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LI governments worry about financial fallout from virus

The Freeport Recreation Center, which is closed during

The Freeport Recreation Center, which is closed during the pandemic, is normally a source of revenue for the village. Credit: Barry Sloan

As the reality of a global financial slowdown sets in, budget officials and elected leaders of Long Island towns and villages said serious local impacts were possible in coming months. 

“People will remember where they were during this period,” said Smithtown Comptroller Donald Musgnug, who said financial damage caused by the COVID-19 pandemic was possible on the scale caused by superstorm Sandy or the Sept. 11 attacks. 

Slowing home sales, shuttered recreation centers and village courts: Once dependable sources of revenue to fund the work of local governments are being choked off at a time when some of those governments face costs for which they never budgeted, like Freeport’s cleaning of a municipal building after a staffer received a positive virus diagnosis. 

“We don’t know the extent of this crisis, and we don’t know how long it’s going to last,” said Martin Melkonian, adjunct assistant associate professor of economics at Hofstra University, who predicted falling revenue from sales and property taxes would hit Long Island and New York City especially hard. “Unless there’s federal money forthcoming, we’re in trouble.”

All of the officials interviewed said their municipalities were well-positioned with strong reserves to ride out any downturn, and credit rating firm Moody’s Investors Service in a March 19 report said that consequences for most local governments across the country would be modest, in part because an important revenue stream — property taxes — tends to be relatively stable over the near term.

But some governments will experience “significant budget stress” if revenue from sales tax and other local consumption taxes declines during an extended period of self-quarantine, Moody’s analysts wrote. Municipalities using short-term debt could also face significantly higher borrowing costs, they said. Even Aaa-rated Southampton was having trouble placing $17 million in long-term bonds. "We're ready to borrow $17 million, but our advisers are saying to hold off because they're not getting any bids or the rates are too high," Comptroller Len Marchese said.  

Some potential concerns:

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  • Commercial garbage fees. Towns such as Brookhaven and Smithtown charge for disposal of the garbage that businesses generate. Brookhaven Town chief of operations Matt Miner said activity has dipped at the town landfill, which depends on a strong building and renovation market for income from construction and demolition debris collected by contractors. Musgnug warned that lower volume and possibly fewer surviving businesses could cut into commercial fees, budgeted at $7 million in 2020. 
  • Mortgage recording tax. This one-time tax is 1.05% of the value of a mortgage in Suffolk and Nassau counties. It is imposed by New York State, but a portion flows back into town coffers. In a healthy real estate market, it is lucrative — Musgnug expected it would generate $4.3 million in Smithtown this year, about 4% of revenue — but its revenue is likely to drop significantly through July, he said, as nervousness about the economy combines with the logistical problems of home shopping during a pandemic. In a sustained downtown, “the most likely town revenue sector to be impacted would be related to mortgage recording taxes and other revenue connected to property taxes,” Babylon spokesman Kevin Bonner wrote in an email.
  • Building permits. Smithtown officials expected fees for these permits to generate $2.1 million in 2020, “but we’re thinking there’s going to be a significant softening as the economy contracts,” Musgnug said. A North Hempstead spokesman, Gordon Tepper, said officials there were “tightly controlling” spending in areas outside essential services and virus response in expectation of dropping revenue from permits and fees. 
  • Recreation fees. Freeport’s Recreation Center, whose ice rink, pool and gymnasium Mayor Robert T. Kennedy expected would generate $300,000 in fees per month, is now closed. Beach-ticket and other tourism-derived revenue could drop in Southampton, Standard & Poor's analysts wrote this week. Tepper said North Hempstead also expected recreation fees to drop. 
  • Health care premiums. Smithtown pays about $16 million a year in premiums for its workers now, and has taken steps to ensure their safety, such as twice-daily office cleanings and staggered work schedules. But the state health insurance system is a consortium, so the town would bear a share of increased claims in other municipalities. “If that goes up, that could be a significant number for us,” Musgnug said. 
  • Pension contributions. Poor market performance could force municipalities to increase payments to the state pension system for their workers. 
  • Virus response. Municipalities may pay more for overtime and cleaning costs.

In Freeport, the second biggest village in New York State, Kennedy said he was facing many of these problems at once. Police overtime was up because some officers are sick with the virus and healthy officers were covering their shifts. Water and electric revenue were already down.

“People are calling up and saying they can’t afford to pay” their bills, he said. 

Kennedy, president of the New York Conference of Mayors, also worried the pandemic could lead to Nassau County cutting the village’s share of sales tax revenue generated within its borders, or cuts to two New York State aid programs best known by their acronyms, AIM and CHIPS, that help fund general municipal needs and roadwork.

Many local governments will dip into reserve funds or build budgets around property tax levies that exceed the state-imposed tax cap, though officials have been loath to do that in the past, said Gerald K. Geist, executive director of the Association of Towns, a lobbying and information group in Albany whose membership includes most of New York’s 932 towns.

Critical information such as the rate of real property tax collections is not yet known, he said. Nor is it clear what help local governments can expect from New York State, which is approaching the end of its fiscal year with a multibillion-dollar deficit; or from Suffolk and Nassau, the most fiscally stressed counties in New York, according to a 2019 state comptroller's report. 

“We are providing essential services on the front lines,” Geist said of town governments. “But there doesn’t seem to be an outcry to help local governments deal with this.”

With Denise M. Bonilla, Vera Chinese, Carl MacGowan and Dandan Zou

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