What Does the Economy Hold for Counties?

By Dave Lucas, NYSAC Director of Finance and Intergovernmental Affairs

On the one hand…

The New York State and U.S. economy are facing headwinds as we briskly stumble toward 2023. The highest inflation in 40 years, a Covid pandemic supply chain breakdown hangover, geopolitical conflict, severe weather and war impacting food supplies, a shrinking workforce, a stock market in bear country, rising interest rates, negative GDP, and continuous declines in housing sales have most economists projecting a recession during 2023 and many CEOs planning for the impact of a recession on their operations in August.

But on the other…

Even with all of this, is a recession inevitable? There is a lot of conflicting economic data muddying the waters. Unemployment is near historic lows, consumer spending remains strong in the face of higher prices, cumulative “excess” personal savings has remained more than $1.1 trillion above pre-Covid levels since May of 2020 (down from a $2.1 trillion peak in July of 2021), employees still seem to have leverage in wage negotiations with employers, and there are still way more job openings than there are employees to fill them.

However, the consensus appears to be…

Even with the mixed signals, it seems a recession is far more likely than not over the next 12-18 months. So, should we expect a hard landing or something more manageable? Back to our CEO’s thoughts on this front. According to the August Conference Board survey of CEO sentiment “…81% said they expect the downturn to be brief and shallow, vs. 12% who said they expected a deep recession.”

Among economists, a most recent Wall Street Journal survey reported that 63% are expecting a recession to occur within the next 12 months (up from 49% in the prior month). Most expect the recession to be relatively short (around 8 months), with unemployment topping out just under 5% by the end of 2023 and hovering around that level through most of 2024. By historical standards, a 5% unemployment rate is pretty low. However, the low rate is driven by a smaller worker pool. The smaller worker pool will keep upward pressure on wages for many employers, which will, in turn, keep upward pressure on inflation and prod the Federal Reserve to continue raising interest rates. Some economists believe this cycle could lead to a longer and deeper recession.

Expectations for County Finances

A recession will definitely impact county finances and revenues in a negative way. The State signaled after their first quarterly update to the SFY 2023 financial plan that the vast reserves they had built up were dwindling quickly and they would have to be more cautious. The midyear update had not come out as of this writing, even though cash reports from the State Comptroller for September showed revenues nearly $3 billion above the first quarter update. Longer term projections are likely to come down further as stock market volatility undermines income tax collections throughout the remainder of 2022 and potentially much of 2023.

Counties rely on the state to, at a minimum, maintain funding for programs counties administer and partially fund on behalf of the state. If the state fiscal situation deteriorates enough, new cost shifts from the state to counties are likely. Other county revenues such as property tax are important parts of the county budget and should remain generally stable over the near term.

Mortgage recording taxes will be reduced as interest rates continue to increase. The most volatile revenue source for counties will be sales tax in a recessionary environment.

The biggest fiscal positive for counties right now is the prudent fiscal management they entrenched into their budget development and long-term planning practices over the last 15 years. These practices date back to the Great Recession when significant state funding cuts and a deep recession forced counties to realign priorities, budget cautiously and build reserves.

The addition of historic direct federal assistance to counties during the pandemic also boosted counties’ capacity to weather the public health emergency and rebuild after the pandemicfueled recession.

Sales Tax Implications

Sales tax remains the number one source of local revenue for most counties, but it can be volatile. The slowing economy will put downward pressure on sales tax receipts for most counties, especially from the robust sales tax returns experienced recently as the economy continues to rebound from the Covid pandemic. While inflation is problematic for the economy overall it does help boost local sales tax, as long as consumers have sufficient resources to spend. The excess personal savings mentioned above have kept consumers in the game even with high inflation, but these reserves will eventually run out.

While consumers have maintained their spending in nominal terms, we have recently seen spending adjusted for inflation (real spending) by consumers turn negative. According to an analysis by the Conference Board of recent federal CPI data, year-over-year nominal spending on goods was up about 7.8% in September but came in negative when adjusted for inflation, -1.8%.

Further, inflation-adjusted spending on goods has dropped every month since March. Spending on services has been growing more rapidly in recent months, as the Covid-induced spending splurge on goods continues to unwind. Food service and drinking places (and other service/tourism/adventure categories) have been strong during the summer months but showed signs of slowing down a bit in September.

Counties will need to watch key categories of sales tax collection as consumer sentiment and spending capacity become more restrained by inflation pressures. Automobile sales, gasoline, energy, restaurants, travel accommodation and other big-ticket items such as appliances and home furnishings will be under more pressure as interest rates rise to tame inflation.

The chart below shows the impact of inflation in key sales tax categories for counties (with the exception of medical and shelter) since December 2020 in six-month intervals. Inflation in December 2020 was muted as the pandemic was still restricting economic activity in different categories.

Sales tax cash received by counties through October shows the average county up about 7.8% over the prior year for the same period. In inflation-adjusted terms, however, most counties’ sales tax collections are about breaking even for 2022 so far. The continued softening of the economy, especially as unemployment rises, will likely force a drop in county sales tax collections for many counties, in nominal and real terms, from today’s returns.

