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Home to Hamptons is Haunted by Dependence on Sales Tax

June 3, 2020, 4:55 PM

Suffolk County, home to the Hamptons, is the summer playground for some of Wall Street’s wealthiest. But the coronavirus pandemic is exposing the government’s fragile finances and tipping it into a budget crisis.

The Long Island county of 1.5 million people, which spans about 85 miles (137 kilometers) from Melville to Montauk, relies on sales taxes for almost half of its $3.2 billion budget. With stores and restaurants shuttered and unemployment at a record high, sales-tax revenue plummeted almost 27% in April, according to the state comptroller’s office.

County executive Steve Bellone’s 2020 budget assumed that sales-tax collections would increase 3.7% from 2019. Now, a fiscal task force appointed by Bellone projects a revenue shortfall of as much as $590 million if there’s a second wave of the virus. There’s no cash in its rainy day fund to cushion the blow.

“Given the absence of reserves, the county was poorly prepared for an economic downturn, much less the current economic dislocation,” said Shannon McCue, a Fitch Ratings analyst.

The cities and counties that are seeing the earliest financial hits from the economic meltdown are those that rely on taxes from personal income, retail sales and tourism, all of which are tumbling because of the downturn. Local governments that draw mostly on property taxes are far more insulated because assessments are set before the current budget year.

Related Analysis: New York Sales-Tax Declines Creating Havoc for All Localities

In Ohio, where cites depend heavily on income taxes, Cincinnati and Dayton furloughed more than a quarter of their workforce. In Tulsa, Oklahoma, where sales taxes make up almost two-thirds of revenue, the city is furloughing 1,000 employees for 17 days through December.

Suffolk County, where the median household income was about $100,500 in 2018, was one of the first municipalities downgraded by credit-rating companies in March as states began shutting non-essential businesses to contain the pandemic. That month, Fitch and S&P Global Ratings lowered Suffolk’s rating to BBB+, the third-lowest investment grade. Both took the unusual step of also downgrading short-term debt issued by the county in 2019.

Derek Poppe, a spokesman for Suffolk County Executive Steve Bellone, didn’t respond to a call and emails seeking comment.

Bellone, a Democrat, has declared a fiscal emergency, giving him the power to withhold portions of each department’s budget. Bellone has also proposed diverting $44.4 million from a sewer reserve fund. The county received $257 million under the CARES Act, the federal government’s coronavirus relief package.

Suffolk is eligible to borrow as much as $541.4 million from a $500 billion credit line for municipalities created by the Federal Reserve. The county already relies heavily on cash flow borrowing to pay bills before tax receipts arrive. Suffolk planned for $615 million in short-term borrowing this year, an 11% increase over 2019.

Suffolk’s finances were wobbly even before the pandemic hit. When Bellone took office in 2012, after the last recession, he faced a deficit of about $150 million.

Revenue growth in Suffolk failed to keep pace with rising costs of employee compensation and social services, resulting in budget deficits. Suffolk spent almost 60% of its revenue on salaries and benefits in 2018, a bigger share than any other county, according to the state comptroller’s office.

“Even small variances in the revenues, if the sales taxes are coming in below estimate, or if overtime costs run a little higher, there’s just not a lot of wiggle room there,” said Tiffany Tribbitt, an S&P analyst.

Instead of making politically difficult choices to raise property taxes above the 2% state cap or cut spending enough to close persistent deficits, county officials relied on maneuvers like deferring a portion of the government’s pension payments, property sales and borrowing more than $170 million from the sewer fund.

Bellone has also cut costs, reducing the county’s workforce by 13% to 8,914, saving $100 million annually. Last year, the county required all employees to pay 2% of their salary for health care, rising to 2.5% by 2025, for a projected savings of $40 million. In 2019, Suffolk stopped deferring payments to the state pension.

Since Bellone took office in 2012, he hasn’t submitted a budget that pierced a state property-tax cap that limits levy increases to 2% or the rate of inflation. A municipality can override the cap with a 60% vote of the governing board. The average Suffolk homeowner pays about $10,000 in property taxes, the fifth highest among New York’s 57 counties, but about $2,000 less than its Long Island neighbor to the west, Nassau, according to Attom Data Solutions.

“In the Tri-state region, property taxes are a difficult topic,” said Tribbitt. “It’s politically sensitive.”

Over eight years, Fitch and S&P downgraded Suffolk County’s $1.6 billion general-obligation debt four levels. Suffolk is the most fiscally stressed county in New York, according to the state comptroller.

But Suffolk has avoided the fate of its even richer neighbor Nassau, which has had a state financial oversight board since 2000. The Nassau County Interim Finance Authority, which can take control of the county’s finances if its deficit exceeds 1%, has taken an active role, rejecting the county’s financial plans when it believes revenue estimates are optimistic or spending cuts insufficient.

To contact the reporter on this story:
Martin Z. Braun in New York at mbraun6@bloomberg.net

To contact the editors responsible for this story:
Elizabeth Campbell at ecampbell14@bloomberg.net

William Selway

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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