The following appears in the October 5-11, 2012 issue of the Long Island Business News:

The Office of the New York State Comptroller announced Sept. 19 that total state tax revenues for the period April 1 through Aug. 31 were $147 million less than projected and $204 million below collections for the same period in 2011.

“Almost halfway through the state’s fiscal year, the state’s budget is still on relatively solid ground, but weak revenue collections and slow economic growth signal a need for caution going forward,” Comptroller Tom DiNapoli said.

What should sound alarms throughout the state is the comptroller’s report on personal income tax, or PIT, collections. These revenues, which totaled $11.2 billion as of Aug. 31, were down $149.5 million and are lower than the total income projected in the state’s revised fiscal plan.

The PIT figures indicate that three years after the recession ended, New York’s economy is not experiencing a robust recovery. The state Labor Department confirmed this when it announced Sept. 21 that the Empire State’s unemployment rate is stuck at 9.1 percent versus 8.1 percent nationally. The total number of unemployed, which was 869,400 in July, increased in August to 872,100.

Don’t expect the job situation to get any better during the fourth quarter of this year. That’s because the financial sector, which is the key component of the state’s economy, will contract, not expand, by the year’s end.

The nation’s second largest bank holding company, Bank of America, announced in September it will lay off 16,000 employees and close 200 more branches by the end of the year. New York will take a big hit because Bank of America has a large presence in the state. In addition, Wall Street investment banking firms are expected to downsize due to declining revenue, particularly in corporate finance departments.

On another front, American Airlines, which is a major employer at the region’s airports, has sent out layoff notices to 11,000 employees and intends to fire at least 4,000.

Other bad news for the state: The economic slowdown in Europe is beginning to hit our economy. There is less demand for American goods and as a result, traffic in New York’s ports is expected to decline. A prolonged European downturn will also hurt the state’s If Italy or Spain or Ireland or Greece throw in the towel, abandon the euro and default on debt, a worldwide recession could ensue, further damaging New York’s stressed financial sector.

Another potential problem: If the Bush tax cuts, the payroll tax cut and various business tax credits all expire in December, and the mandatory federal sequestration of across the board cuts in discretionary spending is triggered, there will be a fiscal shock that will severely harm New York’s already weak economy.

The Congressional Budget Office has announced that if these events come to pass, the nation will plunge into a recession in the second half of 2013. And New York, which is dependent on major government spending and has a high concentration of high earners, will take a major hit.

In a recent analysis, the American Action Forum has pointed out that if the U.S. falls off this “fiscal cliff,” total federal and state marginal rates for New York’s small business owners and high-earning taxpayers will exceed 50 percent. They predict this would increase the costs of doing business for every small and medium-sized company and “would reduce the probability that a small business would undertake expansion by nearly 15 percent, and reduce the capital outlays of those who do by almost 20 percent.” The AAF estimates that New York could lose between 171,000 and 614,000 jobs.

This fall, don’t let any politicians con you into believing all is well. National and international events could easily shatter New York’s fragile economy.

Statement by
George J. Marlin
Director
Nassau Interim Finance Authority

September 24, 2012

            The County’s proposal to finance property tax judgments is another scheme to evade the approval process to borrow money.

           If the County could execute a deal with RPTF LIC of Uniondale (a firm Newsday reports “has not been incorporated and does not have a web site or phone number listed in public records”) it would not be “selling” judgments it would be borrowing money for seven years at an outrageous annual interest rate of 5.95%.

           When a government entity sells its unpaid bills or liens or uncollected judgments, it sells them at a deep discount (i.e., 10 cents on a dollar) then it writes down the receivables on its balance sheet and gives up any future claims.  The vendor who purchases these government uncollectibles has the right to go out and try to collect the unpaid balances.

           The County’s proposal is completely different.  The County would not be selling receivables, it would be borrowing money at 5.95% to pay down tax refunds which are listed on the County’s balance sheet as liabilities.  County Comptroller Maragos got it right last week when he said the proposal would be “adding millions of dollars of debt to the County’s books.”

           The CountyAttorney claims he has the power to settle judgments under $100 thousand.  This may be true.  But it does not mean he has the authority to borrow money to pay the judgments he settled.  That approval must come from the Legislature.

           As for the 5.95% annual interest rate, the County announced it would be willing to pay on a seven-year loan—it is an egregious amount.  The County could issue tax-exempt municipal bonds for seven years at an approximate rate of 1.50% or lower.  The County’s claim that it can issue only 20 year tax-exempt bonds is wrong.

           If the County does not abandon this ill-conceived borrowing scheme, County legislators should go into court and request a Temporary Restraining Order (TRO).

 The following appears in the September 21-27, 2012 issue of the Long Island Business News:

The news of late has been bleak for Long Island taxpayers.

First there was the state comptroller’s announcement on the Friday of Labor Day weekend that county and local government pension contributions for fiscal year 2013 must be increased an incredible 12 percent.

The average contribution for non-uniformed government employees will go from 18.9 percent of base salaries to 20.9 percent. For police and firemen it will be 28.9 percent, up from 25.8 percent.

