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Out on Long Island, Another Crisis

MAR 9, 2012 6:36pm ET
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SMITHTOWN, N.Y. — Suffolk County is home to Long Island’s Hamptons beach resorts and carries the monicker “playground of the rich.”

It’s also home to a projected $530 million budget deficit over three years, and the county fears it will run out of money in April, before the millionaires open their summer homes.

In the latest bond rating agency action against the county, Moody's Investors Service on Monday lowered the county's general obligation bond rating to A1 from Aa2, with a negative outlook.

County Executive Steve Bellone declared a state of emergency last week. While the major rating agencies held off on any immediate action — two of the three lowered their outlooks and ratings late last fall — there has been market fallout.

“The muni market is not reacting kindly to Suffolk’s fiscal troubles,” Thomson Reuters analyst Daniel Berger said Friday.

According to Berger, a few blocks of the county’s general obligation bonds with 4% coupons maturing in 2014 traded Thursday at 70 basis points above Municipal Market Data’s triple-A scale.

In January, the blocks traded at 35 basis points above the triple-A MMD scale.

Bellone declared the emergency after a task force of fiscal experts laid out the deficit numbers before the county Legislature. “Staggering” became the instant buzzword. Bellone insisted that Suffolk was not alone.

“I don’t think the country has come to grips with how bad things are at the local level,” he said.

Bellone immediately impounded 10% of the money earmarked to each county department and fast-tracked the sale of $90 million in revenue anticipation notes, as part of a mitigation plan.

“Bellone was right. There are Suffolk Counties all over this country,” said Jonathan Henes, a restructuring partner at Kirkland & Ellis LLP. “The federal government says hey, things are getting better, look at the economy. But when you look at the local level, things are terrible.”

Bellone, a Democrat and former Babylon supervisor, convened the seven-member task force shortly after taking office in January.

Its chairman is Richard Halverson of Hampton Bays, former assistant deputy director of the financial control board that oversaw New York City’s recovery in the 1970s.

Halverson’s group spotted several red flags in Suffolk, including soaring pension costs, excessive dependence on sales tax revenue, a slow recovery on Long Island, use of reserves and overreliance on stop-gap measures.

“The recession hit, sales tax revenues dropped and their pension costs are much higher. Over time, the county is no longer in a structural balance,” Halverson said. “We didn’t conclude that anyone was stupid. People here have been grappling with the problem, and none of the solutions have been adequate.”

Anthony Sabino, a law professor at St. John’s University’s Peter J. Tobin College of Business and a resident of neighboring Nassau County, called Suffolk “a study in contrasts.”

“In Suffolk, you have extremely wealthy people, you have your middle class, and your lower-income people. You also have people that consider it the last bastion of downstate farmland,” he said.

Bellone’s predecessor, Steve Levy, blamed the county Legislature for not approving his budget-cutting proposals last year. They included closing the county-run John J. Foley Nursing Home in Yaphank and eliminating 700 jobs.

“The nursing home is a money pit,” said Levy, a former Democrat who ran for New York governor as a Republican in 2010. He also noted that localities statewide are worried.

“I went to a county executives meeting in December and I never saw a group as petrified as to what will happen in a year or two,” he said in an interview, recalling tales of woe from Albany, Chautauqua, Rockland and Orange counties, in addition to the Long Island pair. “The worst is yet to come. Mandates are out of control, and sales tax continues to lag.”

For Bellone, the forecast for fiscal doomsday in April added an immediacy to the crisis. “The path we’re in is headed to bankruptcy if we don’t make structural changes,” he said.

In addition to shepherding the $90 million Ran sale to cover payroll, he has also discussed budget cuts with department heads and lawmakers.

Consequences could include further rating downgrades and the imposition of a state-appointed oversight board, similar to one created in 2000 for Nassau, when that county’s bonds flirted with junk status.

The Nassau Interim Finance Authority imposed fiscal control over the county in January 2011, when its deficit exceed 1% of budget funds, and county officials and NIFA have had knock-down, drag-out battles since.

