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Cuomo's Tax Cap Wins the Day

JUL 8, 2011 6:42pm ET
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Shortly after the ink dried on his signature on New York's property-tax cap law, Gov. Andrew Cuomo took a victory lap around the state.

"It will help revitalize the state's economy and send a message to the rest of the country that New York is no longer the tax capital of the nation," Cuomo said at a ceremonial signing last week in Monroe County.

The legislation, which will take effect Jan. 1, will limit annual property-tax increases to 2% or the inflation rate, whichever is less. Local communities and local voters could override the cap with a 60% vote on the budget for school boards or relevant legislative bodies.

But while Cuomo has received accolades for the tax cap — one of several political victories early in his first year in office — questions linger about its effect on counties, municipalities, and school districts.

Call it a "What now?" moment.

"We're still looking through the nuts and bolts of calculating the cap. There are a lot of moving parts," said David Albert, a spokesman for the New York State School Boards Association.

While observers say the new law will likely force local governments to better control their spending, it will also squeeze them by limiting their ability to raise revenue amid budget cuts from state and federal governments, and could jeopardize their bond ratings.

The cap "is likely to put additional pressure on local government financial operations already strained by declining state aid, weakened tax revenue, high fixed expenditures, and state-mandated services," Moody's Investors Service said last week in a report.

Analyst Robert Weber, who wrote the report, said that while the cap will not directly trigger rating downgrades, "the new restriction on the taxing powers of local entities only adds to their weakened finances."

Moody's said the law will have a greater effect on school districts, given the need for a supermajority to pierce the cap and existing, state-imposed limits on general fund reserves, which other local governments do not face.

"While lower property taxes could have a positive effect on property values in the long run, the effect is likely to be slow, and at any rate, the cap is on the levy itself so new growth won't be captured without an override," the rating agency said.

The Moody's report "is something that has been sought after by the county governments," said Stephen Acquario, executive director of the New York State Association of Counties.

"We hadn't seen until now how the rating agencies would rate the various debts that governments would issue," he said. "This is our first opportunity to see how the rating agencies would handle outstanding debt. It was what we were waiting for, and I suspect what bondholders were most anxious to see."

"It's is a game-changer, no question," Gerald Benjamin said of the tax cap. Benjamin is the director of the Center for Research, Regional Education and Outreach at SUNY New Paltz and a former majority leader of the Ulster County Legislature.

"Politically, it sets expectations for what behavior, what arrangements, and what choices are acceptable," he said. "And yes, it will have a major impact on school districts."

"I think the effect will vary from government unit to government unit," said Michael Imber, a principal in the corporate advisory and restructuring practice at consulting firm Grant Thornton LLP.

But Imber warned about the short-term effects on localities, saying: "The state has cut off an option for fiscal sustainability, creating irreconcilable differences."

Though local governments other than school districts can override the property tax cap without voter approval, Moody's said the cap will still pressure them to maintain revenues in step with escalating expenditures, given the relative weakness in other revenue sources.

Moody's report red-flagged financially strapped communities, including Newburgh, whose general obligation bonds are rated Ba1, and Glen Cove, which has a Baa3 with a negative outlook.

Towns "of particular concern," according to Moody's, include Colonie, with a Baa1, Fishkill, rated Baa3, and East Greenbush, rated Ba1 with a stable outlook. Vulnerable counties, the rating agency added, include Monroe, with an A3 and a stable outlook, Nassau, and Rockland, both rated A1 with a negative outlook.

"Look at Newburgh; people are leaving in droves," Imber said. "The state has told Newburgh it won't help — no bailout. They're being squeezed hard. The saddest part of all is that on top of things, there are also big cuts to cities and towns. The state is saying, 'You can't raise taxes, and by the way, your block grants are cut, too.' I see scores of issues that could result in bankruptcy."

New York City, which accounts for 40% of the state's population, is exempt from the new law. But other relatively large cities — Buffalo, rated A2 with a positive outlook, Aa3-rated Rochester, A1-rated Syracuse, and Yonkers, rated A2 and stable — are not.

"Lots of these places will feel the pinch," Imber said. "Even communities that are healthy or historically healthy will feel the pinch."

All three major rating agencies rate the state double-A.

Local governments worry about having to cap revenues without concurrent relief from unfunded state and federal mandates.

Albert cited some mandate-relief measures, including transportation and seating-related requirements for school buses, as well as the authority to piggyback onto federal contracts for computer hardware, software and professional services. He said they were "good first steps, but more needs to be done."

Albert said the School Boards Association would like some flexibility in such mandated costs as pensions, health insurance and salaries. For example, schools now cannot unilaterally freeze salaries or require employees to contribute more to their medical and retirement costs in financially difficult times.

The new law establishes a joint legislative and executive council to hear petitions for mandate relief through such measures as compliance alternatives. Imber, though, doubts its effectiveness.

"The question is, how well will it perform?" he said. "Will it have the teeth to solve irreconcilable differences?"

According to Moody's, the joint council "may mitigate the effects of the cap for some local governments in the near term, but it does not preclude the state from issuing additional mandates in the future."

Both Benjamin and Imber envision local governments possibly merging such operations as human resources or emergency services.

Some are taking proactive steps and looking at the big picture. In Ulster County, for example, Onteora's school district is paying consulting firm Bernard P. Donegan Inc. of Victor, N.Y., $12,000 to $14,000 to help it craft a long-range financial plan.

"That will come. That's a strategy that districts will employ," Albert said. "But right now there's an immediate need to understand how this equation will work."

"What ends up happening is that the market sorts itself in a messy way," Imber said. "The smarter communities adjust and the others learn from them."

The new law should have little or no effect on fire districts, though they typically sport modest reserve levels. Many fire districts use volunteer firefighters and have much less exposure to such high fixed costs as employee contracts and pension contributions.

Acquario, of the counties association, has already discussed mandate relief with Cuomo advisers, Senate Majority Leader Dean Skelos and Assembly Speaker Sheldon Silver. Acquario said he and county leaders plan to discuss mandate relief with Cuomo himself over the summer.

"Reaction is positive about the law, negative about corresponding mandate relief," Acquario said of feedback from the counties. "There is a feeling of burden. There are a number of issues outstanding."

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