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.

The following appears in the March 27-April 2, 2015 issue of the Long Island Business News:

Recently, Nassau County Executive Ed Mangano and his new deputy for finance, Eric Naughton, have boasted that the county’s 2015 operating budget is not only balanced but will have a budgetary basis surplus. They are likely to claim that, when the books are closed on 2014, that budget was ‘balanced,” too.

Frankly, they’re delusional. When the 2015 budget was approved by the Nassau Interim Finance Authority last fall, the deficit projected under generally accepted accounting principles was in the $100 million range. And since that time most experts agree that the gap between revenues and expenditures has continued to grow.

The school speed camera revenues disappeared due to a bungled rollout and the elimination of the program after legislators succumbed to pressure from outraged citizens. There’s also little expectation of revenues from any ill-advised gambling ventures, and the privatization of the county sewer services will not, as Mangano claimed, save $23 million this year. Savings will be in the $10 million range at best – which is merely the minimum amount that was guaranteed in the contract with the third-party management company. And, despite claims to the contrary by NIFA’s chairman and the county, sales tax revenues fell far short of 2014 projections, setting up a shortfall for 2015, as well.

The root cause of the ever-increasing deficit, however, is the negative impact of last year’s deals with the public employees unions that lifted the NIFA-approved wage freeze.

Readers will recall that, in 2014, the new Chairman of NIFA, Jon Kaiman, convinced himself and a majority of the NIFA board that the deals he had negotiated with Nassau County and the unions were cost-neutral. His claim, however, was absurd. Every objective analysis arguing otherwise has proven to be true, and done so even sooner than expected. The union agreements will cost up to $70 million more a year then they will save.

Stated differently, had those union deals not been approved, or had they only been approved in a manner in which they were actually paid for by revenues that are as predictable as the expenses, the fiscal plan approved by NIFA in 2011 under the leadership of Chairman Ronald Stack would have resulted in Nassau balancing its budget in 2015 or incurring a deficit of less than 1 percent. If the Stack plan had been adhered to, NIFA controls could have been lifted in 2016. But under the Kaiman plan, that’s impossible.

What I find most disturbing is that after five years in office, Mangano still hasn’t learned that a budget is balanced only when revenues from taxes and fees match expenditures. The county executive cannot get it through his head that borrowing money to meet payrolls and to cover other financial obligations doesn’t count.

Another grave disappointment: Eric Naughton, the county’s CFO. Naughton, who had credibility during his tenure as head of the Nassau Legislative Budget Review, has forfeited that credibility by adopting “budgetary basis surplus” language. It’s the same language used by his predecessor, Tim Sullivan, that assumes if the county doesn’t pay its bills or borrows the difference, it can declare a cash surplus in contravention of GAAP, good practices and common sense.

Believing their spurious surplus rhetoric has prompted county officials to resurrect bad ideas. Specifically, even with a deficit that is essentially the same as it was in 2011, the county appears to believe that things are well enough to approve $11 million for artificial turf fields. Prior and current analysis shows that, just like most of the county’s bad ideas, such fields don’t produce “savings.” Instead there is a negative return on investment. The fields cost more than the additional revenue received and do not cover depreciation, let alone the increased operating costs and maintenance. They also don’t last very long and require multimillion-dollar replacements.

Mangano’s misguided fiscal policies, enabled by Kaiman, will have long-term consequences. Current taxpayers, their children and grandchildren will be paying off the debt incurred to finance the fiscal follies of these political hacks for many decades to come.

The following appears in the March 13-19, 2015 issue of the Long Island Business News:

I don’t know about you, but I’m getting tired of watching Governor Andrew Cuomo’s propaganda commercials touting New York’s so-called economic renaissance.  First of all, in my judgment, the money expended to run the ads is a waste of taxpayer money.

And secondly, the TV ads are delusional.  The claim that New York is job- friendly is nothing more than empty rhetoric designed to promote Cuomo’s image nationally.

To get a realistic picture of New York’s financial and economic plight, here’s some interesting data that was released in the past year:

• The American Legislative Exchange Council ranked New York as having the worst economic outlook.
• More people have left New York to find greener economic pastures than any other state in the nation. Over 450 thousand have hit the road in the past four years.
• An AARP study revealed that 60 percent of New Yorkers over 50 years of age say they are likely to move to a less expensive state when they retire.
• The Empire Center for Public Policy reported that New Yorkers “pay some of the highest local taxes in the nation.” And, you will be happy to know that the Town of Oyster Bay gets the award for being “the highest-spending and most heavily indebted large town” in the state.  This may help explain why the town is in deep financial trouble, lost its Moody’s insured rating on bonded debt and why, last November, it passed an 8.8 percent property tax increase without any notice to its residents.
• The Mercatus Center at George Mason University in its 2014 edition of “Freedom in the 50 states” determined that “New York is the least free state in the union.” The state has the highest taxes—14 percent of income.  As a result, the researchers were not surprised that residents have been heading for the exits with, on net, 9 percent leaving since 2000.  This is the highest migration figure in the nation.
• The University of Illinois ranked New York as having the most corrupt government in the United States.

