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.

This Op-ed piece I wrote appeared in the NY Daily News on May 9, 2012.

The following appears in the May 4-10, 2012 issue of the Long Island Business News:

In “Modern New York: The Life and Economics of a City” (Palgrave Macmillan, $28), author Greg David traces the longtime war between pro-welfare state pols and pro-economic growth ones.

David’s story begins in the 1960s when most potentates embraced Mayor Robert F. Wagner’s proclamation that he “would not propose to permit our fiscal problems to set the limits of our commitments to meet the essential needs of the people of the city.”

That philosophy was taken to its extreme by Mayor John Vliet Lindsay. To cure perceived social ills, during his tenure (1966-1973), he went on a spending and hiring spree that put the city on the road to perdition.

To fund budgets that ballooned from $3.87 billion in 1966 to $11 billion in 1973, Lindsay raised every existing business tax and invented new ones. He imposed a progressive city income tax on residents and a flat one on commuters. He also successfully pursued the extension of World War II’s “temporary” rent control laws.

As a result of Lindsay’s tax-and-spend policies, the end of Wall Street’s bull market in 1969 and rent control laws that caused landlords to abandon 13,000 apartment buildings and “cost the city $500 million a year in property taxes,” the city fell into the fiscal abyss.

New Yorkwas saved thanks to two people, Gov. Hugh Carey and Mayor Ed Koch. Carey created the state oversight and control agencies – the Emergency Control Board and the Municipal Assistance Corp. – needed to avoid bankruptcy and to institute an orderly process for placing the city on a sound financial footing. Koch made the tough decisions needed to balance the budget four years in a row and to get state controls lifted.

David reports that Koch not only “moved to curtail many of the social programs the city financed,” but also held that spurring economic development “was the key to reviving the city.” Koch boasted, “Past administrations did not talk about jobs and profits but how to getNew York Cityto be the No. 1 welfare city inAmerica. The whole business of our city is how to get people to stay here, how you get people to come here, how you get business to thrive.”

During Koch’s three terms as mayor,New Yorkregained “two-thirds of the jobs lost in the downturn of 1969-1977.” Employment growth in banking and securities, business services, culture and tourism, and various professional fields more than made up for the loss of 259,000 factory jobs.

New York’s immigrant population, who earlier labored in factories, now occupied jobs in the thriving tourism industry. They have revitalized many of the city’s most depressed neighborhoods.

With the exception of Mayor David Dinkins’ administration (1990-1993), the Koch approach has prevailed. Despite the tragedy of 9/11, severe recessions and reckless spending by Mayors Giuliani and Bloomberg, the city has endured.

It hasn’t been perfect. David states that when the city’s investment banking jobs peaked at 190,000 in October 2007, “the sector accounted for 28 percent of all the wages in the city.” Hence the city, and for that matter the state, have been too dependent on a cyclical industry that paid 20 percent of state and 13 percent of city tax revenues.

The potential impediment to future prosperity: the election of a new mayor who will be beholden to municipal employee unions and the Working Families Party. An administration dedicated to reviving Lindsay’s spendthrift ideological approach to governing could stifle economic growth and drive out the city’s most mobile citizens, the 40,000 households that pay 51 percent of taxes and make investments that create jobs. Taking such a course, David rightfully concludes, could cause “another economic and fiscal cataclysm.”

The following appears in the April 20-26, 2012 issue of the Long Island Business News:

Last December New York State Senate Majority Leader Dean Skelos and his merry band of downstate suburban Republican senators enthusiastically embraced Gov. Andrew Cuomo’s so-called tax-reform legislation. The reality, however, is that the enacted law, which projects $2 billion in additional tax revenue, actually raises taxes on many overburdened suburban taxpayers.

The downstate senators apparently did not grasp the consequences of their actions. By yielding to the temptation of political expediency (an apt motto for the group is Oscar Wilde’s epigram, “I can resist everything but temptation”) they are hurting the very constituents who elected them to office. Not only will higher taxes drive more of suburbia’s wealthiest to lower-tax states, those left behind will forfeit more of their income to Albany and will get in return proportionally less in state-funded aid.

Every year New York’s Department of Taxation and Finance collects approximately $80 billion in fees and taxes on personal income, corporate profits and sales. The bulk of those dollars are then distributed to fund various local programs and services throughout the state. Services include education, transportation, public safety and health care.

A recent study commissioned by the Citizens Budget Commission and performed by the Nelson A. Rockefeller Institute of Government at SUNY Albany confirmed what most Long Islanders have long suspected: “New York City and the downstate suburbs give far more to Albany in revenues that they get in state-funded expenditures.”

Downstate suburbia contributes about 27 percent of the total tax dollars that go into the state coffers but receives about 17 percent of state aid. In other words, for every dollar paid in taxes, only 72 cents returns in the form of state aid.

Upstate residents benefit the most. For every $1 they send to Albany they receive back $1.69. That explains why upstate Republican legislators – who hypocritically swear allegiance to the principles of fiscal conservatism – happily vote for higher state taxes. They know their regions will benefit the most and will be required to spend the least. That’s because most of the wealthiest in the state live in New York City or its suburban bedroom communities.

When it comes to state aid to public schools, downstate suburban counties are also shortchanged. In fiscal year 2009-2010, for example, Nassau County received $935 million in school aid or $692 per capita, and Suffolk County received $1.795 billion or $1,183 per capita. Western New York’s Erie County, however, received $1.213 billion, which translates into $1,382 per capita.

Get the picture? Long Islanders are paying more to get less from Albany.  And thanks to income tax increases that go into effect this year, they will be contributing even more to state coffers.

Skelos and his suburban confreres were rolled last December. Instead of taking deep bows they should be hanging their heads in shame.