Review of Nassau County's Proposed Multi-Year Financial Plan Fiscal 2020-2023

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Nassau County Interim Finance Authority

NIFA

REVIEW OF NASSAU COUNTY’S PROPOSED MULTI-YEAR FINANCIAL PLAN FISCAL 2020 - 2023

October 15, 2019

NASSAU COUNTY INTERIM FINANCE AUTHORITY

DIRECTORS

Adam Barsky Chair

Paul D. Annunziato

John R. Buran

Paul J. Leventhal

Lester Petracca

Howard S. Weitzman

Christopher P. Wright

STAFF

Evan L. Cohen Executive Director

Carl A. Dreyer Treasurer

Kathleen Stella Corporate Secretary

Jeremy A. Wise General Counsel

Martha B. Worsham Deputy Director

Table of Contents

I. OVERVIEW ...... 1

II. DISCUSSION OF FY 2020 ...... 5

III. THE OUT-YEAR GAPS: FY 2021 – FY 2023 ...... 17

IV. CONCLUSION ...... 23

V. APPENDICES ...... 25

I. OVERVIEW

On September 16, 2019, the Administration released its Proposed Multi-Year Financial Plan, Fiscal 2020-2023 (the “Proposed Plan”), the first year of which is the Proposed Budget for FY 2020 (the “Proposed Budget”). The following discussion reflects the analysis of NIFA staff regarding the Administration’s submission.

Staff reviewed the Administration’s assumptions and projections and compared them with NIFA’s. Our analysis indicates that the County’s finances continue to have a mismatch between recurring revenues and expenditures during each of the years of the Proposed Plan. Although our assessment of risks in FY 2020 has improved by $14.4 million since our last report issued on August 12, 2019, the mismatch could still lead to a year-end deficit of $47.5 million in FY 2020 and higher amounts in the Out-Years.

For perspective, the Control Period will continue if there occurs, or there is a substantial likelihood of a 1% deficit on a GAAP Basis in the County’s Major Funds (defined herein), or $31.1 million based on the Proposed Budget.1 While the proximity of the projected deficit to the threshold appears promising on its face, the County’s fiscal outlook remains precarious, there is little room for unbudgeted expenditures, and the Control Period is likely to remain in effect for the foreseeable future for three main reasons.

1. The projected Out-Year deficits could reach $76.3 million in FY 2021, $143.9 million in FY 2022 and $194.3 million in FY 2023. These deficits are multiples of the 1% deficit threshold.

2. Our current risk projections exclude the negative impact of using additional bond proceeds (not yet officially requested or authorized) to pay tax certiorari refunds (for claims that arose prior to December 31, 2017) beyond those already borrowed at the end of 2018. Stated differently, deficits in FY 2020 or the Out-Years will be larger (up to $200.0 million higher) to the extent tax certiorari refunds made to reduce the backlog are paid with additional borrowed money.

3. Unless labor costs are controlled by offsetting productivity improvements during the current round of contract negotiations, the Administration estimates there could be added costs of approximately $10.5 million annually for each one percent increase negotiated. Incremental costs would compound for multi-year increases.

1 “GAAP Basis” operating results are calculated in accordance with the NIFA statute, which mandates using Generally Accepted Accounting Principles (“GAAP”) and precludes using “other financing sources” (such as bond proceeds) to support operating expenses. 1

The Proposed Plan reflects the Administration’s intention to rely heavily on borrowing to pay its significant tax certiorari backlog liability in the near term, even though NIFA’s preliminary conditions for considering this initiative have still not been met. The Proposed Plan contains an assumption of borrowing $200.0 million in December 2019, which would increase the GAAP Basis deficit above the previously noted deficits in each year that the bond proceeds are utilized for the refunds. Further, any borrowings and related debt service for tax certiorari refunds would negatively impact spending on future operating budgets and capital projects.

The Proposed Plan does not explicitly include any funds for salary or fringe benefit increases except for mandated step increases paid to certain employees, as required by union contracts that expired on December 31, 2017. However, the Administration has acknowledged that funding of up to $7.0 million potentially could be available as a result of its decision to remove 66 vacant positions from the Proposed Budget but leave in place the associated funding. Any additional raises would increase the projected deficits and prolong the County’s challenge of exiting the Control Period.

As indicated in the following table, we estimate that the County’s fiscal progress may be set back by the end of FY 2019. This is due primarily to the County’s use of $61.4 million of borrowed resources to pay tax certiorari refunds in 2019. We also project that the deficit could shrink to approximately $47.5 million in FY 2020, before growing to $76.3 million in FY 2021, $143.49 million in FY 2022, and $194.3 million in FY 2023 on a GAAP Basis. However, it should be noted that the Administration’s plan to borrow $200.0 million in December 2019 would increase the projected deficit in FY 2020 to $247.5 million if all bond proceeds were used to pay tax certiorari refunds in 2020.

Operating Results on a GAAP Basis ($ in millions) FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019p FY 2020p FY 2021p FY 2022p FY 2023p ($189.2) ($125.3) ($83.1) ($63.2) ($61.2) ($74.4) ($47.5) ($76.3) ($143.9) ($194.3) Projections assume no additional bond proceeds are used to pay certiorari refunds above the amounts already used in 2019, which would otherwise increase the deficit dollar-for-dollar. A portion of the projected risk in FY 2020 could be eliminated if the County: (1) collects all of the incremental revenue it expects to receive from the State’s recent extension of sales tax to internet sales made by merchants without a physical presence in New York State (we are holding at risk $7.3 million of the $14.6 million budgeted); (2) realizes an additional $6.7 million in revenue from real estate related transactions subject to the GIS tax map verification fee; and (3) closes transactions for the sale of $6.5 million in County properties. The County has only limited control over the latter initiative and no control over the two former initiatives.

The County should have a balanced budget, therefore, ending the Control Period is only interim step toward sustained fiscal stability. Until there is a balanced budget, the financial outlook will remain unhealthy and there is always the possibility of a reimposition of a Control Period while NIFA remains in existence. The County’s budget should realistically ensure that the growth rate of recurring revenues equals the growth rate 2

of recurring expenditures – in all parts of its budget, not just the Major Funds – and creates healthy reserves to address OPEB and other risks and liabilities. This paradigm goes beyond the narrow ambition of ending the Control Period. The greatest threat to the achievement of this goal is a failure of the County to successfully implement its assessment reform plan and effectuate a meaningful reduction of its tax certiorari backlog (and eliminate the risk of future backlogs), but other challenges like the large deficits projected in the sewer and storm water system budget are also of concern.

