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Long IslandColumnistsJoye Brown

NIFA: 3 reasons Nassau sewer deal didn't work

A view of the Cedar Creek Water Pollution

A view of the Cedar Creek Water Pollution Control Plant in Wantagh in 2010. Credit: Daniel Goodrich

Why did a state financial control board go out of its way to slap back Nassau County Executive Edward Mangano's plan to turn the county's wastewater system over to a private operator?

Mangano, in vowing to find another way to see the deal through last week, said it was because the Nassau Interim Finance Authority didn't understand the plan.

But the board's directors -- two investment bankers, three corporate lawyers and an accountant with expertise in municipal finance -- said they understood it all too well.

The problem? It's threefold, some board members said during NIFA's meeting last Thursday and in later interviews.

First, the proposal is built on a false assumption. Yes, as Mangano has said, the county's Sewer and Stormwater Authority, which currently handles the county's wastewater system, is not adequately funded. When it runs short, the county is obligated to dip into the operating budget to make it whole.

Still, Mangano's assertion that the authority will go bankrupt in 2014 is just plain wrong. The authority, as stated in its initial bond authorization, is forbidden to file for bankruptcy without state approval and for as long as NIFA bonds remain outstanding. And those won't be paid off until 2025.

"The county's claim is nonsense," George Marlin said during the meeting. "It is a red herring."

Still, Mangano spokesman Brian Nevin said the sewer authority is on track to accumulate significant deficits. Nevin said Mangano intended to pursue a sewer deal despite NIFA, but would not comment on whether it would be the same.

Next there's the county's assertion that it can craft a deal that will freeze sewer rates for two years and then limit the private operator's increases to no more than the cost of living for at least the initial 20-year term of its contract.

Some board members believe that scenario to be impossible because the county also wants to recruit a financier who will give Nassau a $750 million upfront lump-sum payment -- and then expect repayment, plus interest.

Mangano has said the entire amount would go to pay down county debt, although the county's four-year plan says that $250 million from the deal would go into Nassau's operating budget.

How would the financier recoup the payment, plus what some board members expect to be a 10 to 15 percent return on investment? It would be repaid by the county from the sewer fees paid to the operator, United Water, and so-called system efficiencies instituted by the firm.

The scenario doesn't make sense, board members said, because of the county's move to limit rate increases over the term of the contract.

"To suggest that a private operator will achieve enough efficiencies to cover most of that cost, and that assessment or user fees will increase no more than the rate of inflation -- well, anyone who believes that, I have a coliseum in Hempstead I would like to sell them," Marlin said at the meeting.

But the biggest objection most board members had was to the upfront lump-sum payment arrangement itself, which they said amounted to a backdoor loan.

"When you cut through the hype and some of the barnyard fumes . . . what you see is that we have an upfront payment of cash that has to be paid back to the investor at interest from the cash flows of a county asset," board member Chris Wright said.

"Because it doesn't involve a sale, it is a very expensive loan," he said.

Which is why the board last week decided to act, by rejecting a contract for the county to hire Morgan Stanley to seek out a financier. The goal was to slow -- or as some board members said, maybe even kill -- the plan before it could gain traction.


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