In the Matter of The County of Nassau v. the Nassau County Interim Finance Auth.

• Decision Date: 11 March 2011
• Parties: In the Matter of The COUNTY OF NASSAU and Edward P. Mangano, County Executive, Petitioners,v.The NASSAU COUNTY INTERIM FINANCE AUTHORITY, Respondent.
• Court: New York Supreme Court

920 N.Y.S.2d 873

2011 N.Y. Slip Op. 21103

In the Matter of The COUNTY OF NASSAU and Edward P. Mangano, County Executive, Petitioners,

v.The NASSAU COUNTY INTERIM FINANCE AUTHORITY, Respondent.

Supreme Court, Nassau County, New York.

March 11, 2011.

Rivkin Radler, Uniondale, William M. Savino Esq., Nassau County Attorney, John Ciampoli Esq., Mineola, for petitioners.Skadden, Arps, Slate, Meagher & Flom LLP, New York, Christopher J. Gunther, Esq., Jeremy Wise, Esq., Nassau County Interim Finance Authority, Mineola, for Respondent NIFA.

ARTHUR M. DIAMOND, J.

The petitioners, County of Nassau and Edward P. Mangano as County Executive (“County”) commenced this action pursuant to Article 78 of the CPLR for a judgement annulling and vacating the respondent Nassau Interim Finance Agency's (“NIFA”) Resolution No. 11 and Supporting Determination dated January 26, 2011 which imposed a control period on the County pursuant to Public Authorities Law § 3669(1).

The County also moved for an order granting a preliminary injunction pursuant to CPLR § 6301, § 6311 and § 7805 thereby restraining and enjoining NIFA from continuing to impose the control period upon it and from exercising any of its powers set forth at Public Authorities Law § 3669.

Respondent NIFA cross moved for an order pursuant to CPLR § 7804(f), § 3211(a)(1), (7) denying the petition and dismissing this proceeding.

The hearing on the preliminary injunction was held on February 18, 2011. At the conclusion of the proceeding, NIFA was stayed by the court from taking any action pending the determination of the County's motion for a preliminary injunction.

PROCEDURAL HISTORY

The NIFA Act was enacted on June 23, 2000 pursuant to a Home Rule Message which had been proposed by the County Executive and approved by a vote of the County Legislature. The Legislative history indicates that in enacting the Act, the Legislature found that “a condition of financial difficulties ... existed and ha[d] existed in the County of Nassau” which resulted in the repeated reduction of the County's bond ratings and as a consequence, increased interests costs being borne by the County. The Legislature found and declared:

“that the continued existence of such condition of fiscal difficulties is contrary to the public interest of the county and the state and seriously threatens to cause a decline in the general prosperity and economic welfare of the inhabitants of the county and the people of this state [and that] [t]he impairment of the credit of the county of Nassau may affect the ability of other municipalities in the state to issue their obligations at normal interest rates. Such effect is a matter of state concern. Public Authorities Law, ch. 43–A, art. 10–D, titl, refs & annots. (McKinneys 2002).

The Legislative history also indicates that the County had

“request[ed] the enactment of all of the provisions of [the] act as necessary and in the public interest to accomplish the objective of improving market reception for the necessary sale of bonds and other obligations of the county by discouraging certain practices which have occurred in the past and providing direction and assistance in budgetary and financial matters to restore the county to fiscal health, while retaining the county's right to operate independently as a municipal corporation of the state of New York.

Indeed, the statute itself provides:

It is hereby determined that the creation of NIFA and the carrying out of its corporate purposes are in all respects for the benefit of the people of the state of New York and are public purposes. Accordingly, NIFA shall be regarded as performing an essential governmental function in the exercise of the powers conferred upon it by this title. Public Authorities Law § 3661(1).

The Act authorized NIFA to issue bonds and notes for various County purposes and to closely oversee the County's budget and finances. Pursuant to the Act, the County was provided with a $100 million state subsidy ($25 million per year through 2004) as well as a State grant of $5 million to assist the County in streamlining the tax certiorari process. NIFA has issued in excess of $1.6 billion in bonds for the County's benefit and assisted the County by restructuring maturing debt, refinancing existing debt and borrowing money.

