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COUNTY MAY FACE UNSAVORY LOAN OPTION

The state comptroller frowns on it. So do rating agencies and Erie County officials themselves.

Still, "deficit financing" -- a long-term loan to keep the government's head above water -- looms as a possible necessary evil to help Erie County emerge from its quagmire.

"It's a last resort, uncommon but certainly a clear sign of a stressed situation," said Jessalynn Moro, an analyst with Fitch Ratings. Fitch in March downgraded Erie County's rating to BBB, so uncommonly low that deficit financing on its own would not sink it further, she said.

"It's just another nail in the coffin," said Kenneth C. Kruly, a budget director under then-County Executive Dennis T. Gorski. "It's like going out and having a fancy dinner tonight and paying for it over the next three years on your credit card. It probably wasn't worth it."

Implications for the taxpayer aren't good. During its financial crisis 20 years ago, Erie County sold deficit bonds then spent 10 years paying them back, he said. That means new tax dollars go to repay years-old expenses, and a tax increase of some sort is still needed because lenders want assurances they'll be repaid.

Budget Director Joseph Passafiume says this time it shouldn't be as bad as 1984. He thinks that if a mid-year sales tax hike isn't in the offing, then County Hall could climb out of its mess by borrowing $60 million over three years, at an interest rate of about 3 percent -- not the 10 percent that could come with a 10-year loan.

The $60 million would essentially cover the shortfall he thinks exists this year -- a figure far less than Comptroller Nancy A. Naples projects. But come 2006, Erie County will need new revenue, he says, which will again pressure lawmakers to raise the sales tax or the property tax.

County Executive Joel A. Giambra revealed Wednesday that he's still plugging the idea of a sales tax increase, to take effect in June or at some other point this year. His initiative, strongly opposed by tax-weary residents, looks as though it will flop with lawmakers just like it did in February.

Giambra's revelation came on the heels of Naples' projection that the government is tracking toward a $113.5 million deficit this year, after running up a deficit now estimated at $106 million for 2004.

Giambra doesn't agree the numbers are as bad as Naples portrays them. It's more like a $60 million hole this year, he says, agreeing with his budget director. Still, that's bad enough to warrant a tax hike, a lesser evil than deficit financing, he says.

As Erie County drained reserves over recent years, it essentially repaid short-term loans with money from new short-term loans. For example, Naples' office in early March borrowed $80 million to pay the bills until reimbursements for social programs arrive. But the county must soon repay the $82.5 million borrowed last year. Then it might borrow $70 million in June and $100 million in December.

Naples has called the borrowing flurry "unprecedented" and said Wall Street's rating agencies might block new short-term loans by lowering or suspending the county's credit rating because of the chronic deficit.

Credit-rating agencies call Erie County government structurally unbalanced -- too little money comes in, too much goes out. If Erie County indeed builds a $113.5 million deficit this year, it will have spent $310,000 a day more than it takes in.

Some officials agree the Legislature seems paralyzed. It can't muster the votes needed to raise taxes, and after laying off 1,500 workers as a way to save $108 million early in the year, members haven't been able to cut deeper. Members have yet to even implement all the cuts involving their own staff.

Said Kruly: "I think frankly that the problem is just so immense that it's overwhelming."

The watershed moment may come June 15, when State Comptroller Alan Hevesi's auditors are expected to deliver their 12-week review of county finances, and the county's own auditors are to present the financial report for 2004.

Will those reports be bad enough to propel lawmakers toward a sales tax increase, or a deficit note, as political primary season approaches?

When Hevesi was in Buffalo March 18 to announce the start of his staff's review, he was asked to assess deficit financing as an option. "A last resort," he called it.

But he, too, implied Erie County might need to raise taxes to avoid a deficit in 2006.

"It is hard to believe that the revenue will increase so dramatically, without policy changes for next year, that you won't be finding yourself in deficit," Hevesi said.

e-mail: mspina@buffnews.com

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