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S&P: Small districts could feel impact of LIPA tax challenges

A report says the credit worthiness of some municipalities and school districts could be constrained if LIPA wins in court.

LIPA’s power-plant property tax challenges, if successful in court, could “constrain” the credit worthiness of small governments and school districts, a Wall Street ratings agency said in a new report.

In the report “Is Long Island Power Authority’s Fiscal Gain Local Government’s Credit Pain?” S&P Global Ratings said the impact of potential legal victories by LIPA would vary depending on the entity’s location, tax base and assessing authority.

Courts could find that the taxing entities owe hundreds of millions of dollars in refunds to LIPA, in addition to limiting future tax payments by the utility. Municipalities have argued that LIPA agreed never to challenge the taxes when it took over the system in 1998, and that the taxes compensate residents and businesses for the impacts of living around the plants.

S&P analyst Rahul Jain wrote that for smaller municipalities and school districts "the outcome could strain credit quality if property-tax-base growth or state aid does not materialize in the long term to offset reduced assessments. State legislators have unsuccessfully tried to pass legislation that would provide relief to districts facing lowered plant taxes."

LIPA has offered settlements that generally would forgive past overcollection of taxes for the years since it filed the tax challenges, beginning in 2010.

The offer also would lower tax payments by LIPA amounting to around half of the current taxes over an approximately eight-year period. Brookhaven Town has agreed to a settlement in principle over taxes for the Port Jefferson power station, and Huntington Town and Northport-East Northport school district have begun nonbinding mediation with LIPA in an attempt to reach a settlement.

If LIPA prevails in court, however, S&P said the “size of these refunds could have a substantial short-term impact on local taxpayer bills.”  

As reported in Newsday on Wednesday, the National Grid-owned Northport power station pays $82 million a year in property taxes, the highest for any commercial property in the country, according to a recent study. LIPA customers pay $42.6 million annually in taxes for the EF Barrett plant in Island Park, $32.6 million for the Port Jefferson power station, and $23 million for a Glenwood Landing site where a plant no longer exists.

National Grid operates the plants under contract to LIPA, which pays all operating costs, including taxes. Overall, taxes make up around 15 percent of LIPA customers’ bills, LIPA said.

S&P said judgments on overcollected past taxes would affect smaller entities most.

“In our view, although refund amounts could be a risk for larger jurisdictions in the absence of achieving a settlement, assessment reductions would have an outsize effect on smaller taxing jurisdictions and school districts by reducing the size of their property tax valuation,” S&P wrote.

The report noted that Nassau County “does not hold underlying jurisdictions harmless for reductions in assessed property values," suggesting the impact would be felt at the local level. "We believe refund liabilities for assessing entities could be paid over an installment period or take considerable time through litigation before payout, which we will monitor.”

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