To add to this dismal picture, this month the John Locke Foundation, a think tank dedicated to transforming government through competition, innovation, personal freedom and personal responsibility, released its “First in Freedom Index.”  The report examines the relationship between tax and regulatory policies and economic growth as well as the fiscal, educational, regulatory, and healthcare freedom of the fifty states.

In the area of taxes, the First in Freedom Index concluded what New Yorkers know instinctively, “that most forms of state and local taxation have statistically significant and negative associations with economic growth.  That is, the lower the tax, the better off the economy is, all things being equal.…”

And after assessing New York’s tax climate which includes income, sales, businesses, property and payroll taxes, the state came in last place.

When it comes to regulatory freedom, New York received a state ranking of 47th.  Only Rhode Island, California and New Jersey received poorer ratings.  In the area of healthcare freedom, New York was rated 49th.

Assessing all the data, the John Locke Foundation was able to make some interesting conclusions:

• Since 2011, the 10 top states have had a 2.3 percent annual average GDP growth rate while the 10 lowest experienced an average GDP growth rate of 1.5 percent.
• The 10 states that have highest rankings in healthcare freedom have average healthcare costs of $6,533 per person. The average healthcare costs of the 10 lowest rate states is $7,689 per person—18 percent higher.

All of these studies refute Cuomo’s wishful-thinking TV ads.  His television campaign is an insult to New Yorkers who know better and if he has an ounce of integrity left he should order the commercials to be pulled.

The following appears in the February 27-March 5, 2015 issue of the Long Island Business News:

In the aftermath of the Martin Luther King Jr. assassination in April 1968, Gov. Nelson Rockefeller forced down the throat of the state Legislature a bill that created the Urban Development Corp. This entity had a wide mandate to provide fast-track housing, industrial development and civic improvements throughout the state.

UDC’s incorporation papers stated there was “legislative intent” to supply money to meet principal and interest on outstanding bonded debt in the event of shortfalls. Since the state had no legal obligation to aid the agency, the concept became known as “moral obligation.” Designed by John Mitchell, who served as Nixon’s attorney general and 1972 campaign manager, “moral obligation” bonds constituted a financial gimmick to get around bonding limitations of the state constitution and to make dubious projects more palatable to the bond underwriters in the investment community.

In early 1975, with cutbacks in federal grants and a recession settling in, UDC had a cash-flow problem when several of its projects went belly-up. On February 25, 1975, UDC defaulted on paying off $104.5 million owed to holders of bond anticipation notes.

Within a month, Gov. Hugh Carey patched together the resources to repay the money, but UDC’s reputation as an economic engine for New York was seriously damaged.

Nevertheless, since that time, the agency has continued to toss bags of money around the state to subsidize various business projects, albeit, since 1995, under the new improved name Empire State Development Corp.

Today ESDC is a huge government leviathan saddled with more than $10.4 billion of debt (20 percent of state public authority debt outstanding), and as a February 2015 report issued by Comptroller Tom DiNapoli points out, it is the primary vehicle for “backdoor borrowing, which is conducted on behalf of the state with no requirement for voter approval.”

The agency has also created more than 200 subsidiary corporations. Audits by the state comptroller’s office have determined the entities do not have adequate oversight by ESDC and that many of them should be dissolved because they no longer serve any purpose.

The comptroller’s office as well as watchdog group Citizens Budget Commission have questioned the effectiveness of ESDC subsidiaries and tax credits. The comptroller concluded that ESDC’s “job creation prowess was relatively meager compared to the amount of state funds spent.”

In fiscal year 2013, ESDC’s total expenditures were $1.3 billion, which included economic development grants of $581 million and reimbursed grant expenses totaling $137 million.

And what was the return in fiscal year 2013 on these so-called investments? ESDC aided 201 companies statewide, which resulted in 12,355 jobs being retained and 2,424 jobs created – 1.8 percent of net private-sector job creation during that year.

Impressive results? I think not. Do the math: $1.3 billion in expenditures divided by 14,779 total jobs saved and created equals $87,962 spent for each job. That’s a lot of money per job.

Even more disturbing: ESDC does not provide the public with any comprehensive data describing how allocations are determined or if the agreed-upon goals of the companies helped are ever met. And approximately 28 percent of the companies assisted in 2013 were not chosen by ESDC but by the state Legislature.

The process, in my judgment, smacks of crony capitalism. The governor or legislative leaders can influence decisions that help their constituents, contributors or pals regardless of the merits – and the meager results prove it.

Job growth will never be sparked by government entities like ESDC. That’s because by its very nature, ESDC is driven by political interests, not economic ones. Until New York’s elected leaders abandon underperforming subsidies in favor of genuine tax cuts and regulatory and unfunded mandate reforms, the Empire State will continue to lag the nation in job growth.