Columns

Suffolk Closeup: More than just a sales tax problem

TIM KELLY FILE PHOTO | New Suffolk County Executive Steve Bellone.

“We cannot solve our problems with the same thinking we used when we created them.” That’s the Albert Einstein quote with which the Budget Review Office (BRO) of the Suffolk County Legislature opened its review last fall of the proposed 2012 county budget.

The report by the BRO — an independent arm of the legislature composed of financial experts — warned of serious fiscal problems ahead. That was six months before a Suffolk County Blue Ribbon Fiscal Analysis Task Force, formed by new Suffolk County Executive Steve Bellone, concluded that Suffolk government was facing a total of $530 million in deficits by next year.

A major factor in Suffolk’s financial jam, said the BRO, is “a structural imbalance that was created by over-reliance on sales tax” by Suffolk County government. It has been warning about that for years.

Also, the BRO and the task force found that Suffolk has been too optimistic in recent years about projecting sales tax revenue. The task force noted Suffolk’s current budget anticipates it will grow in 2012 by nearly 4 percent, although last year’s gain was 2.6 percent.

With the task force’s conclusion earlier this month of a $530 million deficit, Mr. Bellone declared that Suffolk government is facing “the worst fiscal emergency in our county’s history … These numbers are so enormous, it’s not something that can be solved immediately.”

The $530 million is indeed a huge amount and to handle such a shortfall will lead to changes in Suffolk government.

“Downsizing to core missions is unavoidable in the current climate,” maintained the BRO. Still, in context, Suffolk County’s budget for 2012 is $2.7 billion.

The task force determined that when the county’s books for 2011 are closed, there will be a $33 million deficit. It said it expected a $148 million shortfall in 2012. And it projected a $349 million deficit in 2013. Although these figures are each fractions of overall annual budgets in the $2.7 billion range, they are fractions that must be dealt with.

BRO Deputy Director Robert Lipp, with a Ph.D. in economics, says the situation is “more complex” than only sales tax over-reliance and there are other reasons behind Suffolk government’s financial problems, particularly a large increase in pension obligations and decreases in state and federal support.

Still, some 45 percent of the monies that finance Suffolk County government now comes from the sales tax collected here. The rate is 8.625 percent, with the county getting 4.25 percent.

It wasn’t long ago, relatively, that centuries-old Suffolk began a county sales tax in 1969, four years after New York started a state sales tax. Before then, Suffolk government was largely funded through the property tax. Now the property tax provides a small fraction of county government funding — it’s pegged to bring in $49 million in 2012.

The lion’s share of one’s property tax bill — approximately 65 percent — goes to schools. Having schools dependent on the property tax has created a whole other set of problems.

The switch to reliance on the sales tax to finance county governments in New York happened fast — and it carried risk. The state comptroller’s office in an online document (“New York State County Sales Tax Collections by Region”) warns: “Because sales tax revenues can be economically sensitive, conservative budget forecasting techniques are necessary in a recession to help avoid shortfalls in revenue projections.”  By the mid-2000s, the average portion of total revenues coming from the sales tax in New York counties had reached 26.9 percent, says the document. Sales tax revenue exceeded “the property tax as the largest revenue source for counties” in New York. So Suffolk wasn’t alone in shifting to sales tax reliance — but it went further to become among the counties most dependent.

That worked fine when times were flush — as in 2002, with a 12.7 percent increase in sales tax growth in Suffolk, and in 2003 with an 11.29 percent jump. But then, said the BRO report, “the impact of the recession in 2009 resulted in an unanticipated shortfall in sales tax revenue.”

In personal finances, the emphasis is that people “diversify” — spread their investments over several sources and are not overly dependent on any one.

Meanwhile, last week there was positive sales tax news: the increase in sales tax receipts in Suffolk “so far” in 2012 is 5.1 percent, said Mr. Lipp. The likely causes: “pent-up demand, the economy getting better and nice weather.”

New thinking is needed in financing county government.