Deficit reduction at any price?
Deficit reduction is the buzzword in the nation”™s capital, in Albany and even in the county seat in White Plains. While politicians on the federal, state and county levels battle over what should be cut and by how much, business owners are watching the debate to determine how they may be impacted in the months and years ahead.
President Obama and Congress are offering different ways to trim an estimated $4 trillion from the federal deficit in the next decade. In Albany, Gov. Andrew Cuomo and the state Legislature are looking to reform Medicaid, pensions and property taxes. The recently enacted 2011-2102 state budget eliminated a $10-billion deficit this fiscal year and has trimmed a projected four-year deficit from $64.6 billion to $9.2 billion. However, the savings built into the budget call for reforms in state government spending and operations.
In White Plains, Westchester County Executive Robert Astorino, while giving a no-tax increase pledge earlier this month in his “State of the County” message, said a projected deficit of $103 million for county government is emerging due mainly to spiraling costs associated with unfunded state mandates and labor.
In the private sector, the health care, real estate and financial industries are among those feeling the heat at the moment. The Business Journal talked with leaders in each of these areas to find out how reform may affect their bottom lines.
Protecting homeowners”™ interests
President Obama in his recently released plan to reduce the federal deficit called for reforms to the tax code that include recommendations from his National Commission on Fiscal Responsibility and Reform. In a report last December, the commission recommended limiting the mortgage-interest deduction to exclude second residences, home-equity loans and mortgages of more than $500,000.
The National Association of Realtors opposes any change to the mortgage-interest deduction. Bob Nielsen, chairman of the National Association of Home Builders, said limiting the deduction would raise taxes for homeowners “at a time when the housing market is struggling to recover.”
“Any attempt to chip away at the mortgage-interest deduction would represent an attack on middle-class families,” Nielsen said.
Joseph Rand, managing partner of Better Homes and Gardens Rand Realty of New City, said he supports efforts to reduce government spending but questions how politicians can target an industry that has been struggling for years.
“Trying to fix the federal deficit at a time when the economy is still recovering and the housing market is still recovering is foolish,” he said. “When your house is on fire you don”™t worry about the water bill, you put out the fire.”
Rand said deficit-reduction measures should be taken when the economy is performing better. When economic activity picks up, he said, the increase in tax revenue will help alleviate a good portion of the deficits.
As for the mortgage-interest deduction, he expects efforts to limit or eliminate the home-buying tax incentive to fail.
“Millions of Americans take advantage of the mortgage-interest deduction,” he said, “and for that reason it has a very large constituency that will make it very difficult for anyone trying to restrict it.” The national homeownership rate at the end of the fourth quarter of 2010 was 66.5 percent, according to U.S. Census Bureau”™s figures.
Rand said the federal government might restrict mortgage-tax deduction flexibility for higher-income levels. This could affect people spending more than $800,000 or $900,000 on a house, he said, and not impact moderate-income families.
“That”™s the only way I could see it getting through because there are just too many people who have a stake in this,” he said.
If changes were made to tax-deduction eligibility on high-income earners, Westchester, where home sales above $1 million accounted for 16 percent of sales in the fourth quarter of 2010, would feel the most impact in the lower Hudson Valley.
Banking on compliance costs
John Tolomer, president and CEO of The Westchester Bank in Yonkers, said that while there are many proposed changes to lending requirements and compensation, the banking industry is monitoring the work of the Consumer Financial Protection Bureau, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
“There is a great deal of trepidation on the part of the banking community to learn what the details of that will be,” Tolomer said. “There have been a lot of (proposed) legislative changes but it hasn”™t all been spelled out as yet to banks as to what it will mean.”
Tolomer said banks are concerned over potential compliance costs associated with additional regulatory scrutiny that will come about when the bureau finalizes its reform agenda.
Other regulatory changes that impact lending and bank fees are fluid in nature, Tolomer said. For example, legislation was set to take effect this July aimed at capping the debit card fees banks could earn. However, reports out of Washington say Congress may look to delay implementation of that bill.
“There is clearly a desire on the part of legislators, both on the state level and federal level, to protect the consumer. The key question will be, and is, what requirements will be in place and what will it cost banks to make sure that they comply with those requests.”
”˜A very difficult equation”™
Mark Webster, CFO of Hudson Valley Hospital Center in Cortlandt Manor, said deficit-reduction efforts on the federal and state levels appear focused on reductions in Medicare and Medicaid spending.
He said that while politicians are making cuts to balance their budgets, hospitals are having difficulty reducing their budgets because of rising costs for salaries, fuel, oil, gas, pharmaceuticals and pensions.
“So a lot of the things that they can do to balance their budget are trickling down to everybody else and (they) say: ”˜I solved my problem by passing my problem onto you. Now you figure out how to solve your problem,”™” Webster said. “It makes it a very difficult equation.”
Hudson Valley Hospital Center, which recently completed a $100-million addition and is building a $15-million Cancer Care Center scheduled to open in the fall, is facing cuts in state aid due to the recently enacted state budget, but Webster said it could have been much worse.
Because the hospital does not treat a large number of Medicaid patients, Webster said it faces between $250,000 and $350,000 in cuts in state aid due to the proposed elimination of trend factors in Medicaid reimbursement.
Webster said that while the hospital can absorb the Medicaid cuts, proposals being floated in Washington over possible cuts to Medicare funding, which makes up 55 percent of its business, “will be much harder to swallow.”
He expects proposals from both sides of the aisle to crystallize by mid- to late summer, but admits the discussions in Washington “are making us very, very nervous.”