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Officials for two leading bond-rating agencies say the Erie County government needs to raise taxes or cut spending over the long term to pull itself out of the structural problem that leads to deficits and jeopardizes credit ratings.

"Their financial position overall is generally stressed," said Jessalynn Moro, the senior director at Fitch Ratings in New York City who tracks the credit worthiness of governments throughout the Northeast.

"So what we really need to see is either recurring expense savings or recurring revenue enhancements," she said. "That's the real bottom line, because they are heading toward structural deficit. And plugging it with one-time shots really can't last forever."

Moody's Investors Service in New York City sees similar problems with Erie County failing to live within its means.

"It's not for me to tell the county how they need to do it," said Robyn Kapiloff, vice president for Moody's public finance group. "But clearly there is a need at the county to make expenditure modifications or revenue enhancements to return themselves to structural balance."

Both said Friday they were not commenting on the County Legislature's refusal so far to lay off workers as one way to fix the $10 million shortfall from this year's first quarter, and to avoid a huge deficit for 2005.

But as the Democrats who control the Legislature again balked at laying off 85 of the county's 7,000 workers Thursday, Budget Director Joseph Passafiume warned that their reluctance to deal with recurring problems would resonate badly with bond-rating agencies, especially as the county plans to borrow in August for capital projects.

In December, both Moody's and Fitch gave a "negative outlook" to Erie County's issue of $36 million in general obligation bonds. Analysts cited cash shortages, a delay in restructuring the Erie County Medical Center as a public benefit corporation and "aggressive" assumptions about the number of employees who could be lured into retirement with incentives that never won State Legislature approval.

Largely because too few people retired, spending on personnel ran $7 million beyond expectations in this year's first quarter. Budget-makers had also banked on the layoffs of 42 workers whose jobs were targeted in January because of the installation of a new multimillion-dollar computer system. However, county lawmakers never acted on that request.

Those jobs were on a layoff list of 85 positions Passafiume gave legislators this week as he also suggested freezing spending for travel, supplies and some consultants, keeping 23 positions vacant and juggling budget lines, all to save more than $10 million.

Legislature Democrats went along with all of it except the layoffs. They said they needed to know the county's financial position at mid-year before they could assess whether layoffs provided meaningful savings. They also said too many entry-level jobs were involved, and advocated a top-to-bottom review of the staff.

Republicans said Democrats were merely compounding the problem.

"Eighty percent of the costs of county government are personnel related," said Legislator Steven McCarville, R-Orchard Park. "We all know we have to cut our expenses. When are we going to start doing that?"

Fitch still rates Erie County's long-term bonds at AA, and Moody's rates them at A2-- high-grade to upper-medium-grade status. The agencies cite Erie County's history of successful financial management, satisfactory reserves and at least a stable regional economy. But they still want to see reliable revenues balancing spending.

Said Moody's Kapiloff: "Clearly, they need to make aggressive action on one side of the equation or the other to ensure maintenance of a satisfactory financial position."


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