The following appears in the May 18-24, 2012 issue of the Long Island Business News:

Some days I’m sorry I get out of bed. That’s how I felt on the first Saturday in May after reading a slew of government corruption stories in the morning papers.  Here’s the roundup:

• Former state Sen. Hiram Monserrate, who is on probation for assaulting his girlfriend, was sentenced to two years in jail after pleading guilty to using $100,000 of taxpayer dollars to fund one of his campaigns for public office.
• Former state Sen. Pedro Espada this week was convicted of stealing hundreds of thousands of dollars from the Soundview Health Care Network.
• In Brooklyn, three public administrators were charged with stealing $2.6 million. The commissioner of the Department of Public Administration said in a statement, “The investigation exposed an audacious and calculated scheme to steal money from the dead.”
• Federal prosecutors announced they expect to indict 10 more Long Island Rail Road retirees for disability fraud. The October 2011 indictment of 11 former LIRR employees appears to have been only the tip of the iceberg. When The New York Times broke the billion-dollar bogus benefits story three years ago, it reported that “virtually every career employee of the rail road was applying and receiving disability payments giving the Long Island Rail Road a disability rate three to four times that of the average rail road.”

Let’s not forget the recent indictments of three Nassau County commanders, the Nassau County Police Department’s illicit sex inquiry, former state Sen. Carl Kruger’s sentencing to seven years in prison for bribery and honest services fraud, former state Sen. Joe Bruno’s bribery indictment and the Suffolk County grand jury report claiming former County Executive Steve Levy manipulated the Ethics Commission and used it “as a political sword to attack enemies of county officials.”

All in all, not a good spring season for taxpayers.

Historically, New York has had its share of political scandals. In the post-Civil War era, there was Boss William Tweed, (1823-1878), who made government work almost entirely for himself and a few cronies. And then there was Tammany Hall’s George Washington Plunkett, (1842-1924), who is remembered for describing the political corruption of the Roaring Twenties as honest graft. “I seen my opportunities,” he said, “and I took em.” But for the most part, these rogues were small-time crooks who stole for the sake of stealing, hoping not to get caught.

In our times, however, corruption appears to be pervasive at all levels of government for different reasons. Some people in government live under the delusion that they “sacrifice” so much for the public that they are, therefore, entitled to special perks and privileges. (The Government Services Administration Las Vegas scandal comes to mind.)

Others are narcissists who believe they are superior to the rest of society and, therefore, are not bound by the rules that govern the masses.

Then there are those who are infected by what New York Times columnist Ross Douthat calls in his new book, “Bad Religion,” pseudo-faiths that encourage one’s worst impulses instead of serving as a rebuke to avarice. “As a result,” Douthat persuasively argues, “pride becomes ‘healthy self-esteem.’ Vanity becomes ‘self-improvement,’ adultery becomes ‘following your heart,’ greed and gluttony become ‘living the American Dream.’”

The current government corruption crisis is, in my judgment, a spiritual and cultural one. Hence, it will take more than new laws to change hearts and minds. To restore civic virtue, religious and educational leaders will have to take center stage and make a concerted effort to instill in citizens of every age the canon first articulated by New York Governor Grover Cleveland that “public office is a public trust,” not a public trough for self-enrichment and self-aggrandizement.

Statement by

George J. Marlin

Director

Nassau Interim Finance Authority

May 17, 2012

 “On The County Sewer Debt Plan”

Throughout my career, both in the public and private sector, I have supported private-public partnership projects that truly benefit the general public and do not rip-off government sponsors, ratepayers or taxpayers.

For instance, in 1996, as Executive Director of the Port Authority of New York and New Jersey, I initiated what was at that time the largest privatization project in New York public finance history—the $1.2 billion privatization of JFK’s International Arrivals Building.  The old I.A.B. which was owned and managed by the Port Authority was a public embarrassment.  The new building, which was built by private developers and is managed by a renowned professional corporation, is a model for airports throughout the nation.

On May 3, 2012, the County announced a so-called debt reduction and sewer stabilization plan.  The first paragraph in the press announcement contained this false statement:  “The plan also stabilizes NassauCounty’s Sewer Authority which is set to face bankruptcy in 2014, as warned by the Nassau County Interim Finance Authority (NIFA) in an October 2009 report.”  NIFA never made such a statement.