We remain available and ready to lend our expertise and historical knowledge of the County’s finances to help point out where fiscal practices could be improved; however, it remains the County’s elected officials’ responsibility to make the necessary and responsible decisions, some of which may not be popular. We hope that the County will use the findings in this Report that highlight areas of potential weakness where remedial steps would help to lift the Control Period and improve the County’s fiscal health to such a level that there would be no deficit in its budget.

II. DISCUSSION OF FY 2020

As required by the County Charter and NIFA Act, the Administration submitted its Proposed Plan (see Appendix A), the first year of which is the Proposed Budget.

Our analysis of the Proposed Budget indicates that the County could end FY 2020 with an operating deficit in the Major Funds of approximately $47.5 million on a GAAP Basis if all the risks we have identified are not resolved. See “Analysis of Proposed FY 2020 Budget” in Table 1. It is worth noting that Major Funds (which are defined as the General Fund, the Police District Fund, the Police Headquarters Fund, the Fire Commission Fund, and the Debt Service Fund) are the only Funds that are part of the NIFA deficit calculation, but do not include certain major expenditures such as the funding of sewer and storm water treatment services and support payments to Nassau Community College.

The $47.5 million projection includes risks totaling $39.7 million for revenues whose receipt is possible, but uncertain, and $15.1 million in expenditure shortfalls, which are partially offset by $7.3 million in certain GAAP adjustments estimated by the Comptroller. The risks include: internet sales tax revenue ($7.3 million); GIS tax map verification revenue ($6.7 million); Public Safety fees ($7.5 million); and sale of County property ($6.5 million).

The projected deficit in the Projected Risks in Proposed Budgets Major Funds – if all the identified risks ($ in millions) are not resolved – is $16.4 million $250.0 greater than the deficit requiring the $200.0 continuation of the Control Period that commenced in 2011 (deficit of $31.1 $150.0 million or more); however, although $224.2 $217.4 the $47.5 million is the lowest $100.0 $195.4 $127.9 assessment of risk in the Proposed $50.0

Budget projected by NIFA in several $59.1 $47.5 years, the projected deficit excludes $0.0 certain possible major expenditures. FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 For example, the risks do not include potential, unbudgeted labor costs, which could add to the deficit approximately $10.5 million for each percentage point increase given to County employees (even more if retroactive to January of 2018) through collective bargaining, and the use of bond proceeds to pay down the significant tax certiorari backlog. Consequently, the near-term sunset of the Control Period is unlikely.

The Administration proposes to borrow $200.0 million in December 2019 for the purpose of paying tax certiorari refunds (for claims that arose prior to December 31, 2017)

at some point in the Multi-Year Plan. The authorization to borrow this money requires approval by a supermajority of the Legislature and NIFA. Although the debt service on these bonds is included in the Proposed Plan, the County’s use of the bond proceeds would be spent to pay tax certiorari refunds would add to the GAAP Basis deficit on a dollar-for- dollar basis in each of the years in which the proceeds are used. Stated differently, the projected deficit in FY 2020 would increase to $247.5 million if all bond proceeds were exhausted in 2020.

Even if all the risks we have identified for FY 2020 are eliminated, the Administration recognizes that the projected GAAP Basis deficits continue to grow in FY 2021 – FY 2023 (the “Out-Years”).

FY 2020 RISKS

Table 1 lists the major projected risks in FY 2020 prior to Legislative action.

Table 1

Analysis of Proposed FY 2020 Budget (Prior to Legislative Action) FY 2020 FY 2020 ($ in millions) Proposed Projection Surplus / (Risk) Revenues: Fines and Forfeitures $113.1 $101.2 ($11.9) Public Safety Fee 34.7 27.2 (7.5) Fines 16.9 15.3 (1.6) Other 61.5 58.7 (2.8)

Rents and Recoveries 33.5 24.3 (9.2) Sale of County Land 6.5 0.0 (6.5) Recoveries of Prior Year Payables 0.0 0.0 0.0 Other 27.0 24.3 (2.7)

Departmental Revenues 229.9 221.2 (8.7) Mortgage & Deed Recording Fees 39.3 38.8 (0.5) GIS Tax Map Verification Fee 45.1 38.4 (6.7) Park Fees 23.7 22.6 (1.1) Other 121.8 121.4 (0.4)

OTB Payments 20.0 15.0 (5.0)

Sales Tax 1,276.7 1,269.4 (7.3)

Other Revenue 1,436.9 1,439.3 2.4

Total Revenues $3,110.1 $3,070.4 ($39.7)

Expenditures: Salaries and Wages $904.1 $914.8 (10.7) Overtime 81.9 92.6 (10.7) Other 822.2 822.2 0.0

Fringe Benefits 610.2 606.3 3.9 Social Security 58.6 60.0 (1.4) Health Insurance (active) 166.2 166.2 0.0 Health Insurance (retirees) 173.1 167.6 5.5 Pension 83.0 82.6 0.4 Other 129.3 129.9 (0.6)

Contractual Services 285.3 287.7 (2.4)

Tax Certiorari Payments 30.0 30.0 0.0

Judgements and Settlements 30.0 30.0 0.0

Other Expenditures 1,250.5 1,256.4 (5.9)

Total Expenditures $3,110.1 $3,125.2 ($15.1)

Subtotal Risks ($54.8) GAAP Basis Adjustments* $7.3 Total GAAP Risks ($47.5) Potential Use of Bond Proceeds for Tax Certiorari Refunds ($200.0) Total Potential Risks ($247.5) *Includes GAAP accounting adjustments estimated by Comptroller.

Discussion of Major Risks Listed in Table 1

Fines and Forfeitures – The Proposed Budget includes $113.1 million in anticipated revenue from fines and forfeitures. We have identified risks in the following areas:

• Public Safety Fee: $7.5 million based on current trends in FY 2019. • Fines: $1.6 million primarily related to violations against various Consumer Affairs laws and tickets issued by the Police Department and collected by the Traffic and Parking Violations Agency. • Red Light Camera Admin Fee: $1.9 million based on current trends in FY 2019, which we conservatively discount by 3% to account for potential improvement in driver behavior.

Rents and Recoveries – The Proposed Budget includes $33.5 million in rents and recoveries, which is a category of revenue that includes the sale of County property, rental income from tenants that occupy County facilities, recoveries generated by the reversal of prior year appropriations, and recoveries associated with the settlement of claims brought by the County.

