education programs going. So in the city at the same time was moving to expand 3K in the schools. So certainly the city’s priorities were shifted. One of the concerns we’ve identified repeatedly is, again, similar to the state, when you enact new programs, worthy as they may be, if they are of a recurring nature, some of the city spending was tied to the federal money that came in. The federal money, the relief money, is not recurring, so that there is a concern without year gaps for the city. Again, the city though has wisely built up its reserves, so I don’t want to make it sound like the city’s not well positioned, but they do have certain costs that weren’t anticipated.

Obviously the big debate that’s going on now with regard to asylum seekers and migrants, the mayor has been asking for more support, particularly from the federal government. He’d like some from the state too if that’s possible, but that’s not been budgeted for. Labor contracts are coming up. So given the inflationary pressures, you could be sure that the municipal labor unions are going to be looking for increases, so that’s certainly a pressure as well. And then of course, part of the debate with the state budget is the governor and her proposal is anticipating, I believe it’s about $500 million for New York City to contribute to the MTA to help the trains and the subways and the buses and mayor’s taken the position that that’s not something that he’s budgeted for. So there’s obviously a number of uncertainties out there that could impact the city’s budget and how they can fulfill the priorities that they have had to adjust to because of COVID.

Chip Barnett:
Turning back to the state for a second, you’ve just introduced a number of shareholder proposals as part of the New York State Common Retirement Fund’s ongoing efforts to increase corporate accountability on diversity, equity and inclusion. Could you just talk a little bit about that?

Thomas DiNapoli:
Yeah, I mean this has been always an area of concern, but I’d say an accelerated concern in the aftermath of the murder of George Floyd. We really felt that we needed to step up our engagement with the companies that we’re invested in a number of ways. So one of the new areas that we embarked on with Amazon in the recent past was requesting that they do a racial equity audit, which when it was voted on, was defeated, but got a strong vote. And then Amazon engaged with us in a conversation and actually agreed to do a racial equity audit that’s underway right now. It’s headed by Loretta Lynch, so it’s an independent audit, but we’re following up that we announced that we are refiling additional proposals in this regard at Universal Health Services, Brinker International, really asking for how they are making progress on DEI.

Chipotle is another example where we had been engaged with them where they announced that they will do that kind of third party audit like Amazon had done. We’ve had success with other companies trying to focus on this area. We also have some new initiatives focusing on healthcare equity, filing of proposals at Humana and Enlace Health. We’re really looking for an analysis of racial and ethnic disparities in healthcare outcomes and as always an interest and concern about issues of discrimination, sexual harassment at companies, the impact that has on morale, on workplace performance, on the rights of workers. And we continue to press companies to disclose their DEI policies, practices information on their workforce diversity, and this also follows through, these new proposals that we’re putting out or filing, a continued effort on our part with boards of corporate boards of directors. We’ve really been focused on diversity there. We’ve had success working with other institutional investors, particularly with having more women added to corporate boards. But we’ve also added a priority on racial and ethnic diversity.

In addition to gender and sexual orientation. So we keep a close eye on slates of board of directors that are presented and we vote against boards that are not diverse. So that continues to be an important part of our corporate engagement as well. And it is all from the perspective that we think that companies that are diverse from the top of their leadership and in terms of their workplace practices end up being more productive, more sustainable investment opportunities for us. Sparate from what we announced today, we also are continuing our focus on disability inclusion. Studies have shown that workplaces that are welcoming to people with disabilities perform even better in terms of bottom line. And we know from the numbers that unemployment is higher for people with a disability than those without. So we think there’s a large pool of untapped talent out there. So we encourage disability inclusion to be part of the workplace practices as well. So this will the whole DEI agenda broadly defined, will continue to be a priority for us as a shareholder.

Chip Barnett:
Do you have any last thoughts you would like to add for our listeners today?

Thomas DiNapoli:
I guess I would just mention a bit of good news. It’s been a challenging investment climate out there. I think all your listeners could relate to that. And we value our pension fund March 31st of every year. So we shortly be coming up to that date. Last year, despite the fact that the markets were starting to become a bit problematic, we actually had a very strong return of over 9% and our funded status was over 100% — at 102.9%. So we’ve always been a well-funded pension plan, particularly in comparison to other state retirement systems. But certainly when you’re over 100%, you could truly say you’re fully funded. Then you went into the challenges of 2022 investing and our estimated quarterly returns at the end of June 30th and September 30th, we had two down quarters. So I was very pleased that with our December 31st estimated numbers, we actually posted a positive return for that quarter about over 4.5%.

So we’re starting to see a bounce back, obviously after the first of the year the markets have been a bit up and a bit down, we’ll see how we end up on March 31st. But I was very pleased that it looked like, at least in the short run, we had somewhat turned the corner. So we go into this problematic investment environment as a well-funded pension plan. So I could certainly assure the retirees that they don’t have to worry about their pensions, but it’s been a much more challenging investment environment. But we’re counting on our diversified portfolio to get us through this challenging time, even if we have perhaps a negative year this year again, because of our strength, as we saw after the dor.com bubble burst and 9/11 happened as we saw after the great recession hit we certainly are capable of bouncing back rather quickly. And I’m very heartened by the fact that the December number came in much stronger than what we had at the end of September and the end of June. So we’ll see how we end up on March 31st, Chip, but let’s just say it’s been a little more challenging investment climate, but we’re steady as she goes in terms of our asset allocation, and I’m confident that we’re going to get through this tough time.

Chip Barnett:
It’s always nice to end with some good news.

Thomas DiNapoli:
It doesn’t happened often up in recent years. So we take the good news where it comes

Chip Barnett:
Exactly! Comptroller Thomas DiNapoli, thank you very much for being here with us today.

Thomas DiNapoli:
Thank you, Chip. It was my pleasure.

Chip Barnett:
And thanks to the listeners of this latest Bond Buyer podcast. Special thanks also to Jeanmary Wen-Wyst who did the audio production for this episode. And don’t forget to rate us, review us, and subscribe at www.bodbbuyer.com/subscribe. For the Bond Buyer, I’m Chip Barnett.

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