As recession fades, banks settlement spigot is drying up

Judy Sanders/Office of the Governor
Ben Lawsky, the former Department of Financial Services superintendent.

As recession fades, banks settlement spigot is drying up

As recession fades, banks settlement spigot is drying up
March 1, 2016

When Gov. Andrew Cuomo created the state Department of Financial Services in 2011, he did more than create an agency devoted to regulatory oversight of the financial district. The agency also has spurred a new revenue stream for the state budget, which the governor himself once called “basically a gift from above.” In the last two state budgets alone, Cuomo had a total of $8.3 billion from recent bank settlements to devote to his legislative agenda.

However, budget analysts and experts are concerned about how the state will handle the loss of the settlement money since they also predict the settlements will begin to taper off in coming years.

“I certainly think the magnitude of the settlements is a one-time event. There have been settlements in past budgets going back several years with a few million here and there,” said David Friedfel, director of state studies at the Citizens Budget Commission. “So that’s probably closer to the baseline, but the levels we’ve seen – the multi-billion-dollar settlements – shouldn’t be expected to continue.”

Friedfel added that a decline can already be seen. In the 2014-15 budget there was $4.9 billion in settlement dollars, while in the 2015-16 budget there is $3.4 billion.

James Parrott, deputy director and chief economist for the Fiscal Policy Institute, said the state Division of the Budget has “hinted” there may be more settlements down the road, but he expects they will not be at the same level as in previous years.

“We gather there are some settlements in the pipeline, but I would assume there’s no reason to expect them at the level they’ve been at the last two or three years,” Parrott said. “I think that represented both a set of issues that stemmed from a period when the regulation and oversight of the financial community is not what it is today, and I think there was also clearly a public expectation that banks somehow needed to be made to pay for the financial crash.”

The state Attorney General’s Office declined to comment and the state Department of Financial Services did not respond to requests for comment. Both offices are involved in the state’s oversight of banks and investigating accusations of wrongdoing.

When Cuomo created the state Department of Financial Services, he appointed Benjamin Lawsky, a former federal prosecutor, to run the new agency. Under Lawsky, the agency during the next four years collected billions of dollars from banks found violating terror-related restrictions on transactions with rogue regimes and from the fallout from the housing crisis.

Lawsky last June vacated his post at the state DFS to start his own law firm.

“That’s tapering off. This was a highly unusual, unprecedented and unlikely to ever be repeated situation,” said E.J. McMahon, president of the Empire Center for Public Policy.

State Comptroller Tom DiNapoli has repeatedly cautioned the state not to count on extraordinary windfalls to pay the state’s bill down the road.

“We know the (state Division of the Budget) is projecting revenue growth will slow down in the years ahead at the same time the settlement resources, which are an extraordinary asset, are being spent and at some point in the future will not be available,” said Robert Ward, deputy comptroller of budget and policy analysis at the state Comptroller’s Office. “This raises the possibility that the state may face increased budgetary challenges in the future due to those factors.”

Both Ward and McMahon praised the governor’s decision to devote $850 million in settlement funds to begin to pay back the billions of dollars owed to the federal government, which stemmed from an audit of the state Medicaid claims, but said they would have preferred to see more settlement money go to bolstering the state’s reserves.

“Another appropriate use, although less fun politically, would have been to put some of it into reserves. Our reserves are very small by the standards of other major states. We have very limited reserves,” McMahon said. “He basically sliced and diced it in ways that politically allowed him to have a variety of regional press releases on different subjects while essentially shortchanging core infrastructure, I would argue, which he still relies on borrowing for to the extent he does anything.”

The Cuomo administration defended its record.

“We make no apologies for a state budget that continues the trend of fiscal responsibility and reduces the burden on taxpayers,” said Abbey Fashouer, a spokeswoman for the Cuomo administration. “This administration has invested more than $4 billion in settlement funds for one-time infrastructure projects, and more than $54 billion in total – while at the same time making the maximum deposit in the rainy day fund. Everyone is entitled to their own opinion, but not their own facts.”

Budget analysts gave Cuomo’s use of the settlement funding a mixed review and said it’s still unclear whether the settlement resources will be primarily used for capital or other one-time purposes.

Additionally, the governor allocated $627 million in settlement funds for general budget support and $4.5 billion for the Dedicated Infrastructure Investment Fund.

“General budget support is not necessarily a one-time purpose. By definition, you have to balance your budget every year,” Ward said. “Some of the (DIIF) dollars are going to identifiable capital purposes, which is what the comptroller has said should be the main use of them, but many of the dollars appropriated from the DIIF are not clearly directed for a particular capital use or other purpose.”

Parrott applauded the governor’s choice to put a significant portion of the into the DIIF fund with the option of it being available as reserves until it’s spent, though the move was criticized by McMahon, who accused the governor of “having his cake and eating it, too.”

“It’s very smart and I’m very supportive of him using that way. On the other hand, some of the earmark purposes – you could question them,” Parrott said. “Providing relief for Thruway users? It’s probably hard to find support among budget watchdogs for that. That’s a very dubious proposal. That’s not the sort of thing that’s going to get a lot of support except for heavy Thruway users.”

Ashley Hupfl