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Housing crisis will force tough municipal decisions

BY REID J. EPSTEIN

November 25, 2007

With sales tax collections falling well below expectations, municipal officials and fiscal experts increasingly are warning that Long Island politicans soon may face a difficult dilemma -- either cut already tight budgets, or raise property taxes.

The housing market slump triggered by the national subprime mortgage crisis is forcing some local governments across the country to make dramatic spending cuts, but the crisis has so far spared county governments here from taking drastic steps. Officials, including Suffolk County Executive Steve Levy, say fiscal belt-tightening will make tax increases unnecessary.

Still, a variety of experts and officials are worried about lower-than-expected sales tax revenues.

In Nassau, sales tax revenue is running less than 0.9 percent ahead of 2006 figures, about a quarter of the county's original projected growth of 3.6 percent for 2007. Suffolk, which began the year with a more conservative sales tax projection, also will fall short of its initial target, according to budget officials.

"The counties are just sitting there waiting for this tsunami coming at them of declining tax revenues," said Martin Cantor, director of the Long Island Economic and Social Policy Institute at Dowling College. "There's no new revenues coming in and it's going to get worse."

The Nassau Interim Finance Authority, a state board that started monitoring the county's finances after the 1999 fiscal crisis, is concerned enough about the potential shortfalls that it has directed Nassau to provide a contingency budget on Jan. 15 indicating what the county will do if revenues do not come in as expected.

"We're concerned about declining tax numbers not just in Nassau County but in Suffolk and around the region," NIFA member Richard Kessel said last week.

"The trend right now is a significant slowdown in sales tax revenues to state and local governments," Kessel said.

The Long Island counties so far have been insulated from the fallout from the sub-prime mortgage crisis, according to officials, because they are less reliant than many other municipal governments on property and mortgage transfer taxes.

But Nassau and Suffolk are heavily reliant on sales taxes, which make up about 40 percent of their budgets; Suffolk's budget for next year is $2.8 billion while Nassau's proposed budget is $2.5 billion. With indications of a slowdown in retail spending and little optimism for relief from holiday spending on the horizon, experts are concerned.

Suffolk had projected an increase in sales tax receipts of 2.75 percent over 2006, but collections are running only 2.5 percent ahead. The difference amounts to nearly $3 million, officials said.

"There is no question that the tanking of the subprime market does have a deleterious impact on county government because people don't have the disposable income as they once did and they're not investing in home expansion or new homes that filters out through the economy," Levy said.

Falling home values and tightened loan requirements mean residents are less able to draw equity out of their homes, which they then could devote to retail spending that generates sales tax revenue.

Levy said that if such revenues "trend downward, we will need to further control" spending by "perhaps filling fewer approved positions and tightening supplies and materials across the board.

"It would all depend upon if a shortfall is identified and how much it is determined to be," Levy said.

Legis. Ricardo Montano (D-Central Islip), chairman of the Budget and Finance Committee, agreed that if sales tax collections come in short of projections, the legislature and Levy would have to do some belt tightening.

"If we have a shortfall, the likely areas we'd look at are a hiring freeze, cutting back on purchases and imposing cuts," Montano said.

Nonetheless, Montano, Levy and others said it's unlikely Suffolk will end the year with a deficit. Not only do spending trims remain a possibility, but Suffolk is expected to end the year with a surplus of more than $100 million, Montano said.

"Suffolk is in a better state than Nassau," Cantor, of Dowling, said. "It has a surplus. It wasn't in a mess in the first place," he said, referring to Nassau's 1999 financial crisis.

For 2008, Nassau is projecting sales tax growth of under 2.5 percent, while Suffolk's calculations predict a rise of 2.25 percent.