This week, the finances of Nassau County were seized by New York State. Coincidentally, the Financial Crisis Inquiry Commission (FCIC) also released its report on the underlying causes of the crisis.
Nassau County, on suburban Long Island, N.Y., is a microcosm of the crisis and provides valuable insights (more on this a little later).
As expected, the FCIC assessments comport with my long-standing, publicly expressed views, which diametrically opposed those of many senior financial executives.
In essence, the report stated that the causes of this crisis were known and preventable. You may recall, for years industry” titans” were adamant that the crisis was not a predictable event: end of story. At that time, my response was: at best, this suggests a lack of competence (especially given their highly generous compensation). More likely, it was disingenuous, possibly worse.
In 2007, BusinessWeek said the New York financial industry possessed 5 percent of the jobs and 20 percent of the compensation (4 times average). At Goldman Sachs, the average annual salary was $622,000 (12 times average). In addition, a recent Federal Reserve Bank report indicates the financial industry contributes less than 1 percent to total GDP, while generating 25 percent of the profits.
The crisis was a reflection of misaligned values and principles. Poorly designed public policy enabled capitalistic excess and manipulation. The result was a massive transfer of wealth (not wealth creation).
Back to Nassau County.
In 2008, Forbes ranked Nassau County as the 10th wealthiest in the nation. Based on a three-year average from 2006-2008, The Tax Foundation reported median annual household income was $103,831 (double the national mean). Its annual tax revenue is roughly $2.6 billion for a population of 1.3 million ($2,000 per person).
Despite this wealth and high tax revenue, the county elected to live beyond these stellar means, resulting in state seizure. Currently, its annual expenditures exceed revenue by 10 percent (maximum threshold is 1 percent). This annual deficit of $278 million is expected to grow to $496 million in 3 years.
The main issue involves property tax refunds. Residents have filed property tax grievances with the court, which were approved. The problem: the county does not have the money to refund the residents. It has attempted to transfer this expenditure to other taxing authorities, such as school districts and towns. In the interim, it has borrowed heavily to reimburse the residents.
In 2006, Nassau County Comptroller, George Maragos, issued a report and said the following concerning these refunds: “Reducing the county’s liability for real estate tax refunds has been a cornerstone of the county’s plans for fiscal recovery since 2002. In the 1990s, the county regularly borrowed in excess of $100 million per year just to pay refunds to residential and commercial property owners who had filed successful grievances. The resulting debt totaled more than $1.8 billion and was a key contributor to the county’s near-bankruptcy in 1999. Under the NIFA [Nassau County Interim Finance Authority] Act, the county was required to effectively end this practice by 2006.”
In a recent report, Mr. Maragos stated County General Obligation and NIFA bond debt has reached $2.6 billion, with an annual debt service of $293.7 million. The county portion of this debt stood at $887.7 million, with annual debt service of $122 million.
In 2004, the reserve fund contained $214.5 million. Last year this figure fell to $14.4 million. In addition, the probability of future deficits remain extremely high, rising from $258.1 million in 2011 to $496 million in 2014, adding more to the swollen outstanding debt of $2.6 billion. The outstanding county debt will soon exceed the annual sales tax revenue of $1 billion.
Despite the significant levels of income, tax revenues, and expenditures, the quality of education has not been stellar: a poor return on investment, indeed.
What happened: Artificial assets were accumulated and real liabilities were transferred.
Why did this happen: External material growth was valued over internal wisdom and learning.
Lesson: Wisdom first, the money follows.
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