INTEREST RATE EXCHANGE AGREEMENTS AND VARIABLE RATE EXPOSURE

Article 5-D of the State Finance Law authorizes the use of a limited amount of variable rate obligations and interest rate exchange agreements (“swaps”). The Statute was implemented as a debt management tool to minimize debt service costs, diversify the debt portfolio and match variable rate debt exposure to variable rate earnings on the State’s short-term investments. Issuers of State-supported bonds (“Authorized Issuers”) may enter into variable rate debt instruments that result in a maximum net variable rate exposure of 20 percent of State-supported debt. Issuers may also enter into interest rate exchange agreements in a total notional amount that does not exceed 20 percent of State-supported debt, subject to various criteria established in the statute to effectively minimize risk.

Interest Rate Exchange Agreements (Swaps)

The statutory provisions include various criteria and limitations to ensure that swaps are prudently managed to effectively reduce the costs of State-supported debt.

Those criteria include:

● The adoption of uniform interest rate exchange guidelines;

● Minimum counterparty ratings of AA, and collateral requirements should their ratings fall;

● A finding by an independent financial advisor certifying that the terms and conditions of all swaps reflect a fair market value;

● The use of standardized interest rate exchange agreements; and

● Monthly reporting requirements by the Authorized Issuers and DOB that monitor and assess swap performance.

The following table shows the amount of outstanding interest exchange agreements which are subject to the statutory cap. The State’s swap exposure is expected to increase from about 15 percent in 2007-08 to 17 percent in 2012-13.

Interest Rate Exchange Caps (millions of dollars)

2007- 2008- 2009- 2010- 2011-

2012-08 09 10 11 12 13

Interest Rate Exchange Cap 8,970 9,708 10,395 10,958 11,320 11,614 Notional Amounts of Interest Rate Exchange

Agreements 6,711 7,437 8,150 8,837 9,502 9,645

Percent of Interest Rate Exchange Agreements to

Debt Outstanding 15.0 15.3 15.7 16.1 16.8 16.6

DETAILED DATA

103 New York State has used swaps to:

● Convert variable rate bonds to fixed rate obligations (synthetic fixed rate debt), generating fixed rates 80 to 100 basis points below traditional fixed rate bonds ($6.0 billion);

● Convert fixed rate bonds to variable rate obligations (synthetic variable rate debt), generating variable rates trading between 5-15 basis points below the Bond Market Association (BMA) average ($277 million); and

● Convert fixed rate bonds to variable rate obligations at a future date (synthetic convertible bonds), generating variable rates trading between 5-15 basis points below the BMA average ($693 million).

Variable Rate Exposure

Consistent with the State’s efforts to reduce debt service costs and match variable rate exposure to variable rate earnings on the State’s short-term investments, the State’s net variable rate exposure is projected to increase from about 10 percent of outstanding debt in 2007-08 to roughly 17 percent in 2012-13. The following table presents estimates for net variable rate exposure.

Variable Rate Exposure Variable Rate Exposure Cap 8,970 9,708 10,395 10,958 11,320 11,614 Current Unhedged Variable Rate Obligations 1,645 1,554 1,460 1,366 1,278 1,187

Convertible Bonds — 664 664 1,178 1,066 1,908

Synthetic Variable Rate Swaps 168 128 83 62 40 17

Additional Planned Variable Rate Exposure 500 1,250 2,000 3,000 3,250 3,250 Total Net Variable Rate Exposure 2,312 3,595 4,206 5,606 5,634 6,362 Net Variable Rate Exposure to Debt Outstanding 5.2 7.4 8.1 10.2 10.0 11.0 Current Policy Reserve for LIBOR Swaps 2,349 2,603 2,853 3,093 3,326 3,376 Net Variable Rate Exposure (with Policy Reserve) 4,662 6,198 7,059 8,699 8,960 9,737 Net Variable Rate Exposure (with Policy Reserve)

to Debt Outstanding

10.4 12.8 13.6 15.9 15.8 16.8

The State’s current policy is to count 35 percent of the notional amount of outstanding 65 percent of London Inter-Bank Offered Rates (LIBOR) fixed rate swaps in its variable rate exposure. This policy reserve accounts for the potential that tax policy or market conditions could result in significant differences between payments owed on the bonds and the amount received by the State under their 65 percent of LIBOR swaps, and that the factors affecting such payments can be consistent with variable rate exposure.

The State and its Authorized Issuers will continue to evaluate market conditions, available support capacities and related costs, as well as alternative structures to help implement in the least costly manner the planned increase of variable rate debt, over the next two to five years.

