New York state voters raise debt cap for schools in small cities

BY SourceMedia | MUNICIPAL | 11/09/23 11:49 AM EST By Chip Barnett

New York State voters approved a ballot measure to raise the debt limit for schools in smaller cities, opening the door to more voter-approved bonds. The measure was approved by a margin of 64.5% to 35.5% on Tuesday, according to unofficial results.

The amendment to the state constitution removes a special debt limit in the state constitution for school districts in cities with under 125,000 people and brings it in line with the cap that larger school districts in New York must abide by.

Changes to the New York State constitution require certain prerequisites. This ballot proposition first had to be passed by two consecutive legislatures, before going to the public for Tuesday's vote.

Before passage, debt of 57 small city school districts were subject to a limit of 5% of the value of their taxable real estate, while all non-small city school districts have a 10% limit.

Some of the small city schools that will benefit from the new rules are those in Albany, Corning, Port Jervis and Mount Vernon.

"The approval of raising the New York State school district debt limit cap on smaller districts removes an artificially low barrier and brings consistency to how all school districts are treated in the state," Howard Cure, director of municipal bond research at Evercore Wealth Management, told The Bond Buyer.

"It also allows these smaller school districts to coordinate capital projects more easily and economically with less delays rather than being forced to stagger projects due to debt limits," he said.

"Passage of Proposition 1 is a tremendous outcome for students in small city school districts," said William Lynch, immediate past executive director of the New York State Council of School Superintendents. "New York State voters have provided for a fairer and more equitable system so that schools and facilities in small city school districts can be maintained and upgraded in a more efficient, timely and cost-effective manner."

Ahead of the proposal's passage, Gov. Kathy Hochul signed legislation last month that brings the small city school districts into line with the 10% cap, and will take effect as soon as the Board of Elections certifies the official results.

"The approval puts the onus of fiscal discipline back on the districts themselves," John Hallacy, founder of John Hallacy Consulting LLC, told The Bond Buyer.

"How much debt is too much debt is up to the voters," he said. "The beneficial aspect is necessary projects will get done."

The ballot proposal was backed by education advocates as well as union and elected officials.

State Sen. Shelley Mayer, D-37, said that in her Westchester district there are three school districts that will benefit from the change ? the White Plains City School District, the Rye City School District, the New Rochelle City School District.

"School districts borrow money under their debt limit to make the necessary improvements to their buildings," she said in a video supporting the measure. "The effort is to make the rules about borrowing consistent between small city school districts and non-small city school districts."

She said that in the past the 5% law was a brake on non-voter approved debt being issued by small city school districts. However, laws have changed in the meantime and now those districts must get an okay from voters at the ballot box before issuing debt or raising taxes.

A simple majority vote is required to pass a bond issue in New York State while a three-fifths supermajority is required to approve a bond that surpasses the constitutionally protected debt limit.

Approved proceeds for such bond issues include refunding outstanding debt; paying for as for additions, alterations, repairs or improvements to school district property; equipping libraries; erecting new buildings; building garages for school buses; paying teachers and other expenses of the school; and paying any court ordered judgments.

Robert Breidenstein, executive director of the school superintendents' council, told The Bond Buyer that he was very appreciative of "the collective efforts of our valued partners in education across New York State" to get the issue before the voters.

"I am very pleased by the outcome," said Robert Lowry, deputy director of NYSASCSD. "It appears to have passed in all counties of the state ? and by a wide margin."

He noted that an almost identical amendment that was proposed in 2003 was defeated, partly due to the fact that the ballot language was seriously flawed, by making it appear that the small cities would not have any debt limit at all, which was not true.

He said this year's measure was all about leveling the playing field for these smaller city school districts and that message was clear and on target.

"This time we emphasized over and over again that this was not about providing special treatment to small cities," Lowry told The Bond Buyer. "It's the just opposite. It's assuring that they get the same treatment as suburban and rural districts, which have a 10% limit set by law in the constitution and on top of that they are able to reduce the amount of debt that counts toward the limit by any applicable state aid."

This had led to a wide disparity between the two types of districts.

"The small cities typically serve higher poverty student populations," he said. "And one effect of the lower limit was to push the smaller cities toward breaking up projects and doing them over the long term that tends to increase costs for similar work."

He said this corrects an inequity that was partly a relic of a time when there were many more differences between the rules for small cities and rural and suburban districts. He noted that it wasn't until 1997 that small city school districts were required to put their budgets up for a vote.

The measure "is an important move towards parity and justice statewide," Jay Lebrun, superintendent of the Plattsburgh City School District, wrote in an opinion piece in the local Press-Republican newspaper. "In some regions of our state, this correction is critical to addressing equity issues."

Elizabeth Biggerstaff, deputy executive director of NYSASCSD, told The Bond Buyer that "57 small city school districts now have the same fiscal tool in their toolbox that their neighbor districts use to address needs such as structural improvements and safety upgrades."

Separately, voters on Tuesday approved a ballot proposition that gave a 10-year extension to the authority of counties, cities, towns and villages to remove from their constitutional limit any debt issued for the construction of sewage facilities.

The vote was 68.1% to 31.9%, according to unofficial results.

While the state constitution limits the debt counties, cities, towns and villages can incur, it doesn't include debt for sewage treatment and disposal construction projects. The sewer debt exemption expires on Jan. 1, 2024, which will now be extended until Jan. 1, 2034, once the results have been certified by the Board of Elections.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.