Included in this amount is a Historical Property Sales $6.5 million “one shot” that the ($ in millions) Administration expects to realize from Budget Actual the sale of County property in FY 2020. Although the County has had $8.0 past success in selling property, we $6.7 $6.9 have been given little updated information about progress in this area $5.1 $5.1 $4.0 and note that there have been years $3.9 $3.6 when anticipated transactions closed $1.2 $0.0 later than expected (or not at all) and budgeted revenues fell short. FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Consequently, we consider the revenue anticipated from property sales to be at risk until specific parcels are identified, potential purchasers are located, contractual agreements are reached, and the Legislative approvals are secured.

Additionally, we are not recognizing the budgeting of $9.4 million the Administration anticipates from a future reversal of unspent appropriations from prior years. Under GAAP accounting principles (required by the NIFA Act) this amount would not be recognized.

Finally, the Proposed Budget includes $2.5 million for recovery of damaged County property of which we are holding $2.3 million at risk. The $2.5 million amount is 8

consistent with FY 2019 projections because in FY 2019 the County received a $2.3 million onetime litigation settlement related to the Nassau County Aquatics Center. We are not aware of any similar recoveries that are expected to become available in FY2020.

Departmental Revenues – The Proposed Budget includes $229.9 million in departmental revenue, of which we project $8.7 million to be at risk. Most of this risk stems from a projected diminution in GIS tax map verification fees ($6.7 million) and mortgage recording fees ($0.9 million), which we assume will continue from FY 2019 into FY 2020. We are projecting a $0.4 million shortfall in other revenues, such as the Parks Department, which has a projected shortfall of $1.1 million. These risks are offset by an expected surplus of $0.4 million in deed recording fees.

OTB Payments – The Administration is expecting OTB to pay it $20.0 million in 2020 (and each year thereafter) in quarterly installments from proceeds it expects to realize from its agreement with Genting, the entity that operates Resorts World Casino at Aqueduct Racetrack. OTB and the County have had disagreements in recent years. We hope that relations will improve and OTB will fulfill both the letter and the spirit of their recent agreement with the County, as outlined below. OTB has now committed to making quarterly payments of $5.0 million to the County every year on or before February 15th, May 15th, August 15th and November 15th. OTB made its first payment under these terms in August and we have no reason to doubt that the next two payments will be made in full; however, we are concerned because permitted offsets to OTBs payment each May have not been fully committed to writing and said offsets are subject to a reconciliation of OTB profitability (which may be a disincentive to improving fiscal responsibility), which will be prepared after OTB closes its books for the fiscal year (OTB’s fiscal year is April 1 through March 31). Notwithstanding OTB’s obligation, we are holding $5.0 million at risk because OTB’s commitment to make the May payment is subject to the offsets that have not been fully agreed upon (or known) between OTB and the County. Sales Tax – Sales tax is the largest revenue source for the County, comprising 41% of all revenues in the Major Funds in FY 2020, and is budgeted at approximately $1.277.0 billion in FY 2020. The Administration assumes that sales tax revenues will grow by 3.1% in FY 2020, including its expected receipt of $14.6 million in incremental sales tax revenue generated from internet sales made by merchants without a physical presence in New York State. The Administration characterizes the growth rate as 1.9% in FY 2020, excluding the incremental $14.6 million.

Our analysis indicates that the 3.5% growth rate assumptions are reasonable Sales Tax Growth Rates 3.0% only if the County realizes the entire 10 Year Average $14.6 million in incremental internet 2.5% sales tax revenue. Although the 2.0% Administration based its internet sales tax projection on preliminary estimates 1.5% provided by the State, the extension of this tax to merchants without a physical 1.0% presence in New York State became 0.5% effective only in June and thereby lacks 0.0% a track record. Since the County has 2019 Est 2020 Plan 2021 Plan 2022 Plan 2023 Plan averaged annual sales tax growth of only 1.9% over the past 10 years (and the County is projecting 3.1% in FY 2020), we are holding $7.3 million at risk until we see evidence that the internet sales tax is pushing up growth rates above historical norms.

Furthermore, the County has been told that the associated payment of the Aid and Incentives for Municipalities (“AIM”) would be withheld by the State prior to the distribution of sales tax to the County (the County would receive net revenue); however, since the actual mechanics of this intercept has not been finalized, we are concerned that the uptick in sales tax revenue we have recently seen may be partially “reversed” in future disbursements by the State to make up for the AIM payments that have not yet been withheld.

The Administration projects sales tax revenue will grow by 2.0% in each Out-Year of the Proposed Plan, which we find to be a reasonable assumption.

Salaries and Wages – The Administration projects that salaries and wages will total $904.1 million in FY 2020. Our analysis indicates that the Administration’s assumptions for salaries and wages are not unreasonable if the new labor agreements have savings to substantially offset any salary increases. The only exceptions are their estimates of overtime costs, which may be under budgeted by approximately $10.7 million (mostly in the Police Department and Correctional Center), and because of potential unfunded labor costs that could arise from ongoing labor negotiations.

We note that most labor agreements expired at the end of FY 2017. Although the Administration budgeted for the additional costs of step increases that will be provided to eligible employees in FY 2020, it did not explicitly include any funding for cost of living adjustments (“COLAs”). Instead, the Administration noted that approximately $7.0 million of resources is subsumed in the salary lines, which potentially could be made available to fund COLA increases.

The Administration explained that OMB removed 66 positions from the Proposed Budget but left the funding in place to help offset potential wage increases. Any additional

raises would increase the projected deficits and prolong the County’s challenge of exiting the Control Period.

Consequently, the Administration is generally assuming that all salary increases will be self-funded by savings from enhanced productivity or union concessions. We are skeptical that cost-neutral agreements will be successfully negotiated although there appears to be room for savings without jeopardizing public safety or service delivery.

Our analysis indicates that the $7.0 million in resources would be insufficient if wage increases were not offset by enhanced productivity or labor concessions. In fact, the Administration has estimated that salary increases could cost approximately $10.5 million per year for each one percent increase given to County employees. Further, although we have not included a risk for COLAs in Table 1, it should be noted that the financial impact on FY 2020 of providing COLAs with retroactivity to FY 2018 is not supportable in the Proposed Budget or Proposed Plan as the incremental costs of multi-year increases compound. For example, a one percent increase for each of 2018, 2019 and 2020 would add approximately 32.0 million in unfunded costs to FY 2020, which if not offset through savings measures, would increase the projected deficit by an equivalent amount.

