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.

The following appears in the August 23-29, 2012 issue of the Long Island Business News:

In an important report released this month, State Comptroller Thomas P. DiNapoli diagnosed the rapidly declining fiscal health of municipalities throughout the Empire State.

“No matter how you measure it,” he states, “almost all cities in New York are stressed and have to work hard to keep their fiscal houses in order. … If a city is not facing budget solvency issues, it is likely facing service delivery stress – that is, it is having a hard time maintaining the services its residents want and need.”

The reason why municipalities are in fiscal peril: Tax revenues do not match expenditures.

First the revenue side of the ledger.

Since the Great Recession began in 2008, property tax revenues in most municipalities have declined due to the drop in residential and commercial real estate values. In the nine downstate suburban counties, including Nassau and Suffolk, property values have, on average, decreased 5.3 percent annually.

Upstate declines during the same period have been smaller, 1.8 percent a year, because many cities in northern regions did not participate in this century’s real estate boom. For instance, between 1998 and 2005, property values in Oswego were down 45 percent; Dunkirk, -38 percent; Fulton, -12 percent; Schenectady, -11 percent; and Buffalo, -10 percent.

State aid to municipalities, which peaked in 2008-2009, has declined over the last three fiscal years. Fewer home sales translated to lower mortgage recording tax income. The comptroller’s report points out that since 2005, “local governments have lost nearly $320 million in annual MRT revenues.”

Many municipalities are also reaching their constitutional tax limits. There are presently eight local governments that have hit the total amount of property taxes that can be levied.

Declining populations due to huge manufacturing job losses have also contributed to lagging tax dollars. Buffalo, whose population stood at 532,000 in 1960, is now down to 240,000. With more than 40,000 single-family homes abandoned, the city’s property tax base has been wrecked.

As for expenditures, thanks to unfunded state mandates, gratuitous public employee contracts and spiraling pension and health care contributions, local magistrates are cutting essential services to cover those costs.

There are over 2,000 unfunded mandates imposed on New York municipalities. These mandates, of which Medicaid is the most costly, consume more than 60 percent of county governments’ budget dollars. For example, Erie County in 2003 had announced that its Medicaid costs hit $175 million while its total property tax revenue was expected to be $128 million. County officials told The New York Times, “Every penny we take in the county property taxes is used to pay for Medicaid. This is before we pay for any libraries or plow any roads or pay for any police services.”

Instead of grappling with the fiscal crisis and making tough budget decisions, some municipal leaders have resorted to sloppy bookkeeping or cooking the books. The comptroller points out an audit uncovered that the Village of Freeport between 2006 and 2010 adopted unrealistic general fund budgets that resulted in operating deficits totaling $10.9 million. The budget included $5 million in transfers from nonexistent reserves. In addition, Freeport issued long-term debt to cover short-term operating deficits. This is like using one’s credit card to make a current mortgage payment. One is merely transferring debt, not paying it down.

The comptroller’s report is a wake-up call. And if state and local elected officials do not aggressively address these fiscal woes by slashing state mandates, enacting genuine pension reform, renegotiating union contracts and scrapping rigged arbitration boards, expect the day of reckoning to quickly arrive and distressed municipalities lining up to enter into receivership.

The following appears in the August 10-16, 2012 issue of the Long Island Business News:

After observing Nassau elected officials from a ringside seat the past few years, I have concluded many squander much of their day on extraneous matters. Too much time is spent attending photo opportunity events, fundraisers, golf outings and issuing reams of press releases containing dubious data and claims.

As a result, not enough time is spent governing and this, in my judgment, explains why the county is teetering on the edge of the fiscal cliff.

Governing is more than political posturing. It requires more than just showing up at one’s office. Governing is about advancing one’s policy agenda. And to achieve that end, elected executives must devote their time, energy and influence hamming out agreements with the legislative branch.

Gov. Andrew Cuomo is a good example of a chief executive who has been successful at governing. When he took office Jan. 1, 2011, he immediately tackled the $10 billion budget deficit he inherited, calling for shared sacrifices that spared no facet of government. He persuaded the Democratic Assembly and the Republican Senate to pass a budget that eliminated the deficit without new taxes or borrowing.

What exactly happened when the governor bargained with legislative leaders behind closed doors we will never know for sure. Nevertheless, I believe it is fair to assume that Cuomo’s hard-nosed negotiating and his threat to use his broad executive budgetary powers persuaded legislators to come to terms with the state’s fiscal plight.

Speaker Sheldon Silver and Senate Majority Leader Dean Skelos did receive some swag in the deal (i.e., $250 million in education cuts were restored). But that’s part of the give and take of governing. The key was for the first time in years the budget agreement was a major victory for taxpayers, not special interests.

For a real lesson in the art of governing, I recommend local officials pick up a copy of the recently published “The Passage of Power,” the fourth volume in Robert Caro’s monumental “The Years of Lyndon Johnson.”

In that work, one learns how Johnson immediately grasped the reins of power after being sworn in as president in Dallas and moved through Congress John F. Kennedy’s tax and civil rights legislation that was hopelessly logjammed for years.

Johnson, a former “master” of the U.S. Senate, wooed legislative leaders of both parties. He threw himself into the budget and tax-cut negotiations, and made the compromises and deals necessary to break the deadlock that Caro reports “before November 22, 1963, had seemed all but unbreakable.”

When Johnson was told by advisers that he should not antagonize Southern Democratic members of Congress by promoting Kennedy’s civil rights bill that had no chance of passage, he looked at them and said, “Well, what the hell’s the presidency for?”

Dismissing conventional wisdom, Johnson executed a plan strategy to get the Civil Rights bill out of committee and on to the floors of the House and Senate for a vote. “It was a struggle,” Caro writes, “whose strategy and day-to-day tactics were laid out and directed by [Johnson].”

Johnson successfully marginalized the South by persuading the members of the party of Lincoln to join northern Democrats in supporting the legislation. By using all the levers of power available to him, he broke the bill free from the Congressional logjam and on the road to passage one month after assuming office. Seven months later, on July 2, 1964, he signed the 1964 Civil Rights Act into law.

Johnson, whom the chic Kennedy crowd called “Rufus Cornpone,” proved that it takes more than glitz to govern. He proved much could be accomplished when a chief executive is determined, hardworking, and not afraid to step on a few toes.

Unless county officials heed the Cuomo and Johnson examples, expect Nassau to continue down the road to fiscal perdition.