The total pension tab for Long Island municipalities in 2013 will come in at about $3.2 billion; $348 million more than 2012’s expenditures of $2.9 billion. And unless there are budget cuts to offset these additional costs, property taxes will have to be hiked. Remember, pension costs, are excluded from the 2 percent property tax cap.

The other dismal news: It was revealed that the unfunded liability for New York’s public-sector retiree health insurance is a whopping $250 billion.

For years, many elected officials, who have been giving away the store in collective bargaining agreements, have been burying the cost of retiree health insurance in an accounting line called “other post-employment benefits,” or OPEB. New government accounting standards have, however, forced the state and its local governments to finally fess up to the future costs of this long-term entitlement. And, thanks to the monumental efforts of the Empire Center for New York State Policy, we now know that taxpayers will have to foot a $250 billion bill to keep the promises made by elected officials.

Retired employee health care costs consume, on average, about 30 percent of a municipality’s OPEB costs and it is expected to rise every year for decades to come. These health care costs are “pay as you go.” In other words, not one dollar has been set aside and every municipality is solely responsible for coming up with the money to meet its obligations. Some municipalities presently spend more on retirement heath care than they do on current employees.

After totaling and analyzing OPEB, the Empire Center concluded, “Unfunded liabilities for retiree health coverage are starting to erode the balance sheets of state and local governments, undermining their fiscal solvency to an even greater degree than rising pension costs.”

Taxpayers should be aware that unlike public-employee pensions, health care benefits are not protected by the state constitution; hence they can be scaled back if there is the political will to do so.

In a few years, pension and health care costs will be consuming more than 40 percent of the revenues of many Long Island municipalities. If they are to avoid insolvency, or worse yet, bankruptcy, politicians must find the backbone to deal with these issues at the collective bargaining table now.

The following appears in the September 7-13, 2012 issue of the Long Island Business News:

Back in March 2010, then-New York Lt. Gov. Richard Ravitch unveiled his plan to save the deficit-ridden state budget, which called for borrowing $6 billion to pay operating expenses. The money was to come from the proceeds of personal income tax or PIT bonds issued by an off-balance-sheet state agency.

This mega-one-shot approach, which would have stuck taxpayers with 30 years of interest payments for current expenses, was universally jeered. The plan was quietly shelved by Gov. David Paterson.

After leaving office in January 2011, Ravitch went back to the drawing board and began analyzing the fiscal challenges facing state governments. He put together a task force that included former Fed Chairman Paul Volker; Bush 41’s treasury secretary, Nicholas Brady; Reagan’s secretary of state, George Schultz; and Clinton’s top economic adviser, Alice Rivlin.

The final product, “The Report of the State Budget Crisis Task Force” released in July, is a thorough, thoughtful and frightening analysis of the fiscal problems the states in this nation are facing. In my judgment, its authors achieved their goal “to inform the public of the gravity of the issues and the consequences of continuing to postpone actions to achieve structural balances.”

The task force examined in depth six large states, including New York, and concluded:

• Medicaid costs are growing at unsustainable rates and crowding out other needs
• Pension funds for state and local government workers are underfunded to the tune of $3 trillion and create risks for future budgets
• Unfunded liabilities for retired government workers’ health care is $1 trillion
• Tax revenues have been eroding because states “now rely on highly economically sensitive taxes for 70 percent of their tax revenue.”

The report noted that although state constitutions require balanced budgets, “revenue and expenditures are not defined terms.” This has led to excessive use of one shots (i.e., long-term borrowing and assets sales) and other gimmicks that “render balanced budgets illusory.”

In recent years, New York has used an assortment of nonrecurring actions to fill budget holes, including temporary federal stimulus money, borrowing, payment deferrals, transfers of balances from independent dedicated funds to the general operating fund and rosy economic scenarios to boost revenue projections.

An egregious example of a New York one shot was the 2002 securitization of tobacco settlement revenue. That transaction generated $4.2 billion that was utilized in one fiscal year. All tobacco settlement revenue that is received over the next 30 years will be used to pay off the $4.2 billion in securitization debt.

Albany has also raided during the past decade to fill budget holes balances from these dedicated funds: environmental protection programs, $26.4 million; wireless network improvements, $50 million; state lottery, $76 million; home care, $82 million; welfare, $261 million.

To avoid fiscal calamities, the Ravitch task force recommends:

• Generally Accepted Accounting Principles replacing cash-based budgeting. This will improve “the quality of planning, budgeting and reporting.”
• Enactment of multiyear fiscal plans that extend several years past the present fiscal year. State governments should be legally bound to adhere to these plans “so that the long-term consequences of budgetary decisions become apparent.”
• Automatically funded rainy- day funds to better manage counter- cyclical policies.
• Establishment of reserves to fund retiree health care obligations.
• Development of procedures that enable state officials to monitor the fiscal health of local municipalities in order to take “early action to help local governments resolve their fiscal problems before they threaten insolvency or bankruptcy.”