The Police Department has the largest proposed overtime budget at Overtime Projection vs Budget ($ in millions) $52.8 million in FY 2020. However, we $125 project that the Department will $84.1 $93.8 $87.0 $94.0 continue to spend in FY 2020 at the $100 $13.4 $13.6 same pace as it has in FY 2019, which $75 $13.4 $13.6 $24.1 $24.1 will then cause it to exceed the Proposed $19.9 $20.1 Budget by $1.1 million. $50

The Administration expects to $25 $50.8 $56.3 $53.3 $56.3 schedule two classes of police officers $0 (200 new officers) during FY 2020 to FY 2018 FY 2018 FY 2019 FY 2019 address the upward pressure on Adopted Projection Proposed Projection overtime spending; however, we are hesitant about recognizing the Police Department Corrections All Other Departments anticipated positive impact on overtime costs until we see evidence of success.

The Correctional Center has the second largest proposed overtime budget at $15.3 million in FY 2020. Overtime spending at the Correctional Center has been increasing each year since FY 2016, even though the average census of prisoners has declined. The overtime trend has worsened in FY 2019; however, the Correctional Center hired two new classes in FY 2019 and expects to hire two additional classes in FY 2020, which we assume will help restrain runaway overtime spending moving forward. That said, we project overtime costs in FY 2020 will be consistent with FY 2019, which will still exceed the Proposed Budget by $9.6 million.

We believe that workforce management and savings from vacancies and attrition could mitigate some of the Police and Correctional Center overtime risk. Although, we do not have financial data on the impact of the Criminal Justice Reform and the Raise the Age State mandates, it is estimated that both will have a positive impact on the Correctional/Sheriff Department overtime costs with a slight increase in the Probation Department. We will continue to closely monitor spending to determine if more critical measures need to be taken.

Headcount – The Proposed Budget contains 7,492 full-time positions, which is 66 positions lower than the FY 2019 Adopted Budget (see Appendix B), but 265 positions higher than the County’s August 29st on-board headcount of 7,227. The Proposed Budget also includes an unallocated attrition factor of 260 heads.

The significant increase in the proposed headcount from 2019 Adopted Budget is attributable to funding positions needed to deliver current services as well as to support the continuation of initiatives such as: Assessment reforms; staff increases at the Assessment Review Commission; County Attorney compliance with the NYS mandate of Raise the Age; and an increase in the District Attorney’s staff to remain in compliance with the changes in the legislation for Criminal Justice passed by the State. The Administration is also providing funding, for the first time, for the Office of Asian American Affairs, which has not yet been staffed.

Fringe Benefits – Our analysis indicates that fringe benefits may be overfunded by $3.9 million. The projected surplus is composed of several variances. Based on current trending, we estimate that health insurance costs for retirees is overbudgeted by $5.5 million. Additionally, there is a surplus in various other codes within the Fringe Benefits line in the amount of $1.0 million. These favorable variances are offset by a projected shortfall of: $1.4 million in FICA expenses and $1.2 million in Medicare reimbursement surcharges.

Contractual Services – The County uses outside contractors for many different services, some of which are referenced below. NIFA reviews and approves all contracts in excess of $50,000, and as appropriate requests changes or clarifications. Consequently, we feel comfortable that these costs have been reasonably estimated except for costs for providing medical and psychiatric services to inmates at the Correctional Center.

The Transdev Services, Inc. (formerly Veolia) contract is the largest County contract and is budgeted for FY 2020 at $135.4 million for the provision of bus transportation services, which is $4.2 million more than the adopted FY 2019 Budget. The County is working on the possibility of adding routes and it is also providing funding for natural gas-fueled buses.

Another major County contract is with NHCC for providing certain services, such as medical and psychiatric services to inmates at the Correctional Center. The cost to the County for the provision of these services is budgeted at $25.5 million per year, an increase of $1.7 million when compared to the adopted FY 2019 Budget. However, based on FY 12

2018 results and the 2019 trending we are projecting an additional $2.4 million will be needed for this contract. We also note here that NHCC management has stated in its audited financial statements that substantial doubt exists about NHCC’s ability to continue as a going concern. This heightens our concern that the County’s obligation to pay debt service on NHCCs debt continues regardless of NHCCs ability to repay the County.

The current contract with NHCC expires in February of 2020 and the County is in the process of negotiating a new long-term agreement, the cost of which is may exceed the $25.5 million that is currently budgeted. Among the major outstanding issues is a reconciliation of charges dating back to 2017.

The Proposed Budget for the Department of Information Technology (“IT”) includes an additional $1.8 million in expenses when compared to the 2019 Adopted Budget. The IT services have been consolidated from other departments into IT, thus the increase in the expense.

Utilities – The Proposed Budget includes $34.0 million for utility expenses, which is $0.1 million lower when compared to the 2019 Adopted Budget. Based on current trends and historical data we project a shortfall of $0.8 million. The shortfall arises from increased expenses for telephone service and other utilities.

Other Expenditures – Other expenditures include costs such as: Social Services expenses, debt service-related expenses, Early Intervention & Pre-School Education expenses, etc. We are projecting a shortfall of $5.9 in this category. This is primarily due to a potential risk in Pre-school related expenses in the amount of $4.9 million, which would be partially offset by an estimated $2.8 million in associated State Aid reimbursements.

Tax Certiorari Payments – We acknowledge both the existing and new professionals that the County is using to try to solve its tax certiorari problem. Likewise, we acknowledge several major accomplishments that have taken place during the new Administration.

We are not, however, ready to endorse the proposal in the Proposed Plan that calls for borrowing an additional $200.0 million to ostensibly eliminate the backlog of claims that arose prior to December 31, 2017. That will only be possible once the County proves, consistent with our communication regarding approval of the first traunche of borrowing, that they need the additional $200.0 million to eliminate the backlog and that once it is disbursed the County will handle all future tax certiorari claims from current operating income.

We also hold out the possibility that by using available Disputed Assessment Funds (“DAF”) funds and a reasonable amount of operating funds, the backlog may be effectively eliminated without the full $300.0 million that was originally requested. The backlog was estimated by the Comptroller to be $230.9 million at the end of FY 2018, which was down from his estimate of $257.2 million at the end of FY 2017.

For the present, NIFA still has many questions and needs more data about outstanding claims, the filing of vacant positions and turnover. We also need to see if the reappraisal has generated an excessive number of new claims.

