Challenges Persist For Many New York Counties

1. Challenges Persist For Many New York Counties 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. Strong Unions • 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

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 FY2005-2007 & 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. Counties have fared differently Depending upon a number of factors: • 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

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. 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 challengesto structural balance and financial flexibility: Structural imbalance depleted reserves Mounting losses reduced liquidity Reliance on one-shot revenues and aggressive budget assumption Where are we now?