Challenges Persist For Many New York Counties Presented by: Robyn Kapiloff Vice President/Senior Analyst Presented by: Robyn Kapiloff Vice President/Senior Analyst March 30, 2005

2 New York County Operating Paradigm On average 75% of costs are fixed or mandated Strong unions Pay 25% of most Medicaid services Dependence on economically sensitive sales tax ranges from 20-40% Contribute to a fully funded pension system Decreasing revenue raising flexibility

3 As a result of the high percent of fixed and mandated costs (75% on average) NY Counties have a poor turning radius, limiting ability to respond to revenue constraints or expenditure pressures

4 Public Safety unions generally have, and often use, binding arbitration More discretion with non-public safety employees Relative to other states, considered very strong in NY Strong Unions

5 Medicaid NY Counties pay 25% of most Medicaid services By far the largest local share in the nation Annual growth has averaged 15% over last 3 years for counties as a result of both expanded eligibility and growth in the cost of prescription drugs Movement to cap county cost appears to have momentum in current state budget negotiations; state did pick up one program in SFY2006 providing limited budgetary relief

6 Sales Tax Dependence Revenue stream impacted by economic downturn exacerbating expenditure pressures State ability to adjust payments retroactively detracts from cash flow predictability 23 (of 57, excluding NYC) counties have increased rate and relative dependence over last 3 years Average rate now 3.8% vs 3.45% 3 yrs ago; 5 counties now exceed 4% local share, long considered the max

7 NYS Pension System Pension payments tied to stock market performance Due to system losses, exponential growth in system contributions State froze rate (4.5% of payroll) to ease in increases in 2004; 2005 rate averaged 12.5%-- not expected to decline markedly in near term State allowed bonding of a decreasing percent of expense in FY & changed payment due date FY2005 costs to decline modestly; those who bonded in 2004 will not benefit from cost decrease

8 Deteriorating Revenue Raising Ability Property taxes are limited by NY State in a manner that favors those with taxbase growth Counties with limited, or negative, growth have begun to approach their legal limit-with 5 counties very close to exhausting this taxing margin Counties have raised various other fees and taxes to the max limiting future flexibility

9 How early/aggressively they responded to expenditure pressures and slow-down in revenue growth Political ability/willingness to pursue additional revenues Reliance on one-shots Counties have fared differently Depending upon a number of factors:

10 Rating Changes Last 2 Years 16 Downgrades 4 counties currently on Watchlist for potential downgrade 15 counties currently have a negative outlook 7 Upgrades Largely Reflecting Story Credits (includes 3 Nassau County Upgrades) 1 county currently on Watchlist for potential upgrade

11 Where are we now? Some counties have turned a corner as a result of: Increases in recurring revenue Reduction in force Vacancy management Expenditure reductions Conservative budgeting and strong budget management Other counties continue to face challenges to structural balance and financial flexibility: Structural imbalance depleted reserves Mounting losses reduced liquidity Reliance on one-shot revenues and aggressive budget assumption