Finally, it is noteworthy that the Proposed Plan does not include other funds for LIPA-related property tax litigation, which the County estimates could be as high as $245.5 million.

Judgments and Settlements – The Administration has budgeted $30.0 million annually to cover the costs of non-certiorari judgments and settlements and has an additional $14.5 million in a Litigation Reserve Fund. Based on historical spending, our analysis indicates that the $30.0 million is a reasonable projection of “ordinary” expenditures and the Litigation Reserve Fund provides a modest contingency. We note that in the early years of NIFA, all these expenses would have been bonded.

Although it is impossible to predict with certainty the likelihood or magnitude of future litigation, there are several existing liabilities that could require a significant amount of additional County resources and which are totally unfunded. For example, at the end of FY 2018 the Comptroller noted the possibility of a liability of $414.8 million for non- certiorari litigation and $209.8 million for Workers’ Compensation claims.

Other Major Concerns

In addition to the risks described above, we continue to have other concerns which could hinder the County’s ability to achieve and maintain balance on a GAAP Basis.

Contingency Reserve –The Proposed Budget does not allocate funding for contingencies. Although our analysis indicates that the Proposed Budget contains fewer risks than in recent years, unanticipated shortfalls could emerge in FY 2020. For example, from lower sales tax revenues and higher expenditures for overtime, tax certiorari refunds, and judgments and settlements. The Administration’s decision to not maintain any reserve for contingencies in the Out-Years is equally disconcerting and not consistent with recommended budgeting practices or its own guidelines.

Fringe Benefits – For the ninth consecutive year, the Administration is taking advantage of a State authorized program that allows the County to amortize certain pension costs over several years. The original program, which was called the “Contribution Stabilization Program,” allowed the deferred portion to span ten years. Beginning in 2014, the County began to use the “Alternate Contribution Stabilization Program,” which allowed the amortization period to be extended by two years to 12 years.

As we have repeatedly warned in past years, while the use of this program will yield short-term budget relief (approximately $12.2 million in FY 2020), the effect of the amortization is to merely extend current liabilities into the future. Stated differently, the County has avoided paying approximately $339.4 million through 2019 in current 14

liabilities through the years and passed that expense onto future taxpayers. The total amount deferred including FY2020 is $351.6 million. Of this amount, approximately $206.4 million remains as the County’s outstanding liability. In practical terms, the County’s current installment payments resulting from past years' cost avoidance now exceeds the relief garnered in the current year.

In addition, the County has a significant unfunded liability for certain benefits owed to retirees (unrelated to pensions) referred to as Other Post-Employment Benefits (“OPEB”). The County’s OPEB liability is estimated to be $6.3 billion as of December 31, 2018. The County is not required by law to provide funding for OPEB other than the pay-as-you-go amount necessary to provide benefits in the current fiscal year to retirees and eligible beneficiaries (which have been budgeted). However, OPEB is a liability that many entities are addressing by establishing reserves and the liability is growing and it will eventually have to be paid. Among other issues, this liability has been noted repeatedly as a negative to Nassau County by the various rating agencies. The rating agencies and the Government Finance Officers Association (“GFOA”) both recommend the establishment and funding of an OPEB Trust.

Sewer and Storm Water Resources District Fund – Although the Sewer and Storm Water Resources District is not one of the five Major Funds, as defined in the NIFA Act, it is a significant fiscal responsibility for the County, and we continue to have ongoing concerns regarding the sustainability of its business model. Simply stated, projected baseline revenues are insufficient to support projected baseline expenditures.

To address the inherent imbalance, the Administration proposes a tax levy increase in FY 2020 in the amount of $19.0 million (the Administration does not plan to use the $4.2 million in fund balance that is projected for the end FY 2019). Even with the proposed increase in the tax levy, the Administration projects ongoing baseline deficits of $5.8 million in FY 2021, $11.7 million in FY 2022 and $20.7 million in FY 2023. To close these projected Out-Year deficits, the Proposed Plan reflects proposed increases in the sewer tax levy of 3.9% in FY 2021, 3.8% in FY 2022, and 5.6% in FY 2023.

A lower Court ruled unfavorably against the County’s efforts to charge non-profit institutions for sewer and storm water services, thereby eliminating the use of an estimated $12.6 million annually, which could have been used to mitigate the proposed tax levy increases. This initiative should not be abandoned even if the County ultimately loses its current court proceeding. The County should find a way, along with almost every other municipality in the nation, to charge for this service.

III. THE OUT-YEAR GAPS: FY 2021 – FY 2023

This section of the Report discusses the projected Out-Year (FY 2021 – FY 2023 gaps and the Administration’s plan for ensuring balance in these years.

Sizing the Out-Year Gaps – The Administration assumes that even if it can mitigate all risks in FY 2020, projected baseline gaps between recurring revenues and expenditures will emerge in the Out-Years totaling $49.9 million in FY 2021, $90.8 million in FY 2022, and $113.7 million in FY 2023 (prior to implementing newly proposed gap- closing initiatives).

However, our analysis indicates that if the risks we identified in FY 2020 are not satisfactorily addressed with recurring solutions, the Administration’s projections of Out- Year gaps may be understated by approximately $26.5 million in FY 2021, $53.1 million in FY 2022, and $80.5 million in FY 2023. Stated differently, we project that the baseline gap could reach $76.3 million in FY 2021, $143.9 million in FY 2022 and $194.3 million in FY 2023, as shown in Table 2.

Table 2 Projected Out-Year Gaps are Understated ($ in millions) FY 2021 FY 2022 FY 2023 County Estimated Baseline Gap* ($49.8) ($90.8) ($113.8) NIFA Risks (26.5) (53.1) (80.5) NIFA Estimated Baseline Gap ($76.3) ($143.9) ($194.3) * The baseline gaps were calculated by the Administration using growth rate assumptions listed in Appendix C. Most of these risks are extrapolated from our analysis of projected revenues and expenditures in FY 2020, which are described in detail earlier in this Report. However, there are a few Out-Year risks that are either new or require closer examination, as discussed below.

Salaries and Wages – On December 31, 2017, the County’s major labor agreements expired, as well as NIFA’s commitment not to re-impose a wage freeze. As we discussed earlier in this Report, the Administration has budgeted for the additional costs of step increases that will be provided to eligible employees in the Out-Years; however, except for the potential availability of $7.0 million referenced on pages 2 and 10, the Administration did not explicitly include any funding for COLAs, which have typically been provided in previous contracts.