The Act provided for an “interim finance period” during which time the County was required to demonstrate: (1) based upon annual audit reports for three consecutive fiscal years, that it had adopted and adhered to budgets covering all expenditures which did not show a major operating deficit when calculated pursuant to Generally Acceptable Accounting Principles (hereinafter refer to as) GAAP and that there was a substantial likelihood that the County's operations for the current fiscal year would not show a deficit in the major operating funds in accordance with GAAP, either; and (2) that the securities sold in the general public market by or for the County's benefit during the fiscal year immediately preceding as well as the current fiscal year satisfied the financing requirements of the County and that there was a substantial likelihood that such securities could be sold in the general public market from that date through the end of the next fiscal year in amounts sufficient to satisfy substantially all of the County's capital and seasonal financing requirements in accordance with the County's fiscal plan. (Public Authorities Law § 3651(14)).

During the interim finance period, NIFA was required to approve or disapprove the County's budget and current year financial plans based on whether or not they met the fiscal balance requirements set forth in the Act.

The interim finance period established via the Act's enactment was scheduled to end in 2004. (Public Authorities Law § 3651(14)). In 2003, the interim finance period was extended by the legislature to 2007 over the County Executive's objection. County Executive Suozzi maintained that an extension was “unnecessary and redundant” because there was already “a mechanism for continuing oversight: a control period”. (Letter from Thomas R. Suozzi, July 21, 2003, in N.Y. Bill Jacket, 2003 S.B. 5543, ch. 314). In 2007, the Legislature again extended the interim finance period through 2008 finding that its “insight, expertise and guidance [was] needed and necessary for the foreseeable future.” (N.Y. Bill Jacket 2007, S.B. 6014, ch. 364). The interim finance period expired in 2008.

Thereafter, pursuant to the Act, NIFA continued to review and issue detailed reports on the County's budget and financial plans. In fact, in its December 3, 2008 report NIFA noted

Last Year after NIFA approved the county's fiscal year 2008 through 2011 multi-year plan the county borrowed for cert judgements and settlements over the unanimous objection of the NIFA directors. NIFA considers this borrowing practice to be one of if not the preeminent reason for the original fiscal crisis of the county, which led to the creation of NIFA by the state. (Order to show cause, affidavit of Tomas Sullivan, Exhibit, H p. 1).

It cautioned that because the tax certiorari borrowing would probably exceed one percent of the County's budget, it would be required to make a determination “unless the County can convince NIFA that the borrowed funds should count as revenue” A letter authored by the County's bond counsel which concluded that bond revenues could be budgeted as operating revenues without limit after the interim financing period did just that.

In its May 28, 2009 report, NIFA commented “the county's actions are troubling because the use of bond proceeds and off-budget reserves to pay operating expenses masks an imbalance that many would characterize as a deficit and also exacerbates the budgetary gaps that must be resolved in future years, both by deferring the necessary steps to correct the imbalance and layering on debt reserves for current year borrowings. The county has continued to rely on its practice of bonding items that should be funded with operating income, for example, tax certiorari refunds.” Indeed, in its May, 2009 report, NIFA acknowledged that $58.8 million in bond proceeds had been used in 2008 to pay tax certiorari claims. While it does not expressly state that that would not be permitted in the future, it declared that it “masks an imbalance that many would characterize as a deficit.” Similarly, while NIFA again acknowledged in its October 2009 report that the County would likely use $27.7 million in borrowed funds to pay tax certiorari claims in order to achieve a balanced budget and that only $50 million of the $90 million needed in financial year 2010 for tax certiorari claims would come from operating funds with the remainder presumably coming from borrowed funds, it noted (r)egrettably, the County already bonds for certiorari judgements, both of which should also come out of the operating budget (emphasis added).” In 2009 and 2010, based on the County's bond counsel's opinion that bond funds used to pay tax certiorari obligation could be budgeted as operating revenue, coupled with efforts by the County to pay a portion of those claims from actual operating revenues, NIFA permitted deficits that might otherwise have triggered a control period.

Similarly, NIFA allowed the County to use $13.4 million in General Reserve Fund balance in 2006, $38.1 million in 2007, $17.9 million in 2008 and $10 million in 2009 to balance the budget. In 2011, it has disallowed its use of the $65 million Reserve Fund balance.

When the County issued bond offerings in December 2009, November 2010 and as recently as December 16, 2010, the bond offerings noted not only the history of the Act including the interim finance period which it noted had expired in 2008, but NIFA's continuing “ongoing monitoring and review of the County's financial operations ...” as well as NIFA's power “to impose a control period” under certain conditions set forth in the...