Imposing a control board requires state legislation.

“It’s a concern,” Bellone said. “I’ve talked to financial experts in the region, and they say we’re in the area where you would have a financial control board imposed. We’ll do everything available to avoid the kind of scenario that has played out in Nassau County.”

Fitch Ratings, which in late November assigned a negative outlook to Suffolk’s GO public improvement bonds and tax anticipation notes, said last week it would take no immediate further action, but would monitor developments.

Moody’s last fall dropped to MIG-2 from MIG-1 the county’s $120 million of Series I 2011 Tans that mature in September.

Fitch assigns a AA-minus rating to Suffolk’s general obligation bonds, while Standard & Poor’s rates them AA.

Henes said the rating agencies present a variable. “You never know what the bond rating agencies are going to do. Only time will tell.”

He also thinks an oversight board could be helpful. “There are benefits and there are risks,” Henes said.

“If you have an oversight board, you have checks and balances on political pressures, to some extent. You can also use the board as leverage for negotiations,” he said. “The risk is that the board could create a barrier that doesn’t allow for decisions quickly enough. So you have a give-and-take.

“But people who negotiate for a living, talk for a living, can bring some valuable things to the table,” Henes added.

His examples include workout pros Matthew Feldman of law firm Willkie, Farr & Gallagher LLP and James Millstein of investment bank Lazard, both of whom served on President Obama’s auto industry task force, which coordinated the restructuring of General Motors and Chrysler.

Levy, who now runs a Hauppauge-based consulting firm, Common Sense Strategies LLC, favors an oversight board that could reopen contracts.

“I would have allowed that, even in the good times,” he said.

“Suffolk and Nassau are both clobbered by mandatory arbitration and what they have done to public safety costs,” Levy added. “One reason the task force came in with that high [budget deficit] estimate is that pensions and public safety salaries are going to explode.”

Moody’s, in a report last week, said that while enterprise risk — ventures such as the sewer system in Jefferson County, Ala., and the incinerator in Harrisburg, Pa. — often triggers many U.S. public finance defaults, many bankruptcy filings and defaults now come from smaller communities struggling to sustain general government services.

“They include the burdens of non-debt obligations, including pensions, entitlements and salaries that have grown out of proportion to the resources available to pay for them,” said Anne Van Praagh, Moody’s chief credit officer for public finance.

Long Beach, in Nassau County, declared fiscal emergency last month, giving city manager Jack Schnirman power to curb and veto spending items. Moody’s, which issued a five-notch downgrade of the beachfront municipality in December, called the declaration a credit positive.

St. John’s Sabino does not envision a Chapter 9 filing by either Long Island county.

“I don’t foresee Nassau or Suffolk in such dire straits as other parts of the country. Jefferson County, Harrisburg, Vallejo, Stockton [the latter two in California] … those are your hot spots,” the law professor said. “Long Island’s not the rust belt. There are serious problems, to be sure, but there are counties across the country in far worse shape than Nassau or Suffolk.”

According to Sabino, the controversy over Nassau’s downsizing of four of its eight police precincts into “community policing centers” — which its Legislature passed last week — is a far cry from police-related budget problems elsewhere.

“It’s a whole world apart from firing cops,” he said.

County Executive Edward Mangano had proposed the measure to save Nassau about $20 million.

Bellone said the marquee names on the task force add credibility to the county’s efforts.

They include Stuart Klein, the former first deputy director of New York City’s Office of Management and Budget, and Charles Stein, Suffolk’s former deputy county executive for finance.

“When I convened this task force, I wanted no politics involved and no one questioning their credentials,” Bellone said. “Listening to [Halverson] and the way he laid it out before the Legislature, he was very professional, almost professorial, about the problem.”

Halverson, however scholarly, warned Suffolk not to let things get worse. He vividly recalled the capital markets shutting off access to New York City in the mid-1970s.

“Suffolk County is not there yet, but its trajectory is not promising,” he said.

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