The unfunded impact of providing COLAs is not quantified as a risk in Table 2; however, COLAs could cost approximately $10.5 million per year for each one percent increase given to union members – even more if they are made retroactive to FY 2018 – if they are not offset by enhanced productivity or labor concessions. For example, annual 17

COLAs of only one percent beginning in 2018 would add unfunded costs of approximately $43.0 million in FY 2021, $54.0 million in FY 2022, and $65.0 million in FY 2023. If these unfunded costs were not offset by various savings measures, the projected Out-Year deficits would increase by equivalent amounts.

We expect the Administration and its unions to be mindful of NIFA’s concerns and the County’s distressed finances during any negotiations. In addition, NIFA has repeatedly stated that as a prerequisite to NIFA’s review of any proposed labor agreements, the County and each of its unions must complete the preparation and execution of consolidated contracts.

Tax Certiorari Refunds – The County has taken steps to fund its annual tax certiorari obligations with operating revenue and resources accumulated in its Disputed Assessment Fund(s). It is unclear if the County’s assessment reforms can take care of this operating burden prospectively; however, even if successful in this regard, it does not solve the backlog which has amassed in prior years. The Administration proposes to borrow an additional $200.0 million in December 2019 to pay down the backlog, which the Comptroller estimates to be approximately $230.9 million as of December 31, 2018 (excluding approximately $245.5 million related to the reassessment of LIPA properties). This is also discussed earlier in this Report.

Judgments and Settlements - The Administration is funding its annual, non- certiorari judgments and settlements with $30.0 million in operating revenue in FY 2020 and in each of the Out-Years. Our analysis indicates that this is a reasonable amount based on average historical spending, assuming no large judgments are rendered, or settlements reached in FY 2020 or the Out-Years. However, we find it concerning that the County currently has only $14.5 million in its Litigation Reserve Fund to mitigate potentially large judgments.

Regrettably, the County is a defendant in several major lawsuits for which no significant funds have been reserved beyond the $14.5 million. The County Comptroller reported that the County has potential liabilities of $414.8 million for non-certiorari litigation and $209.8 million for Workers’ Compensation claims as of December 31, 2018. Consequently, resolution of these potential liabilities will likely result in actual costs far exceeding budgeted amounts, necessitating a significant restructuring of other County spending unless a new revenue stream is identified. For this reason, we recommend that the County work to increase the size of its Litigation Reserve Fund.

Contingency Reserve - We advise the County to fund a non-earmarked contingency reserve in each of the Out-Years with at least $10.0 million in operating revenues. Reasonable contingency reserves are expected by bond rating agencies and are part of any well-constructed budget because of the probability that certain assumptions will break unfavorably in any year. Even a modest contingency reserve could buffer the otherwise disruptive impact on operations caused by unforeseen increases in expenditures or unanticipated shortfalls in revenues.

*** The following discussion describes the Administration’s plan to close the baseline gaps it has projected, as shown in the center section of Table 3. However, as discussed above (and illustrated in Table 2), our analysis indicates that the Administration’s projections of baseline gaps are understated (delineated on the top line of Table 3).

Table 3 County Gap-Closing Plan ($ in millions) FY 2021 FY 2022 FY 2023 NIFA Estimated Baseline Gap ($76.3) ($143.9) ($194.3) County Gap-Closing Options Expense/Revenue Actions Building Consolidation 5.0 5.0 5.0 Workforce Management 5.0 10.0 15.0 ERP Implementation 0.5 1.0 1.0 County's District Energy Facility 1.0 1.0 1.5 Income and Expense 15.0 15.0 15.0 Belmont Arena and Hub Sales Tax Benefits 7.7 12.8 14.8 Other Savings Initiatives 15.4 46.8 62.0

NYS Actions E-911 Reimbursement 1.0 1.0 1.0

Total Gap-Closing Options $50.6 $92.6 $115.3 Remaining Surplus / (Deficit) ($25.7) ($51.3) ($79.0)

Closing the Out-Year Gaps – Our analysis indicates that the projected value of the Administration’s gap-closing plan will be insufficient to close NIFA’s estimates of baseline gaps (NIFA’s projected risks plus the Administration’s estimate of baseline gaps). As shown in Table 3, even after fully implementing the Administration’s proposed gap- closing plan, the projected gaps would still be $25.7 million in FY 2021, $51.3 million in FY 2022 and $79.0 million in FY 2023. Moreover, we think it is unlikely that the full savings from the proposed gap-closing initiatives can be realized.

Discussion of County Gap-Closing Initiatives Listed in Table 3

Expense/Revenue Actions – The Administration has referenced several initiatives that it is pursuing and that it projects could generate additional revenue or reduce expenditures in the Out-Years. While theoretically this may be true, in most instances our discussions and review of the plans for implementation of these initiatives have generated little confidence that the projections are achievable.

Building Consolidation – The Administration claims that reductions in its workforce during the past few years have provided opportunities for reduction of office space and centralization of its staff. It has hired a vendor to assist with the process of 19

finding opportunities within this framework. We have no additional information and question whether there would be significant savings without the transfer of employees out of leased space to County-owned facilities.

Workforce Management – The Administration claims that savings can be derived by running County operations with fewer employees and without labor union grievances or a detrimental impact on services. As of August 31, 2019, there were 331 funded vacancies; however, the Administration plans to fill many of these positions as it staffs up the Assessment Department, Assessment Review Commission, Correctional Center, Probation, Police Department. The elimination of programs and a reduction in certain services seems possible, but we remain doubtful that the County can realize additional workforce savings of $5.0 million to $15.0 million in the Out-Years.

ERP Implementation – The Administration is hopeful that the County’s new Enterprise Resource Planning (“ERP”) system will facilitate its pursuit of efficiencies and savings by streamlining core business processes. The initiative is underway and the Administration claims that the first phase involving personnel and payroll will be operational by the end of 2019, although the completion of this phase has slipped more than once. It’s unclear how these savings will be realized considering that few details are disclosed.

County’s District Energy Facility – The County’s agreement with Engie NA, which currently provides electric power and thermal energy to various County buildings and institutions through the County’s District Energy Facility, has been extended again. The County had previously indicated that among the options it was evaluating was a public- private partnership that could involve a “sale, lease, or private operation” of the Facility. The Administration is short on specifics that explain the projected revenue of between $1.0 million and $1.5 million in the Out-Years; therefore, we cannot confirm the viability or time parameters of generating this amount of revenue.