DETAILED DATA

104 BOND AUTHORIZATIONS

The 2008-09 Executive Budget proposes to consolidate into a single provision of law all State-supported bond authorizations. This would ensure greater public knowledge about existing and proposed new bond authorization actions, permitting the public and elected officials to comprehensively understand the cumulative effect of the budget’s reliance on debt financings. This approach would also ensure that all State debt authorizations and practices are conducted on a consistent and streamlined basis, including moving all bond caps to a “net project cost” basis, eliminating conflicting legal interpretations of said laws, and standardizing provisions for new debt authorizations and refundings.

Consistent with the previously-authorized caps, the statute contains limits, or caps, on the amount of bonds that can be issued for each particular programmatic purpose. As the bond cap for that purpose is reached, subsequent legislative changes are required to raise the statutory caps to the level necessary to meet the bondable capital needs.

Bond caps provide authorizations to finance a single year’s appropriations or can be for multi-year periods. To ensure that the State-supported issuance calendar can be effectively managed, and projects are advanced as scheduled, the bond caps included in the Executive Budget for programs that can be financed with State Personal Income Tax (PIT) Revenue Bonds are proposed to be issued by any Authorized Issuer (i.e., the Empire State Development Corporation (ESDC), the Dormitory Authority of the State of New York (DASNY), the Thruway Authority, the Environmental Facilities Corporation (EFC), or the Housing Finance Agency (HFA)).

DETAILED DATA

Gros s SUNY Educational Facilities Net SUNY Dorm itory Facilities

Net SUNY Upstate Com m unity Colleges

Gros s CUNY Educational Facilities Gros s Library for the Blind

Net SUNY Athletic Facilities

Net RESCUE

Net Univers ity Facilities (Jobs 2000) Net School Dis trict Capital Outlay Grants Net Judicial Training Ins titute Net Transportation Trans ition Grants Net Public Broadcasting Facilities

Net Higher Education Capital Matching Grants

Net EXCEL

Net Library Facilities

Net Cultural Education Facilities Education:

Net Environm ental Infras tructure Projects

Net Hazardous Was te Rem ediation

Net Riverbank State Park

Net Water Pollution Control

Net State Park Infrastructure

Net Pipeline for Jobs (Jobs 2000)

Net Wes tern New York Nuclear Service Center

Net Long Is land Pine Barrens

Net Pilgrim Sewage Plant

Environment:

Gros s Em pire State Plaza

Net State Capital Projects (Attica) State Facilities

Net Division of State Police Facilities

Net DMNA

Net Alfred E. Sm ith Building

Net Elk St. Parking Garage

Net State Buildings and Other Facilities

Net Judiciary Im provem ents

Net OSC State Buildings

Net Albany Parking Garage (Eas t)

n/a Aqus ition of State Buildings and Other Facilities

Net Equipm ent Acquis ition (COPS)

Net Food Laboratory

Net OFT Facilities

Net Courthouse Im provem ents

Gros s Prison Facilities

Net Hom eland Security

Gros s Youth Facilities

Net E-911 Program

State Building/Equipment/Public Protection:

Gros s Hous ing Capital Program s

Gros s Javits Convention Center

Net Com m unity Enhancem ent Facilities (CEFAP)

University Technology Centers (incl. HEAT):

Net Science and Technology Center (Syracuse)

Net Super Com puter Center (Cornell)

Net Center for Telecom m unications (Colum bia)

Net HEAT

Net Center for Indus trial Innovation (City of Troy)

Net Center for Advanced Materials (Clarks on)

Net Center for Electro-Optic (Rochester)

Net Center for Neural Sciences (NYU)

Net Center for Incubator Facilities

Gros s Onondaga Convention Center

Net Sports Facilities

Net Child Care Facilities

Net Bio-Tech Facilities

Net Strategic Inves tm ent Program

Net Regional Econom ic Developm ent

Net NYS Economic Developm ent (2004)

Net Regional Econom ic Developm ent(2004)

Net High Technology and Developm ent

Net Regional Econom ic Developm ent/SPUR

Net Buffalo Inner Harbor

DETAILED DATA

Net Econom ic Developm ent 2006 Net Convention Center Project (Javits/2006) Net Queens Stadium (Mets )

Net Bronx Stadium (Yankees) Net NYS Ec Dev Stadium (06) Parking Net State Modernization Projects (TRAM) Net Int. Com puter Chip Res earch and Dev. Center Net 2008 Econom ic Developm ent Initiatives Economic Development and Housing:

Net Departm ent of Health Facilities Gros s Mental Health Facilities Net HEAL NY Capital Program Health/Mental Hygiene:

Gros s Consolidated Highway Im provem ent Program (CHIPS) Net Dedicated Highway & Bridge Trus t

Net High Speed Rail Net Albany County Airport

n/a MTA Transit and Com m unter projects

Current Cap

DETAILED DATA

107

STATE AND FEDERAL PAY-AS-YOU-GO (PAYGO) FINANCING