Government and Fiscal Irresponsibility

Town of Oyster Bay bond rating

Summary: Note to government: Eventually you runout of other peoples money to spend and when the piper needs to be paid the pockets will be empty!

And the burden on business and investors of all types to make-up the deficit can quickly become unsustainable!

‘Long Island’s Town Of Oyster Bay An Example Of What Happens When The Fiscal Music Stops!’

Note to the peoples representatives in local, state and federal government: Financial results never last forever!

In the game of fiscal musical chairs and the budgetary smoke and mirrors played and employed by governments all over the world, the good times will roll until that unfortunate period of time when they no longer do!

And that’s when whoever is in office will be to left to hold the bag that has been filled not only by that person but by all of his/her predecessors who have done what every ‘good’ politician does…Kick the proverbial fiscal can down the road!

What they seem to all conveniently forget (unless they remember and realize that election is predicated on seeding the coffers of important constituents and financial benefactors) is that…

  • Economies are strong until they aren’t,
  • Taxes receipts grow and roll-in until they inevitably slow,
  • Economic cycles are a fact of life and at some point the financial burdens faced by constituents make payment of some taxes impossible and revenues like sales taxes slow…
  • Fiscal smoke and mirrors can only work for so long,
  • At some point taxes in the form of fees or taxes in the form of taxes will create a burden so high that people will choose to leave for lower cost alternatives,
  • Legacy costs need to be controlled or at some point they will become impossible to balance with the cost of day to day operations,
  • ***Now for the obvious sticking point –  Ideally it’s the greater good of the people that is more important than the need for said politician to either be elected or be reelected! And because public servants are very well aware of the veracity of the points made above, one can only conclude that it’s the election piece that’s the driving force behind what they do, the decisions that they make and the votes that they cast!

So to use a cliche’ from the real estate boom and bust of the 2000’s and technology boom and bust of the late 1990’s, you don’t want to be the last one standing in a game of musical chairs when the music stops!

This brings us to the Town of Oyster Bay located on Long Island in New York and it’s bond rating recently reduced to junk after having been AAA in 2011!

It is a tale that will hopefully be heeded in other halls of government but, if we use history as our guid, of course it won’t!

Oyster Bay, N.Y., Downgraded to BB-Plus by S&P

While the headline story is that Standard & Poor’s reduced its rating on the general obligation bonds of Oyster Bay to junk, the lesson to be learned by other governmental entities (which of course they won’t) is why this has happened and what needs to be done to avoid a similar fate!

“The resolution of the CreditWatch negative by lowering the rating to BB-plus reflects Oyster Bay’s chronically weak budgetary performance and very weak budgetary flexibility that has diminished liquidity to weak levels,” said Standard & Poor’s credit analyst Victor Medeiros. The rating is further constrained by weak management based on chronic fiscal imbalances over several years, and weak budgetary planning and estimating.

Town officials originally estimated that general fund reserves would see only a slight decline in fiscal 2014 following an increase in 2013. However, fiscal 2014 closed with a $19 million operating deficit, or about 14% of expenditures, in the general fund, and a $9.2 million deficit across all other major governmental operating funds.

This negative operating result, S&P says, was sizable and significant. For fiscal 2015, management is estimating an additional negative result, albeit smaller, in the general fund, even after executing on certain revenue enhancements, and expenditure cuts.

Compounding the financial challenges of the town have been delays in its financial reporting. According to the town, the 2014 audit was late as a result of challenges in implementing new accounting software, and the fiscal 2015 audit will be available only later this calendar year.

The town, with an estimated population of 295,330, is in Nassau County.

“The negative outlook reflects our opinion that we could lower the rating further if the town can’t make strong corrective budgetary adjustments to improve budgetary performance and base-line reserves to much stronger levels,” added Medeiros.

The town continues to face budgetary pressures as fixed costs escalate and liquidity remains weak, leaving it vulnerable to further financial deterioration, particularly if the business, financial, or economic environment worsens. Should budgetary performance remain weak and liquidity levels continue to deteriorate, or if market access diminishes, the rating could be lowered further, the agency said. (Source)

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com

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