Income and Expense – The Administration anticipates that the New York State Court of Appeals will rule in favor of the Income and Expense Law, which requires commercial property owners to provide income statements for properties that charge commercial rent. Property owners who do not comply will be subject to a fine, which will produce a minimum of $15.0 million per year in gap-closing revenue, beginning in 2021. While the outcome of the County’s appeal to the lawsuit challenging the law, which had previously been decided in favor of the property owners, is uncertain, the income estimates are based upon the property owners’ defiance of the law. The financial impact of the property owners complying with the law, if the Court reverses the previous decision, is unknown.

Belmont Arena and Hub Sales Tax Benefit – The Administration expects to realize additional sales tax revenue during and after construction of the new Belmont Arena and the Hub development project surrounding the Nassau Coliseum. These incremental amounts are $7.7 million in 2021, $12.8 million in 2022 and $14.8 million in 2023. Construction of the Belmont Arena is expected to be completed in 2021 and plans for the 20

Hub have yet to be finalized. Consequently, we question the assumptions behind significant sales tax revenue increments before the end of 2021.

Other Actions – The Administration proposes evaluating revenue generating and expense reduction initiatives, not mentioned elsewhere, that would result in net savings of between $15.4 million and $62.0 million per year in 2021, 2022 and 2023. Without specifics, it is difficult to imagine that savings of this magnitude would be realized in such a short time span.

New York State Actions

The Administration has included one initiative that it intends to pursue, but which would require State approval before it can be advanced: (1) E-911 Reimbursement.

E-911 Reimbursement – The Administration recommends that the County seek State approval to increase surcharges on telecommunication equipment and telephone service supplier customers. The County would use this revenue to cover the cost of technology needed to make enhancements to the 911 (E-911) emergency telephone system.

IV. CONCLUSION

The County will remain fiscally challenged throughout the term of the Multi-Year Financial Plan even if the identified risks are resolved. Significant obstacles include the County’s tax certiorari backlog and potentially new, unbudgeted labor costs resulting from the next round of collective bargaining. Furthermore, Out-Year deficits could worsen if sales tax growth wanes because of future weakness in the local economy. Our analysis indicates that the County will likely remain in a control period for an extended period, especially if the County moves forward with its plan to use an additional $200.0 million of bond proceeds to pay tax certiorari refunds. If bonding is not approved, the payments needed to bring down the County’s long-term tax certiorari liability would add to the already overextended operating budget. We cannot overstate that the recipe for exiting the Control Period and beginning the process of achieving a balanced budget has been well known since it was first imposed. The County must adopt measures that significantly raise the level of recurring revenue enough to fund its current obligations and desired level of services. In the alternative, the County must radically cut the level of its recurring expenditures so that they match its available recurring revenues. A reasonable course of action would combine both approaches. County leaders claim that they want to exit the current Control Period but seem happy to let it continue even though they are aware that all they would need to do is pass minimal revenue enhancing initiatives. We wish they would take the necessary actions so that FY 2020 would truly be a transformative year.

V. APPENDICES

Appendix A Proposed Multi-Year Financial Plan, Fiscal 2020-2023

MAJOR FUNDS

EXPENDITURES Object 2020 Proposed 2021 Proposed 2022 Proposed 2023 Proposed AA - SALARIES, WAGES & FEES 904,059,751 939,098,158 974,070,427 1,010,482,846 AB - FRINGE BENEFITS 610,220,656 645,815,074 674,204,892 703,960,376 AC - WORKERS COMPENSATION 31,157,100 31,157,100 31,157,100 31,157,100 BB - EQUIPMENT 3,149,862 3,149,862 3,149,862 3,149,862 DD - GENERAL EXPENSES 37,821,943 37,821,943 37,821,943 37,821,943 DE - CONTRACTUAL SERVICES 285,308,450 288,696,015 288,697,422 288,698,858 DF - UTILITY COSTS 33,990,976 33,147,085 33,384,844 33,711,489 DG - VAR DIRECT EXPENSES 5,250,000 5,250,000 5,250,000 5,250,000 FF - INTEREST 143,698,791 148,964,959 151,992,191 154,751,922 GA - LOCAL GOVT ASST PROGRAM 75,065,514 76,541,824 78,047,661 79,583,614 GG - PRINCIPAL 119,869,999 137,300,000 152,975,000 154,150,000 HH - INTERFUND CHARGES 23,295,916 23,295,916 23,295,916 23,295,916 MM - MASS TRANSPORTATION 45,134,383 45,598,574 46,069,729 46,547,950 NA - NCIFA EXPENDITURES 2,000,000 2,010,000 2,025,000 2,075,000 OO - OTHER EXPENSE 240,810,591 211,291,350 195,017,407 173,988,004 PP - EARLY INTERVENTION/SPECIAL EDUCATION 137,000,000 138,370,000 139,753,700 141,151,237 SS - RECIPIENT GRANTS 51,130,000 51,130,000 51,130,000 51,130,000 TT - PURCHASED SERVICES 69,724,579 70,421,825 71,126,043 71,837,303 WW - EMERGENCY VENDOR PAYMENTS 53,225,000 53,757,250 54,294,823 54,837,771 XX - MEDICAID 238,209,048 238,209,048 238,209,048 238,209,048 Total Expenditures 3,110,122,559 3,181,025,984 3,251,673,007 3,305,790,239

REVENUES Object 2020 Proposed 2021 Proposed 2022 Proposed 2023 Proposed BA - INT PENALTY ON TAX 36,912,500 36,912,500 36,912,500 36,912,500 BC - PERMITS & LICENSES 18,740,082 18,740,082 18,740,082 18,740,082 BD - FINES & FORFEITS 113,150,165 113,150,165 113,150,165 113,150,165 BE - INVEST INCOME 9,725,000 9,725,000 9,725,000 9,725,000 BF - RENTS & RECOVERIES 33,459,283 33,459,283 33,459,283 33,459,283 BG - REVENUE OFFSET TO EXPENSE 20,713,099 20,712,599 20,714,974 20,710,224 BH - DEPT REVENUES 229,881,150 229,881,150 229,881,150 229,881,150 BO - PAYMENT IN LIEU OF TAXES 47,883,296 47,883,296 47,883,296 47,883,296 BQ - CAPITAL RESOURCES FROM DEBT 2,700,000 2,700,000 2,700,000 2,700,000 BS - OTB PROFITS 20,000,000 20,000,000 20,000,000 20,000,000 BW - INTERFUND CHARGES REVENUE 79,483,649 83,626,001 87,525,021 92,372,416 FA - FEDERAL AID REIMBURSEMENT OF EXPENSES 142,404,310 140,889,321 140,835,634 140,777,205 SA - STATE AID REIMBURSEMENT OF EXPENSES 224,275,784 224,275,784 224,275,784 224,275,784 TA - SALES TAX COUNTYWIDE 1,161,262,757 1,184,488,012 1,208,177,772 1,232,341,328 TB - PART COUNTY SALES TAX 115,409,606 110,569,016 112,780,396 115,036,004 TL - PROPERTY TAX 821,723,596 821,723,596 821,723,596 821,723,596 TO - OTB 5% TAX 1,938,000 1,938,000 1,938,000 1,938,000 TX - SPECIAL TAXES 30,460,282 30,460,282 30,460,282 30,460,282 Total Expenditures 3,110,122,559 3,131,134,087 3,160,882,936 3,192,086,315

