Government Technology

Unpaid State Bills Shift Burden to Local Governments



New York State Capitol in Albany.

October 21, 2010 By

Reprinted courtesy of Stateline.org

Anthony Picente decided he’d had enough. The state of New York had fallen $34 million behind on payments to Oneida County, the Upstate county around Utica where Picente is the top elected official. Picente was counting on the money to reimburse the county for services it provides that are in high demand these days: job training, food stamps and other key pieces of the social safety net.

By July, Picente hadn’t seen a check from Albany in months. He was still waiting for reimbursements for money the county spent in December. So Picente decided to fight back. Counties in New York State are expected to make their own weekly payments back to the state, in order to help pay for the state’s Medicaid program. Picente sent a letter to Governor David Paterson with a simple message: We won’t pay Albany until Albany pays us.

As threats go, Picente’s wasn’t all that menacing. After all, Oneida County’s weekly payments to the state amount to less than $1 million. That’s barely a rounding error in New York’s $79 billion budget.

Still, county officials across New York noticed the rebuke. So did school administrators, contractors and just about anybody who does business with state government. New York had been delaying its payments across-the-board since December, when the state treasury ran out of money for the first time in its history. It was squeezed for cash again this spring when the Legislature’s budget negotiations reached gridlock. New York didn’t have a budget until 125 days into its fiscal year.

The late payments left counties in a particularly tough spot. In New York, counties are responsible for providing most social services. They rely on state money -- and federal money funneled through the state -- to pay for them. The counties typically spend their own money upfront and get reimbursed by the state later.

As New York fell behind on its bills, that system came close to breaking down. By the time Picente sent his ultimatum, the state owed Oneida County more than the county had in reserve to continue paying for social services. To deal with its own cash crunch, Oneida County started doing to its contractors what the state was doing to the county: skipping payments. At one point, the county owed a local agency for youth roughly $800,000.

“Part of the issue is the state, through all its budget talks, has been talking about shutting down state government,” Picente told Stateline this summer. “In essence, what they’ve done is slowly shut down county government.”

Eventually, the state caught up on its backlog of payments to Oneida County. It even got its Medicaid money back by deducting it from the other payments to the county. Still, the state’s cash flow problems have persisted into the fall. Last month, New York put off a payment to K-12 schools in order to keep money in the bank. It was the third time in a year that schools had been told to wait for state money. “Our message to everybody is: We know this is a difficult time but hang in there,” says Erik Kriss, a spokesman for New York’s budget division. “We’re all sharing in the sacrifices.”

The Weak Links

The standoff between Albany and Oneida County shows how tightly linked the different levels of government are, in fiscal terms. Money gets trucked back and forth among the federal government, states and localities. States are right in the middle of the action. But that means a financial breakdown at the state level can cause a chain reaction that passes along the state’s budget problems to the counties, cities and school districts.

Yet local governments are in a worse position to weather the cash crisis than states are. Like states, locals must deal with slumping revenue in a recession. But municipalities generally have fewer options to bring in more cash. States often limit the types of taxes local governments can impose and, especially when it comes to property taxes, how much they can collect. “The state government can’t pay its bills, but the buck stops with the counties,” says Nancy Krumwiede, president of the Illinois Association of County Officials. “We’re the ones who have to carry the brunt of it.”

In Illinois, many counties are running out of options. At the moment, state government is operating without a balanced budget. State revenues simply aren’t keeping up with expenditures. So Illinois has fallen as much as six months behind on payments to counties to cover the state’s share of certain services, particularly in the criminal justice arena. Counties in Illinois can only borrow against expected revenues so often; they at least should pay back one loan before taking out another. Property taxes — the primary source of revenue for counties — are capped by the state. So the only thing left to do is cut.

In rural Hardin County, population 4,800, officials waited 11 months last year for Springfield to reimburse the county for the state’s 85-percent share of the state’s attorney’s $128,000 salary. The state also has fallen way behind on its half of the paycheck for the public defender and the supervisor of assessments, as well as payments for probation officers and the county share of the state’s income tax. The late payments have made the business of county government nearly impossible to manage.

Money became so tight this May that the county commission laid off all seven county employees at the courthouse who weren’t elected officials. In fact, the elected officials thought they would have to go without pay, too, until the state sent some of the money that it owed. But the county still is in crisis mode. The county was able to re-hire a janitor and some office staff on a part-time basis only because David Robinson, one of the county commissioners, gave up his salary for three months. For the upcoming election, part-time staffers are coming in on their days off to make sure the paperwork is done in time. There is no money set aside to pay election judges to monitor polling stations.

Nearly all county services are getting shortchanged, but some of the most striking examples deal with cops and courts. Criminal defendants have requested jury trials in routine cases, rather than bench trials, because they know the county can’t afford to spend a few thousand dollars to pay jurors. In one case, the county prosecutor had to ask to delay the trial from May until November, when the county hopes it will have more money on hand to pay jurors. In order to keep cases from stacking up too much, the recently-retired wife of State’s Attorney Roger Ralph has come into the office to help her husband file charges. Staffing at the sheriff’s office, Ralph says, has been reduced to the point that the county is “barely able to say there’s an officer on duty at all times.”

What’s more, Hardin County is delinquent in paying its own bills, piling on to the problems other units of local government are having getting their own payments from Springfield. In her office, Mary Ellen Denton, Hardin County’s elected clerk and recorder, has a stack of unpaid bills totaling $25,000. Almost all of the payments are owed to other government entities: More than $10,000 for the regional superintendent of schools, about $5,000 for a planning commission that handles local economic development and another $5,000 to a nearby county for housing prisoners.

The Cost of Borrowing

Borrowing offers counties one way to cope with state arrears, although it comes at the risk of digging a deeper hole. Last spring, Hardin County took out a loan for $79,000 to cover payroll expenses. New York’s Erie County, which includes Buffalo, used a short-term loan to keep afloat. Neither Illinois nor New York will cover the interest on those loans. In effect, the states are using borrowed money to get through their cash crises, without acknowledging that debt on their own balance sheets.

But in Oneida County, Anthony Picente refused to borrow money to cover the state’s debts. He says the problem of the backlog of unpaid reimbursements “was not of our making” and that he didn’t want Oneida County to incur the “exorbitant” interest payments that go along with short-term borrowing.

He also didn’t want to risk raising red flags with bond-ratings agencies that might see such borrowing as a reason to lower the county’s credit rating. There is reason to worry. Standard & Poor’s analyst Gabe Petek says that, for counties that don’t usually resort to borrowing, taking out a short-term loan can be a warning sign for credit risk. Even if it’s the state that ultimately is responsible for the cash shortage, Petek explains, the fact that the county is so dependent on an unreliable funding source raises the chances that the county won’t have enough money on hand to pay its creditors.

But financial concerns aren’t all that’s at stake in Oneida County. Picente also wanted to keep the heat on Albany to make counties whole. “If the state saw that counties were borrowing money to handle this dilemma,” Picente says, “they would be less likely to see a sense of urgency in paying the money back.”


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