It’s a tale of four counties.

On the surface, it should be the best of times for all four New York State counties closest to the city, which each enjoy household income levels well above the national median. Yet Nassau, Suffolk, and Rockland counties struggle financially while only Westchester County sails smoothly along a triple-A glide path.

Nassau County’s struggles were exemplified Tuesday when Fitch Ratings downgraded the county to A from A-plus, and maintained a negative outlook.

Nassau, with about 1.3 million residents, occupies the part of Long Island adjacent to New York City. Moody’s rates the county A2, with a stable outlook, down two notches since April 2010. Its neighbor on the east end of Long Island, Suffolk County, with about 1.5 million residents, is A2 with a negative outlook, down three notches from April 2010.

Rockland County, west of the Hudson with about 315,000 residents, has been hit hardest -- Moody’s now rates it Baa3 with a negative outlook, down six notches from Aa3 in April 2010.

They aren’t poor places, at least statistically. The median household income in the United States was $52,762 and for New York State $56,951, according to 2011 U.S. Census data. By comparison, median household income for Nassau was $95,823, for Suffolk it was $87,187 and for Rockland it was $84,661.

SHARED PROBLEMS

The three struggling counties share some problems.

Chief among these have been an unusually high reliance on sales tax revenues, analysts from all three rating agencies said. Sales tax revenue represents 40% of Rockland’s revenues and almost  50% of Suffolk’s revenues, Moody’s assistant vice president Rob Weber said.

When the recession hit, all four suburban counties saw significant hits in sales tax revenues. According to data provided by New York State, in inflation adjusted terms from peak to trough Rockland County saw a 6.6% decline, Nassau had a 9% decline and Suffolk had a 12.1% decline.

Despite the economic downturn, many of the counties made over-optimistic projections for sales tax revenues, said Fitch Ratings director Karen Wagner.

Since the recession revenues have recovered modestly but in inflation adjusted terms they are still well below their pre-recession highs in 2007 or 2008. Nassau is down 5.7%, Suffolk is down 9% and Rockland is down 9.7%.

Property values also slipped in the recession, but the counties adjusted tax rates to keep property tax revenue fairly even over the last several years, analysts said.

That’s not an option with sales taxes.

The counties need approval from the state legislature to raise sales tax rates. While some of the counties have sought these raises, they have been rejected. Rockland County was the last county among the four to make a change to the sales tax rate, in March 2007.

The struggling counties have been relying to significant degrees on nonrecurring revenues in the last few years, Wagner said. Fitch, Moody’s and Standard & Poor’s have treated these practices as credit negatives.

The three counties have turned to using their reserves to make ends meet, Wagner said. The reserve levels have fallen and the agencies’ ratings have followed suit. Nassau is rated A by Fitch and A-plus by S&P. Suffolk is rated A by Fitch and A-plus by S&P. Rockland is rated BBB-minus by S&P.

All three counties in recent years have extensively used revenue anticipation notes to get through their fiscal years, another credit negative in the agencies’ view.

With increased borrowing has come increased debt service payments, Wagner said. Labor and pension costs have generally increased, said S&P associate director Lindsay Wilhelm.

Nassau and Suffolk have enormous police forces that are “princely paid,” said senior fellow E. J. McMahon of the Empire Center for New York State Policy, an arm of the libertarian-right leaning Manhattan Institute think tank.

At the start of the recession, the state and federal government provided financial aid to the counties, Fitch director Eric Friedman said. They have since pulled back on this aid and this helps to explain the recession’s lingering impact on the counties, he said.

 

UNIQUE CIRCUMSTANCES

While all three counties share some problems, they also have a few differences. Nassau County’s problems are long-standing. In 2000, the state created the Nassau County Interim Finance Authority to help guide the county through its problems, and the control board remains in place.

Nassau has had a long running problem with tax protests, McMahon said. Commercial property owners have frequently and successfully challenged assessments. Around 2000 it started issuing bonds to pay off the judgments.

The county now has $1 billion outstanding debt connected to those tax certiorari judgments alone, McMahon said, and $330 million in pending judgments that the Nassau County Interim Finance Authority refuses to bond.

Since January 2011 NIFA has had control over Nassau County’s borrowing. Poor relations between NIFA, the county legislature and the county administration are a credit negative for the county, Wagner wrote.

The county faces substantial liabilities if tax refund and wage freeze suits are ultimately decided against it, Wagner said.

In the last two to three years Suffolk County government has made no major effort to increase revenues, Weber said.

Suffolk’s two major non-recurring items in its 2013 budget are the sale of a nursing home and the sale/leaseback of county owned buildings. Recently it has decided that it will not sell the nursing home, thereby losing $12 million that the budget had assumed. However, patients are expected to be moved out of the home by June. This should save the county $8-$10 million a year in the future, Weber wrote.

The county is waiting for state approval of the sale/leaseback of county buildings. Without the approval the budget would take a $70 million hit, Wagner wrote.

Rockland County has been losing money on a nursing home for several years, Weber said. To improve the county’s finances, it must either sell it or balance its finances, he said.

On the surface, Westchester County demographics are slightly worse than its three peers though its $80,725 median household income remains far higher than state and national medians. Yet the county has maintained its triple-A rating.

At about 25-26% of its revenues, the county’s reliance on sales taxes is much lower than the other three counties’, Weber said. Because of this, the recession has had a smaller impact on the county’s coffers.

Unlike the other counties, Westchester has a major corporate presence including headquarters for IBM and PepsiCo, Weber noted. The corporate presence helps improve property taxes and adds to sales tax revenue through the in-county purchases by people who work at the firms.

Westchester County had stronger reserves going into the recession, Wilhelm said. In the recession Westchester was more aggressive than the other counties in cutting its expenditures, Friedman said.

Officials in the three troubled counties all see a turnaround ahead.

Nassau County “plans to move towards greater financial stability through proactive financial management, continued workforce efficiencies, assessment reforms, continued savings through public-private partnerships and various New York State initiatives,” wrote Nassau spokeswoman Katie Grilli-Robles in an e-mail.

The percentage of spending above recurring revenue has decreased from 10% in 2009 to 1.3% in the 2013 budget, Grilli-Robles wrote.

The county’s 2012 unaudited results include a $41.6 million surplus, which will be added to the fund balance, Grilli-Robles added. The county expects its cash flow borrowing to decrease by over 5% in 2013 compared to 2012.

Rockland County has lowered its budgetary assumptions for sales tax and mortgage recording tax revenue, compared to what it had assumed in budgets a few years ago, Rockland County commissioner of finance and budget Stephen DeGroat said.

A few years ago out of a budget of roughly $700 million, property taxes were only $60 million, DeGroat said. The county has made changes so that it now expects property taxes of $96 million this year.

To gain a structurally balanced budget, not only has the county taken the above measures, it has also had layoffs, an early retirement incentive program, and introduced an energy tax, DeGroat said.

To cut the use of deficit financing notes, the county is seeking to sell deficit finance bonds with maturities around 10 years. This would provide the county with some long-term stability.

Suffolk’s reserves have improved to $110 million in early May from $15 million in early May 2012, said Suffolk executive director of accounting services Brenda Sloan.

Suffolk County is making real headway in 2013 to address its structural deficit, said Connie Corso, the budget director. County executive Steve Ballone declared a financial emergency in January, allowing him to embargo 10% of department’s unspent discretionary funds. The county has cut 800 from the payroll this year, Corso said. More than a 100 more will be let go within the next few months.

In a recently approved contract, the county has taken steps to curb police salaries, Corso said.

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