Actually, this dubious claim was made by County Executive Mangano and was confirmed by Deputy County Executive Walker.  The March 18, 2012 issue of Newsday reports that Mangano said:  “I inherited a bankrupt sewer district….”  The March 19, 2012 issue of Newsday reported:  “Deputy County Executive Robert Walker told Newsday that the County’s Sewer and Storm Water Finance Authority is supposed to be bankrupt by 2014.”

I recommend the County read the official statement of any Nassau County Sewer and Storm Water Finance Authority bond offering; particularly the section, “Security For the Bonds” which states:

The County and the Authority (as a Covered Organization), pursuant to the statute governing NIFA, are prohibited from filing any petition with any United States district court or court of bankruptcy for the composition or adjustment of municipal indebtedness without the approval of NIFA and the State Comptroller, and no such petition may be filed while NIFA bonds or notes remain outstanding.

Hence, the County’s claim is nonsense.  It is a red-herring.

As for the County’s so-called “Debt Reduction Plan,” in my 35 years as an investment banker, I have never come across such an ill-conceived plan.  It is an example of bad public finance and if implemented will give private-public partnerships a bad name.

The County expects to select a private investor who will finance $850 million to pay down existing low interest cost tax-exempt sewer debt and County debt.  This is a form of backdoor borrowing.  Potential Financial Investors who invest money to Public Private Partnerships (P3s) expect annual returns of 10 percent to 15 percent.  To suggest that a private operator will achieve enough efficiencies to cover most of that cost and that assessment or user-fees will increase no more than the rate of inflation—well, anyone who believes that, I have a coliseum in Hempstead I would like to sell to them.  (It is my understanding that the Goldman Sachs P3 fund passed on this deal.  I can appreciate why.)

To use such costly funds to pay down low interest tax-exempt County and sewer debt makes no sense.  This would be like drawing down the credit line on one’s VISA card at 15 percent interest per year to pay down one’s home mortgage which has a 4 percent annual interest rate.  Sheer folly!

Contrary to Press Release claims, this deal will not be a win-win.  The big losers will be Nassau’s non-profits (e.g., North Shore Hospital), commercial real estate owners and home owners.  They will be the big losers because their toilet flush fees (a/k/a taxes) will be overflowing.

Therefore, because in my professional judgment the Sewer-Debt Plan is an ill-conceived backdoor borrowing scheme, I will oppose the approval of the Morgan-Stanley Contract.

Statement by

George J. Marlin

Director

Nassau Interim Finance Authority

 May 17, 2012

“On the 2011 Nassau County Operating Deficit”

On January 26, 2011, after numerous warnings to the County were ignored concerning budgetary deficiencies and the degree of risk in various projected revenue sources and cost savings, the NIFA board voted unanimously to declare a control period.

Grant Thorton had analyzed the 2011 budget risks and had concluded it was likely that Nassau County would end the fiscal year on December 31, 2011 with a statutory GAAP deficit of $155.5 million and a cash deficit of $53.5 million.

After the NIFA board declared a control period, my colleagues and I were vilified by County officials.  We were accused of being mean-spirited partisans.  Wanted posters which contained our names and photos were distributed at a press conference.

Today I will review our estimates of January 26, 2011 versus the unaudited actuals released by the County Comptroller, and I am confident the general public will agree that our actions were warranted.

On March 28, 2012 the Nassau County Comptroller announced that the 2011 year-end unaudited fiscal results indicated the County would incur a statutory GAAP deficit of $167.6 million and a cash deficit of $42.9 million.  (It is my understanding that the cash deficit could grow to $50 million+.)  This cash deficit explains why the County is desperately seeking the authority from the County legislature to issue long-term debt—they wish to borrow to fill the deficit hole.  (This, as we all know, is like using one’s credit card line to make one’s mortgage payments.)

Let’s review:  NIFA projected a statutory GAAP deficit of $155.5 million; the County’s unaudited actual GAAP deficit is projected to be $167.6 million.  NIFA projected a cash deficit of $53.5 million; the County’s unaudited actual cash deficit is projected to be at least $43 million.  It certainly appears to me that NIFA called it right on January 26, 2011.

Now I will go through one more financial exercise:  I will compare various projected revenue and expense line items in the 2011 adopted budget to those line items in the 2011 unaudited actuals.  (Lest we forget the County claimed throughout 2011 that the adopted budget was either “balanced” or “achievable.”)

And let’s not forget the $61 million in labor contract savings that never materialized.

The unaudited actual budget results and the revenue and expense variances confirms NIFA’s January 2011 analysis that there existed a substantial likelihood of the County incurring a major operating funds deficit of one percent or more in the aggregate results of operations during its Fiscal Year 2011.