If New York State and its municipalities are to get their budgets in order and avoid fiscal Armageddon, implementing these suggestions should be a priority. All New Yorkers owe Dick Ravitch and his colleagues a debt of gratitude for their efforts.

Statement by
George J. Marlin
Director
Nassau Interim Finance Authority

August 30, 2012

        Today I would like to review several issues that have arisen since our last board meeting: 

1.    In late July, the Nassau County Comptroller finally closed the books for the fiscal year that ended December 31, 2011 and confirmed that the County incurred a cash deficit of $50.4 million and a GAAP deficit of $173.4 million.  The County’s claims throughout 2011 that its budget was balanced were wrong, and NIFA’s deficit analysis released in January 2011 was pretty much on the mark.  NIFA had projected a GAAP deficit of $155.5 million and a cash deficit of $53.4 million.  The final figures for 2011 prove that many of the County’s revenue and expense estimates were delusional.

        The County Comptroller also projected that Nassau will end fiscal year 2012 with a cash deficit of $45 million.  To address this conservative cash deficit projection, the County announced among other things the cancelling of $19 million in capital projects.  The $19 million will be applied to an operating budget expense, debt service payment.

       Utilizing capital project money that was raised by issuing long-term tax-exempt bonds to pay current operating expenses is a classic “one shot” fiscal abuse.  This irresponsible fiscal practice brought down New York City in 1975.

       When I cast my vote as a NIFA board member to approve borrowing to fund capital projects, I presume the good intentions of the County to proceed with a given project.  If the County is going to deceive NIFA and treat capital dollars as operating dollars, I will have to seriously consider withholding my support for the funding of new capital projects presented to this board.

2.   In December 2012, this board reluctantly approved the Veolia bus deal because we received the contracts at the last minute and did not wish public bus transportation to come to a halt on January 1, 2012.

       When I cast my “yes” vote I warned that the County presented too rosy a picture of the contracts merits and that it would prove to be a disaster for taxpayers and bus riders.  Sadly, my prediction has come to pass.

       As a recent Newsday editorial pointed out, the $106 million estimate cost for a private company to run the system in 2012 was off by $14 million.  Hence, bus routes had to be eliminated and services cut to save $7 million.  The other $7 million came from an unexpected one shot of federal and state aid that the County turned over to Veolia.

       Once again, the County’s budget projections were wrong.

3.   When this board rejected the Morgan Stanley contract it sent a strong message that it frowned upon the proposed sewer system deal that would include approximately $750 million in borrowing.  No matter how the County describes this potential securitization deal it is still borrowing.  (As New York’s greatest governor, Alfred E. Smith, once said, “Anyway you slice it, it’s still baloney.”)

       The County continues to pursue this deal because it hopes to use about $300 million of the proceeds as “one shot” revenues to balance operating budgets.  “One shots” do not solve structural operating deficits.  It merely kicks the can down Mineola Blvd., and sticks the bill to the children and grandchildren of today’s taxpayers.

       When someone hands over $750 million the lender expects to be paid back the principal amount plus a rate of return.  In the case of a sewer deal, every citizen who flushes a toilet would be paying back for the next 50 years that $750 million with an annual interest rate of 10% to 15%.

      The next two generations of Nassau residents would be paying ever increasing toilet flushing taxes so that the County could receive “one shot” dollars to plug the deficit hole in current operating budgets.  Taxpayers have every right to be outraged.

      One last comment on this matter.  Newsday’s Joye Brown reported on August 7, 2012 that:

Mangano said he has no plan to give lawmakers documents for analysis because he can’t produce a formal document without help.  And he can’t hire help, he said, unless he can convince NIFA to approve Morgan Stanley’s contract.

      I have been an investment banker for 35 years and I can say with authority that this claim is nonsense.  Firms like Morgan Stanley advise municipalities on potential deals without upfront fees all the time.  They invest their time in the hopes of reaping returns if the deal is completed.  I am confident the County will have no problems finding a qualified firm to work on a contingency basis.

4.  The 2012 budget that was approved by the CountyLegislature requires the County to cut $150 million of recurring labor costs.  The County has failed to comply with this requirement. 

      To review:

–    County officials insisted the 2011 budget was balanced.  They were wrong.

–    County officials insisted the Veolia Bus Company could run the County system for $106 million in 2012.  They were wrong.

–    County officials who are legally bound to cut $150 million of recurring labor costs from the 2012 budget are not close to reaching that number.

      The County has a serious credibility problem.  This is what happens when one tries to govern by press release.

      Last December I supported a compromise fiscal plan that included $450 million of tax exempt bond borrowing over 3 years in order to get the County to a balanced GAAP budget.  This plan included the $150 million in recurring cuts I described earlier.  To help the County achieve this goal, this board has approved long-term borrowing to pay court judgments and to fund voluntary employee separation incentive plans.  (Other municipalities in New York pay for these expenses with current operating dollars not borrowed ones.)  And now the County wants to borrow another $750 million.  

      Let me make my position clear—I will not vote to approve a 2013 budget or a fiscal plan that includes any “one shot” proceeds from mortgaging the sewer system to the tune of $750 million.