Surplus / (Deficit) 0 (49,891,897) (90,790,071) (113,703,924)

Appendix B FY 2020 Proposed Budget Full-Time Headcount (HC) Comparison Table

Inc/(Dec) 2019 Adopted 2020 Proposed Inc/(Dec) On-Board Proposed vs. Department HC HC 2020 vs. 2019 August 29, 2019 On-Board AN - ASIAN AMERICAN AFFAIRS 0 6 6 0 6 AR - ASSESSMENT REVIEW COMMISSION 56 72 16 53 19 AS - ASSESSMENT DEPARTMENT 203 203 0 140 63 AT - COUNTY ATTORNEY 96 99 3 86 13 BU - OFFICE OF MANAGEMENT AND BUDGET 23 31 8 26 5 CA - OFFICE OF CONSUMER AFFAIRS 30 30 0 26 4 CC - NC SHERIFF/CORRECTIONAL CENTER 1,031 1,024 (7) 968 56 CE - COUNTY EXECUTIVE 14 13 (1) 12 1 CF - OFFICE OF CONSTITUENT AFFAIRS ¹ 37 15 (22) 37 (22) CL - COUNTY CLERK 87 87 0 80 7 CO - COUNTY COMPTROLLER 85 86 1 71 15 CS - CIVIL SERVICE 46 48 2 48 0 DA - DISTRICT ATTORNEY 385 424 39 396 28 EL - BOARD OF ELECTIONS 155 156 1 153 3 EM - EMERGENCY MANAGEMENT 8 8 0 8 0 FC - FIRE COMMISSION 88 96 8 93 3 HE - HEALTH DEPARTMENT 175 167 (8) 158 9 HI - HOUSING & INTERGOVERNMENTAL AFFAIRS 13 17 4 13 4 HR - COMMISSION ON HUMAN RIGHTS 6 5 (1) 5 0 HS - DEPARTMENT OF HUMAN SERVICES 56 62 6 56 6 IT - INFORMATION TECHNOLOGY ¹ 91 132 41 95 37 LE - COUNTY LEGISLATURE 96 99 3 93 6 LR - OFFICE OF LABOR RELATIONS 8 6 (2) 7 (1) MA - OFFICE OF MINORITY AFFAIRS 6 10 4 5 5 ME - MEDICAL EXAMINER 97 78 (19) 76 2 PA - PUBLIC ADMINISTRATOR 6 6 0 6 0 PB - PROBATION 239 203 (36) 178 25 PD - POLICE DEPARTMENT 3,352 3,298 (54) 3,124 174 PE - DEPARTMENT OF HUMAN RESOURCES 7 8 1 7 1 PK - PARKS, RECREATION AND MUSEUMS 143 147 4 146 1 PR - PURCHASING DEPARTMENT 11 14 3 12 2 PW - PUBLIC WORKS DEPARTMENT 424 416 (8) 390 26 RM - RECORDS MANAGEMENT 13 13 0 10 3 SA - COORD AGENCY FOR SPANISH AMERICANS 4 7 3 5 2 SS - SOCIAL SERVICES 601 576 (25) 561 15 TR - COUNTY TREASURER 30 34 4 29 5 TV - TRAFFIC & PARKING VIOLATIONS AGENCY 48 47 (1) 47 0 VS - VETERANS SERVICES AGENCY 10 9 (1) 7 2 SubTotal 7,780 7,752 (28) 7,227 525 Unallocated HC Reduction (222) (260) (38) 0 (260) Grand Total 7,558 7,492 (66) 7,227 265

¹ Division of Printing and Graphic in Constituent Affairs has been transferred to Information Techonology

Appendix C Multi-Year Plan Baseline Inflators

Category 2021, 2022, 2023 Inflator Explanation Expenditures Employee Benefits: Non-Police Pension NYSERS Estimates provided by the NYS Retirement System Police Pension NYSPFRS Estimates provided by the NYS Retirement System Health Ins. – Active 6.0%, 6.0%,6.0% Highest average increase over last 3, 5, or 9 years Health Ins. – Retirees 6.0%, 6.0%,6.0% Highest average increase over last 3, 5, or 9 years Other Than Personal Services Flat, Flat, Flat Utilities: Light and Power -1.35%, 0.03%, 0.01% EIA (US DOE) 2019 Annual Energy Outlook Price Projection for Mid-Atlantic Region Commercial Customers (Reference Brokered Gas 1.4%, 2.24%, 3.22% Case). Blended (2/3 weighting for natural gas & 1/3 weighting for the Trigen 1.43%, 2.00%, 2.65% ten-year avg. CPI [2.43%]). Fuel -3.01%, -3.64%, -1.95% EIA (DOE) 2018 Annual Energy Outlook Price Projection for Mid-Atlantic Region Commercial Customers (Reference case). Derived from the NY Public Service Commission’s 2017 Water 2.67%, 2.67%, 2.67% Five Year Book, Percent Increase in Average Annual Bill per Customer, and weighted equally with the CPI.

Telephone 1.5%, 1.5%, 1.5% Assumes increases consistent with the ten-year average growth in the CPI – All Urban Consumers (New York-Northern New Jersey-Long Island, NY-NY-CT-PA). Medicaid Flat, Flat, Flat 2017 goes back to Original Weekly Medicaid Cap prior to relief. Social Services Entitlements Variable Reflects most current caseload information. Special Education Program Variable Reflects most current caseload information.

Revenues State Aid Variable Variable based upon reimbursement formula Federal Aid Variable Variable based upon reimbursement formula Sales Tax 2.0%, 2.0%, 2.0%