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Long Island’s Coming Fiscal Crash

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Long Island’s Coming Fiscal Crash

Even wealthy suburbs can’t spend beyond their means forever. Autumn 2015

Budget deficits papered over with borrowed money and fiscal gimmicks. Unaffordable union contracts. Pension contributions “amortized” into the future. Retiree health benefits promised but unfunded. Corruption probes and whiffs of scandal. Accountability blurred, responsibility shirked, and hard decisions avoided again and again.

That litany could describe any number of old, declining American cities—including a few that, like Detroit, actually went broke. But the same dysfunction exists in affluent corners of New York’s archetypal suburb, Long Island—generally defined as Nassau and Suffolk Counties, excluding the New York City counties of Kings (Brooklyn) and Queens on the island’s western end. A few local governments on the island have struggled to make ends meet in recent years; more could ultimately require the kind of state fiscal oversight already imposed for years now (with mixed results) on Nassau’s county government. The Long Island story is a cautionary tale for still-expanding metro areas across the country: if they don’t restrain spending in good times, even relatively stable, high-income suburbs can’t defy the financial laws that have brought down more vulnerable cities.

Graphs by Alberto Mena (4)

With a combined population of 2.8 million, Nassau and Suffolk Counties face many of the same challenges as other older U.S. suburban regions, including aging populations and infrastructure, a loss of manufacturing employment, and a growing immigrant population. Still, Long Island’s median household incomes ($97,690 in Nassau and $87,763 in Suffolk) are high. The region’s population isn’t declining, and it is at least holding its own economically—more than one could say for most of New York’s upstate municipalities. Why should any level of government in Long Island feel the need to engage in risky financial behavior?

The basic answer: Long Islanders failed to learn from the mistakes of the big city that many of them left behind (and that many continue to commute to). Instead, Nassau’s Republican machine spent the boom years building a suburban version of the profligate, union-dominated, debt-ridden urban-governance model that almost bankrupted New York in the mid-seventies—and Suffolk generally followed suit. Like their liberal urban counterparts, the putative moderates and conservatives running Long Island’s biggest local governments spent as though the good times would never end.

As of 2014, the average local government salary on Long Island was $71,393, more than a third higher than the private-sector average of $53,133, according to state labor statistics. Government jobs also come with more—and more expensive—benefits than are commonly available in the private sector. Small wonder that Long Island’s property taxes are among the highest in the country.

But high government operating costs aren’t the only burden that Long Island’s homeowners and businesses have to bear. To varying degrees, the region is also buried in public debt, especially Nassau, which has by far the highest debt, measured per capita or relative to income, of any New York county outside New York City. The total bonded indebtedness for all levels of local suburban Long Island government—including two small cities, 13 towns, and 125 school districts—came to $7.7 billion in Nassau and $6.4 billion in Suffolk as of 2013, reports the state comptroller’s office.

To be sure, the layers of local government debt are unevenly distributed, much heavier in some jurisdictions than in others, and they represent only part of what Long Islanders owe. Long Island local governments and school districts collectively have amassed nearly $26 billion in unfunded liabilities for retiree health benefits promised to current and former employees. Between them, since 2011, the two counties and more than two dozen of their municipalities and special districts also have deferred more than a half-billion dollars in pension contributions for periods of ten to 12 years.

Other New York City–area suburbs, such as Westchester and Rockland Counties, have indulged in similar unwise practices. What sets Long Island apart is yet another layer of long-term obligations: the $7.4 billion (and rising) debt of a government-owned public utility, the Long Island Power Authority (LIPA). Long Islanders pay LIPA and its private operator some of the highest utility rates in the nation because, in the past, the authority repeatedly borrowed to keep rates from rising. LIPA acquired the assets of the investor-owned Long Island Lighting Company in 1998, after bailing LILCO out of the debt associated with building the Shoreham Nuclear Power Plant, which shut down more than a quarter-century ago, before generating a kilowatt of commercial power. LIPA was entitled to a massive refund on local property taxes that it had paid on the Shoreham plant, but then-governor George Pataki pressured the utility to accept a much smaller reimbursement and borrow $750 million to cover the difference, and later issue another $250 million in bonds instead of hiking rates when fuel costs rose. Debt grew and grew.

After years of excessive spending and sweetheart labor deals under County Executive Thomas Gulotta, a Republican, Nassau initially flirted with insolvency in 2000. The state responded with a $100 million bailout, linked to the creation of a state control board, the Nassau Interim Finance Authority (NIFA), which restructured the county’s debt. Thomas Suozzi, a Democrat elected to succeed Gulotta in 2001, stabilized county finances for a time by raising taxes and restraining spending. But Nassau was teetering again by 2009, when voters ousted Suozzi and replaced him with Republican Edward Mangano. The new executive immediately repealed an unpopular home-energy tax but did little to close a lingering structural budget gap. In 2011, NIFA retook control of the county and stopped the bleeding by freezing employee contracts. Over the next few years, Mangano reduced the payroll (mainly through attrition) and slowed spending growth but repeatedly pushed back against NIFA criticism that he wasn’t doing enough. Before winning his second term in a 2013 rematch with Suozzi, Mangano negotiated a new police contract that, he asserted, contained sufficient concessions to justify lifting the wage freeze. NIFA questioned details of the deal, though, and didn’t agree to unfreeze wages for cops and other government workers until some modifications of the deal had been made in mid-2014.

