STATE BUDGET INFO

Explanation of State Capital Funding Package for NYC

In order to better understand the state’s CFE capital funding package being provided outside of the state’s school aid formula consider the following fictional examples:

Current Capital Funding Practice of NYS

Background: A fictional family of six, including four kids, currently lives in a one-bedroom condo. The family is supported by kind Aunt Bea.  Years ago, when the family only had two children, Aunt Bea agreed to pay half the mortgage and other family expenses, such as food and clothing. At present, they pay the mortgage then send the proof of payment to Aunt Bea along with grocery and clothing bills.  Aunt Bea sends them a check to reimburse half of their mortgage payments and whatever extra she can afford up to a limit of one third of what she earns from an investment. As the family grew from two kids to four, the "extra" that Aunt Bea sends does not really cover half the costs of the mortgage, food, and clothing. The family treats her reimbursement as part of a lump sum contribution to their well being that no longer really supports half of their living expenses.

Aunt Bea represents New York State. The fictional family represents New York City. The reimbursement practice represents the current Building Aid formula. Every year, the state limits any increase in school aid to the City to a 38 percent share of the total increase in the total funding for school aid formulas. If the City receives more in the Building Aid formula, it will not increase the total amount of school aid going to New York City.

Mechanism 1-- DASNY Grants

Assumptions: The parents are in the market for a new home and realize they can't afford to buy anything. They share their problem with Aunt Bea.  Aunt Bea suggests they look for another condo in their building to expand living quarters-- the kids are getting older and need more space.  The apartment next door goes on sale. They ask Aunt Bea to pay for it 100%. She gives them a check for $400k.  Aunt Bea applies for and receives a loan for $400K to pay for the additional condo apartment. The parents knock out a wall to join the two apartments together.  They now have three bedrooms, an eat-in kitchen and two full baths.

Aunt Bea represents New York State. The second condo apartment represents the 2005 and 2006 scheduled projects in the Five-Year Capital Plan. The family with growing needs represents NYC. The lump-sum payment represents the DASNY grant from the state.

Mechanism 2-- TFA Bonds

Assumptions: A condo on the other side of the apartment becomes available. The fictional family wants to buy it in order to again expand its living quarters-- they want a bedroom for every child.  They share this idea with Aunt Bea.  Aunt Bea suggests they buy it, only this time THEY must take out the mortgage.  In light of the fact that the family income is only $60k a year, Aunt Bea offers to pay half the mortgage on this additional apartment.  When they go to the mortgage lender, their salary and credit rating do not qualify them for a mortgage for $400k. However, they reason with the lender that because Aunt Bea is going to guarantee half of the mortgage, the family's resources should be evaluated as though they were qualifying for a mortgage of $200k.  The lender agrees to give them a mortgage so long as Aunt Bea is the guarantor for half of the mortgage.

Aunt Bea represents New York State. The additional condo apartment represents the rest of the Five-Year Capital Plan. The lender represents TFA and the relationship with bondholders.

End of Story

The family now has a five-bedroom condo apartment through three funding mechanisms: 1) reimbursement by Aunt Bea for half the ongoing monthly mortgage costs of the first apartment, which in reality is governed by the family's getting only getting a share of Aunt Bea's investment income; 2) payment of $400K from Aunt Bea for the second apartment made possible by a loan that Aunt Bea must pay; and 3) the family's mortgage of $400k for a third apartment, made possible because Aunt Bea has guaranteed to the lender that she will pay half the mortgage costs.

State Capital Funding Package

On Monday, April 24, 2006 the Governor witnessed by and the Mayor, Speaker Sheldon Silver, Chancellor Joel Klein, Borough President Marty Markowitz, Senator Frank Padavan, and Senator Marty Golden, signed the budget law that would guarantee New York City up to $6.5 billion in state aid to cover half of the cost for the Five-Year Capital Plan for school construction.  Estimates of the benefit of the budget agreement range $11.2 billion up to $13.0 billion.  The historic funding arrangement is a two-part deal that comes close to a remedy for facilities problems raised by the CFE trial hearing, but stops short of funding the full CFE BRICKS proposal.  The two funding mechanisms are explained below.

The first mechanism: The payment of $1.8 billion through the Dormitory Authority of the Sate of New York (DASNY) grants is very generous because the state usually only reimburses school districts for payments of interest and principal for bonds. The DASNY grants are essentially upfront payments with no outlay or hidden cost to New York City. Starting in FSY 2007 the state will make available to New York City grants of up to $1.8 billion through bonds issued by the NYS Dormitory Authority.

The second mechanism: For facilities expenses to be incurred beginning FSY 2008, the state has provided NYC additional bonding ability through the city's Transitional Finance Authority (TFA). The additional bonding by the Transitional Finance Authority is authorized in an amount up to $9.4 billion to cover only the costs and expenses associated with the construction of the schools approved by the New York City Council in July 2005. 

The second mechanism includes Building Aid reimbursement for half of the amount of TFA borrowing-- $4.7 billion. The reimbursement is not new and would have happened anyway.  Historically NYC General Obligation bonds backed by city property tax revenues have financed school construction and major repairs. Mayor Giuliani created the Transition Finance Authority (TFA) in 1997 because New York City had exceeded the state constitutional debt limit for localities of 10% of assessed real property value.  The Mayor and fiscal experts argued that state constitution debt limit was archaic and shortsighted since it was written before the creation of municipal sales tax and a city personal income tax. Therefore, the constitution did not take into account all of the revenues available to NYC to pay back bondholders.  The Transition Finance Authority bonds are secured with personal income tax revenue and the sales tax revenue not already encumbered by Municipal Assistance Corporation bonds, which refinance the 1976 fiscal crises debt. 

The two funding mechanisms are tied to the Five-Year Capital Plan. The first is tied to the Five-Year Capital Plan as approved by the City Council in July 2005 without any changes. The second mechanism is more loosely tied to the Capital Plan as it permits changes and modifications to the year-to-year allocation of projects, because in reality New York City will need to make adjustments to the timing and number of projects put out to bid based on availability of sites as well the receptivity of the market to the numerous RFPs that will be issued.

The costs authorized with the additional bonding power for facilities include:

• Approved costs of new school construction
• Reconstruction
• Purchase of existing structures
• Site purchase and improvements
• Furnishings
• Professional fees

The two funding mechanisms combined appear to provide the same amount of money as the BRICKS proposal, however, the BRICKS proposal contains more building projects than are listed in the current Capital Plan.  The most remarkable aspect of the state funding mechanisms is the unprecedented grant of $1.8 billion.

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