Counties Turn Focus to Strengthening Cybersecurity Protections

By Mark LaVigne, NYSAC Deputy Director

The cybersecurity threats to our governments cannot be understated. Breaches are happening right here in New York. Hackers are trying to access your systems right now, as you are reading this article. They are sending emails to county employees, looking for vulnerabilities in your website, and for ways into your databases. They want to disrupt your work, destroy your systems, exploit your data, and hold it for ransom.

A recent ransomware attack on Suffolk County took them offline for nearly a month and forced county leaders and departments to deploy continuity of operations plans while their IT staff, consultants, and criminal investigators combed through, cleaned up, and rebuilt all their information systems.

As one of the state’s largest and most sophisticated counties, Suffolk County had taken many steps to strengthen their cybersecurity protocols, yet bad actors were still able to penetrate their security. As their partners scour and remediate their systems, update their servers, and restore their data, the county implemented its continuity of operations plan, and is serving the citizens, partner agencies, and employees.

It will cost Suffolk County millions of dollars to respond to this cybersecurity attack.

Suffolk County is the latest and largest victim of cybercriminals, but they were not the first and they will not be the last. On Saturday, October 18, 2020, Chenango County public health officials came into the office to carry out critical Covid related duties, only to find they had no access to the files on their computers. It was the height of the pandemic and days before early voting would begin for the presidential election, and unknown to them at the time, their county’s data was being held for ransom.

The State’s Response

The 2023 State Budget included a $66 million allocation to support local government cybersecurity efforts. These funds are being used to create, staff, and operate a joint security operations center (JSOC) in Brooklyn, designed to serve the state’s largest cities and the 57 counties. The JSOC will be tasked with collecting incident and potential breach data from all participating members. This information will then be evaluated by JSOC staff and shared with participants to help them appropriately protect their respective systems.

The state is also using the budget allocation to invest in Endpoint Detection and Response (EDR) services for all counties and the five largest cities by leveraging New York City’s contract with CrowdStrike. EDR provides a technology tool designed to monitor incoming activity on every device—such as a laptop, personal computer, or server—that is connected to the Internet. The information gathered by the EDR can then be used to help the county segregate a potentially infected computer or system to reduce the chances that it spreads to other systems on a county’s network. This information will also be shared with the JSOC so that staff can warn other participants about the attempt to hack into a members’ system.

The state’s investments in the JSOC and the EDR services supplement efforts by the Division of Homeland Security and Emergency Services (DHSES) and the Office of Information and Technology Services (ITS) to support local governments’ cybersecurity efforts. These include tabletop exercises for counties to practice what to do in the event of a cyber incident, and responses by the Cybersecurity Incident Response Team (CIRT), which is the first point of contact for local governments following a cyberattack.

The Challenge of Cybersecurity Insurance

As the frequency, sophistication, and severity of cyberattacks is rising, one of counties’ most important mitigation tools–cybersecurity insurance–is getting harder to come by and more expensive. In the past three years, counties that purchase cybersecurity insurance have seen their cybersecurity insurance premiums increase to double or triple the rates they were paying in 2019, while receiving less robust coverage and new limits on the different aspects of their coverage. They also must fill out increasingly long and cumbersome applications and fulfill new requirements. And sometimes, despite these hoops, increased costs, and new limits, local governments or counties still may be denied the insurance coverage they are looking for.

This summer, NYSAC began exploring the possibility of organizing a collective of county governments for the purposes of the joint procurement of cybersecurity insurance with more competitive premium rates, improved coverage, and standardize requirements and coverage policies across participants.

We conducted a County Cybersecurity Insurance Survey to our member counties and members of the NYS Local Government IT Directors Association. We received 28 responses by the last week in July from 26 public entities (23 counties, 1 city, and 2 towns). The results indicated that 21 entities purchased some level of insurance coverage, and five counties did not buy insurance. We then asked those entities who were still interested in exploring a pooled insurance program to submit a cybersecurity insurance application that included a series of questions about cybersecurity controls they had in place. Thus far, brokers have indicated that there is little or no appetite on the part of the current insurance market to develop a pooled purchase program for public entities. The degrees of risk vary too dramatically, and the controls in place across entities are not at a standard level of acceptance for insurance underwriters.

NYSAC Resources

In response to this evolving cyber threat, NYSAC has developed a number of resources to help educate our members and provide tools to help counties step up their efforts to protect their information infrastructure. These resources include a Cybersecurity Primer for County Leaders, a report on Cybersecurity Insurance Challenges for Public Entities, and a cybersecurity webinar series cosponsored by NYSAC, the NYS Conference of Mayors, the Association of Towns, the New York Municipal Insurance Reciprocal, and the Center for Technology in Government at the University at Albany. All these resources and more can be found on our website at www. nysac.org/cyber.

While the threat from cyber criminals continues to grow and “silver bullet” solutions remain elusive, NYSAC will continue to work with experts in the field as well as our partners at the state and federal levels to develop policy, tools and training to help counties mitigate to keep their systems, their data and their residents safe from cybercriminals.