Nassau’s control board recently has found fresh cause for concern, issuing a report in August that called Mangano’s updated financial plan unbalanced and that urged the county to “act quickly to address . . . growing risks” in its $3.1 billion budget. NIFA projected that Nassau’s future budget gaps—based on the rigorous accounting rules used by New York City and not the more fungible cash accounting preferred by the county—could reach $241 million in 2016 and rise to $311 million by 2018. Further clouding the outlook is an investigation by the Nassau district attorney of the county’s issuance of numerous personal-services contracts falling just below the $25,000 threshold requiring county legislative approval. Meanwhile, in September, a politically connected restaurateur with close ties to top Nassau Republicans was indicted on federal charges, including allegations that he bribed an Oyster Bay official to secure a loan guarantee linked to lucrative town contracts. Fiscal problems in Nassau aren’t limited to the county government. The county’s two small cities, Glen Cove and Long Beach, have issued bonds to deal with chronic budget deficits within the past few years. And Nassau’s wealthiest town, Oyster Bay (median income: $109,286), has had to scramble to close recent budget gaps. The town has nearly doubled its long-term bonded debt and jacked up taxes by more than 20 percent in the past few years. But given the limited financial disclosures required of New York municipalities, it remains unclear whether Oyster Bay is out of the woods.

Suffolk County seems to be in comparatively better shape, but that impression may be superficial: unlike Nassau, Suffolk doesn’t release multiyear financial projections. But Suffolk county executive Steven Bellone has acknowledged persistent structural gaps, which he has filled by drawing down reserves and using one-shot revenue raisers. Suffolk’s most egregious gimmick came two years ago, when it “sold,” and then leased back, its county office building from an off-budget county agency, which borrowed $70 million to finance the purchase.

The imbalance in Suffolk’s $3.4 billion budget has narrowed since then, but legislative analysts suggested in April that the county could face an $87 million shortfall in 2016, even if it once again defers a chunk of pension contributions and raises property taxes by 2 percent to cover mounting police costs.

Police departments are a common denominator in the budget challenges facing both Long Island counties. Roughly equal in size—Nassau has 2,189 officers, Suffolk 2,389—the two county police agencies are well remunerated by the standards of larger jurisdictions nationally. Including overtime and other extras, which can add 20 percent to 30 percent to base salaries, cop pay averaged $156,632 in Nassau and $149,242 in Suffolk in 2014. Both of Nassau’s cities, five towns in Suffolk, and 30 villages across the two counties also have their own police departments, with pay at least as good.

Generous police salaries, spiked by overtime, invariably lead to skyrocketing pension costs. In 2014, 603 retired Nassau cops had pensions of $100,000 or more, as did 279 retirees from the Suffolk County department. Dozens more retired cops from city, town, and village departments earned six-figure pension benefits—not including the recently retired chief of Old Westbury’s department, whose unused sick time, vacation pay, and compensatory time brought him a severance check of more than $1 million.

Local police salaries in New York have been boosted over the last four decades by a 1974 state law requiring binding arbitration of contract impasses with police and fire unions. Pay awards by arbitration panels often have far exceeded inflation, even during economic downturns. Long Island police unions have milked arbitration for all it’s worth—generally plenty. Besides adding to union leverage, the law had the pernicious effect of letting politicians in both parties avoid pitched battles with labor and pass the blame for costly contracts to faceless, unelected state arbitrators.

For all its excesses, county and municipal spending accounts for only one-third of property-tax collections on Long Island. Roughly two-thirds of the bill originates with Nassau’s and Suffolk’s public schools, which in 2012–13 spent an average of $22,818 per pupil, more than double the national average of $10,700 that year, according to U.S. Census data. To look at it from a different angle: Long Island’s 125 school districts spent $10.3 billion to educate 451,355 students—$1.7 billion more than the total expenditure of Connecticut’s 165 local and regional school districts, which enroll 517,812 kids.

Complaints about Long Island school spending usually come to focus on its multitude of districts (125), which range in size from tiny, eight-pupil New Suffolk to the 17,492-pupil Brentwood district in central Suffolk. The main driver of the massive school budgets, though, is a combination of large staffs and generous teacher salaries. As of 2012, Long Island schools employed an average of nearly 12 full-time-equivalent instructional staffers per 100 pupils, compared with a national average of fewer than ten, census data show. With starting pay typically ranging from $50,000 to $60,000, the median teacher salary on Long Island as of 2014 was $104,129; senior teachers earn more than $130,000 a year. Apart from New York’s similarly heavy-spending Westchester and Rockland Counties, teacher salaries that high are virtually unheard of elsewhere in the country, including in other affluent Northeast suburbs whose residents are similarly supportive of public schools.

