Tough love for broke county

The challenges confronting Gov.-elect Andrew Cuomo won’t be limited to closing a state budget gap now estimated at between $9 billion and $11 billion. Cuomo and the Legislature will also need to respond to growing fiscal distress among New York’s local governments.

Most of the Empire State’s counties, municipalities and school districts are still struggling to bring their spending into line with post-recession reality — while facing the looming specter of rising pension costs. Typifying the trend, Mayor Bloomberg just announced $1.5 billion in “gap-closing” budget cuts, including layoffs, and warned of more to come.

While New York City’s bud get remains solidly bal anced — for now, at least — the same can’t be said for neighboring Nassau County. In fact, by the time Cuomo takes the oath as governor on Jan. 1, a state oversight agency may have taken control of Nassau’s troubled finances.

In key respects, Nassau’s problems are a microcosm of the pathologies now afflicting all levels of government in New York.

Like the state, the county raised spending to unsustainable levels during the boom years — and then, after the recession hit, used temporary federal stimulus aid to dig itself into a deeper hole. It has saddled itself with costly labor deals — especially with county police officers, who earn an average of $126,000 a year, plus lavish benefits. (Nearly 400 retired Nassau cops have pen sions exceeding $100,000 a year.) Also like the state, it has built up a large “structural” gap between recurring expenditures and recurring revenues.

After years of mismanage ment, Nassau initially flirted with insolvency back in 2000. It was bailed out by an infusion of $100 million in special aid from Albany and by the creation of the Nassau Interim Finance Authority, which restructured the county’s debt.

The Nassau budget stabilized for a time under County Executive Thomas Suozzi, a Democrat elected in 2001, who combined major tax hikes with a modicum of spending restraint. By 2009, though, the county was teetering again. Last year, Nassau voters ousted Suozzi and replaced him with Republican Edward Mangano.

Mangano immediately repealed an unpopular home-energy tax passed under Suozzi but hasn’t appreciably closed the structural budget gap. NIFA has warned that the county’s 2011 budget relies on unprecedented levels of borrowing to pay current operating expenses and fails to “meet the standards of prudence necessary for us to project budget balance at this time.” More recently, Moody’s Investors Service downgraded Nassau’s long- and short-term debt, citing “a weakening of [the county’s] liquidity position” and “a trend of ongoing structural deficits and the lack of a feasible long-term plan.”

A fiscal crisis like this one might be easier to understand if it arose in one of New York’s many decaying industrial cities. But Nassau is the third-wealthiest county in America. Its unemployment rate of 6.8 percent is well below the state’s and nation’s. Its residents already pay the nation’s second-highest average property-tax bills.

In addition to borrowing more than $1 billion to cover past property-tax refunds (see sidebar), the county this year also bonded out the $86 million cost of an early-retirement program, which helped Mangano reduce the employee head count to its lowest level in decades. Yet labor costs will continue escalating under a series of Suozzi-era union contracts that stretch through 2015, complete with a no-layoff clause effective through next year.

The 2011 county budget is “balanced,” in part, with the assumption of $61 million in savings from labor concessions — which unions, predictably, are refusing to make. It also counts $55 million in savings from sale of county-owned land and “securitizing” of some property leases. However, Moody’s notes these gambits “may be more difficult to achieve in the current market and may require additional time.”

Amid these travails, Mangano recently announced that the county is negotiating a deal to build a minor-league baseball stadium. “It would create jobs and low-cost entertainment,” he explained. Talk about mixed messages: While pressing for sacrifices all around, the executive seems to think the county has credit to spare.

Enter NIFA. Under state law, the authority can take mat ters into its own hands if it determines there is “a substantial likelihood and imminence” of an operating deficit equal to more than 1 percent of the county budget — or about $26 million. While the next fiscal year doesn’t start until Jan. 1, such a deficit seems likely.

By invoking a control period sooner rather than later, the seven-member NIFA board could stop the bleeding by freezing county wages. By using its power to block further borrowing, NIFA could also force county officials to choose between making deeper budget cuts or, at some point, failing to meet payroll. This could easily lead to the sort of tense brinksmanship last seen during the mid-1970s New York City fiscal crisis.

It all adds up to a key early test for Cuomo. He can begin by signaling support for a get-tough stand by NIFA. Beyond that, rather than waiting for more crises to pop up elsewhere, the new governor should seek legislation empowering all local governments and school districts to freeze employee wages for a period of up to three years.

Cuomo needs to press for re peal of the state law man dating compulsory arbitration of public-safety contracts, a key factor in Nassau’s over-the-top police compensation. He should also push for statewide reforms to rein in pensions and health-benefit costs at the state and local levels.

At the end of the day, local officials need to be held accountable for solving local problems. But the governor must give them the tools they need to manage better.

Property-tax madness

Nassau County has compounded its problems via a unique provision in its charter that requires the county to pay the cost of property-tax refunds owed by towns, special districts and all but one of the more than 50 school districts within its borders. Such refunds are ordered when courts find that a property has been assessed for more than its true market value.

For years, Nassau’s commercial-property owners have accused the county of deliberately over-assessing them. This allowed municipalities and schools to raise and spend more without passing along the full cost to homeowners. When property owners successfully challenged their assessments in court, the county would eat the entire cost — and officials would over-assess the same property all over again.

In recent years, the resulting refunds have averaged $100 million a year — much of which the county has financed with long-term borrowing. It now has $1.2 billion in outstanding debt related to property-tax refunds alone.

To his credit, County Executive Edward Mangano has persuaded the county Legislature to end this madness by repealing the tax-backstop provision. But the reform won’t take effect until 2013; in the meantime, he has proposed bonding out another $300 million in tax refunds — stretching past and current expenses decades into the future.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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