During the rollicking 1980s, the Long Island counties of Nassau and Suffolk brimmed with economic optimism. Shopping malls, commercial real estate projects and new homes sprouted from the island's western border with Queens to its eastern tip at Montauk Point.

But the aftershocks of the 1987 stock market crash slowly destabilized the economies of these two affluent suburbs of New York City, where many Wall Street executives had bought opulent homes and summer cottages in the Hamptons.

A general reduction in the level of military spending cut into another traditional growth sector of the Long Island economy, the defense industry. By 1991, many commercial projects remained vacant, and thousands of blue-collar workers were looking for work along with their neighbors from executive-suites of Wall Street.

Now, some five years after the initial hit, the day of reckoning has arrived for officials in Nassau and Suffolk as a recession - some say the longest and deepest since the Great Depression - has produced some of the largest projected budget gaps among New York state municipalities in the 1992 fiscal year.

Last week, county officials began an all-out effort to persuade the New York State Legislature and Gov. Mario M. Cuomo to approve the sale of deficit bonds to close budget gaps of about $100 million each.

But with the 1992 legislative session ending tomorrow, both of the counties' plan remain in limbo. The state Senate had agreed to grant the deficit-financing proposals, but the Assembly refused to pass the plan without the creation of an independent oversight board to monitor each county's fiscal affairs.

Officials in Nassau and Suffolk, along with Senate Majority Leader Ralph J. Marino (R-Muttontown) are trying to prevent the Assembly from forcing them to accept the oversight board, which would have authority to oversee the counties' budget and bond financing plans. The bond proposals would have to be voted on during a special session of the state legislature.

Rough Waters

County officials in Nassau - which projects a $131 million deficit in its $1.8 billion 1992 fiscal year budget - blame the county's fiscal woes largely on a regional recession that will not go away. "This recession is unprecedented in terms of how long it has lasted," said John V. Scaduto, the county's Treasurer. "Nassau county is just one of its victims."

In Suffolk County, economic hardship is just one of the reasons for the county's estimated gap of $91 million in its $1.3 billion 1992 fiscal year budget. Officials led by recently-elected Republican County Executive Robert Gaffney blame many of their problems on the fiscal practices of County Executive Patrick G. Halpin, a Democrat. Mr. Gaffney, who defeated Mr. Halpin last November, took office in January.

"When we walked in last January, they said, ~Congratulations, good luck, and you've got a $91 million budget deficit,'" said Tim Ryan, a spokesman for Mr. Gaffney. "We haven't proposed a budget yet, this is not something we've done."

County officials cite yet another area of common ground - a rise in state and federal government mandates. As economies in each county have suffered, first from a recession caused by Wall Street layoffs, than from a reduction in defense spending, mandates have squeezed a smaller pool of tax revenues.

David Vieser, a spokesman for Nassau County Executive Thomas S. Gulotta, said services mandated by the state, such as certain education initiatives and Medicaid costs, have risen by $142 million or 92% since 1986.

Making matters worse, Mr. Vieser said the county's yearly property tax levy of $103 million covers no more than 35% of the its total mandated costs of $296 million in 1992. "While we've been hit hard by the recession, its impact has been made worse by this increase in mandates," Mr. Vieser said. "It's like a double-barrel shot. "

For its part, Suffolk County's 10-most costly federal and state mandates have increased 43% from 1989 to 1992, said Louis Soleo, the county's budget director. In 1989, these services cost the county $203.2 million. By Dec. 31, 1992, the bill will hit $291.1 million. "The 1992 number could even be higher because the [fiscal] year isn't over," Mr. Soleo said, adding that the basket of ten services represents 90% of all mandates the federal and state government forces the county to provide.

Among the most vexing of the mandates is the cost of Medicaid, which rose 21% from 1990 to 1991, Mr. Ryan said. Another increasingly difficult mandate to satisfy is the cost for educating handicapped students, which jumped to $116.9 million in 1992 from $7.5 million in 1980.

"The problem is we don't have any control of these costs," Mr. Ryan noted. "The school districts determine if the kid is handicapped or not, and the county has to pick up half the tab."

The economic hardships in Nassau and Suffolk have put the rating agencies on full alert. In a series of interviews in recent weeks, officials at Standard & Poor's Corp., Moody's Investors Service, and Fitch Investors Service said they are likely to issue rating actions after the state legislative session.

Moody's Investors Service, which rates Nassau County's general obligation bonds A and Suffolk's GOs Baa 1, will soon issue a report on the counties' deficit-financing plans, said Michael L. Johnston, a vice president and manager of Mid-Atlantic ratings at Moody's.

Lower the Boom?

Standard & Poor's, which rates Suffolk County GOs BBB, has placed the county on CreditWatch with negative implications. Fitch rates Suffolk GOs an A, with a stable credit trend. Standard & Poor's and Fitch do not rate Nassau County.

"The critical thing for us is that [Nassau and Suffolk] put together a reasonable, comprehensive plan to deal with their financial stress," Mr. Johnston said. "The deficit financing itself is not the solution. We need to see a broader" proposal.

Officials in both counties say they have a plan that will work. In Nassau, for example, Mr. Gulotta doubled the county's mortgage tax to 2%. On top of the $71 million in five-year deficit bonds, the county will also issue $30 million in bond anticipaition notes, a county source said.

The mortgage tax should raise $213 million by 1997, easily paying off the debt service on the deficit bond issue, Nassau officials said. In addition, the plan is designed to close a $158 million budget gap expected through fiscal 1993.

In Suffolk County, Mr. Gaffney is attempting to gain state approval to increase its sales tax to 8.5%, from 8%, on top of his plan to issue up to $91 million in four-year deficit bonds to cover the budget gap. Officials plan to include the tax increase with a series of budget cuts and salary reductions for county workers.

In addition to the proposed remedies, officials in Nassau and Suffolk also hope to find some help from improved economic growth, which would help bolster lackluster sales tax revenues.

They did not identify specific industries that would help the region going forward, but said rather that revenue declines would abate and established service industries, such as Wall Street, would rebound.

Mr. Scaduto, the Nassau County treasurer, said in a recent interview that he is optimistic about the prospect of economic improvement throughout Long Island. "The worst is behind us," he said.

This pickup in economic activity should drive the forces that have made Nassau and Suffolk two of the richest counties in the country, he added. These attributes include a stable tax base, a high level of home ownership, and the country's highest percentage of households with annual incomes above $50,000, according to a recent Nassau County official statement.

"Many of our problems are blown out of proportion," Mr. Scaduto said. "What's really important, and what the rating agencies base their ratings on, are the fundamentals of any community. That makes me a little bit excited because the fundamentals of [these counties) are incredible."

Mr. Johnston of Moody's agreed that Nassau and Suffolk have many financial attributes, but reserved judgment on their credit trend until he sees the counties' final plan to achieve structurally balance budgets.

"We're talking with both counties], but we haven't seen a detailed plan," Mr. Johnston said. "The deficit-bond issue only addressed the immediate year's problems. We're looking for a long-term solution.

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