This kind of big spending has become less affordable as the region’s economy has declined since the 1980s. During the 30 years since the Bethpage-based Grumman Corporation reached its peak Long Island employment of 26,000, the area has struggled to replace disappearing aerospace jobs with equally high-paying employment in other fields. Since 2000, most new jobs on Long Island have been in low-paid sectors such as lodging, entertainment, education, and health care.

True, the island still has significant homegrown tech and advanced bioscience assets, including Cold Spring Harbor Laboratory, Brookhaven National Laboratory, and the science-intensive programs at the State University of Stony Brook, as well as the new advanced treatment facilities opened, or in the works, by North Shore–LIJ Health System, based in Great Neck, which is now the largest private employer in New York. But for now, Long island remains heavily economically dependent on the nearly 20 percent of its working residents who commute to well-paid jobs in New York City—a percentage that has changed little since 1990. That dependency leaves Long Island acutely vulnerable to downturns affecting the city’s high-wage sectors, especially finance. It also means that the region has a lot riding—literally and figuratively—on the future of the state Metropolitan Transportation Authority and its Long Island Railroad, which faces its own stiff operational and capital challenges.

Two major factors stifle Long Island’s ability to nurture a higher-wage economy. The first is those high taxes that have come with the region’s spending and debt, which repel both people and firms. As of 2010, the latest year for which figures are available, the median homeowner property tax came to $9,289 in Nassau County and $7,768 in Suffolk County. Measured as a share of homeowners’ median incomes, Nassau’s property tax ranked fifth nationally; Suffolk ranked ninth. In New York, only Westchester and Rockland Counties rivaled these levels. In addition, like their counterparts in the lower Hudson Valley, businesses on Long Island pay added taxes and motorists pay higher fees to support the MTA. The Nassau and Suffolk sales-tax rate of 8.625 percent, slightly more than half of which is retained locally, is slightly lower than New York City’s 8.75 percent but considerably higher than rates in New Jersey or Connecticut or, for that matter, in most of the rest of the country. Business owners have a particularly hard time of it in Nassau County. For years, Nassau systematically overassessed the value of commercial and industrial property, leading to repeated cycles of court-ordered refunds, which the county government has borrowed $1 billion to pay on behalf of itself and its numerous municipalities and school districts.

The second obstacle to growth is rampant NIMBYism, expressed in community opposition to new development and redevelopment proposals—above all, those involving multifamily housing—even when they target aging downtowns. Add zoning restrictions and environmental regulations curbing construction, and it’s no surprise that, among the nation’s 100 most populous counties, Nassau ranked dead last and Suffolk 92nd in their rate of housing permits issued per 10,000 residents between 2004 and 2014. Rentals account for just one in five housing units on Long Island, compared with roughly one in three nationally and in other New York suburbs.

The strangled supply of new housing contributes to a serious affordability crisis. Long Island has the most mortgage foreclosures of any region in the state relative to its housing stock, a report from State Comptroller Thomas DiNapoli noted. Highlighting the problem was a recent Newsday series on abandoned “zombie homes” in Nassau and Suffolk—2,084 and 1,960 respectively, among the largest numbers for any counties in the U.S. The inflated costs of housing make it harder for Long Island to attract millennials, who often find themselves priced out of the few market-rate apartments for rent in Nassau and Suffolk; yet without aspiring young people, the regional economy will continue to underperform.

For Long Island, the most positive public-policy initiative in recent years was the 2011 adoption of Governor Andrew Cuomo’s cap on property-tax levies outside New York City. Since the cap went into effect in 2012, the average annual growth in Long Island school taxes has been 2.2 percent, compared with 6 percent annually over the previous 30 years. The lingering problem is that Cuomo did not supplement the measure with proposals to lift costly state mandates, such as the Triborough Amendments, which require school districts to keep paying teachers automatic annual “step” increases in pay even when no union contract is in place.

The governor did seek in his 2013 budget bills to modify the police and fire arbitration provision by capping imposed settlements at a 2 percent increase per year. But the legislature, including Senate Republicans led by Dean Skelos of Rockville Center, blocked the change. The arbitration law was renewed with just minor tweaks, giving unions a significant victory.

Binding arbitration will next come up for renewal in June 2016—giving Senate Republicans an opportunity to rethink their position on reform under their new majority leader, John Flanagan of Huntington in Suffolk County, who succeeded Skelos in May after the latter’s indictment on extortion, bribery, and other charges. Flanagan has, in the past, been willing to challenge the public-sector labor status quo—for example, proposing a 2010 bill that would have frozen state and local government pay in the wake of the recession. Passing broad state mandate relief for localities will require a break from the traditional state politician’s focus on bringing home more bacon from Albany.

Albany’s strongest voice for reform of public-sector labor laws has been another Long Islander, Republican assemblyman Michael Fitzpatrick of Smithtown. His proposals have included the elimination of the Triborough-driven automatic pay hikes and a ban on pension spiking. So far, however, he’s been a lonely voice on these issues.

The finances of Nassau and Suffolk Counties, as well as several other Long Island municipalities and school districts, are likely to experience severe stress in any economic downturn over the next few years. Perhaps then, at last, real reform will happen.

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