Federal Cuts Could Force N.Y.'s Creative Hand

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The specter of massive cuts in federal domestic aid could force New York City officials to think outside the box about how to salvage programs now financed by the feds.

Mayor Bill de Blasio painted a dire picture of life in the city should President Trump's $1.15 trillion budget blueprint materialize. De Blasio promised pushback on all fronts nationwide.

"There are cuts in this proposal that will be met with massive negative response from all over the country – not just in blue states but red and purple ones as well," de Blasio said March 16.

The New York City Housing Authority alone could lose up to $150 million in operating funds and up to $220 million in capital funding. NYCHA chief executive Shola Olatoye, whose agency has $17 billion in capital needs, said roughly $400 million of Section 8 funds are in jeopardy and about 700,000 New Yorkers could lose access to the low-income energy assistance heating program.

"The biggest issue for New York City is the housing program," said Howard Cure, director of municipal bond research for Evercore Wealth Management.

One creative option, according to Cure, is to convert some properties to the federal Rental Assistance Demonstration, or RAD, program, which the Department of Housing and Urban Development operates.

It allows public housing agencies to fully own their public housing units and to renovate or redevelop the housing using private financing sources. The renovated or new housing receives rental support for the residents through a project-based Section 8 subsidy.

"They could convert to Section 8 for buy in from the private sector," said Cure. "They may have to make that move to be more creative. I'm not so sure the city wants to give control to a more private entity, but that may be the only way to go."

According to Gurtin Municipal Bond Management, municipal bond investors could face serious credit problems should HUD's budget drop by $6 billion, as the Trump blueprint proposes.

"Since federal funds are by far the largest source of revenue for [public housing authorities], their ability to raise sufficient revenue from other sources to cover a decline in HUD appropriations is questionable at best," David Stenhouse wrote in a commentary for Gurtin. "This task becomes even more daunting when considering the timing of this reduction given that it comes on the heels of a prolonged period of significant decline in federal support."

New York City's hospital system, meanwhile, is a mess.

"The health-care system is bleeding money," said Cure.

Reliance on Medicare and Medicaid strains the system. The reimbursements are simply not enough to fully cover the cost of patient care the system delivers. In addition, the mission of the city's Health + Hospitals unit is to provide care regardless of a patient's immigration status or ability to pay.

De Blasio last year unveiled a plan to seal H+H operating deficits, which the department projects will spike to $1.8 billion by 2020. Proposed corrective actions aim to increase revenue, curb expenses and shift H+H from an inpatient focused service delivery model to a greater emphasis on outpatient care.

The mayor has yet to pick a permanent chief executive to succeed Ram Raju, who resigned late last year. Interim chief Stanley Brezenoff was CEO and board chairman in the early to mid-1980s.

According to the watchdog Independent Budget Office, aside from $100 million generated from developing H+H properties, the bulk of additional revenues under de Blasio's transformation plan are expected to come from the federal and state governments.

New federal budget and polices – including the possible repeal of the Affordable Care Act -- could further imperil the system.

"In the short run H+H can take other corrective actions and draw on existing upper payment limit revenue to offset its shortfall for 2017," IBO said in a report. "However, H+H's exposure to potential policy changes, along with uncertainties in achieving the required federal and state cooperation assumed in the transformation plan, could create budget shortfalls in 2018 and beyond."

Upper payment limit revenues are supplemental payments that involve the difference between Medicaid payments for services and the maximum payment level allowed under the limit for those services.

Speaking to reporters at City Hall, de Blasio gave no specifics about the possible effect on the city's budget. "We know that a lot of the issues related to hospitals are tied up with Medicaid, which is tied up with the Affordable Care Act debate," he said.

Also straining the New York budget is the policing of Trump Tower, a mixed-use high rise in midtown Manhattan and home to the president's business empire. In a letter to the state's congressional delegation urging full federal reimbursement for securing the property, police Commissioner James O'Neill estimated the daily cost from election day in November to inauguration day in January at $308,000 – or up to $35 million overall.

Palm Beach County, Fla., where Trump owns the Mar-a-Lago mansion that he has visited frequently since his inauguration, is weighing a creative option.

County Commissioner Dave Kerner, a Democrat and former state representative, has asked county Attorney Denise Nieman to review the legality of labeling the mansion a "municipal service benefit" unit after the federal government has stalled requests for reimbursement. That would enable the county to impose a special tax on Trump.

According to Kerner, the tax would be pegged to the value of any "special benefit" the county has provided to Trump. The Palm Beach Sheriff's Office has estimated Trump-related costs at $1.4 million as of mid-February. Trump's three trips in February and the one earlier this month, included about $570,000 in costs.

According to George Sweeting, the deputy director of New York IBO, Florida law enables counties to establish such municipal benefit units. "I don't believe they exist in New York State, so state law would be needed," said Sweeting.

Given the strained relationship between city and state, cooperation could be a stretch.

Sweeting added that the Florida model is not a property tax and specifically allows assessments of limited set of affected parcels benefitting from the municipal benefits without concern for the equal treatment standards in the property tax.

"If you created such a benefit tax in New York State, you could conceivably assess just the Trump owned units in Trump Tower," and maybe other properties such as 40 Wall Street.

A message seeking comment was left with representatives of the Mayor's Office of Management and Budget.

Federal and local officials should keep talking, said Anthony Figliola, vice president of Empire Government Strategies in Uniondale, N.Y.

"This is a tough logistical and budgetary issue, but I don't believe it's something that needs to be negotiated through the media," he said.

"Obviously, the municipalities deserve to be fairly compensated for work performed and the president, who does not take a salary, must be protected. We all know the wheels of government move slowly; however, with municipal finances being stretched, all parties must come to the table and find a solution in order to protect the local taxpayers."

Trump's call to eliminate the Transportation Investment Generating Economic Recovery, or TIGER, discretionary grant program could handcuff de Blasio's Vision Zero motorist-and-pedestrian safety initiative.

The mayor and city transportation Commissioner Polly Trottenberg had tapped the grant money for street and sidewalk redesigns, among other uses.

While Trump has called for more public-private partnerships, New York and other Empire State cities still need approval from state lawmakers to execute P3s. "That would make it more viable," said Cure.

Far-reaching cuts, said Cure, could also affect arts initiatives, science research in the city's tech clusters and environmental cleanups.

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