Adult Supervision?

Call it the arrival of the grown-ups.

On Wednesday New York State seized control of one of the nation’s wealthiest and most heavily taxed counties. Local governments around the country face hard choices, but Nassau County has serious problems. It has a large and diverse economy—its GDP is $90 billion, larger than a dozen states, and the County has $2.7 billion in revenues. But their expenses are over $3.0 billion, giving them a 10% deficit.

By state law, counties are allowed to run a 1% deficit—something that should be sustainable when the county’s economy grows 4.5% per year. But they got into trouble when they began to cut taxes in mid-decade but didn’t cut services. They kept borrowing to plug their deficit until they had run up over $1.2 billion in debt. The County now has a negative net worth.

Significantly, they haven’t defaulted and aren’t even considering it. The debt is still rated A1 by Moody’s and A+ S&P. Debt service isn’t the problem—it only accounts for 11% of the budget, and their bonds still trade at a premium. The State’s control means that they oversee the budget, but they don’t have the authority to lay off workers. For now they haven’t even frozen wages.

Nassau County is in trouble, but it hasn’t defaulted. This move has been in the works for a long time. This is how public finance works. It takes time to fix problems. Default, if there is one, is still a long way off.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-11T14:44:19+00:00January 28th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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