Tax-cap raises municipal bonding issues

ALBANY -- Recently filed documents show that lawyers representing municipalities preparing to borrow money are raising questions about whether New York's new property-tax cap will face legal challenges.

In Great Neck's latest bond prospectus, lawyers for the village called it "likely" that the tax cap "will be subject to judicial review to resolve constitutional issues." Bond filings in the last two weeks for Greene County, the city of Buffalo and other municipalities raised similar questions.

Gov. Andrew M. Cuomo's administration said the tax-cap law had been thoroughly reviewed by counsel and that questions about it withstanding legal challenges were without merit.

At issue is a clause in New York's constitution that says the State Legislature cannot restrict a local government's power to levy property taxes to pay debt. At stake: billions of dollars of bonds previously issued to cover projects such as renovating government buildings, and the possibility that municipalities might have to pay higher interest rates.

No guarantee for revenue

Previously, municipalities could guarantee they could always raise property taxes as much as needed to repay bonds. Now, Suffolk County Chief Deputy Comptroller Christina Capobianco said the county would change its wording on new bonds because "that's no longer the case."

Just over two weeks ago, Cuomo and state legislators approved the state's first property-tax cap. Effective in 2012, the law limits municipalities and school districts to raising tax levies to 2 percent or the rate of inflation, whichever is less, annually. Supporters said the cap, which does not apply to New York City, was needed to halt endlessly spiraling property-tax hikes. Though spending on school capital projects is excluded from the cap, municipalities' debt is not.

The Cuomo administration said the cap did not violate the constitution because municipalities still have to pay their debts, even if that means cutting services.

"No honest or informed reading of the law would conclude that there is a reasonable challenge," Cuomo spokesman Josh Vlasto said. "This cap does not impact the constitution or current bonding agreements."

Robert Ward, deputy director for the Nelson A. Rockefeller Institute of Government, said the New York constitution grants the legislature broad authority to regulate local governments' financial affairs.

"Limiting the amount of overall property taxes does not necessarily mean limiting the dollars that are available for one particular type of expenditure such as debt service," Ward said.

Concerns have 'merit'

But New York University School of Law professor Clayton Gillette said concerns about bonding agreements have "substantial merit."

"The failure to create an exception for outstanding indebtedness . . . appears to fly in the face of the state constitution," Gillette said. He added that such limits also could run afoul of the federal contracts clause.

Cities, towns, villages, counties and taxing districts included in the cap had approximately $18 billion of outstanding bonds in fiscal 2009, the most recent year available on the state comptroller's website.

"The bond market has expressed some concerns about the cap and the ability for local governments to have the revenue to pay off their bonds -- which could very well lead to higher interest rates," said Peter Baynes of the New York Conference of Mayors.

Richard Tortora, president of the firm Capital Markets Advisors, called the tax-cap law a "bit of a game-changer." But he said the impact of the cap so far hasn't translated into higher borrowing costs.

Rating agencies that evaluate governments' credit quality have said they are aware of the constitutional issue and are reviewing its potential impact.

If the cap faces a challenge on constitutional grounds, the plaintiffs would likely be either investors who believe their bonds lost value because of the property-tax limit, or municipalities that argue the constitution trumps the new law, experts said.