It’s not a good idea for municipal governments to borrow in order to cover operating expenses, according to the business-backed Citizens Budget Commission in New York City. Doing so can burden the next generation “with the cost of benefits enjoyed by the current generation,” according to Charles Brecher of the CBC.
“Because such borrowing is viewed with great disfavor, local leaders who have resorted to this approach in the past in New York State have been made subject to outside ‘control boards’ and required to adhere to improved fiscal practices in exchange for legislative authority to undertake the borrowing,” he wrote on the Citizens Budget Commission’s blog. “This happened in New York City, Buffalo, Nassau County and Yonkers.”
Rockland County and the city of Long Beach on Long Island were unsuccessful in their attempts to convince the Legislature to allow deficit borrowing without the oversight of a control board failed. But similar requests have been approved in recent years for borrowing to cover the cost of settling a big lawsuit or offering a retirement incentive program, Brecher said. to borrow $80 million so it could pay off most of its roughly $95 million deficit, and it planned to pay off the loan through a new 4 percent residential energy tax.
But four communities on Long Island did receive the go-ahead to borrow so they could cover the cost of accrued sick leave, vacation pay and other costs for employees who were retiring or leaving, he said. They were the village of Lynbrook, the town of Oyster Bay, the city of Glen Cove and the city of Long Beach (which was denied authority to borrow for its full operating budget). Long Beach will have to repay the debt in five years, and the other three municipalities have 10 years. Glen Cove is paying $1.8 billion for six police officers to retire, or 4 percent of its $46.6 million budget.
“This trend toward forms of ‘excusable’ borrowing appears now to be growing, extending to borrowing for separation costs such as accrued sick leave and vacation days that are claimed by departing employees without money having been set aside to pay for them. This fiscal strategy should be curtailed, and state officials should develop alternatives to borrowing to cope with the underlying problem – accrued liabilities for ‘separation costs,’”he wrote.
Citizens Budget Commission recommends preventive actions to control accrued liabilities, such as limiting how many sick days and vacation days can be set aside and cashed out upon retirement or separation. Municipalities should place money in reserves to cover accrued benefits for future retirees, the group advises.
Another liability they have to contend with is paying premiums for retirees’ health insurance. The state comptroller’s Comprehensive Annual Financial Report for the 2011-12 fiscal year, which ended March 31, found that the state’s accrued liability for vacation and sick leave was $1.2 billion and $10.6 billion for other post-employment benefits.
“The current troubles in places like Lynbrook and Oyster Bay may foreshadow far greater cash shortfalls in the major governments serving New Yorkers when future retiree health insurance costs must be paid,” Brecher wrote. “Like their smaller suburban neighbors, the leaders of these entities should be doing more to reduce and meet these large future obligations” instead of permitting “ad hoc borrowing.