Nassau’s sewer lease proposal is a disaster – By George J. Marlin

The following appears in the April 10-16, 2015 issue of the Long Island Business News:

Nassau County Executive Edward Mangano has resurrected another bad backdoor borrowing idea: monetizing the sewer system.

In March, Mangano issued a request for proposals from fiscal advisers “in connection with a potential public-private partnership transaction” for the county’s sewage treatment system.

A similar proposal was killed by NIFA in 2012. Why? Here’s the lowdown.

In September 2011, desperate county officials searching for new revenue streams were convinced by lobbyists/consultants they could receive a huge slug of one-shot dollars by leasing the sewer system to a consortium of investors.

The county was determined to move forward in executing the plan despite warnings from NIFA that it might not be legally feasible and could end future FEMA aid. The plan would convey to private-sector operators for 50 years the authority to impose, set and, if necessary, increase residential usage fees without government approval.

Ignoring the warnings, the county announced a so-called debt reduction and sewer stabilization plan on May 3, 2012. The county boasted that it expected to select a private investor who would finance $850 million to pay down existing low-interest, tax-exempt sewer debt and county debt and use any net dollars to balance its operating budget.

What county officials failed to grasp is that investors in this form of backdoor borrowing expect annual returns of 15 to 20 percent. And to achieve this return, sewer rates would have to be raised dramatically year in and year out since cost-cutting opportunities did not, and do not presently, exist in sufficient measure for them to reap their returns any other way. Because the increased payments would be fees, not property taxes, homeowners and businesses would no longer be able to deduct them on their income tax.

The biggest losers in such a deal would be Nassau’s nonprofits (e.g., North Shore-LIJ), commercial real estate owners (and their tenants, to whom they pass such costs along) and homeowners. Their toilet flush fees would be overflowing.

The biggest winners: investment bankers and lobbyists flushed with millions in commissions and fees.

NIFA rejected in May 2012 a $5 million Morgan Stanley sewer advisory contract because it made no sense to spend taxpayer dollars in pursuit of borrowing such costly funds to pay down low-interest tax-exempt county and sewer debt. It would be like paying someone to advise you to draw down the credit on your Visa card at 18 percent interest per year to pay down your home mortgage, which has a 4 percent annual interest rate. Sheer folly!

The flawed sewer deal has reared its ugly head again – but this time with a new twist. The chatter around One West Street is that if a sewer lease yields $1 billion or more, the proceeds could be used to eliminate NIFA by paying off its outstanding debt. If NIFA is disbanded, it would be party time in Mineola. The political hacks and lobbyists would have a field day lining their pockets with taxpayers’ money – even more than they do now.

However, in the unlikely event this scheme came to pass, the county’s structural budget deficit won’t go away but NIFA’s protections would.

Under the NIFA statute, Nassau cannot go bankrupt. But, if the control board is gone so is its statute. That would force the ratings agencies to take a fresh look at the county finances – and my guess is that before long Nassau’s rating would drop below investment grade and the county could become insolvent.

If the Nassau County Legislature and NIFA permit Mangano to lease the sewers, the irony would be that this man who ran as a “tax revolt” candidate would not only be raising costs on homes and business owners. He would singlehandedly manage to raise federal, state and local taxes for his electorate.

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