Challenges Persist For Many Challenges Persist For Many New York CountiesNew York Counties

Presented by:

Robyn Kapiloff

Vice President/Senior Analyst

Presented by:

Robyn Kapiloff

Vice President/Senior Analyst

March 30, 2005March 30, 2005

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New York County Operating Paradigm

On average 75% of costs are fixed or mandated

Strong unions

Pay 25% of most Medicaid services

Dependence on economically sensitive sales tax ranges from 20-40%

Contribute to a fully funded pension system

Decreasing revenue raising flexibility

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As a result of the high percent of fixed and mandated costs (75% on average)

NY Counties have a poor turning radius, limiting ability to respond to revenue constraints or expenditure pressures

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Public Safety unions generally have, and often use, binding arbitration

More discretion with non-public safety employees

Relative to other states, considered very strong in NY

Strong Unions

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Medicaid

NY Counties pay 25% of most Medicaid services

By far the largest local share in the nation

Annual growth has averaged 15% over last 3 years for counties as a result of both expanded eligibility and growth in the cost of prescription drugs

Movement to cap county cost appears to have momentum in current state budget negotiations; state did pick up one program in SFY2006 providing limited budgetary relief

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Sales Tax Dependence

Revenue stream impacted by economic downturn exacerbating expenditure pressures

State ability to adjust payments retroactively detracts from cash flow predictability

23 (of 57, excluding NYC) counties have increased rate and relative dependence over last 3 years

Average rate now 3.8% vs 3.45% 3 yrs ago; 5 counties now exceed 4% local share, long considered the max

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NYS Pension System

Pension payments tied to stock market performance

Due to system losses, exponential growth in system contributions

State froze rate (4.5% of payroll) to ease in increases in 2004; 2005 rate averaged 12.5%--not expected to decline markedly in near term

State allowed bonding of a decreasing percent of expense in FY2005-2007 & changed payment due date

FY2005 costs to decline modestly; those who bonded in 2004 will not benefit from cost decrease

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Deteriorating Revenue Raising Ability

Property taxes are limited by NY State in a manner that favors those with taxbase growth

Counties with limited, or negative, growth have begun to approach their legal limit-with 5 counties very close to exhausting this taxing margin

Counties have raised various other fees and taxes to the max limiting future flexibility

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How early/aggressively they responded to expenditure pressures and slow-down in revenue growth

Political ability/willingness to pursue additional revenues

Reliance on one-shots

Counties have fared differentlyDepending upon a number of factors:

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Rating Changes Last 2 Years

16 Downgrades

4 counties currently on Watchlist for potential

downgrade

15 counties currently have a negative outlook

7 Upgrades

Largely Reflecting Story Credits (includes 3 Nassau

County Upgrades)

1 county currently on Watchlist for potential upgrade

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Where are we now?

Some counties have turned a corner as a result of:

Increases in recurring revenue

Reduction in force

Vacancy management

Expenditure reductions

Conservative budgeting and strong budget management

Other counties continue to face challenges to structural balance and financial flexibility:

Structural imbalance depleted reserves

Mounting losses reduced liquidity

Reliance on one-shot revenues and aggressive budget assumption